<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, 1999.
[ ] 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. $16,443,137
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. $5,595,611 based on the average of the bid and asked on the
National Association of Securities Dealers Automated Quotation System on March
27, 2000.*
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest publication date. 1,756,320 as of March 27,
2000.
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 2000 Annual Meeting of Shareholders are incorporated by reference into
Part III hereof.
- --------------------
* Excluded from such market value computation are the approximately 727,715
issued and outstanding shares beneficially owned by executive officers and
directors of Issuer and its subsidiary.
EXHIBIT INDEX APPEARS ON PAGE 48 IN SEQUENTIAL NUMBERING SYSTEM OF THIS FORM
10-KSB
2
<PAGE>
MADISON BANCSHARES GROUP, LTD.
FORM 10-KSB
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
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........................... 9
Item 7 Financial Statements.......................................... 23
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 ......................... . 48
</TABLE>
3
<PAGE>
PART I
ITEM 1 -DESCRIPTION OF BUSINESS
MADISON BANCSHARES GROUP, LTD.
Madison Bancshares Group, Ltd. (the "Company") is a one-bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
It was incorporated under the laws of the Commonwealth of Pennsylvania on
May 31, 1988. The Company became a bank holding company on August 8, 1989
when it consummated the acquisition of all of the capital stock to be
issued of the Madison Bank in connection with the Bank's formation. The
Company provides banking services through The Madison Bank, and does not
engage in any activities other than banking and related 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 eight
branch offices.
As of the date hereof, the Company and Madison Bank had a total of 84
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, 8000 Verree Road, Philadelphia, PA, 100 Gibraltar Road,
Horsham, PA and Route 413 and Doublewoods Road, Langhorne, 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, the Northeast office in June, 1998, the Horsham office in
December, 1999 and the Langhorne office in February, 2000. As of December
31, 1999 and 1998, the Bank held deposits totaling $130,423,177 and
$132,644,741, respectively, including deposits of the Company. As of the
same dates, the Bank had gross loans receivable of $129,652,578 and
$126,997,724 (inclusive of residential loans held for sale), respectively.
The majority of such loans were made for commercial purposes.
As of December 31, 1999 and 1998, the Company had total assets of
$155,842,410 and $147,925,863 and total shareholders' equity of $10,282,531
and $9,450,392, respectively. Investments amounted to $19,319,853 at year
end 1999, of which $16,749,747 were classified as available for sale and
the balance was classified as held to maturity. Investments amounted to
$2,612,493 at the end of 1998, of which $1,010,000 were classified as
available for sale and the balance classified as held to maturity.
4
<PAGE>
The Bank's branch offices serve an area that encompasses an eight mile
radius. The addition of the Horsham and Langhorne branches strengthens the
Bank's visibility in Montgomery and Bucks Counties and enhances the ability
to meet the needs of the communities we serve. These added offices
guarantee Madison Bank impact and influence within the five county regions.
The Bank currently offers services to residents of approximately 109
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 also has 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
<PAGE>
COMPETITION
There is substantial competition among financial institutions in the
Bank's service areas for deposits as well as loan customers. The Bank
competes with new and established local commercial banks, as well as
numerous Philadelphia and regionally-based commercial banks. In addition,
the Bank competes directly and indirectly with savings banks, savings and
loan associations, finance companies, credit unions, mortgage brokers,
insurance companies, securities brokerage firms, mutual funds, money market
funds, private lenders and other institutions for deposits, mortgages and
consumer and commercial loans, as well as 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, a wider
range of deposit and credit instruments, and possess greater depth of
management. The Bank is subject to potential additional competition from
new branch banks which could open in its trade areas.
In addition, there are banks and other financial institutions which
serve surrounding areas and out-of-state financial institutions which
currently, or in the future, may compete in the Bank's market. The Bank
competes to attract deposits and loan applications both from customers of
existing institutions and from customers new to its service areas.
6
<PAGE>
ITEM 2 -DESCRIPTION OF PROPERTY
The Company leases approximately 13,381 total square feet on the first
floor 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. 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) were payable monthly at an annual
rate of $142,092. The Company exercised its second renewal option,
beginning January 1, 2000, and base rental payments increased 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 and was paid to
the Bank in February, 2000. 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 1999,
the amount of such expenses was $39,652. The maximum allocable portion of
the Building's operating costs will be approximately $41,742 for 2000. 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, 2001. The
additional 1,400 square feet were leased for approximately $28,078 during
1997 and increases to $29,575 through February 1, 2001. The second floor
space of 3,355 square feet was leased at an annual rate of approximately
$70,722 and increases to $77,354 through November 30, 2001.
The Bank also leases space for branch banking facilities at the
following locations and through the years indicated in parentheses: (i)
2,800 square feet in Horsham, Pennsylvania (2009) (ii) 3,965 square feet in
Lansdale, Pennsylvania (2007), (iii) 3,000 square feet in Strafford,
Pennsylvania (2006); (iv) 3,600 square feet in Center Square, Pennsylvania
(2005), (v) 3,620 square feet in Conshohocken, Pennsylvania (2001), (vi)
2,800 square feet in Horsham, Pennsylvania (2009) and (vii) 2,400 square
feet in Langhorne, Pennsylvania (2009). The aggregate annual rent for the
space leased for branch banking facilities is $436,842 and is subject to
annual increases. The Bank is also responsible for its allocable share of
operating costs for such space.
ITEM 3 -LEGAL PROCEEDINGS
The Company and the Bank are involved from time to time in legal
proceedings arising in the ordinary course of business. In the opinion of
management, no pending proceedings will have a material adverse effect on
the Company's results of operations or financial condition.
ITEM 4 -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
7
<PAGE>
PART II
ITEM 5 -MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company is traded on the NASDAQ SmallCap
Market. As of March 27, 2000, there were approximately 451 holders of
record of the Company's common stock.
The high and low bid prices for the Company's common stock during each
quarter of the last two fiscal years were as follows:
<TABLE>
<CAPTION>
1999
----
1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
<S> <C> <C> <C> <C>
High Bid 10 10 8-3/4 7-7/16
Low Bid 6-13/16 7-3/64 7-1/8 4-7/8
<CAPTION>
1998
----
1ST QTR 2ND QTR 3RD QTR 4TH QTR
------- ------- ------- -------
<S> <C> <C> <C> <C>
High Bid 12-3/16 12-1/2 11 8-1/4
Low Bid 10-13/16 10-3/8 7 7
</TABLE>
Such quotations reflect inter-dealer prices, without retail mark-ups,
mark-downs or commissions and may not necessarily reflect actual
transactions. Trading in the Company's common stock during such periods was
sporadic. The quotations do not reflect an adjustment for the Stock
Dividends described below.
The Company has not paid any cash dividends. The Board of Directors
does not intend to declare cash dividends in the immediate future. At
December 31, 1996 the Company's comon stock outstanding was 971,360 shares.
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. In May, 1998 a 20% stock dividend was
declared, resulting in 259,040 additional shares of common stock, and in
September, 1999 a 10% stock dividend was declared, resulting in 156,648
additional shares of common stock being issued (collectively, the "Stock
Dividends"). In addition to the dividends issued, a total of 79,486 options
and warrants were exercised.
On July 13, 1998, Madison Capital Trust I, a Delaware business trust
established by the Company (the "Trust"), sold $5,000,000 in liquidation in
the amount of 9.00% Capital Securities, representing preferred beneficial
interest in the assets of the Trust, to seven institutional accredited
investors in a private offering exempt from registration under Regulation D
under the Securities Act of 1933.
On February 8, 2000, the Company received commitments to purchase, in
a private placement to its Board of Directors, pursuant to Section 4(2) of
the Securities Act of 1933, as amended, 335,000 shares of its common stock.
In certain circumstances, some purchases may be subject to regulatory
approval. If all of the shares are purchased, the private placement would
raise $1,926,250 million. As of March 27, 2000, 175,000 of such shares have
been sold for an aggregate of $1,006,250.
