15
Management's Discussion & Analysis of Financial Condition & Results
of Operations
General Discussion 16
Acquisition Activity 18
Results of Operations 19
Financial Condition 26
Consolidated Financial Statements
Consolidated Statements of Condition 33
Consolidated Statements of Income 34
Consolidated Statements of Changes in Shareholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements
Note A Summary of Significant Accounting Policies 37
Note B Business Combinations 38
Note C Fair Value of Financial Instruments 39
Note D Assets Available-for-Sale 41
Note E Investment Securities 42
Note F Mortgage-backed Securities 42
Note G Loans 42
Note H Real Estate 43
Note I Office Properties and Equipment 43
Note J Deposits 44
Note K FHLB Advances and Other Borrowings 44
Note L Interest Exchange and Protected Rate Agreements 45
Note M Shareholders' Equity 45
Note N Income Taxes 46
Note O Employee Benefits 48
Note P Parent Company Financial Information 50
Note Q Segment Information 53
Report of Management 54
Report of Independent Auditors 54
Other Supplementary Data 55
Directors and Board Members 57
16
Management's Discussion and Analysis
General Discussion
Metropolitan Financial Corporation (the "Company") is a regional financial
services holding company. The Company's mission is to be the premier
provider of community financial and home ownership services throughout its
markets by offering exceptional value to its customers, resulting in
profitable growth, fulfilling careers and community enhancement. The primary
operations of the Company are in North Dakota, Minnesota, Nebraska, Iowa,
Kansas, South Dakota, Wisconsin and Arizona.
Table 1: Selected Financial Data
Year ended December 31
(Dollars in thousands, except per share data) 1993 1992 1991 1990 1989
Operations Data
Interest income $ 472,726 $ 424,765 $ 407,020 $ 367,482 $ 371,734
Interest expense 274,612 272,208 301,908 291,790 305,898
Net interest income 198,114 152,557 105,112 75,692 65,836
Provision for loan losses 7,859 8,316 8,000 6,011 6,441
Net interest income after
provision for loan losses 190,255 144,241 97,112 69,681 59,395
Gains related to mortgage
banking activities 16,271 9,264 225 4,645 2,930
Other gains on sale of mortgage-backed
and other securities _ 44,377 33,366 8,725 13,007
Other noninterest income 73,566 60,761 55,850 50,961 51,912
Noninterest expense 193,633 148,581 124,687 108,656 113,369
Income before income taxes,
extraordinary item and cumulative
effect of accounting change 86,459 110,062 61,866 25,356 13,875
Federal and state income taxes (benefit) 21,285 42,543 4,427 (1,980) (10,203)
Income before extraordinary item and
cumulative effect of accounting change 65,174 67,519 57,439 27,336 24,078
Extraordinary item _ (6,329) _ _ _
Cumulative effect of accounting change _ 75,941 _ 995 _
Net Income $ 65,174 $ 137,131 $ 57,439 $ 28,331 $ 24,078
Earnings Per Share
Primary:
Before extraordinary item and cumulative
effect of accounting change $ 2.01 $ 2.34 $ 2.42 $ 1.25 $ 1.20
Extraordinary item _ (0.22) _ _ _
Cumulative effect of accounting change _ 2.66 _ 0.05 _
Net Primary $ 2.01 $ 4.78 $ 2.42 $ 1.30 $ 1.20
Fully Diluted:
Before extraordinary item and cumulative
effect of accounting change $ 2.01 $ 2.17 $ 1.96 $ 1.08 $ 1.12
Extraordinary item _ (0.21) _ _ _
Cumulative effect of accounting change _ 2.47 _ 0.04 _
Net Fully Diluted $ 2.01 $ 4.43 $ 1.96 $ 1.12 $ 1.12
Cash Dividends Per Share
Common $ 0.39 $ 0.27 $ 0.19 $ 0.17 $ 0.15
Preferred-Series A _ _ 2.00 2.00 0.99
Preferred-Series B $ 2.88 $ 2.88 $ 2.88 $ 0.33 $ _
17
Ratios
Return on average assets before
extraordinary item and cumulative
effect of accounting change 0.98% 1.28% 1.25% 0.68% 0.60%
Return on average assets 0.98 2.61 1.25 0.70 0.60
Return on average equity before
extraordinary item and cumulative
effect of accounting change 14.00 17.03 22.78 13.84 16.03
Return on average equity 14.00 34.58 22.78 14.35 16.03
Average equity to average assets 7.02 7.54 5.47 4.88 3.72
Net interest margin 3.21 3.13 2.44 2.02 1.75
Nonperforming assets to total assets 1.65 1.60 2.32 1.62 0.91
Common dividend payout ratio 19.40 6.09 9.69 15.18 13.39
At December 31
Financial Condition
Total Assets $7,006,785 $6,146,511 $4,667,680 $4,545,741 $3,822,473
Loans 4,585,410 3,267,131 2,335,993 1,936,677 1,670,789
Mortgage-backed securities 943,193 1,612,801 936,929 1,511,456 1,057,695
Investment securities - 419,129 100,693 204,277 172,164
Assets available-for-sale 873,938 162,304 882,527 - -
FSLIC notes and covered assets - - - 487,080 527,048
Goodwill 61,517 62,715 62,720 66,993 73,802
Deposits 5,354,635 5,207,025 3,824,069 3,394,175 2,719,411
FHLB advances 921,801 252,643 462,323 574,243 539,989
Other Borrowings 133,159 166,343 55,251 296,048 331,771
Shareholders' equity $ 504,383 $ 426,644 $ 278,763 $ 225,746 $ 188,727
The Company operates an FDIC insured consumer savings bank, Metropolitan Federal
Bank, fsb (the "Bank"), which concentrates on the traditional thrift business of
soliciting deposits and making residential mortgage and other secured consumer
loans. The Company's residential real estate brokerage subsidiary, Edina Realty,
Inc. ("Edina Realty"), and title company subsidiary, Equity Title Services
("Equity Title"), are among Minnesota's largest providers of their respective
services. Edina Realty and Equity Title conduct their business in Minnesota and
western Wisconsin. Certain financial services products like annuities, uninsured
investments, such as mutual funds, and insurance are provided to customers
through a subsidiary operating as Metropolitan Financial Services ("MFS").
Consolidated Highlights
The Company earned net income of $65.2 million for the year ended December 31,
1993, compared with net income of $137.1 million in 1992 and $57.4 million in
1991. Fully diluted earnings per share were $2.01 in 1993, compared with
$4.43 in 1992 and $1.96 in 1991. Earnings in 1992 included nonrecurring
gains, an extraordinary item and the cumulative effect of implementing
Statement of Financial Accounting Standards ("SFAS") No. 109, which
represented approximately $96.7 million, net of tax, or $3.16 per share.
Earnings in 1991 included nonrecurring gains related to securities sales of
$20.4 million, net of tax, or $.71 per share.
Income before income taxes, extraordinary item and cumulative effect of
accounting change totaled $86.5 million for 1993, compared with $110.1 million
in 1992 and $61.9 million in 1991. Amounts in 1992 and 1991 include
nonrecurring gains associated with mortgage-backed and other securities sales.
These gains which resulted from balance sheet restructurings were $44.4 million
or 40 percent of pre-tax earnings in 1992 and $33.4 million or 54 percent of
pre-tax earnings in 1991. Net gains on asset sales of $16.3 million in 1993
were in conjunction with ongoing mortgage banking activities. This compares
with net gains of $9.3 million in 1992 and $225,000 in 1991 associated with
ongoing mortgage banking activities.
18
Growth in the Company's balance sheet during 1993 resulted primarily from
acquisitions. During 1993 the Company acquired two institutions with assets
totaling approximately $813 million. Total assets at December 31, 1993 were $7.0
billion, an increase of $860 million or 14 percent from December 31, 1992.
Shareholders' equity totaled $504.4 million at December 31, 1993, an increase of
18 percent over the previous year-end balance.
At year end, the Bank's regulatory tangible capital ratio was 7.0 percent, which
is well above the minimum requirement. The Bank is considered "well capitalized"
as defined by the Federal Deposit Insurance Corporation ("FDIC"), placing the
Bank in the lowest deposit insurance premium range established by the FDIC.
Acquisition Activity
The Company continued its acquisition strategy in 1993 and 1992. On September
26, 1993, the Company signed a definitive agreement to acquire Rocky Mountain
Financial Corporation and its bank subsidiary, Rocky Mountain Bank, fsb
("Rocky Mountain"). Rocky Mountain had assets and deposits of approximately
$537 million and $428 million at December 31, 1993, respectively. The Bank
will pay Rocky Mountain shareholders approximately $64.2 million in cash as
consideration after payment of approximately $3.0 million of transaction
expenses. The transaction, which received regulatory approval in February
1994, will be accounted for as a purchase and is expected to close in
March 1994.
On August 6, 1993, the Bank completed its acquisition of Eureka Savings Bank,
fsb, Eureka, Kansas ("Eureka"). The acquisition consideration of approximately
$20.8 million was paid in cash and the transaction was accounted for as a
purchase. The acquisition expanded the Company's presence in Kansas which
began with the acquisition of Western Financial Corporation ("Western") in
June 1993. The transaction added assets of $233 million, deposits of $176
million and 10 retail branches.
On June 11, 1993, the acquisition of Western and its federally chartered savings
and loan association subsidiary Columbia Savings Association F.A.
("Columbia") was completed. Pursuant to the agreement and plan of merger,
Western was merged into the Company and Columbia was merged with the Bank.
Total merger consideration of approximately $21.9 million the form of cash
and the Company's common stock. The transaction was accounted for
as a purchase. The acquisition of Western gave the Company a presence in Kansas
with $580 million in assets, $497 million in deposits and 24 retail branches.
On December 16, 1992, the Company completed a merger with American Charter
Federal Savings and Loan Association of Lincoln, Nebraska ("American
Charter"). The transaction, a voluntary supervisory conversion merger,
converted American Charter from a mutual to a stock company which was then
merged with the Bank. The Bank assumed all assets and liabilities of American
Charter at no cost other than transaction costs. Total assets and deposits
added to the Bank's balance sheet were $945 million and $848 million,
respectively. The acquisition represented the Company's first expansion
into Nebraska. On December 1, 1992, the Company completed the purchase of
Home Owners Savings Bank of Fergus Falls, Minnesota ("Home Owners") from
the Resolution Trust Corporation ("RTC"). The purchase included all assets
and liabilities of Home Owners including five branch offices. Four of the
branches are located in northwestern Minnesota, providing the Bank its first
significant entry into this area. The transaction added approximately $127
million in assets and $113 million in deposits.
On September 30, 1992, the Company completed a merger with Security Financial
Group, Inc., St. Cloud, Minnesota ("Security Financial"). The transaction was
completed through the exchange of common stock, with shareholders of Security
Financial receiving $12.8 million of the Company's common stock. The
transaction was accounted for as a pooling of interests, however, due to the
relatively small size of Security Financial in relation to the Company, prior
year amounts were not restated. Therefore, 1992 amounts were adjusted to
reflect the combination of Security Financial as if it had occurred
January 1, 1992. The transaction added $220 million in assets, $200
million in deposits and provided the Bank with a presence in St. Cloud and
other central Minnesota communities.
19
On April 24, 1992, the Company purchased from the RTC twelve branch offices and
$160 million in deposits of First Federal Savings Bank of South Dakota, Rapid
City, South Dakota, ("First Federal"). The acquisition included the purchase of
deposits, selected consumer loans, and sundry assets. The Company paid $2.9
million for the First Federal deposits. The acquisition of First Federal
gave the Company a presence in western South Dakota.
On March 13, 1992, the Company purchased from the RTC five branch offices and
$73 million in deposits of Monycor Federal Savings Bank, Barron, Wisconsin
("Monycor"). The acquisition included the purchase of deposits and various
assets. The Company paid $2.9 million for the Monycor deposits. The
acquisition of Monycor provided the Company with an enhanced presence in the
western Wisconsin market.
Results of Operations
The primary source of the Company's recurring net income is net interest income.
Also affecting the Company's net income are realty commissions, gains related to
mortgage banking activities, title closing and other fee income, noninterest
expense and income taxes.
Organizational Highlights
The Company's earnings are provided by its four primary operating entities
offset somewhat by parent company expense which reflects, among other things,
interest expense on the Company's subordinated debt.
The following table reflects net income before extraordinary items and the
cumulative effect of accounting changes by organizational unit.
Year Ended December 31
(In thousands) 1993 1992 1991
The Bank $64,715 $66,143 $55,293
Edina Realty 1,601 1,538 979
Equity Title 1,675 1,375 941
MFS 1,406 418 13
Parent Company
and Other (4,223) (1,955) 213
$65,174 $67,519 $57,439
The Bank recorded net income before extraordinary items and the cumulative
effect of accounting changes of $64.7 million in 1993, compared with $66.1
million in 1992 and $55.3 million in 1991. Excluding nonrecurring gains,
earnings before extraordinary items and the effect of changes in accounting
totaled $64.7 million in 1993, compared with $40.0 million in 1992 and $34.9
million in 1991. Bank results for 1993 and 1992 reflect 33 percent and 47
percent increases in net interest income over 1992 and 1991, respectively,
attributable to acquisitions and improved net interest margin. The net interest
margin was 3.32 percent for the Bank in 1993, compared with 3.17 percent in 1992
and 2.45 percent in 1991. Noninterest income decreased to $34.5 million in 1993
from $68.4 million in 1992 and $53.2 million in 1991. Noninterest income in
1992 and 1991 included nonrecurring gains related to asset sales of $44.4
million and $33.4 million, respectively. Noninterest expense increased 35
percent to $136.9 million from $101.1 million in 1992 and $84.1 million in
1991. The increases are due principally to acquisitions. As a result of
acquisitions, the number of retail branch offices increased to 196 branches at
December 31, 1993, compared with 185 at the end of 1992 and 125 in 1991.
The Company announced in January 1994 that Edina Realty and Equity Title
would not be spun-off. As a result, the activities of these organizations
are no longer reflected as discontinued operations. The Company originally
announced the spin-off of Edina Realty and Equity Title in April 1993 as a
means of allowing the companies to meet new, more challenging growth
objectives. These objectives included the Company's intent to have the
flexibility to obtain multiple thrift holding company status and Edina Realty
and Equity Title's intent to grow through the use of a separate, publicly
traded stock. However, the decision was made to retain Edina Realty and
Equity Title, as the larger transactions that would require the flexibility to
become a multiple thrift holding company became too costly. Management
believes that the most effective means of achieving further balance sheet
earnings and growth is to retain Edina Realty and Equity Title and their
access to asset generating opportunities and fee generating capabilities.
Total loans originated by the Bank's loan officers located in Edina Realty
offices in 1993 was $570 million, approximately 35 percent of the Company's
total mortgage loan production. In addition, the Company is looking to expand
its real estate brokerage presence through acquisition in markets the
Company serves outside Minnesota.
