FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended...............June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For transition period from _____________ to ______________
Commission File Number: 022218
METROPOLITAN BANCORP
(Exact name of registrant as specified in its charter)
State of Washington 91-1600929
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1520 Fourth Avenue Seattle, Washington 98101
(Address of principal executive offices and zip code)
(206) 625-1818
(Registrant's telephone number, including area code)
____________________________________________________
(Former name, address and fiscal year if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes X No ____
(2) Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: At August 9, 1996
Common stock, $0.01 par value 3,710,205 shares
PART I
Item 1. Financial Statements
The Consolidated Financial Statements of Metropolitan Bancorp and
Subsidiaries filed as a part of the report are as follows:
Page
Consolidated Statements of Financial Condition
as of June 30, 1996 and March 31, 1996 1
Consolidated Statements of Income for the three
months ended June 30, 1996 and 1995 2
Consolidated Statements of Cash Flows for the
three months ended June 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
METROPOLITAN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
(Unaudited)
June 30, March 31,
1996 1996
ASSETS
Cash and due from banks (including interest-
bearing deposits of $10,038 and $12,217) $ 10,939 $ 13,585
Securities available-for-sale 10,425 10,397
Mortgage-backed and related securities
available-for-sale 189,290 192,240
Mortgage-backed and related securities held-
to-maturity (fair value of $163,079 and
$169,742) 165,517 171,008
Loans (net of reserve for losses of
$6,283 and $6,133) 339,283 331,839
Loans held for sale 2,417 10,610
Investor receivables 12,423 18,299
Accrued interest receivable 4,798 4,787
Real estate held for sale 310 310
Federal Home Loan Bank (FHLB) stock, at cost 13,051 12,803
Premises and equipment, net 4,454 4,695
Goodwill 4,764 4,856
Prepaid expenses and other assets 3,343 2,736
TOTAL ASSETS $761,014 $778,165
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $424,031 $398,153
Advances from the FHLB 193,000 219,474
Subordinated debt 22,113 22,092
Other borrowings 65,591 82,253
Federal income taxes payable 591 (235)
Other liabilities 4,522 5,546
TOTAL LIABILITIES 709,848 727,283
Preferred stock, 10,000,000 shares authorized;
no shares issued
Common stock $.01 par value 40,000,000 shares
authorized; 3,710,205 and 3,710,205 shares
issued and outstanding 41 41
Additional paid-in capital 34,884 34,884
Retained earnings 25,970 24,374
Valuation reserve for available-for-sale
securities (5,652) (4,340)
Treasury stock, at cost; 383,648 and
383,648 shares (4,077) (4,077)
TOTAL STOCKHOLDERS' EQUITY 51,166 50,882
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $761,014 $778,165
METROPOLITAN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months ended June 30, 1996 1995
Interest income
Loans $ 7,695 $ 7,481
Mortgage-backed and related securities 5,980 4,947
Securities available for sale 125 174
FHLB stock dividends and other 417 288
14,217 12,890
Interest expense
Deposits 5,600 5,455
Advances from the FHLB 2,591 3,130
Subordinated debt 510 508
Other borrowings 938 0
9,639 9,093
NET INTEREST INCOME 4,578 3,797
Provision for loan losses 150 0
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,428 3,797
Other income
Income from mortgage banking activity 1,526 1,202
Other 25 86
1,551 1,288
Other expense
Compensation and employee benefits 1,636 1,588
Occupancy 584 585
Savings Associations Insurance Fund premiums 201 220
Advertising 185 184
Net income on real estate operations (12) (33)
Goodwill amortization 92 156
Other 809 799
3,495 3,499
INCOME BEFORE FEDERAL INCOME TAXES 2,484 1,586
Federal income tax expense
Current 845 539
Deferred - -
845 539
NET INCOME $ 1,639 $ 1,047
NET INCOME PER SHARE $ 0.44 $ 0.28
METROPOLITAN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, unaudited)
Three months ended June 30, 1996 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,639 $ 1,047
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities
Provision for loan losses 150
FHLB stock dividends received (248) (179)
Amortization of fees, discounts and
premiums, net (45) 195
Goodwill amortization 92 156
Depreciation and amortization 245 290
Loss (gain) on loans held for sale (143) 67
Originations of loans held for sale (64,271) (68,533)