8
<PAGE>
ITEM 6 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains "forward-looking" statements. The Company is
including this statement for the express purpose of availing itself of the
protections of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to all of such forward-looking
statements. Examples of forward-looking statements include, but are not
limited to (a) projections of revenues, income or loss, earnings or loss
per share, capital expenditures, growth prospects, dividends, capital
structure and other financial items, (b) statements of plans and objectives
of the Company or its management or Board of Directors (c) statements of
future economic performance and (d) statements of assumptions underlying
other statements and statements about the Company or its business.
The Company's ability to predict projected results or to predict the
effect of certain events on the Company's operating results is inherently
uncertain. Therefore, the Company wishes to caution each reader of this
report to carefully consider certain factors, including competition for
deposits and loans; potential changes in interest rates; changes in
governmental policy and other factors discussed herein, because such
factors in some cases have affected and in the future (together with other
factors) could affect, the ability of the Company to achieve its
anticipated results and may cause actual results to differ materially from
those expressed herein.
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 1,747,947 shares at
December 31, 1999. The book value per share of the Company's common stock
at December 31, 1999, 1998 and 1997 was $5.88, $5.41 and $5.00,
respectively, after giving retroactive effect to the issuance of stock
dividends and options exercised.
9
<PAGE>
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, 1999, which exceeded the levels required to be "well capitalized"
under applicable Federal Deposit Insurance Corporations' regulations.
RISK WEIGHTED CATEGORY
<TABLE>
<CAPTION>
RISK WEIGHTED ASSETS 0% 20% 50% 100% TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $48,968 $80,348 $129,316
Securities Available for Sale $ 323 $17,500 17,823
Securities Held to Maturity 570 2,000 2,570
Federal Funds Sold 500 500
Cash and Due From Banks 2,254 335 2,589
Other Assets 4,306 4,306
-----------------------------------------------
--------------------------------------------------------------------------------
CATEGORY TOTALS 2,577 18,905 48,968 86,654 157,104
--------------------------------------------------------------------------------
Off balance-sheet items
(risk weighted) 182
--------------------------------------------------------------------------------
Total risk-weighted assets $ 0 $3,817 $24,484 $86,654 $114,955
================================================================================
Average Total Assets 156,072
</TABLE>
<TABLE>
<CAPTION>
CAPITAL TIER 1 TIER 2 TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholders' equity (inclusive of Trust
Preferred Securities eligible for Tier 1) $13,979 $ $13,979
Allowance for loan losses and Trust
Preferred 2,767 2,767
------ ------ -------
--------------------------------------------------------------------------
Total Capital $13,979 $2,767 $16,746
==========================================================================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
REGULATORY
MINIMUM ACTUAL ACTUAL
RATIO 12/31/99 12/31/99 12/31/98
----- -------- -------- --------
<S> <C> <C> <C>
Qualifying Total Capital
to Risk Weighted Assets 8.0% 14.57% 10.72%
Tier 1 Capital to Risk Weighted
Assets 4.0% 12.16% 9.71%
Tier 1 Ratio to
Total Adjusted Average Assets 4.0% 8.96% 8.26%
</TABLE>
The Company's capital-to-assets ratio increased from 6.39% as of
December 31, 1998 to 6.60% at December 31, 1999. The increase in the
capital-to-assets ratio was due to increased earnings of the Company during
1999. The Company's return on average equity for 1999 was 9.39% and for
1998 was 5.13%; and its return on average assets was .61% for 1999 as
compared to .32% for 1998. The increase in the Company's return on equity
and return on assets from 1998 to 1999 was directly attributable to
increased net income. (See "Management's Discussion and Results of
Operations.") For information concerning the Bank's Capital Ratios see
footnote 17 of the Company's financial statements.
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, 1998 and 1999. Such yields
and costs were derived by dividing actual income or expense by the monthly
average balance of assets or liabilities, respectively, for the respective
period, and exclude unrecorded interest income related to non-accrual
loans.
11
<PAGE>
<TABLE>
<CAPTION>
1999 1998
(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) $ 123,628 $12,037 9.74% $ 110,761 $10,507 9.49%
Other Investments 11,255 302 2.68 4,135 236 5.71
Federal Funds Sold 7,880 370 4.70 6,408 352 5.49
--------- ------- --------- -------
Total Interest-Earning Assets $ 142,763 $12,709 8.90 $ 121,304 $11,095 9.15
------- ---- ------- ----
Non-Interest-Earning Assets 8,309 8,203
--------- ---------
Total Assets $ 151,072 $ 129,507
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand Interest-Bearing $ 12,624 $ 249 1.97 $ 9,237 $ 189 2.05
Money Market & Savings 26,943 754 2.80 21,932 640 2.92
Other Time Deposits 71,933 3,810 5.30 69,010 3,919 5.68
Borrowed Funds 2,444 139 5.69
Preferred Trust 5,000 450 9.00 2,500 225 9.00
--------- ------- --------- -------
Total Interest-Bearing Liabilities 118,944 5,402 4.54 102,679 $ 4,973 4.84
------- ---- ------- ----
Other Liabilities 22,272 18,132
------ ------
Total Liabilities 141,216 120,811
Shareholders' Equity 9,856 8,696
--------- ---------
Total Liabilities and Shareholders'
Equity $ 151,072 $ 129,507
========= =========
Net Interest Income/Rate Spread $ 7,307 4.36% $ 6,122 4.31%
======= ==== ======= ====
Net Interest Margin 5.12% 5.05%
==== ====
</TABLE>
The following table analyzes the rate/volume variances between the
Bank's interest-earning assets and interest-bearing liabilities for the
fiscal years 1999 compared to 1998 and 1998 compared to 1997. For each
category of interest-bearing assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(change in volume multiplied by prior year rate), (ii) changes to rate
(change in rate multiplied by prior year volume), and (iii) total change in
rate and volume. The combined effect of changes in both rate and volume has
been allocated proportionately to the change due to rate and the change due
to volume.
12
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 VS. 1998 1998 VS. 1997
------------- -------------
(IN THOUSANDS)
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loan Portfolio (includes mortgages
held for sale) $ 1,247 $ 283 $ 1,530 $ 1,240 $ 128 $ 1,368
Other Investments 242 (176) 66 (31) (23) (54)
Federal Funds 74 (56) 18 147 9 156
------- -------- -------- ------- ------- -------
Total Interest Earning Assets 1,563 51 1,614 1,355 115 1,470
------- -------- -------- ------- ------- -------
Interest Expense:
Demand Interest - Bearing 67 (7) 60 64 (2) 62
Money Market & Savings 141 (27) 114 86 (54) 32
Other Time Deposits 161 (270) (109) 715 (53) 662
Borrowed Funds 139 139 (399) (399)
Preferred Trust 225 225 225 225
------- -------- ------- ------- ------- -------
Total Interest Bearing Liabilities 733 (304) 429 691 (109) 582
------- -------- -------- ------- ------- -------
Net Change in Net Interest Income $ 830 $ 355 $ 1,185 $ 604 $ 224 $ 888
------- -------- -------- ------- ------- -------
------- -------- -------- ------- ------- -------
</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
13
<PAGE>
gap indicates that interest-earning assets exceed interest-bearing
liabilities within a given interval. A positive gap position results in
increased net interest income when rates increase and the opposite when
rates decline.
At December 31, 1999, 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 $19,600. If rates fell 200 basis
points, monthly revenues a year from now would increase approximately
$20,663 and a rise in rates by 200 basis points would represent a monthly
loss in revenues of approximately $17,842.
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, 1999 by listing major categories of
interest-sensitive assets and compares them to interest-sensitive
liabilities for various time periods. The repricing intervals primarily are
determined by the first opportunity for the Company to change the interest
rate on the subject instrument. The table shows the difference between
interest-sensitive assets and interest-sensitive liabilities, or Gap, for
each repricing interval and a cumulative Gap and certain calculations based
on such information.