20
Edina Realty recorded net income of $1.6 million in 1993, compared with $2.0
million in 1992 and $1.0 million in 1991. Net income in 1992 included
$346,000 from the cumulative effect of adopting SFAS No. 109. Revenues
increased 7 percent to $36.3 million in 1993 from $33.9 million in 1992 and
$28.1 million in 1991. Increases in revenues resulted from record sales
volume in 1993 totaling $3.5 billion, compared with $3.0 billion in 1992 and
$2.4 billion in 1991. Increases in revenues were offset by increases in
expenses in 1993 and 1992 of 8 percent and 23 percent from 1992 and 1991.
Edina Realty had approximately 2,000 sales associates and 49 offices as of
December 31, 1993.
Equity Title recorded net income of $1.7 million in 1993, compared with $1.4
million in 1992 and $1.0 million in 1991. Revenues increased 19 percent to $13.7
million in 1993 and 44 percent to $11.5 million in 1992. Revenues were $8.0
million in 1991. Increases in revenues resulted from record closings in 1993
totaling 12,782 compared with 10,757 in 1992 and 7,198 in 1991. Increases in
revenues were offset by increases in expenses in 1993 of 18 percent and 56
percent from 1992 and 1991.
Metropolitan Financial Services recorded net income of $1.4 million in 1993,
compared with $418,000 in 1992 and $13,000 in 1991. Revenues in 1993
increased to $4.6 million from $852,000 in 1992. At the end of 1992,
management identified the sale of uninsured investment products as a
significant noninterest income revenue opportunity and began a focused sales
effort in that direction.
Net Interest Income
Net interest income for the year ended December 31, 1993 was $198.1 million
compared with $152.6 million in 1992 and $105.1 million in 1991. The increase
from 1992 to 1993 was due primarily to a 27 percent increase in average
earning assets. The increase from 1991 to 1992 was due to a significant
widening of the net interest margin and a 13 percent increase in average
earning assets. The increase in average earning assets in each period
reflects the Company's acquisition strategy that is expected to continue in
the future.
Net interest income is the difference between the interest earned on interest
earning assets and interest paid on interest bearing liabilities. Net interest
income is affected by both the volume of interest earning assets in relation to
interest bearing liabilities and the net interest margin, representing the
difference in yields earned on assets and rates paid on interest bearing
liabilities. Economic, regulatory and competitive factors also have a
significant effect on net interest income. The Company's primary approach to
managing net interest income has been through growth, primarily by acquiring
organizations with asset/liability structures similar to its own and obtaining
the maximum interest rate spreads available between existing core assets and
liabilities, primarily single-family mortgage and secured consumer loans and
retail deposits, respectively, without accepting high levels of interest rate
risk.
The $45.6 million increase in net interest income during 1993 resulted mainly
from growth in average earning assets of $1,310 million, compared with growth in
interest bearing liabilities of $1,269 million. Interest earning assets
increased primarily in the areas of mortgage and consumer loans due to
acquisitions and record loan originations. Interest bearing liabilities
increased as a result of acquisitions with the majority of the increase coming
from certificates of deposit. The increase in interest earning assets and the
difference by which interest earning assets exceed interest bearing
liabilities resulted in $47.5 million of additional income in 1993 versus
1992. In 1992, average earning assets increased $558 million, compared with
average interest bearing liabilities growth of $492 million. The growth of
the Company's balance sheet from the preceding year was the
primary reason for the increase in net interest income. The details of these
changes are set forth in Table 2-Rate/Volume Analysis.
21
Table 2: Rate/Volume Analysis
Year Ended December 31 Year Ended December 31
1993 vs. 1992 1992 vs. 1991
(In thousands) Volume Rate Total Volume Rate Total
Interest Income
Loans $104,046 $(40,335) $ 63,711 $66,678 $(15,453) $ 51,225
Mortgage-backed securities 8,895 (23,520) (14,625) 11,329 (19,179) (7,850)
FSLIC notes and covered assets _ _ _ (25,910) _ (25,910)
Investment securities and other interest
earning assets (1,093) (32) (1,125) 6,751 (6,471) 280
____________________________________________________________________________________________________________________________
111,848 (63,887) 47,961 58,848 (41,103) 17,745
Interest ExpenseTransaction deposit 3,622 (17,929) (14,307) 8,402 (2,299) 6,103
Passbook deposits 5,350 1,019 6,369 3,010 (15,157) (12,147)
Certificates 46,211 (40,771) 5,440 13,079 (28,786) (15,707)
FHLB advances 7,589 (8,595) (1,006) 613 (6,163) (5,550)
Borrowings 1,601 4,307 5,908 2,267 (4,666) (2,399)
____________________________________________________________________________________________________________________________
64,373 (61,969) 2,404 27,371 (57,071) (29,700)
Increase (Decrease)
in Net Interest Income $ 47,475 $ (1,918) $45,557 $31,477 $15,968 $47,445
[FN]
The Rate/Volume Analysis presents the dollar amount of changes in interest
income and interest expense for interest earning assets and interest bearing
liabilities. The table distinguishes between the changes related to average
outstanding balances (changes in volume holding the average interest rate
constant) and changes related to average interest rates (changes in average
interest rates holding the initial balance constant). Changes in rate/volume
(changes in rate times the changes in volume) are allocated ratably between the
rate and volume variances.
As depicted in Table 3-Consolidated Average Balance Sheet and Related Yields and
Rates, the net interest margin, which represents net interest income as a
percentage of average interest earning assets, increased to 3.21 percent for the
year ended December 31, 1993, compared with 3.13 percent during 1992. In
addition to the interest rate environment described earlier, growth in equity
provided funds for interest earning assets with no direct cost of funds
reflected in the net interest margin. The average cost of interest bearing
liabilities declined 116 basis points from 1992 to 1993 due to the general
decline in rates during late 1992 and the first half of 1993, while yields on
interest earning assets declined only 107 basis points.
The net interest margin for 1992 improved to 3.13 percent from 2.44 percent for
1991. As in 1993, rates paid on interest bearing liabilities declined faster
than yields earned on interest earning assets. A primary factor limiting the
decline in yields earned, compared with 1991, was the reinvestment of the
proceeds from the repayment of the FSLIC notes and the settlement of the covered
asset assistance agreements received during 1991 in loans and mortgage-backed
securities with yields higher than those earned on the notes and covered
assets.
22
Table 3: Consolidated Average Balance Sheet and Related Yields and Rates
1993 1992 1991
Yields Yields Yields
and and and
(Dollars in thousands) Balance Interest Rates Balance Interest Rates Balance Interest Rates
Assets
Loans $ 4,014,215 $ 331,921 8.27% $ 2,801,697 $ 268,210 9.57% $ 2,113,733 $ 216,985 10.27%
Mortgage-backed
securities 1,837,109 122,649 6.68 1,720,034 137,274 7.98 1,589,460 145,124 9.13
FSLIC notes and
covered assets _ _ _ _ _ _ 365,569 25,910 7.09
Investment securities and other interest
earning assets 328,935 18,156 5.52 348,743 19,281 5.53 243,919 19,001 7.79
Total Interest
Earning Assets 6,180,259 472,726 7.65 4,870,474 424,765 8.72 4,312,681 407,020 9.44
Cash and due from banks 66,385 47,876 39,035
Other assets 385,118 339,686 259,312
Total Assets $6,631,762 $5,258,036 $4,611,028
Liabilities &
Shareholders' Equity
Transaction deposits $ 760,940 10,534 1.38% $ 651,398 24,841 3.81% $ 436,124 18,738 4.30%
Passbook deposits 745,805 19,025 2.55 533,682 12,656 2.37 469,697 24,803 5.28
Certificates 3,782,981 202,260 5.35 2,993,810 196,820 6.57 2,812,917 212,527 7.56
FHLB advances 614,871 31,522 5.13 485,444 32,528 6.70 477,634 38,078 7.97
Other borrowings 142,076 11,271 7.93 113,467 5,363 4.73 89,070 7,762 8.71
Total Interest
Bearing Liabilities 6,046,673 274,612 4.54 4,777,801 272,208 5.70 4,285,442 301,908 7.04
Other liabilities 119,587 83,682 73,419
Shareholders' equity 465,502 396,553 252,167
Total Liabilities &
Shareholders' Equity $6,631,762 $5,258,036 $4,611,028
Net Interest Income $198,114 $152,557 $105,112
Gross Interest Margin 3.11% 3.02% 2.40%
Net Interest Margin 3.21% 3.13% 2.44%
[FN]
Delinquent loans on which interest is not being accrued are included in the
average balance of loans.
Asset and Liability Management
The Company is subject to interest rate risk to the extent that its interest
earning assets reprice or mature differently than its interest bearing
liabilities. The Company manages interest rate risk through production of
interest earning assets with repricing or maturity characteristics similar to
its retail deposit funding source, as well as concentrating on the gathering of
retail deposits which match the repricing and maturity characteristics of the
assets produced. This strategy emphasizes the production of fifteen year fixed
rate, five and seven year balloon and adjustable rate mortgage loans and
consumer loans. The Company augments its interest rate risk management
strategy by purchasing assets or borrowing funds with comparable maturity and
repricing characteristics to its loans or deposits. Finally, when considered
necessary and cost effective, the Company uses hedging instruments, such as
interest rate caps and swaps, to reduce its exposure to interest rate risk.
23
A primary industry gauge of exposure to interest rate risk is the one year
interest rate sensitivity "gap" (the difference between interest earning assets
and interest bearing liabilities maturing or repricing within one year). See
Table 4-Interest Rate Sensitivity Gap. The Company mitigates its exposure to
interest rate risk by striving to maintain a neutral "gap" between the
maturities of its interest earning assets and interest bearing liabilities.
This strategy results in a stable net interest margin in periods of either
rising or falling interest rates.
Table 4: Interest Rate Sensitivity Gap
Maturing or Repricing in
1 Year Over 1 to Over 3 to Over 5
At December 31, 1993 (Dollars in thousands) or Less 3 Years 5 Years Years Total
Interest Earning Assets
Mortgage-backed securities $1,042,071 $ 307,043 $ 135,978 $ 76,218 $1,561,310
Loans:
Real estate
Fixed rate 465,066 571,044 381,818 716,723 2,134,651
Adjustable rate 1,027,431 124,832 _ _ 1,152,263
Consumer and other 569,977 693,491 66,216 72,362 1,402,046
Investment securities and other 233,057 56,239 39,118 8,845 337,259
3,337,602 1,752,649 623,130 874,148 6,587,529
Interest Bearing Liabilities
Transaction and passbook deposits 716,437 187,148 187,524 469,558 1,560,667
Certificates 2,295,798 1,077,988 180,701 239,481 3,793,968
Borrowings 188,568 329,542 380,000 156,850 1,054,960
3,200,803 1,594,678 748,225 865,889 6,409,595
Impact of liability hedging (2,500) 2,500 _ _ _
3,198,303 1,597,178 748,225 865,889 6,409,595
Net Gap $ 139,299 $ 155,471 $(125,095) $ 8,259 $ 177,934
Cumulative Gap $ 139,299 $ 294,770 $ 169,675 $ 177,934
Cumulative ratio of interest earning assets
to interest bearing liabilities 104.36% 106.15% 103.06% 102.78%
Cumulative ratio of gap to total interest
earning assets 2.11% 4.47% 2.58% 2.70%
[FN]
Major balance sheet categories are based on estimated prepayment rates ranging
from 4 percent to 50 percent for mortgage loans and mortgage-backed securities
depending on maturity and yield. Assets available-for-sale are included in the 1
year or less category if there is a firm sale commitment outstanding. Assets
available-for-sale without a firm commitment are based on their contractual
maturity considering amortization and prepayments. Passbook savings and checking
account balances assume a 10 percent annual decay rate and money market demand
accounts are included in the 1 year or less category. Loan balances are shown
gross of the allowance for loan losses and include nonaccrual loans.
Provision for Loan Losses
A total of $7.9 million was charged to the provision for loan losses during
1993, compared with $8.3 million in 1992 and $8.0 million in 1991. The Company's
exposure to credit risk relates principally to its consumer and residential
mortgage loan portfolios which historically are low risk loans. The adequacy of
the allowance for loan losses is presented in Table 10-Allowance for Loan Loss
Activity, and the related discussion on page 29 provides additional
information on the adequacy of the allowance for loan losses.
Noninterest Income
Noninterest income is a significant and recurring source of revenue for the
Company and represents a significant component of the Company's results of
operations. Edina Realty contributes the largest recurring component of
noninterest income through realty commissions generated by the sale of
residential real estate. Other significant recurring components of noninterest
income include mortgage loan servicing fees, service charges on deposit
accounts, title closing fees generated by Equity Title, and financial
services income generated by Metropolitan Financial Services.
24
Edina Realty's realty commissions totaled $35.4 million in 1993, compared with
$32.1 million in 1992 and $26.2 million in 1991. The 10 percent and 27 percent
increases in realty commissions in 1993 and 1992, respectively, are due to
acquisitions and record single-family real estate sales volume in the Twin
Cities. Edina Realty is one of the largest residential real estate brokerage
companies in the Twin Cities, participating in more than 40 percent of all
residential real estate transactions.
Mortgage loan servicing fee income of $3.8 million in 1993 compares with $5.1
million and $10.7 million in 1992 and 1991, respectively. Mortgage loan
servicing fee income in 1993 and 1992 reflects accelerated amortization of
servicing assets resulting from the lower interest rate environment and
significant mortgage refinance activity throughout 1992 and 1993. Loans
serviced for others totaled $3.3 billion at December 31, 1993 compared with
$3.5 billion at December 31, 1992. The Company expects amortization of
servicing assets to decrease in future years as a result of the significant
write-downs in servicing assets recorded in 1992 and 1993.
Title closing fees increased to $13.7 million for the year ended December 31,
1993, compared with $11.5 million and $8.0 million in 1992 and 1991,
respectively. The 1993 increase is due to the strong real estate market and the
high levels of loan refinancings. Increased mortgage lending activity influenced
by loan refinancing and record real estate sales activity in the Twin Cities
resulted in the 1992 increase.
Historically, the Company has experienced significant gains on the sales of
assets, primarily mortgage-backed securities and mortgage loans. During 1993,
gains on sales of mortgage-backed securities and mortgage loans totaled $16.3
million. These sales are associated with ongoing mortgage banking activities
which result in the sale of agency conforming 30-year fixed rate FHA/VA
mortgage loans as well as FHA adjustable rate mortgages and other long-term
loan products not meeting management's portfolio requirements with respect to
interest rate risk. Ongoing mortgage banking activities accounted for gains
on sales of $9.3 million and $225,000 in 1992 and 1991, respectively.
Other gains on sales of mortgage-backed and other securities totaled $44.4
million and $33.4 million in 1992 and 1991, respectively. These gains in 1992
represent the disposition of $919 million of 30-year fixed rate mortgage-backed
securities in conjunction with the Company's decision to discontinue
retaining such assets in its portfolio. This decision is discussed in greater
detail in Investments and Mortgage-backed Securities on page 29. Sales of
mortgage-backed securities during 1991 were completed as part of management's
strategy to respond to interest rate and prepayment risk resulting from
declining interest rates, by disposing of higher yield mortgage-backed
securities.
