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...............September 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 November 12, 1996
Common stock, $0.01 par value 3,633,905 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 September 30, 1996 and March 31, 1996 1
Consolidated Statements of Income for the three months
and six months ended June 30, 1996 and 1995 2
Consolidated Statements of Cash Flows for the
six 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 7
PART II
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
METROPOLITAN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
(Unaudited)
September 30, March 31,
1996 1996
ASSETS
Cash and due from banks (including interest-
bearing deposits of $4,228 and $12,217) $ 5,257 $ 13,585
Securities available-for-sale 10,500 10,397
Mortgage-backed and related securities
available-for-sale 183,036 192,240
Mortgage-backed and related securities held-to-
maturity (fair value of $159,787 and $169,742) 160,663 171,008
Loans (net of reserve for losses of
$6,283 and $6,133) 350,711 331,839
Loans held for sale 620 10,610
Investor receivables 11,647 18,299
Accrued interest receivable 4,628 4,787
Real estate held for sale 310 310
Federal Home Loan Bank (FHLB) stock, at cost 13,314 12,803
Premises and equipment, net 4,239 4,695
Goodwill 4,673 4,856
Prepaid expenses and other assets 3,454 2,736
TOTAL ASSETS $753,052 $778,165
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $396,134 $398,153
Advances from the FHLB 200,026 219,474
Subordinated debt 22,106 22,092
Other borrowings 76,590 82,253
Federal income taxes payable 0 (235)
Other liabilities 7,294 5,546
TOTAL LIABILITIES 702,150 727,283
Preferred stock, 10,000,000 shares authorized;
no shares issued
Common stock $.01 par value 40,000,000 shares
authorized; 3,633,905 and 3,710,205 shares
issued and outstanding 41 41
Additional paid-in capital 34,884 34,884
Retained earnings 25,261 24,374
Valuation reserve for available-for-sale
securities (3,881) (4,340)
Treasury stock, at cost; 459,948 and
383,648 shares (5,403) (4,077)
TOTAL STOCKHOLDERS' EQUITY 50,902 50,882
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $753,052 $778,165
METROPOLITAN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
September 30, September 30,
1996 1995 1996 1995
Interest income
Loans $ 7,296 $ 7,678 $14,991 $15,159
Mortgage-backed and related securities 5,945 4,983 11,925 9,930
Securities available for sale 113 133 238 307
FHLB stock dividends and other 353 361 770 649
13,707 13,155 27,924 26,045
Interest expense
Deposits 5,477 5,521 11,077 10,976
Advances from the FHLB 2,745 2,726 5,336 5,856
Subordinated debt 510 508 1,020 1,016
Other borrowings 943 566 1,881 566
9,675 9,321 19,314 18,414
NET INTEREST INCOME 4,032 3,834 8,610 7,631
Provision for loan losses 0 0 150 0
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,032 3,834 8,460 7,631
Other income
Income from mortgage banking activity 899 1,271 2,425 2,473
Other 199 85 224 171
1,098 1,356 2,649 2,644
Other expense
Compensation and employee benefits 1,579 1,597 3,215 3,185
Occupancy 583 567 1,167 1,152
Savings Associations Insurance
Fund premiums 210 217 411 437
Savings Associations Insurance Fund
Special Assessment 2,506 0 2,506 0
Advertising 190 182 375 366
Net income on real estate operations (41) (47) (53) (80)
Goodwill amortization 91 156 183 312
Other 961 687 1,770 1,486
6,079 3,359 9,574 6,858
INCOME BEFORE FEDERAL INCOME TAXES (949) 1,831 1,535 3,417
Federal income tax expense
Current (323) 623 522 1,162
Deferred -- -- -- --
(323) 623 522 1,162
NET INCOME $ (626) $1,208 $1,013 $2,255
NET INCOME PER SHARE $(0.17) $ 0.33 $ 0.27 $ 0.61
METROPOLITAN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, unaudited)
Six months ended September 30, 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,013 $ 2,255
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Provision for loan losses 150
FHLB stock dividends received (511) (392)
Amortization of fees, discounts and
premiums, net 86 (282)
Goodwill amortization 183 312
Depreciation and amortization 479 567
Loss (gain) on loans held for sale (214) 74