14
<PAGE>
INTEREST RATIO SENSITIVITY REPORT
AS OF DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1-90 91-180 181-365 1-5 5 YEARS
DAYS DAYS DAYS YEARS AND OVER TOTAL
-------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets
Federal Funds Sold $ 500 $ 0 $ 0 $ 0 $ 0 $ 500
Loans 52,478 6,815 6,257 43,635 18,869 128,054
Interest-Bearing Balances 0 0 0 0 0 0
Investment Securities Held
For Sale 0 0 0 12,056 5,767 17,823
Investment Securities Held
For Maturity 0 0 0 400 2,170 2,570
-------- -------- --------- -------- --------- --------
Totals $ 52,978 $ 6,815 $ 6,257 $ 56,091 $ 26,806 $148,947
Cumulative Total $ 52,978 $ 59,793 $ 66,050 $122,141 $ 148,947 $148,947
Interest-Sensitive Liabilities
Demand-Interest-bearing $ 12,705 $ 0 $ 0 $ 0 $ 0 $ 12,705
Savings Accounts 8,150 0 0 0 0 8,150
Money Market Accounts 15,205 0 0 0 0 15,205
Time Deposits 21,048 10,679 21,488 14,804 5,719 73,738
Borrowed Funds 0 0 0 9,000 0 9,000
Trust 0 0 0 0 5,000 5,000
-------- -------- --------- -------- --------- --------
Totals $ 57,108 $ 10,679 $ 21,488 $ 23,804 $ 10,719 $123,798
Cumulative Totals $ 57,108 $ 67,787 $ 89,275 $113,079 $ 123,798 $123,798
Gap $ (4,130) $ (3,864) $ (15,231) $ 32,287 $ 16,087 $ 25,149
Cumulative Gap $ (4,130) $ (7,994) $ (23,225) $ 9,062 $ 25,149 $ 25,149
Interest-sensitive assets/
Interest-sensitive liabilities
(cumulative) .93 .88 .74 1.08 1.20 1.20
Cumulative Gap/total earning
assets (3%) (5%) (16%) (2%) 17% 17%
Total Earning Assets $148,947
</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. 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 1999, the Company's net interest spread was
maintained at approximately 4.36%, as compared to 4.31% in 1998.
RESULTS OF OPERATIONS
At December 31, 1999, the Bank held deposits aggregating $130,338,463,
of which $20,540,071, or approximately 16%, were non-interest-bearing
deposits, (exclusive of the $84,714 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 1,762
loan customers totaled approximately $124,233,606, resulting in an average
loan size of approximately $70,507.
At 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.
At 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.
16
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
% OF % OF % OF
TYPE OF ACCOUNT BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Non-Int. Bearing $ 20,540,071 16.00% $ 23,423,200 18.00% $ 16,076,381 14.00%
Interest-Bearing 12,704,649 10.00 11,785,117 9.00 8,164,080 7.00
Money Market 15,205,159 12.00 17,109,125 13.00 14,039,724 12.00
Savings 8,150,269 6.00 11,089,034 8.00 5,270,011 5.00
CDs over $100,000 33,239,808 25.00 31,052,033 23.00 32,244,281 28.00
CDs under $100,000 40,498,507 31.00 38,136,009 29.00 39,037,933 34.00
------------ --------- ------------ --------- ------------ ---------
Total Deposits $130,338,463 100.00% $132,594,518 100.00% $114,832,410 100.00%
============ ========= ============ ========= ============ =========
</TABLE>
For the year ended December 31, 1999, the Company's total income was
$16,443,137 and its total expenses were $15,517,362, resulting in a net
profit for the year of $925,775. The increase in net income for the year
ended December 31, 1999 was due to increased interest income from the
Bank's earning assets and gain on sale of mortgage loans. 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. 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 of $756,478. The decrease in net income for the year ended December
31, 1998 as compared to December 31, 1997 was primarily due to an increase
in operating expenses due to branch expansion and start up costs associated
with the Bank's mortgage department.
As of December 31, 1999, the allowance for loan loss equaled
approximately 1.02% of outstanding loans, including non-accrual loans.
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. The chart below shows an analysis of the
allowance for loan losses for the years ended December 31, 1999, 1998
and 1997. The overall reserve has increased slightly from .96% of
outstanding loans at December 31, 1998 to 1.02% of outstanding loans at
December 31, 1999. Management continues to believe that the reserve
adequately reflects the level of risk in the portfolio.
17
<PAGE>
ANALYSIS OF THE BANK'S ALLOWANCES FOR LOAN LOSSES
DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period: $ 1,111,817 $ 936,974 $ 875,438
----------- ----------- -----------
Charge-offs:
Commercial (216,480) (214,952) (295,581)
Installment (104,880) (61,675) (4,283)
----------- ----------- -----------
Total (321,360) (276,627) (299,864)
Recoveries:
Commercial 9,740 1,400
Installment 1,799 1,730
----------- ----------- -----------
Net Charge-Offs (319,561) (265,157) (298,464)
----------- ----------- -----------
Additions charged to operations 470,000 440,000 360,000
----------- ----------- -----------
Balance at the end of period $ 1,262,256 $ 1,111,817 $ 936,974
=========== =========== ===========
Ratio of net charge-offs during
the period to average loans
outstanding during the period .26% .24% .31%
=========== =========== ===========
</TABLE>
As of December 31, 1999, the Bank had loans outstanding, totaling
$124,233,606, excluding residential mortgage loans held for sale. The Bank
grants loans to customers in its local market area. The ultimate repayment
of these loans is dependent to a certain degree on the local economy and
real estate market.
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
18
<PAGE>
losses is increased by the provision for loan losses and recoveries and is
decreased by charged-off loans.
Management is currently utilizing a blended general portfolio
allocation with segregated pools of loans and a specific loan-by-loan
allocation mirroring bank regulatory classifications. Each classified
credit is assigned a specific reserve allocation based upon the severity of
its classification and its specific characteristics (i.e., industry, type
of project, nature of collateral). General reserve allocations are also
established against the unclassified major segments of the loan portfolio,
as well as against 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, 1999, totaled $470,000. Loans charged off against
the reserve in 1999 amounted to $321,360 and recoveries were $1,799, which
resulted in net charged-off loans of $319,561. The principal amount of
non-accrual loans at December 31, 1999 was $1,564,493, an increase of 44%
over 1998. The increase is attributable to three (3) real estate related
loans which are presently in the process of collection. 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, 1998, totaled $440,000. Loans charged-off against
the reserve in 1998 amounted to $276,627. Recoveries amounted to $11,470
which resulted in $265,157 in net charged-off loans. The principal amount
of nonaccrual loans at December 31, 1998 totaled $1,088,946. This is an
increase of $197,094 over year end 1997.
Additions to the Bank's provisions 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. Loans on non-accrual status as of
December 31, 1997 amounted to $891,852.
Other real estate owned at December 31, 1999 totaled $577,039 as
compared to $734,089 at December 31, 1998. This consists of three
properties acquired at sheriff's sale. The first 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. The second property is a single family residential property in
West Chester, Pennsylvania which was sold and settled in January of 2000.
The third property is a single family residence in the Poconos section of
Pennsylvania which was sold and settled in February of 2000.
Interest expense of $5,401,780, represented 41% of gross interest
income in 1999. Interest expense increased 9% over 1998. This slight
increase was due to a slight increase in interest-bearing deposits and
the increased borrowed funds.
19
<PAGE>
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%.
Occupancy and equipment expenses totaled $1,414,580 for the year ended
December 31, 1999, as compared to $1,169,651 at December 31, 1998. The 21%
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 seventh branch opening in Horsham, PA
and technology enhancements to accommodate the Bank's expansion and product
offerings.