In conjunction with its mortgage banking activities, the Company generally
hedges its risk of loss, resulting from increasing interest rates on its
actual and anticipated production of 30-year fixed agency conforming mortgage
loans, by entering into forward sales commitments.
Service charges on deposit accounts totaled $11.5 million in 1993, compared with
$6.9 million and $5.4 million in 1992 and 1991, respectively. The increase in
1993 from 1992 is a result of acquisitions and the strategic evaluation of
fees and implementation of a new fee structure for deposit accounts. The
increase in 1992 from 1991 was a result of acquisitions.
Financial services income increased to $4.6 million in 1993, compared with
$852,000 and $67,000 in 1992 and 1991, respectively. Financial services income
represents commissions associated with the sales of fixed and variable
annuities, mutual funds and other uninsured financial products by
Metropolitan Financial Services. The significant increase is a result of the
Company's strategic initiative to deepen relationships customers in order to
serve a broader range of their financial needs.
25
Noninterest Expense
Noninterest expense increased to $193.6 million for the year ended December 31,
1993, compared with $148.6 million in 1992 and $124.7 million in 1991. The
increases in noninterest expense resulted mainly from acquisitions. These levels
of noninterest expense reflect efficiency ratios (noninterest expense excluding
goodwill amortization, real estate expense and nonrecurring expense as a percent
of net interest income before the provision for loan losses, plus noninterest
income) for the Company of 62 percent, 63 percent and 70 percent in 1993,
1992 and 1991, respectively.
Noninterest expense for 1993 includes a $3.5 million charge related to a
strategic restructuring announced in the first quarter. The strategic
restructuring included the consolidation or closing of certain retail branch
offices and other cost control initiatives. Management believes the
restructuring actions were successful in reducing ongoing compensation,
occupancy and other general and administrative costs.
Compensation and related items, the largest component of noninterest expense,
totaled $77.9 million for the year ended December 31, 1993. This compares with
$60.3 million and $48.0 million for the years ended December 31, 1992 and 1991,
respectively. The increases in 1993 and 1992 are primarily the result of
acquisitions which increased the total number of retail branch offices to 196 at
year-end 1993 from 125 at the end of 1991.
Occupancy expense, representing the second largest component of noninterest
expense, totaled $24.5 million for the year ended December 31, 1993,
compared with $16.7 million for 1992 and $15.2 million for 1991. The previously
noted acquisitions in late 1992 and 1993 added 71 offices to the bank office
network resulting in the current year increase. The increase in 1992 from 1991
was also due to an increase in bank offices.
Because compensation and related items and occupancy costs represent over
one-half of the Company's noninterest expense, these areas are the primary focus
of the Company's efforts to improve its efficiency ratio. Improvements in these
areas have occurred as a result of restructuring activities including
consolidation of the bank office network and centralization of certain
functions, especially in connection with acquisitions. These improvements
have been reflected in the efficiency ratios of the Bank, which were 55
percent, 56 percent and 64 percent for 1993, 1992 and 1991, after adjustment
for nonrecurring gains and charges.
Data processing expense totaled $10.5 million for the year ended December 31,
1993, compared with $7.5 million for 1992 and $6.6 million for 1991. The
increases in 1993 and 1992 reflect increased costs associated with the
Company's growth and improvements in technology. Although acquisitions,
including transition costs, represent the majority of the increases, 1993 costs
reflect the development of branch performance, product profitability and loan
collection systems. In addition, new mortgage loan origination and real
estate title closing systems were introduced in 1992.
Advertising expense decreased to $11.9 million in 1993, compared with $13.8
million in 1992 and $9.5 million in 1991. Product marketing expenses increased
in both 1993 and 1992 as a result of acquisitions. However, 1992 expense
includes additional costs associated with a name awareness campaign for the
Bank and an image and awareness advertising campaign for Edina Realty.
Deposit insurance premiums totaled $11.1 million in 1993, compared with $9.3
million in 1992 and $8.0 million in 1991. The increase is due entirely to
deposit growth associated with acquisitions, as the rate paid for insurance
premiums has remained constant. As a "well capitalized" institution, as defined
by the FDIC, the Company does not anticipate deposit insurance premiums to
increase as a percentage of insured deposits in the foreseeable future.
Real estate owned expense totaled $6.7 million in 1993, compared with $3.9
million in 1992 and $6.7 million in 1991. The increase in 1993 reflects
additional expense associated with real estate acquired in conjunction with
acquisitions in late 1992 and throughout 1993. The decrease in 1992 resulted
primarily from improved results of operations of certain income-producing
properties, as well as a reduction in charge-offs reflecting overall
improvement.
The increase in other general and administrative costs from $33.0 million in
1992 to $47.1 million in 1993 reflects the impact of acquisitions, as well as a
$3.5 million charge in the first quarter of 1993 related to the restructuring
discussed earlier.
26
Income Taxes
The current year provision for federal and state income taxes was $21.3 million
compared with $42.5 million in 1992 and $4.4 million in 1991. The reduction in
federal and state income tax is due to lower taxable income, a $10.9 million
reduction in the valuation allowance and a $1.9 million adjustment to the
deferred tax asset. The reduction in the valuation allowance resulted from the
favorable resolution of certain tax issues for which the Company had previously
provided a valuation allowance. The adjustment to the deferred tax asset
resulted from an increase in the federal tax rate from 34 percent to 35 percent
and other adjustments.
As previously mentioned, during 1992 the Company adopted SFAS No. 109,
"Accounting for Income Taxes." In accordance with this Statement, the Company
recognized deferred tax assets reflecting the benefit expected to be realized
from the utilization of $182.4 million of net operating loss carryforwards
("NOLs") and $35.8 million of net deductible temporary differences.
The Company had taxable income and pre-tax book income for the periods presented
as follows:
(In thousands) 1993 1992 1991
Taxable income $68,490 $ 76,543 $15,471
Pre-tax book income 86,459 110,062 61,866
The primary difference between taxable income and pre-tax book income in 1993
and 1992 relates to the reversal of net deductible temporary differences. The
primary difference between taxable income and pre-tax book income in 1991
relates to the federally assisted acquisitions of seven insolvent thrift
institutions in 1988 and the related tax exempt assistance received in the form
of interest on FSLIC notes and covered assets and other assistance payments.
The tax exempt assistance was also the primary cause of the NOLs. As shown
above, the Company generated net taxable income in 1993, 1992 and 1991 resulting
in the utilization of NOLs. Except for the effects of the reversal of net
deductible temporary differences, the Company is not currently aware of any
factors which would cause any significant differences between taxable income
and pre-tax book income in future years. However, there can be no assurances
that there will be no significant differences in the future between taxable
income and pre-tax book income if circumstances change (such as, for example,
changes in tax laws or the Company's financial condition or performance).
In order to fully realize the $53.1 million net deferred tax asset at December
31, 1993, the Company will need to generate future taxable income of
approximately $133 million prior to expiration of the NOLs which begin to expire
in 2002. Based on the Company's historical and current pre-tax earnings,
management believes it is more likely than not that the Company will realize the
benefit of the NOLs before they expire. Further, management believes the
existing net deductible temporary differences will reverse during periods in
which the Company generates net taxable income. There can be no assurance,
however, that the Company will generate any earnings or any specific level of
continuing earnings.
Financial Condition
Loan Portfolio
The Company's loan portfolio totaled $4.6 billion at December 31, 1993, an
increase of $1.3 billion from December 31, 1992. The increase is due to new
production of residential mortgage and consumer loans, as well as the
addition of loans through acquisition.
Although consumer loan originations were strong in 1993, origination of first
mortgage loans for the purchase or construction of one to four family
residential property continues to be the main emphasis of the Company. Of the
$2.7 billion of loans originated in 1993, $1.6 billion, or 61 percent, were
residential real estate mortgage loans, compared with $1.3 billion, or 68
percent, in 1992. The reduction in mortgage loan origination as a percentage of
total loan originations results from increased efforts to originate secured
consumer loans. The increases in mortgage loan originations in 1993 and 1992
were a result of acquisitions and the low interest rate environment which
resulted in higher levels of refinancings. While the level of refinancings
may subside, the Company believes that acquisitions and the introduction of
new mortgage loan products will provide future increases in mortgage loan
originations.
The Company's current policy is to sell agency conforming FHA/VA 30-year fixed
rate and adjustable rate mortgage loans, thus significantly reducing interest
rate risk. Approximately 36 percent of the single family loan production meets
the Company's criteria to be classified as held-for-sale. The Company generally
maintains the servicing rights on mortgage loans sold to preserve the customer
relationship, create opportunities to cross sell other banking services and
generate fee income.
27
The Company continues to promote the origination of secured consumer loans,
including personal property, savings account, property improvement, home equity
and education loans. Originations in 1993 totaled $1.0 billion, compared with
$608 million in 1992 and $312 million in 1991. The increase in consumer loan
originations is due primarily to the Company's expansion of indirect consumer
lending activities and lower interest rates. Indirect consumer loans originated
through selected automobile dealers located within the Bank's current and
immediately adjacent market area represent 76 percent of total consumer loan
originations. Remaining originations are generated through the Bank's branch
office network. Home equity loans and loans made pursuant to lines of credit are
usually secured by a second mortgage on the borrower's principal residence.
Other consumer loans are generally secured by personal property, such as
automobiles. During 1993, the Company's commercial real estate portfolio
increased $195 million; this increase as well as the increase from 1991 to 1992
resulted from acquisitions.
Table 5: Loan Portfolio
December 31
(In thousands) 1993 1992 1991 1990 1989
Real Estate:
Residential (One to four family) $ 2,700,214 $ 2,068,300 $ 1,577,435 $ 1,178,365 $ 859,965
Commercial 513,870 318,814 252,514 276,289 301,092
Construction 12,185 9,623 17,006 16,641 41,061
Commercial 6,402 9,457 10,385 14,422 19,421
Manufactured home 41,797 53,164 49,272 54,758 59,551
Consumer and other 1,353,847 843,605 455,653 353,094 246,441
4,628,315 3,302,963 2,362,265 1,893,569 1,527,531
Less:
Allowance for losses 42,905 35,832 26,272 30,386 27,176
$ 4,585,410 $ 3,267,131 $ 2,335,993 $ 1,863,183 $ 1,500,355
Table 6: Loan Originations
December 31
(In thousands) 1993 1992 1991 1990 1989
Real Estate Loans:
Construction $ 9,712 $ 2,050 $ 3,962 $ 11,518 $ 26,682
Loans on existing property 1,628,570 1,309,258 970,047 994,790 789,033
1,638,282 1,311,308 974,009 1,006,308 815,715
Commercial loans 96 1,342 2,045 8,196 16,404
Consumer and other loans:
Direct 216,708 160,383 91,344 77,808 66,767
Indirect 832,464 448,012 220,553 165,530 127,924
Total Loans Originated $ 2,687,550 $ 1,921,045 $ 1,287,951 $ 1,257,842 $ 1,026,810
Real Estate Loans Purchased $ 172,494 $ 121,497 $ 155,482 $ 36,630 $ _
Real Estate Loans Sold (including securitized) $ 743,797 $ 1,189,807 $ 464,673 $ 635,896 $ 673,175
28
Nonperforming Assets and Allowance for Loan Losses
Nonperforming assets are nonaccruing loans and real estate owned. Real estate
owned consists of real estate acquired through foreclosure (foreclosed real
estate for which a redemption period still remains) and in-substance
foreclosures (real estate loans in which the borrower has little or no equity,
repayment can be expected to come only from sale or operation of the real estate
and the borrower has formally or effectively abandoned control). The Company
places loans on a nonaccrual status when the loans are contractually delinquent
more than 90 days or when the facts and circumstances, regardless of the
delinquency status, support the likelihood that interest accrued may not be
recovered (e.g., bankruptcy).
Table 7: Nonperforming Assets
December 31
(Dollars in thousands) 1993 1992 1991 1990 1989
Nonperforming:
Loans $ 61,290 $ 46,503 $ 44,684 $ 30,903 $ 10,962
Real estate 54,134 51,916 63,399 41,074 23,878
Nonperforming Assets $ 115,424 $ 98,419 $ 108,083 $ 71,977 $ 34,840
Nonperforming loans to total loans 1.34% 1.42% 1.91% 1.60% 0.66%
Nonperforming assets to total assets 1.65 1.60 2.32 1.58 0.91
Net Interest Lost on Nonperforming Loans $ 5,713 $ 4,480 $ 4,006 $ 1,907 $ 1,694
Table 8: Composition of Nonperforming Assets
December 31
(In thousands) 1993 1992 1991
Nonperforming Loans:
Single family $ 15,150 $ 16,326 $ 12,507
Commercial real estate 42,330 26,556 29,179
Non real estate 3,810 3,621 2,998
61,290 46,503 44,684
Real Estate Owned:
Single family 6,857 7,779 12,875
Commercial real estate 47,277 44,137 50,524
54,134 51,916 63,399
$ 115,424 $ 98,419 $ 108,083
Nonperforming assets totaled $115.4 million at December 31, 1993, compared with
$98.4 million at December 31, 1992. The increase is due entirely to the impact
of acquisitions during 1993 which added $47.6 million of nonperforming assets.
Excluding nonperforming assets added through 1993 acquisitions, the
nonperforming asset total at December 31, 1993 would have been $73.9 million, a
decrease of 25 percent for the year. Based on the Company's successful history
in resolving nonperforming assets, management is condent acquired nonperforming
assets can be resolved in an efficient manner without significant loss to the
Company. During the last three years, the Company aggressively challenged the
ultimate collectability of its remaining nonperforming commercial real estate
and commercial business loans. Accordingly, the Company recorded charge-offs of
such assets of $2.7 million, $4.4 million and $3.6 million in 1993, 1992 and
1991, respectively.
The Company periodically prepares estimates of fair value and, where
appropriate, obtains independent appraisals of all real estate owned. Provisions
for loss are recorded where the estimated fair value is less than the net book
value. As shown in Table 9 below, 90-day delinquent loans have decreased as a
percentage of total loans each of the last two years. Delinquent loans as a
percent of total loans were 1.27 percent and 0.25 percent of mortgage and other
loans at December 31, 1993, respectively.
Table 9: Delinquent Loans
Mortgage Loans Other Loans
(Dollars in thousands) Amount Percent Amount Percent
As of December 31:
1993 $40,950 1.27% $3,485 0.25%
1992 34,456 1.44 3,570 0.39
1991 39,714 2.15 3,157 0.61
The Company maintains a policy of managing asset quality and controlling credit
risk through systematic review and classification of assets and prompt follow-up
on problem loans and real estate. Allowances are established for losses inherent
in the loan portfolio. Charge-offs are recorded when amounts are deemed
uncollectible. As disclosed in Note G to the consolidated financial statements,
net charge-offs of loans were $12.3 million in 1993 compared with $10.6 million
in 1992.