Originations of loans held for sale (108,848) (137,564)
Proceeds from sale of loans 119,052 136,558
Decrease (increase) in investor receivable 6,652 (8,342)
Decrease in accrued interest receivable 159 52
Decrease (increase) in prepaid expenses and
other assets (954) 212
Increase (decrease) in federal income
taxes payable 235 (441)
Increase (decrease)in accrued interest payable (173) (59)
Increase (decrease) in other liabilities 1,921 (548)
Net cash (used in) provided by operating
activities 19,230 (7,598)
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 20,266 2,129
Principal repayments on mortgage-backed
and related securities held-to-maturity 10,431 8,377
Loan originations (53,949) (21,675)
Loan repayments 35,118 34,444
Loan purchases (7,183)
Proceeds from sale of real estate 91
Purchases of premises and equipment, net (24) (63)
Net cash provided by investing activities 1,088 12,317
METROPOLITAN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands, unaudited)
Six months ended September 30, 1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (2,127) (17,300)
Proceeds from FHLB advances 230,500 187,925
Repayment of FHLB advances (250,000) (255,450)
Proceeds from other borrowings 314,394 137,904
Repayment of other borrowings (320,057) (55,225)
Proceeds from sale of common stock 16
Repayment of subordinated debt (30)
Purchase of treasury stock (1,326)
Net cash used in financing activities (28,646) (2,130)
Net increase (decrease) in cash and
cash equivalents (8,328) 2,589
CASH AND CASH EQUIVALENTS
Beginning of year 13,585 10,942
End of year $ 5,257 $13,531
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 19,486 18,473
Federal income taxes 1,385 1,625
METROPOLITAN BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX-MONTH PERIOD ENDED SEPTEMBER 30, 1996
NOTE A - Basis Of Presentation
The condensed consolidated financial statements included in this report have
been prepared by 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- and six-month periods
ended September 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
On September 30, 1996, President Clinton signed into law federal legislation
designed to recapitalize the Savings Association Insurance Fund ("the SAIF")
of the Federal Deposit Insurance Corporation ("the FDIC"). The legislation
requires a special one-time assessment of approximately 65.7 cents per $100 of
SAIF-insured deposits held at March 31, 1995. Approximately $381.4 million of
the deposit liabilities of Metropolitan Federal Savings and Loan Association
of Seattle ("the Association") were insured by the SAIF at March 31, 1995.
The one-time special assessment resulted in a pre-tax charge to earnings of
approximately $2.5 million in the second fiscal quarter of 1997 ended
September 30, 1996. Management expects that deposit insurance premiums in
future quarters will be significantly reduced from the current premium
applicable to SAIF-insured deposits. The second quarter charge to earnings
is expected to be recovered within approximately 4 years through reduced
deposit insurance premiums.
From October 1, 1996 through December 31, 1996, SAIF-member savings
associations will pay risk-based assessments of 18 to 27 cents per $100 of
SAIF-insured deposits, compared to the current assessment schedule of 23 to
31 cents. Effective January 1, 1997, SAIF members will have the same risk-
based assessment schedule as Bank Insurance Fund ("the BIF") members - 0 to
27 cents per $100 of insured deposits. Financing Corporation ("FICO")
assessments of 6.4 and 1.3 cents per $100 of insured deposits will be added
to the regular assessments for SAIF-insured and BIF-insured deposits,
respectively, until December 31, 1999. The legislation is intended to fully
recapitalize the SAIF so that BIF-insured and SAIF-insured deposits will be
charged the same FDIC deposit insurance premiums after the year 1999.
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 approved by the boards of directors of
both companies, the applicable regulatory authorities and by the shareholders
of the Company. It is anticipated that the merger will be completed by late
November or early December, 1996.