Proceeds from sale of loans 72,607 67,715
Decrease (increase) in investor receivable 5,876 (9,899)
Increase in accrued interest receivable (11) (58)
Decrease in prepaid expenses and
other assets 69 662
Increase in federal income taxes payable 826 1
Increase in accrued interest payable 17 32
Increase (decrease) in other liabilities (1,041) 15
Net cash (used in) provided by operating
activities 15,762 (8,489)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment
securities available-for-sale 5,000
Purchases of mortgage-backed and related
securities available-for-sale (10,845) (8,712)
Principal repayments on mortgage-backed
and related securities available-for-sale 11,556 733
Principal repayments on mortgage-backed
and related securities held-to-maturity 5,534 4,353
Loan originations (22,508) (11,617)
Loan repayments 15,130 15,676
Proceeds from sale of real estate 91
Purchases of premises and equipment, net (4) (43)
Net cash (used in) provided by
investing activities (1,046) 5,390
METROPOLITAN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands, unaudited)
Three months ended June 30, 1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits 25,800 (18,161)
Proceeds from FHLB advances 84,000 164,925
Repayment of FHLB advances (110,500) (143,950)
Proceeds from other borrowings 132,473
Repayment of other borrowings (149,135)
Net cash (used in) provided by
financing activities (17,362) 2,814
Net increase in cash and cash equivalents (2,646) (285)
CASH AND CASH EQUIVALENTS:
Beginning of year 13,585 10,942
End of year $10,939 $10,657
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash investment activities -
Loans transferred to real estate
held for sale $ 90 $
Cash paid during the period for -
Interest 9,622 9,062
Federal income taxes 500
METROPOLITAN BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED JUNE 30, 1996
NOTE A - Basis Of Presentation
The condensed consolidated financial statements included in this report have
been prepared by Metropolitan Bancorp ("the Company") without audit in
accordance with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation are
reflected in the interim statements. Operating results for the three month
period ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the full fiscal year ending March 31, 1997.
NOTE B - Saif Recapitalization
Most deposit liabilities of Metropolitan Federal Savings and Loan Association
of Seattle ("the Association") are insured by the FDIC's Savings Associations
Insurance Fund (SAIF). SAIF-insured institutions currently pay deposit
insurance premiums that range from 23 to 31 basis points, depending on the
risk-based capitalization and regulatory rating of the financial institution.
Financial institutions whose deposits are insured by the FDIC's Bank Insurance
Fund (BIF) currently pay deposit insurance premiums of about 4 basis points.
The difference in the deposit premiums is due to the capitalization level of
each insurance fund. The BIF reached its mandated coverage ratio of 1.25
percent of insured deposits in June of 1995. The FDIC estimates that the SAIF
will not reach its mandated 1.25 percent coverage ratio until after the year
2000 under present conditions. The difference in deposit premiums confers a
decided advantage to BIF-insured institutions in raising deposit rates,
lowering loan rates, investing in new products and delivery systems or paying
higher dividends to shareholders.
Congress has proposed legislation which would speed up the SAIF's
recapitalization in order to restore and preserve the competitive balance
between BIF-insured and SAIF-insured financial service providers. This
legislation would assess a one-time deposit premium of about $6 billion on
SAIF-insured institutions to recapitalize SAIF to the 1.25 percent level,
based on deposits as of March 31, 1995. Such a fee would equal an estimated 85
to 90 basis points of insured deposits held as of that date. At March 31,
1995, the Association held approximately $383.1 million of SAIF-insured
deposits. The proposed legislation would result in a one-time expense for the
Association of approximately $3.3 million to $3.4 million, before tax. As of
August 9, 1996, the terms and structure of the proposed legislation had not
been finalized, approved or signed into law. The future impact of the proposed
SAIF recapitalization on the Company's financial position or results of
operations will depend on the nature and timing of such recapitalization, if
any.
NOTE C - Merger With Washington Federal, Inc.