29
Although charge-offs related to commercial real estate and business loans
decreased 39 percent to $2.7 million in 1993, charge-offs associated with
consumer loans increased 33 percent to $8.5 million for 1993.
This coincides with a 76 percent increase in the average consumer loan portfolio
from 1992 to 1993.
The allowance for loan losses increased $7.1 million or 20 percent during 1993
to $42.9 million at year end. Allowances of approximately $11.5 million were
added through 1993 acquisitions. The provision for loan losses was $7.9
million during the year. Before acquisitions, nonperforming loans decreased
$9.0 million or 19 percent, because of improving credit quality in the
non-acquired loan portfolio. The reduction in charge-offs associated with
commercial real estate and business loans reflects the Company's emphasis of
single-family mortgage and secured consumer loans since 1989. The increase in
consumer loan charge-offs is a result of increases in the consumer loan
portfolio. The year-end allowance for loan losses as a percentage of
nonperforming assets of 37 percent compares favorably to the same ratio one
year ago. Management believes the allowance for loan losses is adequate to
provide for the credit risk in the loan portfolio at December 31, 1993.
Table 10: Allowance for Loan Loss Activity
Year Ended December 31
(Dollars in thousands) 1993 1992 1991 1990 1989
Balance at Beginning of Year: $35,832 $ 26,272 $ 30,386 $ 27,176 $ 34,712
Acquisitions 11,508 11,845 93 144 _
Provision for loan losses 7,859 8,316 8,000 4,316 3,438
Transfer of allowance (to) from real estate
and other assets _ _ (4,543) 1,539 (7,151)
Charge-offs (net of recoveries):
Mortgage loans (3,715) (4,198) (3,922) (568) (2,996)
Other loans (8,579) (6,403) (3,742) (2,221) (827)
Net Charge-offs (12,294) (10,601) (7,664) (2,789) (3,823)
Balance at End of Year:
Mortgage loans 30,810 29,085 21,591 25,309 22,809
Other loans 12,095 6,747 4,681 5,077 4,367
Total Allowance $42,905 $ 35,832 $ 26,272 $ 30,386 $ 27,176
Allowance as a Percentage of:
Mortgage loans 0.95% 1.21% 1.17% 1.72% 1.90%
Other loans 0.86 0.75 0.91 1.20 1.34
Nonperforming loans 70.00 77.05 58.80 98.33 247.91
Nonperforming assets 37.17 36.41 24.31 42.22 78.00
Ratio of Net Charge-offs During the Period
to Average Loans Outstanding 0.31% 0.38% 0.36% 0.16% 0.22%
Investments and Mortgage-backed Securities
Federal thrift institutions have authority to invest in various types of liquid
assets, including short term U.S. Treasury obligations and securities of various
federal agencies, certificates of deposit of insured institutions, bankers'
acceptances and federal funds. Federal thrift institutions may also invest a
portion of their assets in other specified investments, which are subject to
regulatory limitations with respect to rating, marketability and average
portfolio maturity. These include commercial paper and corporate debt
securities. The Company's current portfolio has no investments rated lower than
AA. The Company's policy allows the purchase of investment grade, BBB rated or
higher, debt securities.
30
Table 11: Investment Portfolio
Over 1 Year Over 5 Years
1 Year or Less Through 5 Years Through 10 Years Over 10 Years Total
Market Weighted Market Weighted Market Weighted Market Weighted Market Weighted
(Dollars in thousands) Value Yield Value Yield Value Yield Value Yield Value Yield
U.S. Treasury _ _ $13,012 4.82% _ _ _ _ $ 13,012 4.82%
U.S. government agencies $39,448 4.53% 81,833 6.97 _ _ _ _ 121,281 6.18
Commercial paper 39,793 3.27 _ _ _ _ _ _ 39,793 3.27
Corporate debt securities 10,044 8.95 _ - _ _ _ _ 10,044 8.95
Other 1,689 3.17 512 7.04 $ 153 4.80% $8,692 4.75% 11,046 4.62
$90,974 4.44% $95,357 6.68% $ 153 4.80% $8,692 4.75%$ 195,176 5.54%
[FN]
Amounts are stated at market value and do not include accrued interest.
Table 12: Book Value of Investments
December 31
(In thousands) 1992 1991
U.S. Treasury $ 10,654 $ 18,989
U.S. government agencies 236,392 60,609
Commercial paper 146,745 _
Corporate debt securities 10,000 16,000
Other 15,338 5,095
$ 419,129 $ 100,693
The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" as of December 31, 1993. The Statement requires that
debt and equity securities be classified as trading, available-for-sale or
held-to-maturity. The only securities the Company classifies as trading are
securities formed as a part of mortgage banking activities of the Company.
There were no such mortgage-backed securities in the Company's portfolio at
December 31, 1993. Currently, the Company securitizes its 30 year fixed-rate
and adjustable-rate mortgage loans originated under the Federal Housing
Administration (FHA) and Veterans Administration (VA) programs. Securities
classified as available-for-sale include all securities which qualify for
regulatory liquidity as well as fixed-rate collateralized mortgage
obligations, mortgage derivative products and other mortgage-back
securities for which sales might be considered in response to changes in
interest rates, prepayment expectations, the need to improve capital ratios,
and similar factors. The Company considers all of the investment portfolio
and a portion of the mortgage-backed security portfolio available-for-sale.
Assets available-for-sale at December 31, 1993 total $874 million, which
reflects market value. The ending balance of shareholders' equity was
increased by $4.2 million to reflect the net unrealized gain on securities
classified as available-for-sale which are carried at market value. The
balance of the securities portfolio for which the Company has the positive
intent and ability to hold to maturity are classified as such.
Investment securities decreased to $195 million at December 31, 1993, compared
with $419 million at December 31, 1992. All investment securities qualify for
regulatory liquidity and are therefore considered "available-for-sale" as of
year end. The Company is required to maintain a minimum liquidity ratio
(liquid assets as a percentage of net withdrawable accounts and short-term
borrowings) of 5 percent. Cash as well as certain shorter duration
mortgage-backed securities also qualify for regulatory liquidity. See
Liquidity discussion on page 31. Mortgage-backed securities, including
those available-for-sale, remained unchanged at $1.6 billion at year end
1993. Approximately $618 million of this total are considered available-
for-sale and are carried at market value. At December 31, 1993 market value
of the Company's mortgage-backed securities portfolio held-to-maturity
exceeded the book value by $12 million. Mortgage-backed securities
classified as held-to-maturity total $943 million at December 31, 1993.
Sales of investments and mortgage-backed securities totaled approximately
$919 million in 1992, and accounted for gains of approximately $44.4 million.
Sales in 1991, representing a repositioning of the investment and
mortgage-backed securities portfolio, totaled approximately $800 million
and accounted for net gains of $33.6 million.
In 1991 and prior years the Company periodically sold mortgage-backed and other
securities as a means of reducing loan prepayment risk in a falling interest
rate environment and responding to increases in regulatory capital requirements.
31
Sources of Funds
Deposits remain the Company's primary source of funds to support lending and
other general business purposes. The Company also derives funds from repayments
of loans and mortgage-backed securities, advances from the Federal Home Loan
Bank ("FHLB") of Des Moines and other borrowings. The FHLB of Des Moines
functions as a central reserve bank providing credit for member institutions.
The Company is required to own capital stock in the FHLB of Des Moines and is
authorized to apply for advances on the security of such stock and certain of
its home mortgage and other assets. Other available sources of funds to the
Company include reverse repurchase agreements with primary security dealers
and other outside borrowings.
Deposits
Deposits totaled $5.4 billion at December 31, 1993, compared with $5.2
billion at December 31, 1992. The increase of $150 million, or 3 percent,
relates primarily to acquisitions during 1993 offset by general deposit
outflow as a result of depositors reinvesting their funds in mutual funds
and other non FDIC-insured instruments. The Company expects some deposit
outflow to continue in the future as a result of disintermediation.
Borrowings
FHLB advances increased to $921.8 million at December 31, 1993 from $252.6
million at the end of 1992. The Company utilized FHLB advances to fund current
loan production and offset general deposit outflow. The FHLB advances have terms
which extend to 2000 and as such will provide low cost funds for years to
come. A portion of the proceeds from the sale of $919 million of mortgage-backed
securities in 1992 were used to repay approximately $525 million of FHLB
advances and a related prepayment penalty of $10.4 million. The Company
issued $86.3 million in subordinated debt securities with a 8.25 percent
during 1992. The proceeds of the borrowings were used to strengthen the
capital position of the Bank and position it for further acquisition
opportunities.
Liquidity
In addition to maintaining compliance with liquidity levels mandated by the
Office of Thrift Supervision ("OTS"), the Company manages its liquidity to
maximize net interest margin and provide readily available funds to support its
lending activities. Net interest income and loan sales and repayments are the
primary source of funds from operating activities. The Company regularly invests
available funds in loans and mortgage-backed and other securities. Because of
the relatively stable nature of the Company's deposit base and its use of
shorter term borrowings, financing activities provide a consistent source of
funds.
The Company's primary need for available funds in future periods, other than
continuation of its lending activities, will be determined by the size and
nature of its acquisition activities. While the Company frequently uses its
common shares to complete acquisitions, it may use cash to supplement the
exchange of equity or to complete certain transactions. The Company does not
expect its acquisition strategies to have a significant effect on its liquidity
levels. The Company's regulatory liquidity ratio was 6.68 percent as of
December 31, 1993.
Table 13: Borrowings and Rates
December 31, 1993 December 31, 1992 December 31, 1991
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
Federal Home Loan Bank advances $ 921,801 5.15% $252,643 5.22% $462,323 7.47%
Medium term notes _ _ 18,998 8.70 48,966 9.06
Collateralized mortgage obligations 39,931 7.37 54,909 8.98 _ _
Subordinated debt 86,250 8.25 86,250 8.25 _ _
Notes payable to banks and others 6,978 4.46 6,186 4.79 6,285 5.06
$1,054,960 5.48% $418,986 6.49% $517,574 7.59%
32
Capital Adequacy
Shareholders' equity totaled $504.4 million at December 31, 1993, representing
7.2 percent of total assets, compared to $426.6 million at December 31, 1992, or
6.9 percent of total assets. The increase is due principally to current year
income. Common shareholders' equity totaled $492.2 million at December 31,
1993 or $15.79 per share compared with $414.4 million or $14.15 per share at
December 31, 1992.
The following are the three regulatory capital requirements for thrift
institutions.
Tangible Capital Requirement. Generally this requirement measures capital
adequacy after consideration of the effect of intangibles, purchased servicing
assets and other factors on the financial statements. Tangible capital must meet
or exceed 1.50 percent of tangible assets, as defined in the regulations.
Core Capital Requirement. This measure permits thrifts to include in tangible
capital supervisory goodwill (goodwill related to certain acquisitions prior to
1989) on a declining basis through 1994 and core deposit intangibles. The core
capital of a thrift must meet or exceed 3 percent of assets.
Risk-based Capital Requirement. The risk-based capital ratio measures capital
adequacy taking into account the level of risk of an institution's assets. The
OTS has also issued a rule which would add, under certain circumstances, an
interest rate risk component which increases the risk-based capital requirement.
The Bank is currently not subject to any additional risk-based capital
requirements related to interest rate risk. As of December 31, 1993, a thrift's
risk-based capital must meet or exceed 8 percent of risk adjusted assets.
Table 14: Capital Ratios
Metropolitan
Federal Bank, fsb
and Subsidiaries
Capital Measure
Consolidated Requirement
Tangible capital 7.00% 1.50%
Core capital 7.44% 3.00%
Risk-based capital 13.52% 8.00%
In September 1992, The Federal Deposit Insurance Company ("FDIC") issued
standards by which thrifts are rated in determining their deposit insurance
assessments. The Company qualifies as a "well capitalized" institution as
defined by the FDIC, which places it in the lowest premium range established by
the FDIC.
The OTS has issued a proposed rule establishing a minimum core capital ratio
of 3 percent for savings associations rated composite 1 under the OTS MACRO
rating system. For all other savings associations, the minimum core capital
ratio will be 3 percent plus an additional 100 to 200 basis points. In
determining the amount of additional core capital, the OTS will assess both
the quality of risk management systems and the level of overall risk in each
individual savings association through supervisory process on a case-by-case
basis.
The OTS amendment to risk-based capital requirements is fully effective July 1,
1994, and will require savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings institution's
interest rate risk will be measured in terms of the sensitivity of its "net
portfolio value" to changes in interest rates. Net portfolio is defined,
generally, as the present value of expected cash inflows from existing assets
and off-balance sheet contracts less the present value of expected cash outflows
from existing liabilities. A savings institution will be considered to have a
"normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis points increase or decrease in
market interest rates (whichever results in the greater decline) is less than
2 percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk will be required to
deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets. The Bank does not expect the amended requirements, when
adopted, to have a material impact on its regulatory capital ratios.