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 represented an increase in maintenance costs and equipment leases
reflective of the Bank's newly formed mortgage department in June of 1998
and the opening of its sixth branch location.
Salary and employee benefits of $5,305,395 represented 58% of total
non-interest expenses, or 34% of total Bank expenses, at December 31, 1999.
The increase in salary and employee benefits of $1,986,765 or 60% over 1998
is reflective of hiring additional employees and increased benefits expense
related to the opening of the Bank's seventh branch.
Salary and employee benefits of $3,318,630 in 1998 represented 52% of
total non-interest expense, or 28% of total bank expenses as compared to
$2,254,829 in 1997. The increase in salary and employee benefits of
$1,063,801, or 48%, was attributable to the hiring of additional employees
for the Bank's sixth branch opening and newly-formed mortgage department in
1998.
Other operating expenses in 1999, exclusive of occupancy and equipment
and salary and employee benefits totaled $2,376,821 as compared to
$1,911,095 at December 31, 1998. This increase of 24% for the 1999 year is
a result of branch expansion and asset growth. Legal expenses increased
from $115,013 to $143,211, a 25% increase over 1998. 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 $84,775
in 1998 to $64,410 in 1999. The 24% decrease was related to a decrease in
outside service fees. The $2,169,200 in other operating expenses was
comprised primarily of increases of 55% in telephone expense, 61% in
postage and freight and 28% in business related auto and travel and
miscellaneous expenses. Other components of other operating expenses also
include insurance expense, shares tax expense and accounting and audit
fees. These expenses increased 65% over 1998 and were directly related to
branch expansion and marketing efforts to increase business. Deposit
insurance increased by 90% in 1999 from $22,773 at December 31, 1998, to
$43,217 at December 31, 1999. The Bank pays premiums in accordance with the
deposit size of its portfolio and its insurance category rating.
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
20
<PAGE>
$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 due 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 to 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 non-recurring proxy and 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. Legal expenses decreased $29,049 or 36% from
1996. This was a result of fewer legal and collection issues arising in the
normal course of the Bank's business. Business development expenses were
$176,770 in 1997 as compared to $124,637 in 1996. This 42% increase was a
direct result of the Bank's efforts to develop business and become
increasingly visible in its branch location communities. In addition, the
Bank had 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.
Interest income on investment securities relates primarily to interest
on U.S. Government Obligations. Interest income of $507,834 for the year
ended December 31, 1999 increased 256% from $142,652 for the year ended
December 31, 1998. The increase is a direct result of employing borrowed
funds and Federal Funds Sold to invest in such securities. The average
balance of government obligations increased from $4,135,000 in 1998 to
$9,859,000 in 1999. Interest income of $142,652 for the year ended December
31, 1998, decreased 23% from $185,263 for the year ended December 31, 1997.
The decrease was a direct result of the change in liquidity position of the
Company.
Interest income on temporary investments represents Federal Funds
sold. For the year ended December 31, 1999, interest income on Federal
Funds sold was $370,274, as compared to $352,432 at December 31, 1998, a 5%
increase. The deposit growth allowed the Bank to invest in overnight funds.
For the year ended December 31, 1998, interest income on Federal Funds sold
was $352,432, as compared to $196,425 for the year ended December 31, 1997,
a 79% increase. The deposit growth of the Bank provided for an improved
liquidity position as well as growth in federal funds, which better
prepared the Bank for potential loan demand.
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 years ended December 31, 1999, 1998 and
1997, interest income on other investments was $244,517, $93,490 and
$104,511, 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 1999, 1998 or 1997.
Interest and fees on loans were $12,037,116 in 1999, 91% of gross
interest income, as compared to $10,506,782, or 95% of gross interest
income in 1998. The average loan portfolio grew 12% while
21
<PAGE>
the Bank's yield increased from 9.49% in 1998 to 9.74% in 1999. 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 from 9.35% to 9.49%. Interest and fees on
loans were $9,138,864 in 1997, 95% of gross interest income. The Bank
experienced a 20% growth in average loans while the average yield on the
portfolio decreased from 9.42% to 9.35%. 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 1997.
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 were effective for
fiscal year 1998 and issued, not yet adopted for 1999. 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 have recognized a date using "00" as the year 1900 rather than
the year 2000. The Company did not experience any year 2000 related
computer problems.
22
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report dated March 10, 2000.
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1999, 1998 and
1997.
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997.
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.
23
<PAGE>
- -----------------------------------------------------------------------------
Madison Bancshares Group, Ltd.
and Subsidiary
Consolidated Financial Statements as of
December 31, 1999 and 1998 and for
Each of the Three Years in the Period
Ended December 31, 1999, and
Independent Auditors' Report
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Madison Bancshares Group, Ltd.
Blue Bell, Pennsylvania
We have audited the accompanying consolidated statements of financial condition
of Madison Bancshares Group, Ltd. and subsidiary (the "Company") as of December
31, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States of America. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 10, 2000
25
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and amounts due from banks $ 2,588,835 $ 7,793,484
Federal funds sold 500,000 7,500,000
------------- -------------
Total cash and cash equivalents 3,088,835 15,293,484
INVESTMENT SECURITIES:
Held to maturity (fair value - 1999, $2,567,857; 1998, $1,613,597) 2,570,106 1,602,493
Available for sale (amortized cost - 1999, $17,055,709; 1998, $1,000,046) 16,749,747 1,010,000
Federal Home Loan Bank Stock 750,000 527,300
Federal Reserve Bank Stock 323,400 176,400
LOANS (Net of allowance for loan losses - 1999, $1,262,256; 1998, $1,111,817) 122,635,380 113,819,315
MORTGAGE LOANS HELD FOR SALE 5,418,972 11,593,638
REAL ESTATE OWNED 577,039 734,089
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 1,661,814 1,583,473
ACCRUED INTEREST RECEIVABLE 1,281,928 1,076,682
OTHER ASSETS 785,189 508,989
------------- -------------
TOTAL $155,842,410 $ 147,925,863
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand deposits $ 20,540,071 $ 23,423,200
Interest-bearing demand deposits 12,704,649 11,785,117
Savings deposits 8,150,269 11,089,034
Money market deposits 15,205,159 17,109,125
Time deposits 73,738,315 69,188,042
------------- -------------
Total deposits 130,338,463 132,594,518
BORROWED FUNDS 9,000,000
GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT 5,000,000 5,000,000
ACCRUED INTEREST PAYABLE 960,268 804,222
ACCRUED EXPENSES AND OTHER LIABILITIES 261,148 76,731
------------- -------------
Total liabilities 145,559,879 138,475,471
------------- -------------
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 - 1999, 1,747,947; 1998, 1,562,018 shares) 1,747,947 1,562,018
Capital surplus 8,745,557 7,563,433
Accumulated earnings (deficit) (9,038) 318,371
Accumulated other comprehensive income (loss) (201,935) 6,570
------------- -------------
Total shareholders' equity 10,282,531 9,450,392
------------- -------------
TOTAL $155,842,410 $ 147,925,863
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 12,037,116 $ 10,506,782 $ 9,138,864
Interest and dividends on investment securities:
U.S. Government obligations 507,834 142,652 185,263
Other securities 244,517 93,490 104,511
Interest on temporary investments 370,274 352,432 196,425
----------- ----------- ----------
Total interest income 13,159,741 11,095,356 9,625,063
----------- ----------- ----------
INTEREST EXPENSE:
Interest on:
Demand deposits 248,507 188,770 127,143
Savings and money market deposits 754,109 637,589 607,838
Time deposits 3,809,686 3,918,856 3,256,833
Guaranteed preferred beneficial interest in subordinated debt 450,000 225,000
Other interest 139,478 2,921 399,282
----------- ----------- ----------
Total interest expense 5,401,780 4,973,136 4,391,096