NOTE D - Redemption of 8.5% Subordinated Notes
Effective August 10, 1993, the Company issued $23 million of 8.50%
Subordinated Notes due July 31, 2003. In connection with the offering, the
Company incurred costs totalling $1.1 million. These costs were deferred and
have been amortized to date over the original term of the notes. The notes
have been redeemable in whole or in part, at the option of the Company, at
100 percent of their principal amount since July 31, 1996. On September 12,
1996, the Company announced redemption of all of the notes at 100 percent of
the principal amount plus accrued interest, effective October 1, 1996. At
September 30, 1996, $22.9 million of the subordinated notes were outstanding
with an unamortized deferred cost of $830,000. The remaining unamortized
deferred cost of $830,000 will be expensed in the fiscal third quarter of
1997 ending December 31, 1996.
The subordinated notes were replaced by a borrowing from Washington Federal
at a rate of 8.25% and a maturity of July 31, 2003. This borrowing will be
eliminated through consolidation once the merger with Washington Federal,
Inc. is completed.
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 September 30, 1996, the Company had $753.1 million of assets,
$702.2 million of liabilities, including $396.1 million of deposits, and $50.9
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 ("the FDIC")
to the maximum extent permitted by law.
The Company currently conducts business from its headquarters and main
office in Seattle, Washington and 9 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 five offices and is a leading lender for
home purchase transactions in King and Snohomish counties. Since October 1,
1995, the mortgage banking company has operated as a subsidiary of the
Association, retaining its current name, management and staff. During the
quarter ended September 30, 1996, Phoenix Mortgage closed its loan production
office in Federal Way, Washington. This production office shared space with a
branch of the Association which will be combined with an existing branch of
Washington Federal once the merger is completed. See Note C -- Merger with
Washington Federal, Inc.
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
September 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 ("the 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
("the Federal Reserve Board") and is a member of the Federal Home Loan Bank
("the 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 September 30, 1996,
the Company purchased 76,300 shares in open-market transactions at an average
price of $17.38 per share, bringing the total treasury stock purchased since
April 1994 to 459,948 shares at an average cost of $11.75 per share.
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 approved by the
boards of directors of both companies, by the applicable regulatory
authorities and by the shareholders of the Company. It is anticipated that
the merger will be completed by late November or early December, 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 $25.1 million or 3.2% during the six
months ended September 30, 1996 primarily due to a decrease in interest-
bearing deposits at banks and a decrease in mortgage-backed and related
securities available-for-sale and held-to-maturity. Total liabilities
decreased by $25.1 million or 3.5% 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 $19.5 million or 5.4% during the six months
ended September 30, 1996. One security available-for-sale with market value
of $2.8 million was sold during the period. Amortization and prepayments
were $28.1 million. Partially offsetting these declines, two securities
available-for-sale with market value of $10.8 million were purchased during
the period. The market value of securities available-for-sale increased by
$0.6 million as interest rates, though volatile, were largely unchanged at
period-end from those at March 31, 1996. 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
September 30, 1996, mortgage-backed and related securities available-for-sale
totalled $183.0 million market value ($186.4 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 increased by $2.2
million or 0.6% during the six months ended September 30, 1996. Portfolio
loans increased by $18.9 million or 5.7% 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 $16.7 million or 57.6%. 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 $160.5
million and $155.8 million during the six months ended September 30, 1996 and
1995, respectively. Nonaccruing loans increased by $6.8 million during the
period to $11.1 million at September 30, 1996 compared to $4.3 million at
March 31, 1996. $10.2 million or 91.8% of the nonaccruing loans at September
30, 1996, were due to three commercial real estate loans. One large
commercial real estate loan in Tacoma, Washington went on nonaccrual during
the period, accounting for the increase since March 31, 1996.
The Company's nonperforming assets, which consist of nonaccruing loans and
nonperforming real estate held for sale, if any, totalled $11.4 million or
1.51% of total assets at September 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 September 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. Total deposits decreased by $2.0 million or 0.5% during the six
months ended September 30, 1996. The Company's retail deposit categories
increased by $1.6 million or 0.5%. Institutional deposits and deposits
obtained through wholesale means decreased by $3.6 million or 4.6%.
ADVANCES FROM THE FHLB. Advances from the FHLB decreased by $19.4 million or
8.9% during the six months ended September 30, 1996. These borrowings were not
replaced as they matured due to the net decrease in asset balances over the
period.