33
CONSOLIDATED STATEMENTS OF CONDITION
December 31
(Dollars in thousands, except share and per share data) 1993 1992
Assets
Cash and due from banks $ 85,084 $ 95,370
Short term interest bearing deposits 82,364 157,489
Assets available-for-sale, at market 873,938 162,304
Investment securities (market: $423,774) _ 419,129
Mortgage-backed securities (market: 1993 - $954,908; 1992 - $1,632,794) 943,193 1,612,801
Loans (net of allowance: 1993 - $42,905; 1992 - $35,832) 4,585,410 3,267,131
Federal Home Loan Bank stock, at cost 59,719 64,096
Accrued interest 36,817 36,393
Real estate (net of allowance: 1993 - $9,533; 1992 - $9,874) 56,110 51,915
Office properties and equipment 91,632 71,955
Goodwill 61,517 62,715
Deferred taxes 53,089 51,300
Other assets 77,912 93,913
Total Assets $ 7,006,785 $ 6,146,511
LIABILITIES
Transaction and passbook deposits $ 1,560,667 $ 1,498,578
Certificates 3,793,968 3,708,447
Total deposits 5,354,635 5,207,025
Federal Home Loan Bank advances 921,801 252,643
Other borrowings 133,159 166,343
Accrued interest 42,485 41,262
Other liabilities 50,322 52,594
Total Liabilities 6,502,402 5,719,867
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized 10,000,000 shares;
issued 1993 and 1992 - 488,750 shares 5 5
Common stock, par value $.01 per share; authorized 60,000,000 shares;
issued 1993 - 31,992,275 shares, 1992 - 26,718,855 shares 320 267
Additional paid-in capital 231,881 148,890
Retained earnings 280,813 278,424
Net unrealized gains on securities available-for-sale (net of tax) 4,209 _
Less cost of common stock in treasury: 1993 - 813,522 shares;
1992 - 85,789 shares (12,845) (942)
Total Shareholders' Equity 504,383 426,644
Total Liabilities and Shareholders' Equity $7,006,785 $6,146,511
[FN]
See notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
(Dollars in thousands, except per share data) 1993 1992 1991
INTEREST INCOME
Loans $331,921 $ 268,210 $ 216,985
Mortgage-backed securities 122,649 137,274 145,124
Investments 18,156 19,281 19,001
FSLIC notes and covered assets _ _ 25,910
472,726 424,765 407,020
INTEREST EXPENSE
Transaction and passbook deposits 29,559 37,497 43,541
Certificates 202,260 196,820 212,527
FHLB advances 31,522 32,528 38,078
Other borrowings 11,271 5,363 7,762
274,612 272,208 301,908
Net interest income 198,114 152,557 105,112
Provision for loan losses 7,859 8,316 8,000
Net interest income after provision for loan losses 190,255 144,241 97,112
NONINTEREST INCOME
Gains related to mortgage banking activities 16,271 9,264 225
Other gains on sale of mortgage-backed and other securities _ 44,377 33,366
Mortgage loan servicing fees 3,826 5,107 10,705
Realty commission income 35,350 32,113 26,172
Title closing fees 13,706 11,494 8,001
Service charges on deposit accounts 11,450 6,870 5,414
Financial services income 4,587 852 67
Other income 4,647 4,325 5,491
89,837 114,402 89,441
NONINTEREST EXPENSE
Compensation and related items 77,871 60,250 47,963
Occupancy 24,459 16,729 15,201
Data processing 10,476 7,542 6,585
Advertising 11,856 13,816 9,491
Deposit insurance premium 11,099 9,305 8,012
Amortization of goodwill 4,083 4,000 5,352
Real estate owned 6,684 3,917 6,673
Other general and administrative 47,105 33,022 25,410
193,633 148,581 124,687
Income before income taxes, extraordinary item
and cumulative effect of accounting change 86,459 110,062 61,866
Income tax expense 21,285 42,543 4,427
Income before extraordinary item and cumulative
effect of accounting change 65,174 67,519 57,439
Extraordinary item: Penalty for prepayment of FHLB
advances (net of tax benefit of $4,064) _ (6,329) _
Cumulative effect of accounting change _ 75,941 _
Net Income $ 65,174 $ 137,131 $ 57,439
EARNINGS PER SHARE
Primary:
Income per share before extraordinary item and
cumulative effect of accounting change $ 2.01 $ 2.34 $ 2.42
Extraordinary item _ (0.22) _
Cumulative effect of accounting change _ 2.66 _
Net Primary $ 2.01 $ 4.78 $ 2.42
Fully Diluted:
Income per share before extraordinary item and
cumulative effect of accounting change $ 2.01 $ 2.17 $ 1.96
Extraordinary item _ (0.21) _
Cumulative effect of accounting change _ 2.47 _
Net Fully Diluted $ 2.01 $ 4.43 $ 1.96
[FN]
See notes to consolidated financial statements.
35
Consolidated Statements of Changes in Shareholders' Equity
Net
Unrealized
Gains on
Additional Securities Total
Dollars in thousands, Preferred Stock Common Stock Paid-In Retained Available- Treasury Stock Shareholders'
Shares Amount Shares Amount Capital Earnings for-sale Shares Amount Equity
Balance,
December 31, 1990 2,328,750 $23 18,127,453 $ 181 $133,432 $ 95,025 $ _ (286,302)$ (2,915) $225,746
Stock options
exercised 1,208,454 12 4,143 4,155
Warrants exercised 2,500 13 13
Net treasury stock sold 342 36,315 386 728
Common stock
cancelled (17,540)
Dividends declared:
Preferred (5,085) (5,085)
Common _
$.19 per share (4,233) (4,233)
Net income 57,439 57,439
Balance,
December 31, 1991 2,328,750 23 19,320,867 193 137,930 143,146 _ (249,987) (2,529) 278,763
Issuance of
common stock 1,013,367 10 6,732 7,240 13,982
Stock options
exercised 599,895 6 3,494 3,500
Warrants exercised 31,560 164 164
Net treasury stock sold 1,430 164,198 1,587 3,017
Redemption/Conversion
of series "A" preferred (1,840,000) (18) 5,753,166 58 (860) (820)
Dividends declared:
Preferred (1,405) (1,405)
Common _
$.27 per share (7,688) (7,688)
Net income 137,131 137,131
Balance,
December 31, 1992 488,750 5 26,718,855 267 148,890 278,424 _ (85,789) (942) 426,644
Issuance of
common stock:
Western Financial
Corporation
acquisition 935,772 9 16,991 17,000
Other 619,406 7 8,759 8,766
Stock options
exercised 700,314 7 7,046 7,053
Warrants exercised 194,628 2 921 923
Stock dividends, 10% 2,823,300 28 49,274 (49,302) _
Net treasury
stock acquired (727,733) (11,903) (11,903)
Net unrealized gain 4,209 4,209
Dividends declared:
Preferred (1,405) (1,405)
Common _
$.39 per share (12,078) (12,078)
Net income 65,174 65,174
December 31, 1993 488,750 $ 5 31,992,275 $320 $231,881 $280,813 $4,209 (813,522) $(12,845) $504,383
[FN]
See notes to consolidated financial statements.
36
Consolidated Statements of Cash Flows
Year Ended December 31
(In thousands) 1993 1992 1991
Net income $ 65,174 $ 137,131 $ 57,439
Reconciliation to cash provided by operating activities:
Extraordinary item (net of tax) - 6,329 -
Cumulative effect of accounting change _ (75,941) _
Net amortization of loan fees, discounts and premiums 32,751 14,606 7,639
Provision for loan losses 7,859 8,316 8,000
Decrease in deferred tax asset 11,610 24,641 _
Depreciation and amortization 9,291 6,654 4,244
Amortization of goodwill 4,083 4,000 5,352
Decrease in accrued interest receivable 4,405 6,111 11,011
(Decrease) increase in accrued interest payable (3,864) 6,480 2,734
Net Cash Provided by Operating Activities 131,309 138,327 96,419
Acquisitions of subsidiaries, net of cash received (6,719) 321,507 _
Increase in loans (1,475,603) (1,106,401) (733,150)
Purchase of:
Loans (172,494) (104,942) (144,453)
Investment securities held-to-maturity (39,793) (565,148) (112,468)
Mortgage-backed securities available-for-sale (86,236) (29,183) (75,612)
Mortgage-backed securities held-to-maturity (319,604) (460,398) (580,444)
Proceeds from the sale and maturity of:
Investment securities held-to-maturity 284,416 285,924 217,864
Proceeds from the sale of:
Mortgage-backed securities available-for-sale 713,303 1,274,920 702,701
Loans held-for-sale 169,271 108,734 56,655
Covered assets _ _ 19,403
Real estate 35,294 41,433 24,710
Principal repayments of mortgage-backed securities:
Available-for-sale 48,741 69,379 29,915
Held-to-maturity 617,612 222,523 30,197
Settlement of FSLIC assistance agreement _ _ 47,933
Other investing activities 27,184 (31,971) (30,471)
Net Cash (Used) Provided by Investing Activities (204,628) 26,377 (547,220)
Net increase (decrease) in:
Short term borrowings _ (2,394) (224,144)
Deposits (530,503) (19,210) 175,666
Purchase of deposits _ 231,535 254,228
Proceeds from:
Settlement of FSLIC notes receivable _ _ 365,778
FHLB advances 770,000 1,933,000 310,700
Issuance of subordinated notes _ 86,250 _
Issuance of common stock 5,478 716 _
Exercise of common stock options and warrants 7,976 3,664 4,168
Net sale (purchase) of stock (11,903) 3,017 728
Repayment of:
FHLB advances (186,108) (2,197,297) (422,625)
Other borrowings (35,656) (30,823) (19,161)
Redemption of preferred stock _ (820) _
Cash dividends (13,483) (9,093) (9,318)
Other financing activities (17,893) (4,112) (10,989)
Net Cash (Used) Provided by Financing Activities (12,092) (5,567) 425,031
Net (Decrease) Increase in Cash and Cash Equivalents (85,411) 159,137 (25,770)
Cash and cash equivalents at beginning of year 252,859 93,722 119,492
Ending Cash and Cash Equivalents $ 167,448 $ 252,859 $ 93,722
[FN]
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
37
Note A
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts and results of
operations of Metropolitan Financial Corporation (the "Company") and its wholly
owned subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years' financial statements to conform to the current year presentation.
Trading Account Assets
Trading account assets are mortgage-backed securities held for sale in
conjunction with mortgage banking activities. These mortgage-backed securities
are collateralized by 30-year fixed-rate and adjustable-rate mortgage loans and
are stated at fair value. Gains and losses, both realized and unrealized, are
included in net gains related to mortgage banking activities. The Company
carried no trading account assets at December 31, 1993.
Securities Held-To-Maturity and Available-For-Sale
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income with interest and dividends. Realized gains and losses, and declines in
value judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific identification
method.
Loans Held-For-Sale
Loans held for sale are valued at the lower of cost or market. Market value is
calculated on the aggregate basis, based on commitments outstanding from
investors and current quoted market prices. Net unrealized losses due to
declines in the market value are included in the determination of net income.
Loan Fees and Discounts
Loan origination fees and certain direct costs are deferred and amortized using
the interest method over the contractual lives of the related loans, adjusted
for prepayments, as a yield adjustment. Discounts and premiums on loans
purchased, net of deferred fees, which are considered yield adjustments, are
amortized using methods which approximate a level yield over the estimated
remaining lives.
Allowance for Loan Losses
Provisions for possible losses on mortgage and other loans are charged to
operations based upon management's review of the loan portfolio. The allowance
is based upon an assessment of the net realizable value of collateral
securing loans, loss experience and management's judgment as the risk
inherent in the loan portfolio.
Loans
Loans are carried at amortized cost, net of allowance for loan losses. Interest
on loans is recorded as it is earned. Allowances are established for uncollected
interest on loans for which payments are more than 90 days past due.
Real Estate
Real estate represents properties acquired through foreclosure, in judgment
(foreclosed real estate for which a redemption period still remains), and in-
substance foreclosure (real estate loans in which the borrower has little or no
equity, repayment can be expected to come only from sale or operation of the
real estate and the borrower has formally or effectively abandoned control)
and is carried at the lower of cost or fair value.
Intangible Assets
Goodwill, the excess of cost over fair value of net assets acquired, is
amortized to expense using the straight line and interest methods over periods
approximating the asset life of related long term assets, to a maximum of 25
years. Premiums paid for loan servicing rights are amortized against servicing
fee income over the estimated average life, adjusted for prepayments, of the
servicing portfolio acquired using the interest method. Accumulated amortization
of goodwill was $42.5 million and $38.4 million at December 31, 1993 and 1992,
respectively. Intangible assets are reviewed periodically for possible
impairment.
38
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated depreciation
computed using the straight line method based on estimated useful lives.
Interest Rate Exchange Agreements
Interest rate exchange agreements ("swaps") are designated as hedges against
future fluctuation's in the interest rates of specifically identified assets and
liabilities. The net interest differential resulting from floating rate interest
payments exchanged for fixed rate interest payments is recorded as incurred.
Protected Rate Agreements
Protected rate agreements ("caps") are designated as hedges against future
fluctuation's in the interest rates of specially identified liabilities. The
interest received is recorded on a current basis. The cost of the caps is
amortized on a straight line basis over the life of the caps.
Mortgage Options
Mortgage options ("puts") are designated as hedges against future fluctuation's
in the price of specific mortgage loans held for sale. The premium paid for the
put is accounted for as a component of the book value of the mortgage loans and
is realized upon settlement of the loan sales.
Income Taxes
A consolidated federal income tax return is filed for the Company and its
subsidiaries. Deferred taxes are recorded to reflect the tax consequences on
future years' differences between the tax basis of assets and liabilities and
the financial reporting amounts at each year end and the expected future
benefit of net operating loss and alternative minimum tax credit carryforwards.
Cash Flow Information
Cash equivalents include cash and due from banks, short term interest bearing
deposits and federal funds sold. Cash paid for interest expense in 1993, 1992
and 1991 was $278.5 million, $265.7 million and $299.2 million, respectively.
Cash paid during 1993, 1992 and 1991 for income taxes was $8.5 million, $3.5
million and $684,000, respectively. Cash received during 1993, 1992 and 1991
as a recovery of income tax was $343,000, $379,000 and $97,000, respectively.
Earnings Per Share
Earnings per share has been computed using the weighted average number of shares
of common stock outstanding during the period. Per share data reflects the 10
percent stock dividend declared in July 1993, the 100 percent stock dividend
declared in June 1992, and the 20 percent stock dividend declared in
September 1991. Amounts equal to the fair market value of the additional
shares issued in 1993 have been charged to retained earnings and credited to
common stock and paid-in capital. The stock dividends in 1992 and 1991
represent stock splits effected in the form of a dividend, an accounted for
as such.
The weighted average number of common and common equivalent shares outstanding
used to compute primary earnings per share were 31,662,000, 28,384,000 and
21,646,000 for the year ended December 31, 1993, 1992 and 1991, respectively.
The weighted average number of common and common equivalent shares outstanding
used to compute fully diluted earnings per share were 31,692,000, 30,613,000 and
28,494,000 for the year ended December 31, 1993, 1992 and 1991, respectively.
Note B
Business Combinations
On June 11, 1993, the acquisition of Western Financial Corporation ("Western")
and its federally chartered savings and loan association subsidiary Columbia
Savings Association F.A. ("Columbia") was completed. Pursuant to the
agreement and plan of merger, Western was merged into the Company and
Columbia was merged into Metropolitan Federal Bank, fsb, ("the Bank"). Total
merger consideration of approximately $21.9 million was paid in the form of
cash and the Company's stock. The transaction was accounted for as a
purchase and, accordingly, the purchase price was allocated to assets and
liabilities based on the estimated fair value as of the acquisition date.
Based on their election, Western shareholders received .55 shares of the
Company's common stock or $10 in cash for each Western share owned. The
results of operations of Western for the period since June 12, 1993 have
been included in the Company's consolidated results.
On August 6, 1993, the Bank completed its acquisition of Eureka Savings Bank,
fsb, Eureka, Kansas ("Eureka"). The acquisition consideration of approximately
$20.8 million was paid in cash and the transaction was accounted for as a
purchase. The results of operations of Eureka have been included in the
Company's consolidated results of operations for the period since August 7,
1993.
39
During 1992, the Company completed several acquisitions designed to expand into
markets not previously served by the Bank. The acquisitions of Home Owners
Savings Bank of Fergus Falls, Minnesota ("Home Owners") and American Charter
Federal Savings and Loan Association of Lincoln, Nebraska ("American Charter"),
were completed December 1 and December 16, respectively. Home Owners was
acquired from the RTC and American Charter was acquired through a voluntary
supervisory conversion merger. These acquisitions were accounted for as purchase
transactions. The operating results of Home Owners and American Charter have
been included in the Company's consolidated results of operations from the
dates of acquisition.
On September 30, 1992 the Company completed the acquisition of Security
Financial Group, Inc., St. Cloud, Minnesota ("Security Financial"). The
Company issued 963,740 shares of common stock, valued at $12.8 million at the
time of the transaction. The acquisition of Security Financial was accounted for
as a pooling of interests. Security Financial is not material to the financial
condition or operating results of the Company, and therefore, prior years
balances were not restated. However, 1992 amounts were adjusted to reflect the
transaction as if it had occurred January 1, 1992.