----------- ----------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 7,757,961 6,122,220 5,233,967
PROVISION FOR LOAN LOSSES 470,000 440,000 360,000
----------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,287,961 5,682,220 4,873,967
----------- ----------- ----------
OTHER NONINTEREST INCOME:
Service charges on deposit accounts 577,953 719,541 573,493
Gain on the sale of mortgage loans 2,582,212 599,065 83,339
Other 123,231 172,067 94,604
----------- ----------- ----------
Total noninterest income 3,283,396 1,490,673 751,436
----------- ----------- ----------
OTHER NONINTEREST EXPENSES:
Salaries and employee benefits 5,305,395 3,318,630 2,254,829
Occupancy 976,081 842,264 715,145
Equipment 438,499 327,387 224,659
Computer processing 339,649 288,378 253,196
Deposit insurance 43,217 22,773 13,768
Legal 143,211 115,013 50,331
Professional fees 64,410 84,775 51,166
Business development 323,216 214,773 176,770
Office and stationery supplies 186,880 167,244 132,818
Advertising 86,375 43,846 56,352
Director's fees 138,375 154,975 107,025
Amortization expense 50,519 21,050
Other operating 1,000,969 798,268 416,053
----------- ----------- ----------
Total other noninterest expenses 9,096,796 6,399,376 4,452,112
----------- ----------- ----------
INCOME BEFORE TAXES 1,474,561 773,517 1,173,291
PROVISION FOR INCOME TAXES 548,786 327,155 416,813
----------- ----------- ----------
NET INCOME $ 925,775 $ 446,362 $ 756,478
----------- ----------- ----------
----------- ----------- ----------
BASIC EARNINGS PER SHARE $ 0.54 $ 0.26 $ 0.46
----------- ----------- ----------
----------- ----------- ----------
DILUTED EARNINGS PER SHARE $ 0.51 $ 0.25 $ 0.47
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Accumulated Comprehensive
Common Capital Earnings Income Comprehensive
Stock Surplus (Deficit) (Loss) Total Income
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 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 $ 756,478
Net change in unrealized gain
on securities available for sale
net of taxes of $(4,049) 7,520 7,520 7,520
------------
Comprehensive income $ 763,998
----------- ----------- ----------- ------------ ------------ ------------
------------
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 $ 446,362
Net change in unrealized gain
on securities available for sale
net of taxes of $(3,214) 5,969 5,969 5,969
------------
Comprehensive income $ 452,331
----------- ----------- ----------- ------------ ------------ ------------
------------
BALANCE, DECEMBER 31, 1998 1,562,018 7,563,433 318,371 6,570 9,450,392
Exercise of stock warrants 29,281 85,588 114,869
Issuance of 10% stock dividend 156,648 1,096,536 (1,253,184)
Comprehensive income:
Net income 925,775 925,775 $ 925,775
Net change in unrealized loss
on securities available for sale
net of tax benefit of $106,971 (208,505) (208,505) (208,505)
-------------
Comprehensive income $ 717,270
----------- ----------- ----------- ------------ ------------ ------------
------------
BALANCE, DECEMBER 31, 1999 $1,747,947 $8,745,557 $ (9,038) $(201,935) $10,282,531
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 925,775 $ 446,362 $ 756,478
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation on equipment 317,639 245,048 153,271
Provision for loan losses 470,000 440,000 360,000
Net amortization (accretion) of bond premium/discount 3,413 2,204 (1,913)
Gain on sale of mortgage loans held for sale (2,582,212) (599,065) (83,339)
Gain on sale of investments (575)
Loss on sale of real estate owned 30,416
Originations of loans held for sale (143,306,366) (41,628,024) (10,474,740)
Proceeds from sale of loans 152,063,244 30,924,351 12,402,193
Changes in assets and liabilities which provided (used) cash:
Accrued interest receivable (205,246) (370,234) 401,296
Other assets (276,200) (271,790) (373,621)
Accrued interest payable 156,046 (34,291) 133,806
Accrued expenses and other liabilities 184,417 (20,942) 5,715
Deferred loan fees 136,982 129,976 80,497
------------ ------------ -----------
Net cash provided by (used in) operating activities 7,917,908 (10,736,405) 3,359,068
------------ ------------ -----------
INVESTING ACTIVITIES:
Purchase of investment securities held to maturity (2,000,000)
Purchase of investment securities available for sale (17,056,249) (2,499,308)
Purchase of Federal Reserve Stock (147,000)
Purchase of Federal Home Loan Bank Stock (222,700) (47,500)
Proceeds from maturities of investment securities held to maturity 1,030,000 500,000
Proceeds from sale of investment securities available for sale 998,750
Proceeds from maturities of investment securities available for sale 1,000,000 2,000,000 1,446,200
Proceeds from sale of furniture, equipment and leasehold improvements 3,500
Loans purchased and originated, net of principal repayments (9,808,086) (12,457,404) (11,864,109)
Cost capitalized for real estate owned (1,008) (20,108)
Additions to furniture, equipment and leasehold improvements (399,480) (912,037) (484,991)
Proceeds on sale of real estate owned 619,652 50,000
------------ ------------ -----------
Net cash used in investing activities (26,981,371) (11,437,049) (11,853,458)
------------ ------------ -----------
FINANCING ACTIVITIES:
Net (decrease) increase in demand, savings and time deposits (2,256,055) 17,762,109 27,632,419
Exercise of stock warrants 114,869 250,845
Exercise of stock options 8,998
Proceeds from issuance of capital securities 5,000,000
Advances of borrowed funds 9,000,000 9,000,000
Repayments of borrowed funds (9,000,000) (10,000,000)
------------ ------------ -----------
Net cash provided by financing activities 6,858,814 14,021,952 26,632,419
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,204,649) (8,151,502) 18,138,029
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 15,293,484 23,444,986 5,306,957
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,088,835 $15,293,484 $23,444,986
------------ ------------ -----------
------------ ------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,401,780 $ 4,503,465 $ 3,858,282
------------ ------------ -----------
------------ ------------ -----------
Income taxes $ 745,210 $ 357,000 $ 363,663
------------ ------------ -----------
------------ ------------ -----------
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Issuance of 10% stock dividend in 1999, 20% stock dividend in 1998, and 7.5%
and 20% stock dividend in 1997:
Common stock $ 156,648 $ 259,040 $ 281,413
------------ ------------ -----------
------------ ------------ -----------
Capital surplus $ 1,096,536 $ (259,040) $ 427,149
------------ ------------ -----------
------------ ------------ -----------
Accumulated deficit $(1,253,184) $ (708,562)
------------ -----------
------------ -----------
Transfers from loans to real estate owned $ 492,010 $ 248,669
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
MADISON BANCSHARES GROUP, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
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,
Northeast Philadelphia and its seventh branch location in Horsham, which
was opened in 1999. 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 $1,124,506 and $773,342
at December 31, 1999 and 1998, 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.
30
<PAGE>
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.
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 IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURE. SFAS Nos.
114 and 118 require that certain impaired loans are 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 three 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.
31
<PAGE>
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET - Furniture,
equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by the
straight-line method and charged to operating expenses over the estimated
useful lives of the related assets. 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.
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 10% stock dividend
issued in 1999, the 20% stock dividend issued in 1998 and the 20% and 7.5%
stock dividends issued in 1997. The calculation of the weighted average
shares, after giving effect to the stock split, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Average common shares outstanding 1,724,225 1,694,498 1,656,184
Increase in shares due to options and warrants -
diluted basis 86,358 97,765 114,732
--------- --------- ----------
Adjusted shares outstanding - diluted 1,810,583 1,792,263 1,770,916
--------- --------- ----------
--------- --------- ----------
</TABLE>
ACCOUNTING FOR STOCK OPTIONS AND WARRANTS - The Company accounts for stock
options and warrants in accordance with SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which allows the Company to account for
compensation expense of the options and warrants using the intrinsic value
method as defined in Accounting Principles Bulletin ("APB") Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company is required to
disclose the pro forma net income and earnings per share, calculated using
the fair value method for measuring compensation as defined in SFAS No.