On July 12, 1996, the Company announced the signing of a definitive agreement
under which the Company will merge with and into Washington Federal, Inc. In
connection with the merger, each shareholder of the Company will receive
shares of Washington Federal common stock at an expected value of $18.00 in
exchange for each share of his or her Metropolitan Bancorp common stock,
subject to the pricing and other provisions in the agreement. Phoenix Mortgage
& Investment, Inc. ("Phoenix Mortgage"), the mortgage banking subsidiary of
the Company, will be acquired by Phoenix Mortgage management. It is intended
that the transaction constitute a tax-free reorganization under the Internal
Revenue Code so that shareholders of the Company will not recognize gain or
loss in connection with the receipt of Washington Federal common stock. The
transaction has been unanimously approved by the boards of directors of both
companies. Approval is required from the applicable regulatory authorities and
by the shareholders of the Company. It is anticipated that the merger will be
completed by December 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL:
THE COMPANY. Metropolitan Bancorp ("the Company") is a Washington corporation
which became a savings and loan holding company upon its acquisition of all of
the outstanding stock of Metropolitan Federal Savings and Loan Association of
Seattle ("the Association") in connection with the Association's
reorganization into the holding company form of organization effective July
21, 1993. At June 30, 1996, the Company had $761.0 million of assets, $709.8
million of liabilities, including $424.0 million of deposits, and $51.2
million of stockholders' equity.
The Company's primary subsidiary is the Association, which was organized in
1935 as a federally chartered, mutual savings and loan association and
converted from mutual to stock form in January 1990. The Association's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to
the maximum extent permitted by law.
The Company currently conducts business from its headquarters and main office
in Seattle, Washington and nine full service branch offices located in the
Puget Sound region of Washington. The Company is primarily engaged in
attracting deposits from the general public through its offices and using
those funds, together with borrowings, to originate loans secured by existing
single-family residences and to purchase securities which are backed by such
loans. To a lesser extent, the Company also originates loans secured by
existing, small (generally five to thirty-six units) multifamily residences
and loans for the construction of single-family and such multifamily
residences. The Company also engages in the purchase and origination of non-
traditional mortgage products secured by real estate through Statewide
Mortgage Services Company, a subsidiary of Metropolitan Bancorp, and through
the Association.
As of July 1, 1994, the Company's other major subsidiary is Phoenix Mortgage &
Investment, Inc. ("Phoenix Mortgage"), a mortgage banking company
headquartered in Lynnwood, Washington. On April 18, 1994, the Board of
Directors of the Company authorized the acquisition of the privately held
mortgage banking company which has six offices and is a leading lender for
home purchase transactions in King and Snohomish counties. Since October 1,
1995, the mortgage banking company is operating as a subsidiary of the
Association, retaining its current name, management and staff. During the
quarter ended June 30, 1996, Phoenix Mortgage closed its loan production
office in Spokane, Washington in order to concentrate its efforts in the
higher growth markets of King, Pierce and Snohomish counties.
The Company's principal goals are to achieve long term financial strength and
profitability by (i) increasing the amount and stability of its net interest
income, (ii) decreasing the credit risk inherent in its assets, (iii) reducing
the vulnerability of its operations to changes in interest rates, (iv)
controlling its operating expenses and increasing the efficiency of its
operation and (v) maintaining a strong regulatory capital position. At June
30, 1996, the Association's regulatory capital substantially exceeded all
regulatory capital requirements.
The Company, as a savings and loan holding company, is subject to regulation
by the Office of Thrift Supervision ("OTS"). The Association is subject to
regulation by the OTS, as its chartering authority, and by the FDIC, which
insures its deposits up to applicable limits. The Association also is subject
to certain regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") and is a member of the Federal Home Loan Bank
("FHLB") of Seattle, one of the twelve regional banks which comprise the FHLB
system.
Effective March 11, 1996, the Board of Directors of the Company authorized the
repurchase of up to 357,225 shares, or approximately 10 percent, of the
Company's then outstanding common stock, a continuing program first authorized
in January 1994. Management is authorized to repurchase shares from time to
time in open-market transactions during calendar year 1996 as, in the opinion
of management, market conditions may warrant. The repurchased shares will be
held as treasury stock and will be available for general corporate purposes.
In fiscal 1995, the Company repurchased 376,148 shares at an average price of
$10.58 per share. In fiscal 1996, the Company repurchased 7,500 shares at an
average price of $12.75 per share. In the quarter ended June 30, 1996, the
Company purchased 9,075 shares in open-market transactions in conjunction with
the exercise of stock options by Company employees. No additional shares of
stock were repurchased as treasury stock during the first quarter of fiscal
1997.