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 original term of the notes. The notes are
redeemable in whole or in part, at the option of the Company, at 100 percent
of their principal amount on or after July 31, 1996. On September 12, 1996,
the Company announced redemption of all of the notes at 100 percent of the
principal amount plus accrued interest, effective October 1, 1996. See
Note D - Redemption of Subordinated Notes.
OTHER BORROWINGS. Other borrowings in the form of reverse repurchase
agreements decreased by $5.7 million or 6.9% during the six months ended
September 30, 1996. These borrowings were not needed due to prepayments of
mortgage-backed and related securities available-for-sale and held-to-
maturity discussed above.
STOCKHOLDERS' EQUITY. Stockholders' equity at September 30, 1996 totalled
$50.9 million, unchanged since March 31, 1996. Net income was $1.0 million
and the valuation reserve for available-for-sale securities decreased by
$459,000 during the six months ended September 30, 1996. These changes were
offset by an increase in treasury stock, at cost, of $1.3 million and a
reduction in retained earnings of $126,000 for the purchase of shares of
Company stock to fill the exercise of employee stock options during the
period. 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 a net loss of $0.6 million for the quarter
ended September 30, 1996 compared to net income of $1.2 million for the
quarter ended September 30, 1995. The Company reported net income of $1.0
million and $2.3 million for the six month periods ended September 30, 1996
and 1995, respectively. The decrease in net income in fiscal 1997 is
primarily due to merger related expenses of $0.3 million and a charge of $2.5
million to recapitalize the SAIF. Excluding these one-time expenses,
operating income would have been $1.2 million for the quarter ended September
30, 1996, unchanged from the same quarter a year earlier. See Note B - SAIF
Recapitalization.
Mortgage banking activity for the quarter ended September 30, 1996 contributed
net income of ($108,000) compared to a net income contribution of ($36,000)
for mortgage banking activity in the quarter ended September 30, 1995. For the
six months ended September 30, 1996, the net income contribution from
mortgage banking activity was $117,000 compared to a net income contribution
of ($60,000) for the same period in 1995.
INTEREST INCOME. Interest income increased to $13.7 million for the quarter
ended September 30, 1996 compared to $13.2 million for the quarter ended
September 30, 1995. Interest income was $27.9 million and $26.0 million for
the six month periods ended September 30, 1996 and 1995, respectively. These
increases were due to a higher volume of interest-earning assets, primarily
mortgage-backed and related securities. Average interest-earning assets for
the quarter ended September 30, 1996 were $740.3 million compared to $682.1
million for the quarter ended September 30, 1995. The yield on interest-
earning assets was 7.41% for the quarter ended September 30, 1996 compared to
7.71% for the quarter ended September 30, 1995 and 7.47% for the six months
ended September 30, 1996 compared to 7.67% for the six months ended September
30, 1995.
INTEREST EXPENSE. Interest expense increased to $9.7 million for the quarter
ended September 30, 1996 compared to $9.3 million for the quarter ended
September 30, 1995 and to $19.3 million for the six months ended September 30,
1996 compared to $18.4 million for the six months ended September 30, 1995.
The increases are due to a higher volume of interest-bearing liabilities, both
deposits and borrowings. Average interest-bearing liabilities for the quarter
ended September 30, 1996 were $700.4 million compared to $644.3 million for
the quarter ended September 30, 1995. The weighted average rate on interest-
bearing liabilities declined to 5.53% for the quarter ended September 30, 1996
compared to 5.79% for the quarter ended September 30, 1995 and to 5.45% for
the six months ended September 30, 1996 compared to 5.71% for the six months
ended September 30, 1995.
NET INTEREST INCOME. Net interest income was $4.0 million for the quarter
ended September 30, 1996 compared to $3.8 million for the quarter ended
September 30, 1995. Net interest income was $8.6 million and $7.6 million for
the six months ended September 30, 1996 and 1995, respectively. Although the
volume of interest-earning assets and interest-bearing liabilities increased
over the period, the weighted average yield earned on interest-earning assets
was negatively impacted by the large increase in nonaccruing loans in the
quarter ended September 30, 1996. This is reflected in the Company's net
interest margin, which amounted to 2.18% and 2.25% for the quarters ended
September 30, 1996 and 1995, respectively, and 2.30% and 2.25% for the six
month periods ended September 30, 1996 and 1995, respectively.