123 at the grant date of options and warrants. The Company has not
recognized any compensation expense under the intrinsic value method.
COMPREHENSIVE INCOME - In June 1998, 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, as amended by SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF
THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, is effective for all fiscal
quarters of fiscal years beginning after June 15,
32
<PAGE>
2000, and should 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 1997 and 1998 consolidated
financial statements have been reclassified to conform with the
presentation in the 1999 consolidated financial statements.
3. INVESTMENT SECURITIES
A summary of investment securities and their expected maturities, as well
as estimated fair values at December 31, 1999 and 1998 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, 1999:
Debt securities:
U.S. Government and Federal Agencies $ 2,000,000 $ 2,000,000
Municipal and State Government bonds 570,106 $ 248 $ (2,497) 567,857
------------ ------- --------- -----------
Total $ 2,570,106 $ 248 $ (2,497) $ 2,567,857
------------ ------- --------- -----------
Securities available for sale:
December 31, 1999:
Debt securities - U.S. Government
and Federal Agencies $ 17,055,709 $ $(305,962) $16,749,747
------------ ------- --------- -----------
Total $ 17,055,709 $ $(305,962) $16,749,747
------------ ------- --------- -----------
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
------------ ------- --------- -----------
------------ ------- --------- -----------
</TABLE>
33
<PAGE>
The scheduled maturities of debt securities to be held to maturity and
debt securities available for sale at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Securities to be Securities
Held to Maturity Available for Sale
------------------------------------ ----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due from 1 to 5 years $ 400,000 $ 400,248 $12,055,709 $11,830,997
Due from 5 to 10 years 2,170,106 2,167,609 5,000,000 4,918,750
---------- ---------- ----------- ------------
Total $2,570,106 $2,567,857 $17,055,709 $16,749,747
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
</TABLE>
There were no sales of investment securities in 1999 or 1998. Gross
proceeds from the sale of investment securities available for sale in 1997
totaled $998,750, resulting in a gross gain of $575.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans outstanding are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Real estate mortgage loans $ 24,652,775 $ 33,743,039
Commercial loans 89,988,247 72,425,657
Consumer loans 9,592,584 9,235,390
------------- -------------
Total 124,233,606 115,404,086
Less:
Allowance for loan losses (1,262,256) (1,111,817)
Deferred origination fees, net (335,970) (472,954)
------------- -------------
$ 122,635,380 $113,819,315
------------- -------------
------------- -------------
</TABLE>
The Bank grants loans to customers 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, 1999, 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 7.10% to 10.07% with adjustable
rates ranging from the Bank's prime rate to 2% in excess of prime.
34
<PAGE>
The composition of fixed and adjustable rate loans as of December 31, 1999
was as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
- ------------------------------------------------------ ----------------------------------------------------
<S> <C> <C> <C>
Term to Rate
Term to Maturity Book Value Adjustment Book Value
1 month - 1 year $17,736,816 Less than 1 month $44,468,094
1 year - 3 years 21,734,604 1 month to 1 year 2,687,000
3 years - 5 years 22,440,874 1 year - 3 years
5 years - 30 years 14,317,218 3 years - 30 years 849,000
----------- ------------
$76,229,512 $48,004,094
----------- ------------
----------- ------------
</TABLE>
An analysis of the activity in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of year $ 1,111,817 $ 936,974 $ 875,438
----------- ----------- ---------
Provision charged to operations 470,000 440,000 360,000
----------- ----------- ---------
Loans charged off:
Commercial loans (216,480) (214,952) (295,581)
Consumer loans (104,880) (61,675) (4,283)
----------- ----------- ---------
(321,360) (276,627) (299,864)
----------- ----------- ---------
Recoveries - commercial loans and installments 1,799 11,470 1,400
----------- ----------- ---------
Balance, end of year $ 1,262,256 $ 1,111,817 $ 936,974
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The provision for loan losses charged to expense is based upon past loan
and loss experience and an evaluation of losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114
and 118. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan. An
insignificant delay or insignificant shortfall in amount of payments does
not necessarily result in the loan being identified as impaired. For this
purpose, delays less than 90 days are considered to be insignificant. As
of December 31, 1999 and 1998, 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:
35
<PAGE>
The following table summarizes impaired loan information.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
<S> <C> <C>
Impaired loans with related reserve for loan losses
calculated under SFAS No. 114 $ 2,138,635 $ 2,142,265
Impaired loans with no related reserve for loan losses
calculated under SFAS No. 114 -- --
------------ -----------
Total $ 2,138,635 $ 2,142,265
------------ -----------
------------ -----------
</TABLE>
<TABLE>
Year Ended
December 31,
--------------------------------
1999 1998
<S> <C> <C>
Average impaired loans $ 2,140,450 $ 1,842,643
Interest income recognized on impaired loans 233,646 78,724
Cash basis interest income recognized on impaired loans 19,319 46,353
</TABLE>
At December 31, 1999, all of the Bank's nonaccrual loans were considered
to be impaired loans.
Interest payments on impaired loans are typically applied to principal
unless collectibility of the principal amount is fully assured, in which
case interest is recognized on the cash basis.
Commercial loans and commercial real estate loans are placed on nonaccrual
at the time the loan is 90 days delinquent unless the credit is well
secured and in the process of collection. Generally, commercial loans are
charged off no later than 120 days delinquent unless the loan is well
secured and in the process of collection, or other extenuating
circumstances support collection. Residential real estate loans are
typically placed on nonaccrual at the time the loan is 90 days delinquent.
Other consumer loans are typically charged off at 90 days delinquent. In
all cases, loans must be placed on nonaccrual or charged off at an earlier
date if collection of principal or interest is considered doubtful.
The principal amount of nonaccrual loans at December 31, 1999 and 1998
totaled $1,564,493 and $1,088,946, respectively. Additional interest
income that would have been recorded in 1999 and 1998 under the original
terms of nonaccrual loans totaled approximately $151,000 and $92,000,
respectively.
Accruing loans which are contractually past due 90 days or more totaled
$1,196,854 and $2,321,101 at December 31, 1999 and 1998, respectively.
Interest due on these loans totaled $117,362 and $221,608 at December 31,
1999 and 1998, respectively.
36
<PAGE>
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of furniture, equipment and leasehold improvements is as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
<S> <C> <C>
Building and land $ 681,436 $ 678,236
Furniture and equipment 1,791,173 1,515,903
Leasehold improvements 485,531 368,022
----------- ----------
Total 2,958,140 2,562,161
Accumulated depreciation and amortization (1,296,326) (978,688)
----------- ----------
$1,661,814 $1,583,473
----------- ----------
----------- ----------
</TABLE>
6. DEPOSITS
Interest-bearing deposits have stated rates ranging from 2.02% to 6.08%
with a weighted average cost on all deposits of 4.41% at December 31, 1999
and from 2.05% to 5.68% with a weighted average cost on all deposits of
4.74% at December 31, 1998.
Time deposit accounts outstanding at December 31, 1999 and 1998 mature as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Three months or less $21,047,542 $24,816,936
Four to twelve months 32,167,264 35,803,925
Over twelve months 20,523,509 8,567,181
----------- -----------
$73,738,315 $69,188,042
----------- -----------
----------- -----------
</TABLE>
The aggregate amount of certificates of deposit in denominations of
$100,000 or more at December 31, 1999 and 1998 was $33,239,808 and
$31,052,033, respectively. Interest expense attributable to certificates
of deposit in denominations of $100,000 or more for the years ended
December 31, 1999, 1998 and 1997 amounted to $1,532,485, $1,593,915 and
$1,355,577, respectively. These certificates and their remaining
maturities are as follows:
<TABLE>
<CAPTION>
1999
<S> <C>
Three months or less $14,860,726
Four to twelve months 13,145,156
Over 12 months 5,233,926
------------
$33,239,808
------------
------------
</TABLE>
37
<PAGE>
7. OTHER BORROWED MONEY
Other borrowed money at December 31, 1999 consisted of FHLB advances as
follows:
<TABLE>
<CAPTION>
Investment
Date Rate
<S> <C> <C>
January 2000 5.80% $ 5,000,000
February 2000 5.75% 1,000,000
May 2000 5.84% 1,000,000
August 2000 5.96% 2,000,000
------------
$ 9,000,000
------------
------------
</TABLE>
The advances are collateralized by FHLB stock and substantially all first
mortgage loans.