On July 12, 1996, the Company announced the signing of a definitive agreement
under which the Company will merge with and into Washington Federal, Inc. In
connection with the merger, each shareholder of the Company will receive
shares of Washington Federal common stock at an expected value of $18.00 in
exchange for each share of his or her Metropolitan Bancorp common stock,
subject to the pricing and other provisions in the agreement. Phoenix
Mortgage, the mortgage banking subsidiary of the Company, will be acquired by
Phoenix Mortgage management. It is intended that the transaction constitute a
tax-free reorganization under the Internal Revenue Code so that shareholders
of the Company will not recognize gain or loss in connection with the receipt
of Washington Federal common stock. The transaction has been unanimously
approved by the boards of directors of both companies. Approval is required
from the applicable regulatory authorities and by the shareholders of the
Company. It is anticipated that the merger will be completed by December 31,
1996.
The common stock of the Company, par value $.01 per share (the "Common
Stock"), is quoted on the NASDAQ National Market System under the symbol
"MSEA." The Company's executive offices are located at 1520 Fourth Avenue,
Seattle, Washington 98101, and its telephone number is (206) 625-1818.
CHANGES IN FINANCIAL CONDITION:
GENERAL. Total assets decreased by $17.2 million or 2.2% during the three
months ended June 30, 1996 primarily due to a decrease in investor receivables
(mortgage loans sold but not yet funded), loans held for sale and mortgage-
backed and related securities available-for-sale and held-to-maturity. Total
liabilities decreased by $17.4 million or 2.4% during the period.
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-
MATURITY. Mortgage-backed and related securities available-for-sale and held-
to- maturity decreased by $8.4 million or 2.3% during the three months ended
June 30, 1996. $2.0 million of this decrease was due to a decline in the
market value of securities available-for-sale brought about by rising interest
rates during the period. One security available-for-sale with market value of
$2.8 million was sold during the quarter. Amortization and prepayments were
$14.4 million. Partially offsetting these declines, two securities available-
for-sale with market value of $10.8 million were purchased during the period.
These securities were primarily funded by reverse repurchase agreements,
advances from the FHLB and certificates of deposits with maturities of three
months to one year. At June 30, 1996, mortgage-backed and related securities
available-for-sale totalled $189.3 million market value ($197.3 million
principal value) and consisted of agency mortgage-backed securities and highly
rated whole-loan-backed securities.
LOANS. Loans, loans held for sale and investor receivables decreased by $6.5
million or 1.8% during the three months ended June 30, 1996. Portfolio loans
increased by $7.6 million or 2.3% as borrowers turned increasingly to
adjustable rate loans in response to higher fixed mortgage rates. Loans held
for sale and investor receivables were lower by $14.1 million or 48.7%. The
Company continues to sell most new originations of fixed rate loans pursuant
to an asset and liability management strategy. These sales, in combination
with repayments, primarily offset loan originations, which amounted to $91.0
million and $79.6 million during the three months ended June 30, 1996 and
1995, respectively.
Nonaccruing loans decreased by $352,000 during the quarter to $3.9 million at
June 30, 1996 compared to $4.3 million at March 31, 1996. Two commercial real
estate loans in Los Angeles, California, total $3.0 million of the Company's
nonaccruing loans at June 30, 1996, unchanged from March 31, 1996.
The Company's nonperforming assets, which consist of nonaccruing loans and
nonperforming real estate held for sale, if any, totalled $4.2 million or
0.55% of total assets at June 30, 1996 compared to $4.6 million or 0.59% of
total assets at March 31, 1996.
REAL ESTATE HELD FOR SALE. Real estate held for sale at June 30, 1996 totaled
$310,000, unchanged from March 31, 1996, and consisted of a 4,300 square foot
office building in Los Angeles, California.
DEPOSITS. Deposits increased by $25.9 million or 6.5% during the three months
ended June 30, 1996. The Company's retail deposit categories increased by
$14.8 million or 4.5%. Institutional deposits and deposits obtained through
wholesale means increased by $11.1 million or 15.6%. Most of this growth was
in certificates of deposits (CDs) with average maturities of nine months to
one year. These increased deposit balances were used to replace more expensive
FHLB advances, as discussed below.