The unaudited pro forma consolidated results of operations for the years ended
December 31, 1993 and 1992, assuming the acquisitions of Western, Eureka, Home
Owners and American Charter were consummated as of January 1, 1992 are as
follows:
Year Ended December 31
(Dollars in thousands, except per share data) 1993 1992
Net interest income $212,391 $203,321
Income before extraordinary
item and cumulative effect of
accounting change 79,610 89,538
Net income 79,610 159,150
Per share data:Income before extraordinary
item and cumulative effect of
accounting change $ 2.47 $ 2.79
Net income 2.47 4.99
This unaudited pro forma information may not be indicative of the results that
would actually have occurred if the combination had been in effect on the dates
indicated or which may be obtained in the future.
In February 1993 the Office of Thrift Supervision notified the Bank that its
application to acquire Rocky Mountain Financial Corporation ("Rocky Mountain"),
Cheyenne, Wyoming, and its bank subsidiary, Rocky Mountain Bank, fsb, had been
approved. Rocky Mountain had assets of $537 million and deposits of $428 million
at December 31, 1993. The banking subsidiary operates 14 branches located
throughout Wyoming. The Bank will pay Rocky Mountain shareholders approximately
$64.2 million in cash as consideration after payment of approximately $3.0
million of transaction expenses. The transaction will be accounted for as a
purchase and is expected to close in March 1994.
Note C
Fair Value of Financial Instruments
The following schedule includes the book value and estimated fair value of all
financial assets and liabilities, as well as specific off-balance sheet items,
as of December 31, 1993. The aggregate fair value amounts presented do not
represent the underlying value of the Company. The fair values indicated for
nonfinancial assets and liabilities, including real estate, office properties
and equipment, goodwill, deferred taxes, other assets (excluding unamortized
premiums on interest rate caps and purchased mortgage servicing rights), and
other liabilities, represent the book value as of December 31, 1993.
(In thousands) Book Value Fair Value
Assets
Cash and cash equivalents $ 167,448 $ 167,448
Assets available-for-sale 873,938 873,938
Mortgage-backed securities 943,193 954,908
Loans 4,585,410 4,602,925
FHLB stock 59,719 59,719
Nonfinancial assets 363,601 363,601
Other assets 13,476 31,306
Total Assets $7,006,785 $7,053,845
LiabilitiesTransaction
and passbook deposits $1,560,667 $1,560,667
Certificates 3,793,968 3,829,568
FHLB advances 921,801 928,185
Other borrowings 133,159 134,901
Other liabilities 92,807 92,807
Total Liabilities $6,502,402 $6,546,128
Off-balance Sheet Items:
Rate swaps $ _ $ (1,293)
Commitments _ 658
Total Off-balance Sheet Items $ _ (635)
Total Shareholders' Equity $ 504,383 $ 507,082
40
The following valuation methods and assumptions were used by the Company in
estimating the fair value of financial instruments:
Cash and Cash Equivalents
The book value of cash and due from banks and short-term interest bearing
deposits approximates fair value.
Assets Available-For-Sale
The book value represents market value of these instruments.
Loans Held-For-Sale
The book value represents the lower of cost or market value of these instruments
determined on an aggregate basis based on commitments outstanding and current
quoted market prices.
Mortgage-backed Securities
Fair values are based on quoted market prices.
Loans
The fair values for fixed rate, one to four family residential mortgage loans,
commercial real estate, commercial business, and consumer loans are calculated
using interest rates currently offered for loans with similar terms to borrowers
of similar credit quality.
FHLB Stock
Fair value for FHLB stock is based on the price at which it may be resold to the
FHLB.
Other Assets
Other assets represent unamortized premiums on interest rate caps and purchased
mortgage servicing rights. The fair value of the interest rate caps is
determined using quoted market prices for instruments with similar rate and
maturity characteristics. The fair value of the loan servicing rights is
based on average loan balances, interest rates, pass-through rates and
estimated servicing cost per loan adjusted for assumptions on prepayments,
delinquencies and foreclosures.
Deposits
The fair values disclosed for demand deposits (i.e., interest and noninterest
bearing checking, passbook savings and money market accounts) are equal to the
amount payable on demand at the reporting date. Fair values for fixed-
maturity certificates of deposit are calculated using a discounted cash flow
analysis that applies interest rates currently being offered on certificates.
Borrowings
The carrying amounts of short-term borrowings approximate their fair value. The
fair value of the Bank's long-term borrowing is calculated using a discounted
cash flow analysis, based on the Bank's current incremental borrowing rate for
similar types of borrowing. The subordinated notes are valued according to the
quoted market price.
Rate Swaps
The fair value of interest rate swaps is derived from a pricing model that
discounts the cash flows of both the paying side and receiving side of the swap
using quoted market rates of similar term instruments.
Commitments
Off-balance sheet commitments include commitments to originate mortgage loans
and sell mortgage-backed securities. Outstanding commitments approximate fair
value.
41
Note D
Assets Available-For-Sale
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As permitted under the Statement,
the Company has elected to adopt the provisions of the Statement as of the end
of 1993. In accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting principle and there
were no cumulative adjustments to income as a result of adopting the standard.
However, the ending balance of shareholders' equity was increased by $4.2
million (net of $2.8 million in deferred income taxes) to reflect net
unrealized gains on securities classified as available-for-sale previously
carried at amortized cost or LOCOM. Assets available-for-sale consisted of the
following:
December 31, 1993
Gross Gross
Book Unrealized Unrealized Market
(In thousands) Value Gains Losses Value
Mortgage-backed
Securities:
GNMA $190,164 $ 61 $ _ $190,225
FNMA 36,873 452 (365) 36,960
FHLMC 130,890 1,397 (232) 132,055
Collateralized
mortgage
obligations 256,352 3,301 (776) 258,877
________________________________________________________________________
614,279 5,211 (1,373) 618,117
Investments:
U.S. Treasury 12,900 118 (6) 13,012
U.S. government
agencies 118,336 2,981 (36) 121,281
Corporate
debt securities 10,000 44 _ 10,044
Commercial paper 39,793 _ _ 39,793
Other 11,027 19 _ 11,046
________________________________________________________________________
192,056 3,162 (42) 195,176
Loans Held
For Sale 60,645 _ _ 60,645
________________________________________________________________________
$866,980 $8,373 $(1,415) $873,938
Assets Held-For-Sale
1992
(In thousands) Book Value Market Value
U.S. Agency $ 97 $ 97
GNMA 3,712 3,712
FNMA _ _
FHLMC _ _
Collateralized
mortgage obligations 7,594 7,594
Loans 150,901 150,901
$162,304 $162,304
The amortized cost and market value of assets available-for-sale by contractual
maturity at December 31, 1993 are as follows:
Book Market
(In thousands) Value Value
Investments:
One year or less $ 90,721 $ 90,974
Over one year through five years 92,509 95,357
Over five years through ten years 153 153
Over ten years 8,673 8,692
192,056 195,176
Mortgage-backed securities 614,279 618,117
Mortgage loans 60,645 60,645
$866,980 $873,938
Proceeds from the sale of assets available-for-sale were $835.8 million and
$1.4 billion during 1993 and 1992, respectively. Gross gains on these sales
were $19.3 million and $54.1 million during 1993 and 1992, respectively.
Gross losses were $3.0 million during 1993.
Accrued interest on assets available/held-for-sale at December 31, 1993 and
1992 was $7.0 million and $1.2 million, respectively. Assets available-for-
sale with a book value of $138.1 million were pledged to secure public and
private deposit accounts at December 31, 1993. At December 31, 1993 and 1992,
$59.8 million and $152.4 million, respectively, of loans were committed to be
sold with settlement dates of January through March 1994 and 1993, respectively.
42
Note E
Investment Securities
Investment securities held-to-maturity consisted of the following:
December 31, 1992
Gross Gross
Book Unrealized Unrealized Market
(In thousands) Value Gains Losses Value
U.S. Treasury $ 10,654 $ 44 $ _ $ 10,698
U.S. government
agencies 236,392 4,288 (82) 240,598
Corporate
debt securities 10,000 395 _ 10,395
Commercial paper 146,745 _ _ 146,745
Other 15,338 _ _ 15,338
$419,129 $4,727 $ (82) $423,774
All investment securities are classified as available-for-sale as of December
31, 1993 and are shown in Note D. Accrued interest on investment securities at
December 31, 1992 was $5.2 million. Investment securities with a book value of
$158.7 million at December 31, 1992 were pledged to secure public and private
deposit accounts.
Note F
Mortgage-backed Securities
Mortgage-backed securities held-to-maturity consisted of the following:
December 31, 1993 December 31, 1992
Book Market Book Market
(In thousands) Value Value Value Value
GNMA $ 83,295 $ 86,705 $ 189,516 $ 193,523
FNMA 134,598 134,197 126,639 129,372
FHLMC 86,341 87,630 232,880 237,100
Collateralized
mortgage
obligations 29,913 29,981 438,307 445,262
Participation
certificates 609,046 616,395 625,459 627,537
$943,193 $954,908 $1,612,801 $1,632,794
The market value of mortgage-backed securities held-to-maturity includes gross
unrealized gains of $14.9 million and $24.4 million and gross unrealized losses
of $3.2 million and $4.4 million for 1993 and 1992, respectively.
Accrued interest on mortgage-backed securities at December 31, 1993 and 1992 was
$5.4 million and $10.5 million, respectively. Mortgage-backed securities with a
book value of $181.7 million and $437.9 million at December 31, 1993 and 1992,
respectively, were pledged to secure public and private deposit accounts.
Mortgage-backed securities at December 31, 1993 include current year loan
production with original principal balances of approximately $39 million. During
1993, 1992 and 1991 the Company securitized $690 million, $234 million and $500
million of mortgage loans, respectively.
Note G
Loans
Loans consisted of the following:
(In thousands) December 31, 1993 December 31, 1992
Real Estate Mortgage:
Residential $2,700,214 $2,068,300
Commercial 513,870 318,814
Construction 12,185 9,623
Commercial 6,402 9,457
Manufactured home 41,797 53,164
Consumer and other 1,353,847 843,605
4,628,315 3,302,963
Less:
Allowance for losses 42,905 35,832
$4,585,410 $3,267,131
Changes in the allowance for loan losses were as follows:
Year Ended December 31
(In thousands) 1993 1992 1991
Balance at beginning of year $35,832 $26,272 $30,386
Provision for loan losses 7,859 8,316 8,000
Acquisitions 11,508 11,845 93
Net transfer of allowance
to covered assets and real estate owned _ _ (4,543)
Net charge-offs (12,294) (10,601) (7,664)
$42,905 $35,832 $26,272
43
Accrued interest on loans was $24.5 million and $19.9 million at December 31,
1993 and 1992, respectively.
Origination of residential mortgage loans and consumer loans is concentrated in
the states of North Dakota, Minnesota, Nebraska, Iowa, Kansas, South Dakota,
Wisconsin and Arizona. The ability of borrowers to honor these loan obligations
is influenced by the general economic health of the region. The Company's loans
are generally secured by readily marketable collateral. In addition, the Company
requires some form of mortgage insurance, either government sponsored or
private, on residential mortgage loans with a greater than 80 percent loan to
value ratio. The Company's exposure to loss is equal to the net carrying value
of these loans.
At December 31, 1993, approximately $176 million of commitments to make
residential real estate mortgage loans at specific rates were outstanding. These
commitments are subject to the same credit risk, total risk of loss and
collateral policies, as originated loans.
Loans serviced for others totaled $3.3 billion and $3.5 billion at December 31,
1993 and 1992, respectively. Residential mortgage loans sold with recourse
totaled $1.0 billion and $1.1 billion at December 31, 1993 and 1992,
respectively. Recourse provisions for loans sold relate primarily to
defaults. Substantially all loans sold with recourse have either government
sponsored or private mortgage insurance.
Loans at December 31, 1993 include $43.2 million of restructured loans, of which
$16.4 million are performing in accordance with the restructured terms. The
remaining $26.8 million are included in the Company's nonperforming loans.
In May 1993 the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," effective for years
beginning after December 15, 1994. SFAS No. 114 requires that impaired loans
be valued at the present value of expected cash flows. The Company will be
adopting SFAS No. 114 during the first quarter of 1994 and does not expect the
statement to be material to the Company's financial position or results of
operations.
Note H
Real Estate
Real estate consisted of the following:
December 31
(In thousands) 1993 1992
Acquired through foreclosure
and in-substance foreclosures $61,300 $60,781
Held for investment 1,976 _
In judgment and subject to
redemption 2,367 1,008
65,643 61,789
Less allowance for losses 9,533 9,874
$56,110 $51,915
Changes in the allowance for real estate losses were
as follows:
Year Ended December 31
(In thousands) 1993 1992 1991
Balance at beginning of year $9,874 $3,845 $2,707
Provision for decline in
value of real estate owned 4,540 4,491 2,900
Acquisitions 1,983 3,524 23
Net transfers _ _ 2,282
Net charge-offs (6,864) (1,986) (4,067)
$9,533 $9,874 $3,845
Note I
Office Properties and Equipment
Office properties and equipment consisted of the following:
December 31
(In thousands) 1993 1992
Land $ 10,579 $ 7,841
Buildings 67,574 51,787
Furniture and equipment 52,972 41,683
131,125 101,311
Less allowance for depreciation 39,493 29,356
$ 91,632 $ 71,955
44
Note J
Deposits
Deposits consisted of the following:
Weighted Average
Interest Rates at
December 31 December 31
(Dollars in thousands) 1993 1992 1993 1992
Checking:
Noninterest
bearing $ 254,204 $ 232,010
Interest bearing 390,149 334,600 1.65% 2.45%
Money market
demand 185,440 182,953 2.33 2.95
Passbook and
statement 730,874 749,015 3.17 3.23
Certificates:
Nine months
and less 416,415 612,616 3.24 3.71
Over 9 to 30
months 2,187,970 2,230,348 4.28 5.11
Over 30 months 1,189,583 865,483 6.54 7.45
$5,354,635 $5,207,025 4.10% 4.65%
Accrued interest on deposits was $38.6 million and $36.2 million at December 31,
1993 and 1992, respectively.
A summary of interest expense on deposits is as follows:
Year Ended December 31
(In thousands) 1993 1992 1991
Checking $ 6,601 $ 7,755 $ 7,090
Money market demand 3,933 4,901 11,648
Passbook and statement 19,025 24,841 24,803
Certificates 202,260 196,820 212,527
$231,819 $234,317 $256,068
The following table sets forth the maturities of certificates in
denominations of $100,000 or more at December 31, 1993.