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,
--------------------------------------------------------------------------------
1999 1998 1997
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $516,096 35.0% $270,731 35.0% $410,652 35.0%
Increase (decrease) resulting from:
Benefit of surtax exemptions (14,746) (1.0) (7,735) (1.0) (11,733) (1.0)
Meals and entertainment
disallowed 54,947 3.7 36,512 4.7 30,051 2.6
Tax exempt income (12,020) (0.8) (18,653) (2.4) (18,355) (1.6)
Other 4,509 0.3 46,300 6.0 6,198 0.5
-------- ----- -------- ----- -------- -----
$548,786 37.2% $327,155 42.3% $416,813 35.5%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
Items that give rise to significant portions of the Company's deferred tax
asset, calculated at 35%, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $298,063 $242,381
Deferred fees 4,710 7,133
Other 36,071 68,343
Unrealized loss on securities available for sale 68,658 2,234
--------- ----------
Net deferred tax asset $407,502 $320,091
--------- ----------
--------- ----------
</TABLE>
The deferred tax asset is included in other assets on the consolidated
statements of financial condition.
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997 includes the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current taxes $569,773 $419,400 $ 481,821
Deferred taxes (20,987) (92,245) (65,008)
-------- -------- ---------
Total $548,786 $327,155 $ 416,813
-------- -------- ---------
-------- -------- ---------
</TABLE>
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 $910,932 and $911,954 and unadvanced loan commitments
of $17,985,739 and $13,074,237 at December 31, 1999 and 1998,
respectively. The unadvanced loan commitments at December 31, 1999 and
1998 were primarily at variable rates. In addition, the Bank had
commitments to sell fixed rate residential mortgages of $5,418,972 and
$11,593,638 at December 31, 1999 and 1998, 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
1999, 1998 and 1997 was $629,652, $541,901, and $456,489, respectively.
Future minimum lease payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
1999
<S> <C>
2000 $ 785,549
2001 827,806
2002 522,128
2003 522,731
2004 585,872
Thereafter 1,586,091
-----------
Total $ 4,830,177
-----------
-----------
</TABLE>
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, 1999, a total of 517,599 options were available for grant
under the 1997 Plan. The per share price of exercisable options at
December 31, 1999 reflects the adjusted exercise price resulting from
stock dividends.
Transactions during each of the last three years, adjusted for stock
dividends, are as follows:
<TABLE>
<CAPTION>
Exercise Price Weighted
Per Share Average Exercise
Shares Price Price Per Share
<S> <C> <C> <C>
Exercisable, January 1, 1997 58,097 $4.31 - $4.81 $ 4.72
Issued 9,568 $6.50
-------
Exercisable, December 31, 1997 67,665 $4.31 - $6.50 $ 4.72
Issued 7,920 $9.36
Exercised (2,351) $4.45 - $4.62
-------
Exercisable, December 31, 1998 73,234 $3.45 - $9.36 $ 4.45
Issued 183,800 $7.08
-------
Exercisable, December 31, 1999 257,034 $3.45 - $9.36 $ 6.33
-------
-------
</TABLE>
At December 31, 1999, the options exercisable had a weighted average
remaining contractual life of 7.65 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:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C> <C>
Net income: As reported $ 925,775 $ 446,362
Pro forma 157,958 412,695
Diluted earnings per share: As reported $ 0.51 $ 0.27
Pro forma 0.09 0.25
</TABLE>
41
<PAGE>
Significant assumptions used to calculate the above fair value of the
awards are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
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 %
</TABLE>
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 in 2009. 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, 1999, warrants have an
exercise price of $3.84 per share. As of December 31, 1999, there were
63,007 warrants outstanding and 29,281 were exercised in 1999. 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, 1999, 1998 and 1997 were approximately $52,915, $41,881 and
$20,313 respectively.
14. SHAREHOLDERS' EQUITY
On January 22, 1997, the Board of Directors declared a 7.5% stock dividend
payable to all shareholders 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, 1999.
On August 17, 1999, the Board of Directors declared a 10% stock dividend
payment to all shareholders of record on September 16, 1999. 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.
42
<PAGE>
A summary of unpaid principal balances of loans outstanding to directors,
officers, employees and their business interests is as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
<S> <C> <C>
Beginning of period $7,830,641 $6,123,101
Borrowings 4,264,622 2,414,893
Principal repayments (3,307,034) (707,353)
----------- -----------
End of period $8,788,229 $7,830,641
----------- -----------
----------- -----------
</TABLE>
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 $316,000, $284,000 and $263,000, for the years ended
December 31, 1999, 1998 and 1997, respectively. In the opinion of
management, all aspects of this transaction, including the lease and
amendments thereto, have been negotiated on an arms-length basis and the
resultant terms are no less favorable than those that could be obtained
from third parties.
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>
1999 1998
------------------------------ -----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,089 $ 3,089 $15,293 $15,293
Investment securities held to maturity 2,570 2,568 1,602 1,614
Investment securities available for sale 16,750 16,750 1,010 1,010
Federal Home Loan Bank stock 750 750 527 527
Federal Reserve Bank stock 323 323 176 176
Loans, net 122,635 121,851 113,819 113,957
Mortgage loans held for sale 5,419 5,419 11,594 11,594
Liabilities:
Deposits:
Noninterest-bearing deposits 20,540 20,540 23,423 23,423
Interest-bearing deposits 12,705 12,705 11,785 11,785
Savings deposits 8,150 8,150 11,089 11,089
Money market deposits 15,205 15,205 17,109 17,109
Time deposits 73,738 74,230 69,188 69,238
Borrowed funds 9,000 9,000 - -
Guaranteed preferred beneficial
interest in subordinated debt 5,000 5,000 5,000 5,000
</TABLE>
43
<PAGE>
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For investment securities, fair values are based
on quoted market prices or dealer quotes.
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.
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, 1999 and 1998.
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.
44
<PAGE>
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, 1999, 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, 1999) 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, 1999 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.
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, 1999:
Tier 1 capital (to risk-weighted
assets) $ 13,687 11.92 % $ 4,591 4.00% $ 6,886 6.00%
Total capital (to risk-weighted
assets) 14,949 13.02 9,182 8.00 11,477 10.00
Tier 1 capital (to average assets) 13,687 9.06 6,043 4.00 7,554 5.00
At December 31, 1998:
Tier 1 capital (to risk-weighted
assets) $ 10,694 9.71 % $ 4,405 4.00% $ 6,607 6.00%
Total capital (to risk-weighted
assets) 11,806 10.72 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
</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
12.16%, 14.57% and 8.96% at December 31, 1999, and 9.71%, 10.72% and 8.26%
at December 31, 1998, respectively.
45
<PAGE>
18. PARENT COMPANY FINANCIAL INFORMATION
The financial statements of Madison Bancshares Group, Ltd. (Parent Only)
as of December 31, 1999 and 1998 and for each of the three years in the
period ended December 31, 1999 are presented herein.