ADVANCES FROM THE FHLB. Advances from the FHLB decreased by $26.5 million or
12.1% during the three months ended June 30, 1996 and were replaced by lower-
costing deposits discussed above. A $70 million advance scheduled to mature in
February 1999 was called at par by the FHLB in May 1996. The Association
replaced $60 million of these funds with new advances from the FHLB with
maturities from one to six months.
SUBORDINATED DEBT. Effective August 10, 1993, the Bancorp issued $23 million
of 8.5% Subordinated Notes due 2003. In connection with the offering, the
Bancorp incurred costs totalling $1.1 million. These costs have been deferred
and are being amortized over the term of the notes. The notes are redeemable
in whole or in part, at the option of the Company, at 100% of their principal
amount on or after July 31, 1996.
OTHER BORROWINGS. Other borrowings in the form of reverse repurchase
agreements decreased by $16.7 million or 20.3% during the three months ended
June 30, 1996. These balances were reduced in response to the decline in total
assets, primarily loans held for sale and investor receivables, during the
period.
STOCKHOLDERS' EQUITY. Stockholders' equity at June 30, 1996 totalled $51.2
million compared to $50.9 million at March 31, 1996. The increase of $0.3
million is attributable to net income of $1.6 million during the three months
ended June 30, 1996, partially offset by an increase in the valuation reserve
totalling $1.3 million for securities available-for-sale. The valuation
reserve was recorded in connection with the Company's mortgage-backed and
related securities available-for- sale, mentioned above, in compliance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115), adopted effective April
1, 1994.
RESULTS OF OPERATIONS:
NET INCOME. The Company reported net income of $1.6 million for the quarter
ended June 30, 1996 compared to $1.0 million for the quarter ended June 30,
1995. The increase in net income is primarily due to an increase in net
interest margin and an increase in net non-interest income at the Association.
The net income contribution from mortgage banking activity for the quarter
ended June 30, 1996 was $225,000 compared to a loss of $1,242 for the three
months ended June 30, 1995.
INTEREST INCOME. Interest income increased to $14.2 million in the quarter
ended June 30, 1996 from $12.9 million in the quarter ended June 30, 1995.
This increase was mostly due to a higher volume of interest-earning assets,
primarily mortgage-backed and related securities. Average interest-earning
assets for the quarter ended June 30, 1996 were $754.7 million compared to
$676.7 million for the quarter ended June 30, 1995. The yield on interest-
earning assets was 7.53% for the quarter ended June 30, 1996 compared to 7.62%
for the quarter ended June 30, 1995.
INTEREST EXPENSE. Interest expense increased to $9.6 million for the quarter
ended June 30, 1996 compared to $9.1 million for the quarter ended June 30,
1995. This increase was mainly due to a higher volume of interest-bearing
liabilities, both deposits and borrowings. Average interest-bearing
liabilities for the quarter ended June 30, 1996 were $715.2 million compared
to $646.1 million for the quarter ended June 30, 1995. The weighted average
rate on interest-bearing liabilities decreased to 5.39% for the quarter ended
June 30, 1996 compared to 5.63% for the quarter ended June 30, 1995.
NET INTEREST INCOME. Net interest income was $4.6 million for the quarter
ended June 30, 1996 compared to $3.8 million for the quarter ended June 30,
1995. Although the volume of interest-earning assets and interest-bearing
liabilities increased over the period, the weighted average rate paid on
interest-bearing liabilities decreased more quickly than the decline in the
weighted average yield earned on interest-earning assets. This is reflected
in the Company's net interest margin, which amounted to 2.43% and 2.24% for
the quarters ended June 30, 1996 and 1995, respectively, and interest rate
spread, which amounted to 2.14% and 1.99% for the quarters ended June 30, 1996
and 1995, respectively.