(In thousands)
Maturity Amount
Under three months $ 8,590
Three to six months 40,447
Over six to 12 months 54,077
Over 12 months 302,465
$405,579
Note K
FHLB Advances and Other Borrowings
FHLB advances and other borrowings consisted of the following:
Weighted Average
Interest Rates at
December 31, December 31
1993 1992 1993 1992
Federal Home Loan
Bank advances $ 921,801 $ 252,643 5.15% 5.22%
Other Borrowings:
Medium term notes _ 18,998 _ 8.70
Collateralized
mortgage obligation 39,931 54,909 7.37 8.98
Subordinated debt 86,250 86,250 8.25 8.25
Notes payable to
banks and others 6,978 6,186 4.46 4.79
Total other borrowings 133,159 166,343
$ 1,054,960 $ 418,986 5.48% 6.49%
Borrowings due
within one year $ 165,177 $ 120,941 4.45% 4.19%
At December 31, 1993 and 1992, borrowings due within one year consisted
primarily of FHLB line of credit and FHLB advances of $165.0 million at an
average rate of 4.45 percent and $99.5 million at an average rate of 3.37
percent, respectively.
Maturities of borrowings at December 31, 1993, were:
(Dollars in thousands)
Year of Maturity Amount
1994 $ 165,177
1995 100,823
1996 212,182
1997 165,000
1998 215,000
Thereafter 196,778
$1,054,960
At December 31, 1993, the Company had an existing line of credit with the
FHLB of $100 million. The Company had no balance drawn on this line of credit
as of December 31, 1993. The rate paid on the FHLB line varies daily based on
the federal funds rate.
45
At December 31, 1993, borrowings were secured by the following:
FHLB advances--FHLB stock, real estate loans and mortgage-backed securities
with a carrying value of $1.6 billion.
Collateralized mortgage obligations--mortgage-backed securities with a
carrying value of $41.5 million.
Accrued interest on borrowings was $849,000 and $1.4 million at December 31,
1993 and 1992, respectively.
Note L
Interest Rate Exchange and Protected
Rate Agreements
The Company has entered into interest rate exchange agreements ("swaps") with
primary securities dealers to stabilize its cost of funds. The notional
principal amount of interest rate exchange agreements totaled $200 million
and $250 million for 1993 and 1992, respectively. The Company pays a fixed rate
and receives a variable rate of interest on the stated notional principal
amount for a fixed period of time. The Company's exposure to market risk
results from a declining interest rate environment in which the fixed rate
paid exceeds the variable rate received. These agreements are subject to the
counterparty's ability to perform in accordance with the terms of the
agreements. The Company's risk of loss is equal to the interest payments due
from the counterparty. Net accrued interest payable on swaps was $3.0 million
and $3.8 million on December 31, 1993 and 1992, respectively.
In connection with its asset and liability management program, during 1993 the
Company entered into protected rate agreements ("caps") in the aggregate
notional amount of $450 million with varying maturities. Under the terms of
the caps, the Company will be reimbursed for increases in the three-month
London Inter-Bank Offer Rate ("LIBOR") for any quarter during the agreement
in which such rate exceeds the "strike price", which ranges from 6 percent to
8 percent depending on the maturity of the cap. These agreements are subject to
the counterparty's ability to perform in accordance with the terms of the
agreements. The Company's risk of loss is equal to the original premiums paid
to enter into these agreements.
A summary of the interest rate caps is as follows:
Strike Price
(In millions) 6.00 - 6.50% 7.00 - 7.50% 8.00%+ Total
Mature in 1994 $250 $100 $ 50 $400
Mature in 1995 50 _ _ 50
$300 $100 $ 50 $450
Note M
Shareholders' Equity
Preferred Stock
The Company has 10,000,000 shares of $.01 par value preferred stock authorized.
At December 31, 1993, the Company had 488,750 units of Series B, $2.875
Cumulative Perpetual Preferred Stock, issued and outstanding.
The Company, at its option, redeemed the outstanding 1,840,000 shares of Series
A, $2.00 cumulative convertible preferred stock on April 20, 1992, for 5,753,166
shares of common stock and $400,000 to holders exercising the options to receive
cash.
Each unit of Series B preferred stock consists of one share of Cumulative
Perpetual Preferred Stock and one warrant to purchase 1.32 shares of Common
Stock. The preferred stock is redeemable at the option of the Company at a rate
of $25 per share. Redemption can occur at any time on or after January 31, 1996.
Each warrant entitles the holder to purchase 1.32 shares of the Company's Common
Stock at a price of $6.25. The warrants became exercisable on February 19, 1991,
and expire November 20, 2000. Warrants outstanding at December 31, 1993 allow
for the purchase of 408,751 shares of Common Stock and would result in total
proceeds to the Company, if exercised, of approximately $1.9 million.
The Company's Series B preferred stock ranks prior to Common Stock as to
dividends and liquidation. The liquidation preference of the preferred stock
is $25 per share plus accumulated unpaid dividends. Dividends on the
preferred stock are cumulative and are to be paid at an annual rate of $2.875.
Shares of the Company's preferred stock have no voting rights except in the
event of certain arrearages in which event holders of the preferred stock will
be entitled to elect two additional directors to the Company's Board of
Directors.
46
Regulatory Capital Requirements
The Bank and its subsidiaries are required to meet capital requirements as
defined by the Office of Thrift Supervision ("OTS") for Tangible, Core and Risk-
based Capital. The requirements call for measures of capital as a percentage of
assets. Required capital levels increase through July 1, 1994, at which time
the fully phased in capital requirements will be effective. At December 31,
1993, the Bank exceeds all fully phased in requirements.
Note N
Income Taxes
Income tax expense consisted of the following:
Year Ended December 31
(In thousands) 1993 1992 1991
Current
Federal $ 6,670 $ 5,015 $4,373
State 3,005 3,058 54
9,675 8,073 4,427
Deferred
Federal $ 9,121 $28,657 _
State 2,489 5,813 _
11,610 34,470 _
$21,285 $42,543 $4,427
The provision for federal income tax differs from that computed at the statutory
corporate tax rate as follows:
Year Ended December 31
(In thousands) 1993 1992 1991
Tax at 35% statutory $30,261 $37,421 $21,035
rate (34% in 1992
and 1991)
State income taxes, net
of federal tax benefit 4,364 5,474 36
Change in valuation
allowance (10,902) _ _
Tax effect of:
Amortization of goodwill 1,429 1,360 1,839
FSLIC assistance and tax
exempt interest _ _ (8,768)
Bad debt deduction _ _ (5,743)
Effect of operating losses _ _ (810)
Other, net (3,867) (1,712) (3,162)
$21,285 $42,543 $ 4,427
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. In 1992, Metropolitan
established a valuation allowance for a portion of the operating loss
carryforwards as a result of unresolved matters with taxing authorities. During
1993, certain tax issues were resolved which were previously considered in
management's assessment of the valuation allowance. As a result, the Company has
reduced the remaining valuation allowance. The change in the deferred tax asset
valuation allowance of $10.9 million was recorded as a reduction of income tax
expense.
The adjustments to the net deferred tax asset in 1993 identified as the "Effect
of acquisitions and other transactions" result primarily from the acquisitions
of Western Financial Corporation and Eureka Savings Bank, fsb and the exercise
of compensatory stock options.
At December 31, 1993, Metropolitan had the following income tax net operating
loss carryforwards available for income tax purposes:
Expiration
(Dollars in thousands) Date Amount
Federal regular tax operating loss
carryforwards acquired through
business combinations 2002 $ 3,933
Federal regular tax operating loss
carryforwards from other than
business combinations 2005 43,451
_______________________________________________________________
$47,384
Federal AMT operating loss
carryforwards 2002 $ 4,594
47
The components of and changes in the net deferred tax asset were as follows:
Effect of
Deferred Acquisitions
January 1, (expense) and other December 31,
(In thousands) 1993 benefit transactions 1993
Loan fees and discounts $ 6,366 $ (840) $ _ $ 5,526
Discounts on loans and mortgage-backed
securities arising from acquisitions 10,998 (8,125) 6,504 9,377
Bad debt deduction 2,160 1,241 3,819 7,220
FHLB stock dividends (6,833) 3,248 (2,781) (6,366)
Other 1,161 2,814 (2,097) 1,878
Net temporary differences 13,852 (1,662) 5,445 17,635
Carryforwards:
Federal regular tax operating loss carryforwards 35,993 (22,933) 2,718 15,778
Federal regular tax operating loss carryforwards
acquired in purchase business combinations 1,948 29 (600) 1,377
State regular tax operating loss carryforwards 7,836 (4,430) 238 3,644
State regular tax operating loss carryforwards
acquired in purchase business combinations 4,844 (135) _ 4,709
Federal AMT credit carryforwards 3,327 6,619 _ 9,946
Total carryforwards 53,948 (20,850) 2,356 35,454
67,800 (22,512) 7,801 53,089
Valuation allowance (16,500) 10,902 5,598 _
Deferred tax asset $51,300 $(11,610) $13,399 $53,089
During the first quarter of 1992, the Company prospectively adopted SFAS No.
109, "Accounting for Income Taxes." In accordance with this statement, the
Company recognized deferred tax assets reflecting the benefit expected to be
realized from the utilization of net operating loss carryforwards ("NOLs") of
$182.4 million and net deductible temporary differences of approximately $35.8
million.
The Company had taxable income and pre-tax book income for the periods presented
as follows:
(In thousands) 1993 1992 1991
Taxable income $68,490 $ 74,707 $15,471
Pre-tax book income 86,459 110,062 61,866
The primary difference between taxable income and pre-tax book income in 1992
and 1993 relates to the reversal of net deductible temporary differences. In
1991 the primary difference between taxable income and pre-tax book income
related to the federally assisted acquisitions of seven insolvent thrift
institutions in 1988 and the related tax exempt assistance received in the
form of interest on FSLIC notes and covered assets and other assistance
payments. The tax exempt assistance is also the primary cause of NOLs.
The Company generated net taxable income in 1993, 1992 and 1991 resulting in
the utilization of a portion of the NOLs. Except for the effects of the
reversal of net deductible temporary differences, the Company is not
currently aware of any factors which would cause any significant differences
between taxable income and pre-tax book income in future years. However,
there can be no assurances that there will be no significant differences in the
future between taxable income and pre-tax book income if circumstances change
(such as changes in tax laws or the Company's financial condition or
performance).
In adopting SFAS No. 109 the Company recorded income and a deferred tax asset
equal to the cumulative effect of the accounting change of $75.9 million, $53.1
million of which remains at December 31, 1993. To fully realize the deferred tax
asset the Company will need to generate future taxable income of approximately
$133 million prior to expiration of the NOLs which will begin to expire in 2002.
Based on the Company's historical and current pre-tax earnings, management
believes it is more likely than not that the Company will realize the benefit of
the NOLs existing at December 31, 1993 before they begin to expire in 2002.
Further, management believes the existing net deductible temporary differences
will reverse during periods in which the Company generates net taxable income.
However, there can be no assurance that the Company will generate any
earnings or specific level of continuing earnings.
48
The bank qualifies as a savings and loan institution as defined by the Internal
Revenue Code. As a qualifying savings and loan, the Bank is able to utilize an
available special tax provision for the bad debt reserve deduction which allows
the use of either the "experience" method or the "percentage of taxable income"
method in determining the annual allowable deduction.
Note O
Employee Benefits
Pension Plan
The Company has a defined benefit plan covering substantially all employees. The
benefits are based on years of service, minimum age requirements, and the
employee's compensation while employed with the Company. The Company's funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes. The actuarial cost method used to compute pension
cost is the Projected Unit Credit method.
Net pension cost (income) included the following components:
Year Ended December 31
(In thousands) 1993 1992 1991
Service cost-benefits earned
during the period $1,289 $ 792 $ 218
Interest cost on projected
benefit obligation 580 336 363
Actual return on plan assets (1,453) (2,009) (2,761)
Net amortization and deferral 240 1,167 2,020
Net periodic pension
cost (income) $ 656 $ 286 $ (160)
The following table sets forth the plan's funded status and amounts
recognized in the Company's statements of financial condition:
December 31
(In thousands) 1993 1992
Actuarial present value of
accumulated benefit obligation
including vested benefits of
$3,623 in 1993 and $5,330 in 1992 $(4,401) $(5,860)
Actuarial present value of
projected benefit obligation (7,401) (7,661)
Plan assets at market value,
primarily certificates of deposit,
U.S. Treasury securities and
listed stock, including $2,615
in 1993 and $2,523 in 1992
of Company stock 12,064 12,236
Plan assets in excess of projected
benefit obligation 4,663 4,575
Unrecognized net gain from past
experience different from that
assumed and effects of changes
in assumptions (562) (655)
Prior service cost not yet recognized
in net periodic pension cost (1,119) (1,233)
Unrecognized net assets at end of year (3,980) (3,035)
Pension liability $ (998) $ (348)
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7 percent at both December 31, 1993 and 1992. The expected long
term rate of return on plan assets in 1993, 1992 and 1991 was 7 percent.
49
Postretirement Benefit Plan
In addition to the Company's defined pension benefit plan, the Company sponsors
a defined benefit health care plan that provides postretirement benefits to
eligible employees. The benefits, based on years of service, is contributory
and contains cost-sharing features such as deductibles and coinsurance. The
Company's policy is to fund the cost of medical benefits in amounts determined
by management.
In 1993, the Company adopted Financial Accounting Standard No. 106 "Employers
Accounting For Postretirement Benefits Other than Pensions." The Company's total
postretirement benefit cost for 1993 was $545,000. Postretirement benefit costs
for 1992 and 1991, which were recorded on a cash basis, have not been restated.
The postretirement benefit liability at December 31, 1993 was $499,000. Upon
adoption, the accumulated postretirement obligation was $2.4 million and
increased to $2.9 million at December 31, 1993.
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits is 13 percent for 1993 and is assumed to decrease gradually
to 6 percent for 2001 and remain at that level thereafter. The health care
cost trend rate assumption has minimal effect on the amounts reported.
Increasing the assumed health care trend rates by one percentage point in
each year would increase the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for 1993 by
$160,000. The weighted average discount rate used in determining
postretirement benefit obligation was 7 percent at December 31, 1993.
The board of directors has approved a directors' retirement plan subject to
shareholder approval.
In November 1992, the Financial Accounting Standards Board issued SFAS No. 112,
"Employers Accounting for Post Employment Benefits." The Company is required to
adopt this Statement in 1994. As of December 31, 1993, the Company had not
adopted Statement No. 112. No material effect on the financial condition of the
Company is anticipated when the statement is adopted.
Savings Plans
The Company has a defined contribution savings plan covering substantially all
employees. Eligibility is based on years of service and minimum age
requirements. Employees elect to contribute a percentage of their compensation.
Contributions are invested, at the direction of the employee, in one or more
funds or can be directed to purchase common stock of the Company at fair market
value. The Company makes matching contributions, invested solely in common stock
of the Company, up to a specified percentage of employee's compensation. Company
contributions vest over a period of five years. Total savings plan expense was
$2.5 million $2.0 million and $1.5 million for the years ended December 31,
1993, 1992 and 1991, respectively.