<TABLE>
<CAPTION>
December 31,
----------------------------
BALANCE SHEETS 1999 1998
<S> <C> <C>
ASSETS:
Cash $ 84,714 $ 50,223
Investment in subsidiary 15,016,301 14,168,134
Other assets 181,516 232,035
------------ ------------
TOTAL $15,282,531 $14,450,392
------------ ------------
LIABILITIES:
Guaranteed preferred beneficial interest in subordinated debt $ 5,000,000 $ 5,000,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock 1,747,947 1,562,018
Capital surplus 8,745,557 7,563,433
Accumulated (deficit) earnings (9,038) 318,371
Accumulated other comprehensive (loss) income (201,935) 6,570
------------ ------------
Total shareholders' equity 10,282,531 9,450,392
------------ ------------
TOTAL $15,282,531 $14,450,392
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
STATEMENTS OF OPERATIONS 1999 1998 1997
<S> <C> <C> <C>
Interest income $ 725 $ 25,512 $ 274
Operating expenses (606,622) (335,163) (87,613)
------------ ----------- ----------
Loss before equity in undistributed income from subsidiary (605,897) (309,651) (87,339)
Equity in undistributed income of subsidiary, Madison Bank 1,531,672 756,013 843,817
------------ ----------- ----------
NET INCOME $ 925,775 $ 446,362 $ 756,478
------------ ----------- ----------
STATEMENTS OF CASH FLOWS
Operating Activities:
Net income $ 925,775 $ 446,362 $ 756,478
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in undistributed income of subsidiary (1,531,672) (756,013) (843,817)
Decrease in accrued expenses and other liabilities (11,494)
Decrease (increase) in receivable from subsidiary 475,000 (4,675,000) 63,110
Decrease (increase) in other assets 50,519 (231,535)
------------ ----------- ----------
Net cash used in operating activities (80,378) (5,216,186) (35,723)
------------ ----------- ----------
Financing Activities:
Proceeds from issuance of debentures 5,000,000
Exercise of stock options 8,998
Exercise of stock warrants 114,869 250,845
------------ -----------
Net cash provided by financing activities 114,869 5,259,843
------------ -----------
NET INCREASE (DECREASE) IN CASH 34,491 43,657 (35,723)
CASH, BEGINNING OF YEAR 50,223 6,566 42,289
------------ ----------- ----------
CASH, END OF YEAR $ 84,714 $ 50,223 $ 6,566
------------ ----------- ----------
</TABLE>
46
<PAGE>
19. QUARTERLY DATA (UNAUDITED)
The unaudited quarterly results of operations for 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
<S> <C> <C> <C> <C> <C>
Interest income $3,080,806 $3,180,462 $3,312,414 $3,586,059 $13,159,741
Interest expense 1,271,589 1,317,847 1,334,117 1,478,227 5,401,780
---------- --------- --------- ---------- -----------
Net interest income 1,809,217 1,862,615 1,978,297 2,107,832 7,757,961
Provision for loan losses 120,000 145,000 95,000 110,000 470,000
---------- --------- --------- ---------- -----------
Net 1,689,217 1,717,615 1,883,297 1,997,832 7,287,961
Other noninterest income 816,958 920,636 766,937 778,865 3,283,396
Other noninterest expenses 2,230,527 2,265,750 2,253,754 2,346,765 9,096,796
---------- --------- --------- ---------- -----------
Net income before income taxes 275,648 372,501 396,480 429,932 1,474,561
Provision for income taxes 128,900 155,541 116,259 148,086 548,786
---------- --------- --------- ---------- -----------
Net income $ 146,748 $ 216,960 $ 280,221 $ 281,846 $ 925,775
---------- --------- --------- ---------- -----------
---------- --------- --------- ---------- -----------
Per share data - Diluted earnings per share $ 0.09 $ 0.13 $ 0.16 $ 0.13 $ 0.51
---------- --------- --------- ---------- -----------
---------- --------- --------- ---------- -----------
</TABLE>
<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 $ 0.12 $ (0.01) $ 0.09 $ 0.05 $ 0.25
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</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 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
2000 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
2000 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
2000 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
2000 annual meeting of the shareholders.
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 10-KSB)
48
<PAGE>
<TABLE>
<CAPTION>
PAGE NUMBER IN
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION NUMBERING SYSTEM
<S> <C> <C>
3(a) Amended and Restated Articles of Incorporation of the Company* N/A
3(b) Amended and Restated Bylaws of the Company** N/A
4(c) Form of Warrant of the Company*** N/A
10(a) Lease Agreement, dated February 20, 1989, by and between Madison
Bancshares Group, Ltd. and Blue Bell Office Campus Associates**** N/A
10(b) 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
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
- ----------------------------
* Incorporated by reference from Exhibit No. 3 to the Registration
Statement on Form S-1 of the Company, as amended, Registration
No. 33-22492.
** Incorporated by reference from Exhibit No. 3 to the Registration
Statement on Form S-1 of the Company, as amended, Registration
No. 33-22492.
*** Incorporated by reference from Exhibit No. 4 to the Registration
Statement on Form S-1 of the Company, as amended, Registration
No. 33-22492.
**** Incorporated by reference from Exhibit No. 10(d) to the Registration
Statement on Form S-1 of the Company, as amended, Registration
No. 33-22492.
***** Incorporated by reference from Exhibit A to the Company's 1997
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.
(b) Reports on Form 8-K
None.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MADISON BANCSHARES GROUP, LTD.
By: /s/ Peter DePaul
--------------------
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 21, 2000 /S/ Vito A. DeLisi
--------------------
Vito A. DeLisi,
President and Director
March 21, 2000 /s/ Peter DePaul
--------------------
Peter DePaul
Chairman of the Board
MARCH 21, 2000 /s/ Philip E. Hughes, Jr.
---------------------
Philip E. Hughes, Jr.
Director and Vice
Chairman of the Board
MARCH 21, 2000 /s/ Frank R. Iacobucci
---------------------
Frank R. Iacobucci,
Director
MARCH 21, 2000 /s/ Arnold M. Katz
---------------------
Arnold M. Katz,
Director
MARCH 21, 2000 /s/ Lorraine C. King
---------------------
Lorraine C. King,
Director
50
<PAGE>
March 21, 2000 /S/ Kathleen A. Kucer
--------------------
Kathleen A. Kucer,
Director
March 21, 2000 /S/ Michael O'Donoghue
--------------------
Michael O'Donoghue,
Director
March 21, 2000 /S/ Salvatore Paone
--------------------
Salvatore Paone,
Director
March 21, 2000 /S/ Donald J. Reape
--------------------
Donald J. Reape,
Director
March 21, 2000 /S/ Blaine W. Scott
--------------------
Blaine W. Scott,
Director
51
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
MADISON BANK, STATE OF INCORPORATION: PENNSYLVANIA
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000846809
<NAME> MADISON BANCSHARES GROUP, LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,589
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,750
<INVESTMENTS-CARRYING> 2,570
<INVESTMENTS-MARKET> 2,568
<LOANS> 129,317
<ALLOWANCE> 1,262
<TOTAL-ASSETS> 155,842
<DEPOSITS> 130,338
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 1,222
<LONG-TERM> 5,000
0
0
<COMMON> 1,748
<OTHER-SE> 8,534
<TOTAL-LIABILITIES-AND-EQUITY> 155,842
<INTEREST-LOAN> 12,037
<INTEREST-INVEST> 752
<INTEREST-OTHER> 370
<INTEREST-TOTAL> 13,159
<INTEREST-DEPOSIT> 4,952
<INTEREST-EXPENSE> 5,402
<INTEREST-INCOME-NET> 7,757
<LOAN-LOSSES> 470
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,097
<INCOME-PRETAX> 1,474
<INCOME-PRE-EXTRAORDINARY> 1,474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 926
<EPS-BASIC> .54
<EPS-DILUTED> .51
<YIELD-ACTUAL> 8.90
<LOANS-NON> 1,564
<LOANS-PAST> 1,197
<LOANS-TROUBLED> 264
<LOANS-PROBLEM> 4,164
<ALLOWANCE-OPEN> 1,112
<CHARGE-OFFS> 322
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 470
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,262
</TABLE>