PROVISION FOR LOAN LOSSES. The Company recorded provisions for loan losses of
$150,000 and $0 during the quarters ended June 30, 1996, and 1995,
respectively. The Company's provision in fiscal 1997 was an addition to
general loan loss reserves for commercial real estate loans. At June 30, 1996,
the Company's total allowance for loan losses amounted to $6.3 million
(including $5.0 million of general loan loss allowances) compared to $6.1
million at March 31, 1996. Loan loss reserves as a percentage of
nonperforming assets totalled 149.2% and 134.4% at June 30, 1996 and March 31,
1996, respectively. Management of the Company believes that the allowance for
loan losses at June 30, 1996 was adequate based on facts and circumstances
available. Future additions to the allowance for loan losses could become
necessary, however, based on the performance of the Company's loan portfolio
or changes in economic conditions.
OTHER INCOME. Other income totalled $1.6 million and $1.3 million for the
quarters ended June 30, 1996 and 1995, respectively. Other income in the
quarter ended June 30, 1996 included $1.5 million from mortgage banking
activity. Mortgage banking activity in the quarter ended June 30, 1995
generated other income of $1.2 million.
OTHER EXPENSE. Other expense totalled $3.5 million for the quarter ended June
30, 1996 compared to $3.5 million for the quarter ended June 30, 1995. Other
expense in the quarter ended June 30, 1996 from mortgage banking activity was
$1.2 million. Mortgage banking activity in the quarter ended June 30, 1995
generated other expense of $1.2 million.
The efficiency ratio (defined as total operating expense divided by the sum of
net interest income and other income) of the Company was 57.0% for the quarter
ended June 30, 1996 compared to 68.8% for the quarter ended June 30, 1995.
TAXES. The Company incurred $845,000 and $539,000 of income tax expense for
the quarters ended June 30, 1996 and 1995, respectively.
NEW ACCOUNTING STANDARDS. Effective April 1, 1995, the Company adopted
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" (SFAS 114), and Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" (SFAS 118). SFAS 114 prescribes the methodology
under which certain loans are to be measured for impairment. A loan is defined
as impaired by SFAS 114 if, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due, both
interest and principal, according to the contractual terms of the loan
agreement. Specifically, SFAS 114 requires that a portion of the overall
reserve for possible credit losses related to impaired loans be determined
based on the present value of expected cash flows discounted at each impaired
loan's effective interest rate or, as a practical expedient, based on each
loan's observable market price or the fair value of the loan's collateral, if
the loan is collateral dependent. Smaller balance homogeneous loans may be
collectively evaluated for impairment. SFAS 118 amends SFAS 114 by eliminating
certain income recognition provisions and by expanding the disclosure
requirements.
At June 30, 1996, the Company's recorded investment in impaired loans was
$12.5 million of which $10.8 million had allocated reserves of $1.7 million.
The remaining $1.7 million had no allocated reserves. One loan with a
principal balance of $8.4 million was added to the list of impaired loans on
the last day of the quarter in response to the death of the borrower. For the
quarter ended June 30, 1996, the average amount of impaired loans was $4.1
million and interest income (cash received) from impaired loans was $38,000.
Effective April 1, 1996, the Company adopted SFAS 122, "Accounting for
Mortgage Servicing Rights". SFAS 122 requires that the total cost of the
mortgage loans be allocated to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values,
if practicable. It also requires that capitalized mortgage servicing rights be
assessed for impairment based on the current fair value of those rights. The
Company currently sells all of its mortgage loans-for-sale "servicing
released" (with servicing rights included) so the adoption of SFAS 122 is not
anticipated to have a material impact on the results of operations or
financial condition of the Company.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-based
Compensation". The statement requires expanded disclosure of stock-based
compensation arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions in the statement. SFAS
123 does not rescind or interpret the existing accounting rules for employee
stock-based arrangements. Companies may continue following those rules to
recognize and measure compensation as outlined in Accounting Principles Board
Opinion 25 ("APB 25"), but they will now be required to disclose the pro forma
amounts of net income and earnings per share that would have been reported had
they elected to follow the fair value recognition provisions of SFAS 123.
Effective April 1, 1996, the Company adopted the disclosure requirements of
SFAS 123, but has determined that it will continue to measure its employee
stock-based compensation arrangements under the provisions of APB 25. The
adoption of the disclosure requirements of SFAS 123 will have no material
impact on the Company's financial condition or results of operations.