Stock Purchase Plan
The Company established a shareholder approved Employee Stock Purchase Plan (the
"Plan") in 1992 for which 440,000 shares have been reserved. Under the Plan, the
Company conducts a series of offerings (each an "Offering") of its Common Stock,
each continuing for three months, beginning on January 1, April 1, July 1 and
October 1 of each year (the "Offering Date") and ending on March 31, June 30,
September 30 and December 31 of each year (the "Offering Period"). The per share
purchase price of the shares offered in a given Offering is the lower of 85
percent of the fair market value of one share of the Common Stock of the Company
on the first day of the Offering Period or the last day of the Offering Period.
Employees, subject to restrictions regarding length of service and age, may
designate a payroll deduction limited to a minimum deduction of $25 per pay
period and not exceeding an amount which would result in the purchase of Common
Stock with a fair value of more than $25,000 in any calendar year. During 1993,
a total of 353,450 shares were issued under the plan for an aggregate purchase
price of $4.4 million.
Stock Option and Incentive Plans
The Company has three board of director approved stock option and incentive
plans, initiated in 1984, 1990 and 1993. The 1993 plan is pending shareholder
approval. Two types of options are granted under the plans, incentive and
nonqualified. Incentive options are exercisable on a phased in basis beginning
one year after issuance. Nonqualified options before October 1993 are fully
exercisable on the grant date. Nonqualified options after October 1993 are
exercisable on a phased in basis beginning one year after issuance. All options
expire ten years from the grant date. Under the 1993 plan,restricted stock
awards, performance units, stock bonuses and stock appreciation rights may also
be granted.
The company initiated a non-employee director stock option plan, approved by the
shareholders, in 1993. The options are exercisable one year after issuance. The
grant of incentive and nonqualified stock options is to be made at the
discretion of the committee responsible for administering the plans and is to
be set forth in the option agreement.
50
Shares reserved and options outstanding under all plans are as follows:
Options Outstanding
Shares Reserved Total Number and Exercisable Price
For Future Grant Of Shares Total Shares Per Share
Balance at December 31, 1990 1,371,102 2,805,567 2,805,567 $1.57 _ 4.90
Granted (413,248) 413,248 413,248 4.35 _ 4.35
Exercised _ (1,329,299) (1,329,299) 1.57 _ 4.90
Balance at December 31, 1991 957,854 1,889,516 1,889,516 1.57 _ 4.90
Share allocated 660,000 _ _ _
Granted (767,800) 767,800 767,800 9.72 _ 15.23
Cancelled 79,068 (79,068) (79,068) 4.35 _ 9.72
Exercised _ (574,497) (574,497) 1.84 _ 4.90
Balance at December 31, 1992 929,122 2,003,751 2,003,751 1.57 _ 15.23
Shares allocated 2,275,000 _ _ _
Granted (1,000,900) 1,000,900 553,400 15.13 _ 18.30
Cancelled _ _ _ _
Exercised _ (725,992) (725,992) 1.57 _ 16.02
Balance at December 31, 1993 2,203,222 2,278,659 1,831,159 $2.85 _ 18.30
Note P
Parent Company Financial Information
The Company's ability to pay cash dividends depends upon the cash dividends it
receives from the Bank, Edina Realty and Equity Title.
The Bank is required to give the OTS thirty day notice prior to declaration of a
cash dividend to the parent company. The Bank's dividends to the parent
company are generally limited to the calendar year's earnings plus 50 percent
of the surplus capital (the percentage by which the ratio of its regulatory
capital to assets ratio exceeds the fully phased in ratio) at the beginning
of the year.
51
The summarized financial information of Metropolitan Financial Corporation, the
parent company, is as follows:
Condensed Statements of Condition
(In thousands) December 31, 1993 December 31, 1992
Assets
Cash and investments $ 12,254 $ 12,966
Equity in net assets of subsidiaries 578,046 503,107
Other assets 12,504 8,632
Total Assets $602,804 $524,705
Liabilities
Payable to subsidiaries $ 37 $ 1,180
Other borrowings 92,521 93,857
Other liabilities 5,863 3,024
Total Liabilities 98,421 98,061
Shareholders' Equity
Preferred stock 5 5
Common stock 320 267
Additional paid-in capital 231,881 148,890
Retained earnings 280,813 278,424
Net unrealized gains on securities
available-for-sale (net of tax) 4,209 _
Less cost of common stock in treasury (12,845) (942)
Total Shareholders' Equity 504,383 426,644
Total Liabilities and Shareholders' Equity $602,804 $524,705
Condensed Statements of Income
Year Ended December 31
(In thousands) 1993 1992 1991
Net interest expense $ (7,756) $ (2,070) $ (434)
Cash dividends received from subsidiaries 23,672 17,136 8,930
Management fee income 20,906 15,364 11,979
Noninterest expense (20,731) (15,093) (11,545)
Income before equity in earnings of subsidiaries 16,091 15,337 8,930
Undistributed equity in earnings of subsidiaries 46,137 121,794 48,509
Income before income taxes 62,228 137,131 57,439
Income tax benefit 2,946 _ _
Net Income $65,174 $137,131 $57,439
52
Condensed Statements of Cash Flows
Year Ended December 31
(In thousands) 1993 1992 1991
Operating Activities
Net income $ 65,174 $137,131 $57,439
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiaries (46,137) (121,794) (48,509)
Net Cash Provided by Operating Activities 19,037 15,337 8,930
Investing Activities
Capital contribution to subsidiary _ (78,000) _
Net Cash Used by Investing Activities _ (78,000) _
Financing Activities
(Decrease) increase in receivables from
or payables to subsidiaries (1,123) 68 (410)
Proceeds from:
Issuance of borrowings _ 86,250 _
Issuance of common stock 16,742 4,380 4,168
Sale of common stock held in Treasury _ 3,131 810
Repayment of borrowings (3,860) (3,048) (4,248)
Purchase of common stock held in Treasury (11,903) (114) (82)
Dividends (13,483) (9,093) (9,318)
Other financing activities (6,122) (9,480) 395
Net Cash (Used) Provided by Financing Activities (19,749) 72,094 (8,685)
(Decrease) Increase in Cash and Cash Equivalents (712) 9,431 245
Cash and cash equivalents at beginning of year 12,966 3,535 3,290
Ending Cash and Cash Equivalents $ 12,254 $ 12,966 $ 3,535
53
Note Q
Segment Information
The following summarizes financial data for the Company's business segments:
Year Ended December 31
(In thousands) 1993 1992 1991
Revenues:
The Bank $ 507,995 $ 492,907 $ 460,288
Edina Realty 36,267 33,905 28,105
Equity Title 13,714 11,503 8,001
MFS 4,587 852 67
562,563 539,167 496,461
Expenses:
The Bank 430,110 388,980 400,480
Edina Realty 33,093 30,855 27,052
Equity Title 10,693 9,113 7,009
MFS 2,208 157 54
476,104 429,105 434,595
Net income before income tax expense,
extraordinary item and cumulative effect of
accounting change:
The Bank 77,885 103,927 59,808
Edina Realty 3,174 3,050 1,053
Equity Title 3,021 2,390 992
MFS 2,379 695 13
$ 86,459 $ 110,062 $ 61,866
[FN]
Nearly all assets are attributable to the financial institutions segment.
54
Report of Management
The management of Metropolitan Financial Corporation and its subsidiaries is
responsible for the preparation of the accompanying annual report and
consolidated financial statements and for their integrity and objectivity. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include amounts based upon
management's judgment and best estimates.
The consolidated financial statements have been audited by Ernst & Young,
independent auditors, selection of which has been ratified by the shareholders
of Metropolitan Financial Corporation.
Metropolitan Financial Corporation and its subsidiaries have established and
maintain systems of internal control designed to provide reasonable assurance
that assets are safeguarded and transactions are properly authorized and
recorded. Metropolitan maintains an auditing program that assesses the
effectiveness of the internal controls. In addition, the independent auditors
consider the Company's internal control structure in order to determine their
auditing procedures for the purpose of expressing an opinion on the
consolidated financial statements.
The Audit Committee of the Board of Directors of Metropolitan Financial
Corporation, comprised exclusively of outside directors, meets regularly with
management and representatives of Ernst & Young to review audit, internal
control, and accounting and financial reporting issues.
Management recognizes its responsibility for fostering a strong, ethical climate
so that Metropolitan's affairs are carried out in accordance with the highest
standards of personal and business conduct. This responsibility is reflected in
Metropolitan's personnel policies which address conflict of interest and other
related subjects, and are publicized throughout the Company and its
subsidiaries.
Norman M. Jones
Chairman and Chief Executive Officer
Steven B. Dewald
Executive Vice President and Chief Financial Officer
William T. Cox
Senior Vice President and Chief Accounting Officer
Report of Independent Auditors
Board of Directors and Shareholders
Metropolitan Financial Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated statements of condition of
Metropolitan Financial Corporation and subsidiaries as of December 31, 1993 and
1992 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Metropolitan
Financial Corporation and subsidiaries at December 31, 1993 and 1992 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Note D to the financial statements, in 1993 the Company changed
its method of accounting for certain debt and equity securities. Also, as
discussed in Note O to the financial statements, in 1993 the Company changed its
method of accounting for certain postretirement benefits provided to its
employees.
Ernst & Young
Minneapolis, Minnesota
January 19, 1994
55
Other Supplementary Data
Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1993 and 1992.
(Dollar amounts in thousands, except per share data) First Quarter* Second Quarter* Third Quarter* Fourth Quarter
1993
Interest income $112,073 $115,626 $123,577 $121,450
Interest expense 66,078 67,087 71,496 69,951
Net interest income 45,995 48,539 52,081 51,499
Provision for loan losses 1,500 2,400 2,087 1,872
Net interest income after provision for loan losses 44,495 46,139 49,994 49,627
Net gain on sale of investments, mortgage-backed
securities, mortgage loans and mortgage loan servicing 525 3,452 4,025 8,269
Other noninterest income 13,222 20,277 20,991 19,076
Noninterest expense 49,422 45,132 48,164 50,915
Income before income taxes, extraordinary item and
cumulative effect of accounting change 8,820 24,736 26,846 26,057
Income tax expense (benefit) (6,467) 9,582 9,963 8,207
Income before extraordinary item and cumulative effect
of accounting change 15,287 15,154 16,883 17,850
Extraordinary item _ _ _ _
Cumulative effect of accounting change _ _ _ _
Net income 15,287 15,154 16,883 17,850
Dividends on preferred stock 351 351 351 352
Net Income Applicable to Common Equity $ 14,936 $ 14,803 $ 16,532 $ 17,498
Primary Earnings Per Share $ 0.49 $ 0.47 $ 0.51 $ 0.54
Fully Diluted Earnings Per Share 0.48 0.47 0.51 0.54
Dividends Per Common Share $ 0.09 $ 0.10 $ 0.10 $ 0.10
1992
Interest income $106,540 $112,502 $105,173 $100,550
Interest expense 72,089 72,870 65,428 61,821
Net interest income 34,451 39,632 39,745 38,729
Provision for loan losses 2,321 2,744 1,651 1,600
Net interest income after provision for loan losses 32,130 36,888 38,094 37,129
Net gain on sale of investments, mortgage-backed
securities, mortgage loans and mortgage loan servicing 502 44,405 3,867 4,867
Other noninterest income 13,221 17,578 16,429 13,533
Noninterest expense 33,231 36,423 38,327 40,600
Income before income taxes, extraordinary item and
cumulative effect of accounting change 12,622 62,448 20,063 14,929
Income tax expense 5,102 24,439 7,852 5,150
Income before extraordinary item and
cumulative effect of accounting change 7,520 38,009 12,211 9,779
Extraordinary item _ (6,329) _ _
Cumulative effect of accounting change 75,941 _ _ _
Net income 83,461 31,680 12,211 9,779
Dividends on preferred stock 351 351 351 352
Net Income Applicable to Common Equity $ 83,110 $ 31,329 $ 11,860 $ 9,427
Primary Earnings Per Share 3.53 $ 1.09 $ 0.39 $ 0.31
Fully Diluted Earnings Per Share 2.78 1.04 0.39 0.31
Dividends Per Common Share $ 0.05 $ 0.06 $ 0.06 $ 0.09
*Amounts have been reclassified to conform with the year-end presentation.
56
Other Supplementary Data
Common Stock Prices
The following table sets forth, for each of the calendar periods indicated, the
range of high and low closing sale prices per share of the Company's common
stock. These prices have been adjusted to reflect stock dividends.
1993 1992
Low High Low High
First quarter $13.86 $18.30 $ 9.03 $11.53
Second quarter 14.78 18.06 9.20 11.70
Third quarter 14.13 17.38 9.38 13.86
Fourth quarter 15.25 18.00 12.05 15.23
The Company expects to continue its policy of paying regular cash dividends,
although there is no assurance as to future dividends because they depend on
future earnings, capital requirements and financial condition.
Preferred Stock Prices
During 1990, Metropolitan Financial Corporation issued 488,750 units consisting
of one share of $2.875 Series B Perpetual Preferred Stock and a warrant
entitling the holder to purchase 1.32 shares of MFC Common at $6.25. The
following table sets forth, for the periods indicated, the preferred stock's
range of high and low closing sale prices per unit.
1993 1992
Low High Low High
First quarter $27.00 $29.00 $34.50 $36.50
Second quarter 27.25 29.00 35.50 37.50
Third quarter 27.13 29.00 37.00 39.00
Fourth quarter 27.13 28.75 40.00 42.00
Executive Offices
1000 Metropolitan Centre
333 South Seventh Street
Minneapolis, Minnesota 55402
(612) 399-6000
Annual Meeting
Wednesday, May 4, 1994 at 1:30 PM
Lutheran Brotherhood
Minneapolis, Minnesota
Information Meeting
Thursday, May 5, 1994 at 1:30 PM
Radisson Hotel Fargo
Fargo, North Dakota
Counsel
Oppenheimer Wolff & Donnelly
Minneapolis, Minnesota
Independent Auditors
Ernst & Young
Minneapolis, Minnesota
Securities Information
Metropolitan Financial Corporation's common stock is traded on the New York
Stock Exchange under the symbol MFC and also may be found under the listing
MetFn.
Shareholders with questions concerning lost certificates, dividend payments, or
other transfer related issues are invited to contact the transfer agent and
registrar directly on these matters:
American Stock Transfer & Trust Company
40 Wall Street - 46th Floor
New York, New York 10005
(212) 936-5100
Dividend Reinvestment
Metropolitan Financial Corporation shareholders can take advantage of a dividend
reinvestment plan that provides automatic reinvestment of quarterly cash
dividends and optional cash contributions of up to $2,500 per quarter. If you
would like more information, contact American Stock Transfer & Trust Company.
Investor Information
Form 10-K is available to shareholders at no cost upon request. Shareholders may
reach the Investor Relations department by calling (800) 399-METF (800-399-
6383). Members of the investment community may also contact:
Patricia Henning, Vice President
Investor Relations and Corporate Communications
(612) 399-6045
(612) 399-6995 (Facsimile)