PROVISION FOR LOAN LOSSES. The Company recorded no provisions for loan
losses during the quarters ended September 30, 1996 and 1995, respectively,
and $150,000 and $0 for the six months ended September 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 September 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 55.2% and 134.4% at September 30, 1996 and
March 31, 1996, respectively.
Management of the Company believes that the allowance for loan losses at
September 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 $1.1 million and $1.4 million for the
quarters ended September 30, 1996 and 1995, respectively, and $2.6 million
and $2.6 million for the six months ended September 30, 1996 and 1995,
respectively.
Other income from mortgage banking activity was $0.9 million in the quarter
ended September 30, 1996 compared to $1.3 million in the quarter ended
September 30, 1995. Other income from mortgage banking activity was $2.4
million in the six month period ended September 30, 1996 compared to $2.5
million in the six month period ended September 30, 1995.
OTHER EXPENSE. Other expense totalled $6.1 million for the quarter ended
September 30, 1996 compared to $3.4 million for the quarter ended September
30, 1995 and $9.6 million for the six months ended September 30, 1996 compared
to $6.9 million for the six months ended September 30, 1995. Merger-related
expenses totalled $0.3 million and the SAIF special assessment totalled $2.5
million in the quarter ended September 30, 1996. Excluding these one-time
charges, other operating expense was $3.3 million and $6.8 million for the
three and six month periods ended September 30, 1996, respectively.
Other expense from mortgage banking activity was $1.1 million in the quarter
ended September 30, 1996 compared to $1.3 million in the quarter ended
September 30, 1995. Other expense from mortgage banking activity was $2.4
million in the six month period ended September 30, 1996 compared to $2.5
million in the six month period ended September 30, 1995.
TAXES. The Company incurred ($323,000) and $623,000 of income tax expense for
the quarters ended September 30, 1996 and 1995, respectively, and $522,000 and
$1.2 million for the six month periods ended September 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 September 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. For the
quarter ended September 30, 1996, the average amount of impaired loans was
$12.5 million and interest income (cash received) from impaired loans was
$35,000. For the six month period ended September 30, 1996, the average
amount of impaired loans was $8.3 million and interest income (cash received)
from impaired loans was $73,000.
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. If an institution's
interest-bearing liabilities have shorter effective repricing periods than
its interest-earning assets, material and prolonged increases in interest
rates generally will adversely affect net interest income, while material and
prolonged decreases in interest rates generally will 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 repricing periods. 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 September 30, 1996 was 6.3%. The Association's capital
at September 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 September 30, 1996
(dollars in thousands):
Requirement Actual Excess
Tangible Capital $ 9,952 $50,817 $40,865
1.50% 7.66% 6.16%
Core Capital $19,904 $50,817 $30,913
3.00% 7.66% 4.66%
Risk-based Capital $24,630 $54,679 $30,049
8.00% 17.76% 11.76%
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:
Leverage
FDICIA Category Total<F1> Core<F2> 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 September 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
The Company redeemed $23 million of 8.5% Subordinated Notes due July
31, 2003.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders was held on November 6, 1996 in
Seattle, Washington. The matter that came before the meeting was the
proposal to approve an Agreement and Plan of Merger, dated as of July 11,
1996, by and between Metropolitan Bancorp and Washington Federal, Inc.
For Withheld Abstain
2,905,959 6,946 3,009
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 between
Metropolitan Bancorp and Washington Federal Inc., and the sale of Phoenix
Mortgage & Investment, Inc.
An 8-K was filed on October 2, 1996 regarding the redemption of
Subordinated Notes.
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
November 12, 1996 MICHAEL M. PETE
Michael M. Pete
Senior Vice President
Chief Financial Officer
November 12, 1996 EDWIN C. HEDLUND
Edwin C. Hedlund
Vice President
Secretary