ASSET AND LIABILITY MANAGEMENT:
The operations of the Company, like other savings and loan holding companies,
are vulnerable to fluctuations in interest rates to the extent that there is a
gap between the amount of interest-earning assets and interest-bearing
liabilities which mature or reprice in specified periods. To the extent that
an institution's interest-earning assets have longer effective maturities than
its interest-bearing liabilities, material and prolonged increases in interest
rates generally would adversely affect net interest income, while material and
prolonged decreases in interest rates generally would have a favorable effect
on net interest income.
A principal strategy of the Company has been to minimize the vulnerability of
its operations to changes in interest rates by managing the level of the
Company's interest-bearing liabilities and interest-earning assets within
shorter maturities. The actions which have been taken by the Company in this
regard include the adoption of a lending strategy which emphasizes the
retention in the Company's portfolio of adjustable rate residential and
multifamily loans that meet certain parameters and the sale of new
originations of fixed rate residential loans that do not meet certain interest
rate risk targets. Fixed rate investment security purchases are match-funded
with liabilities that have similar expected cash flows. The Company's deposit
strategy emphasizes core deposits and reduced reliance on shorter term
institutional and wholesale deposits. With such strategies, the Company
intends to manage its interest rate risk exposure to a fairly neutral
position.
LIQUIDITY AND CAPITAL RESOURCES:
Savings associations such as the Association are required under applicable
federal regulations to maintain specified levels of cash and liquid
investments in qualifying types of United States Treasury securities, federal
agency securities and other investments generally having maturities of five
years or less. At present, the Association is required to maintain liquid
assets of the types referred to above in an amount not less than 5% of its net
withdrawable deposits and short-term borrowings. The Association's liquidity
ratio at June 30, 1996 was 6.4%.
The Association's capital at June 30, 1996 exceeded the tangible, core and
risk-based capital requirements established by the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). The following table
lists the Association's tangible, core and risk-based capital as of June 30,
1996 (dollars in thousands):
Requirement Actual Excess
Tangible Capital $10,089 $51,098 $41,009
1.50% 7.60% 6.10%
Core Capital $20,178 $51,098 $30,920
3.00% 7.60% 4.60%
Risk-based Capital $24,031 $54,867 $30,836
8.00% 18.27% 10.27%
During 1992, the Federal Deposit Insurance Corporation (FDIC) implemented new
regulations that establish the amount of capital for each of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established
categories of institutions. Depending on the Association's FDICIA category
classification, the FDIC may restrict certain activities of the Association
including acceptance of brokered deposits or offering interest rates on
deposits that are significantly higher than prevailing interest rates. In
general terms, the capital definitions are as follows:
FDICIA Category Total<F1> Core<F2> Leverage
Capital<F3>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly undercapitalized Below 6% Below 3% Below 3%
Critically undercapitalized 2% or less
<FN>
<F1> Total - risk-based ratio
<F2> Core - ratio of core capital to risk-weighted assets
<F3> Leverage capital - core capital ratio
</FN>
At June 30, 1996, the Association was in compliance with the "well-
capitalized" requirements.
IMPACT OF INFLATION AND CHANGING PRICES:
The Consolidated Financial Statements and related Notes presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Company are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction or in the same
magnitude as inflation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings of a material nature at
the present time. From time to time, the Company is a party to legal
proceedings in the ordinary course of business, wherein it enforces its
security interest.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on July 17, 1996 in Seattle,
Washington. Matters that came before the meeting included the election of
three directors.
Election of Directors:
FOR WITHHELD
David C. Cortelyou 3,268,012 8,804
John H. Fairchild 3,222,427 54,389
Virgil Fassio 3,258,004 18,812
Directors Continuing in Office:
Allen E. Doan
John F. Clearman
Larry O. Hillis
Patrick F. Patrick
H. Dennis Halvorson
John J. Knight
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
An 8-K was filed on July 22, 1996, regarding the merger agreement with
Metropolitan Bancorp and Washington Federal Inc., and the sale of Phoenix
Mortgage & Investment, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METROPOLITAN BANCORP
August 9, 1996 MICHAEL M. PETE
Michael M. Pete
Senior Vice President
Chief Financial Officer
August 9, 1996 EDWIN C. HEDLUND
Edwin C. Hedlund
Vice President
Secretary