1
Exhibit 13
FIVE YEAR SUMMARY OF SELECTED DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997 1996(1) 1995
---- ---- ---- ------- ----
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 1,608,119 $ 1,363,434 $ 924,985 $ 769,076 $ 590,095
Loans receivable, net 1,183,954 1,018,271 693,655 637,493 478,345
Loans held for sale 6,718 15,017 14,230 8,973 1,504
Mortgage-backed securities 255,727 198,295 143,167 56,672 39,156
Securities 51,708 35,660 6,446 13,173 22,806
Intangible assets 2,461 2,724 2,987 3,239 3,188
Loan servicing rights 10,374 13,412 9,224 8,051 9,130
Deposits 1,136,630 1,051,357 737,782 622,105 503,742
Borrowings 360,396 215,486 135,870 101,874 46,874
Preferred securities(2) 43,750 27,750 -- -- --
Shareholders' equity 44,868 42,644 36,661 30,244 25,466
SELECTED OPERATIONS DATA:
Total interest income $ 111,921 $ 85,728 $ 69,346 $ 54,452 $ 43,435
Total interest expense 73,644 53,784 41,703 33,116 26,816
----------- ----------- ----------- ----------- -----------
Net interest income 38,277 31,944 27,643 21,336 16,619
Provision for loan losses 6,310 2,650 2,340 1,636 959
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 31,967 29,294 25,303 19,700 15,660
Loan servicing income, net 1,358 788 1,293 1,204 1,068
Net gain on sale of loans and securities 1,781 3,523 580 336 833
Other noninterest income 4,016 3,006 2,268 2,233 2,323
Noninterest expense (32,591) (25,523) (20,149) (20,839) (14,187)
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item 6,531 11,088 9,295 2,634 5,697
Income tax expense (2,020) (4,049) (3,492) (1,095) (2,155)
Extraordinary item(3) -- (245) -- -- --
----------- ----------- ----------- ----------- -----------
Net income $ 4,511 $ 6,794 $ 5,803 $ 1,539 $ 3,542
=========== =========== =========== =========== ===========
(1) Noninterest expense for 1996 includes a $2.9 million pre-tax or $1.9
million net of tax one-time assessment to recapitalize the Savings
Association Insurance Fund.
(2) Consists of 9.50% preferred securities sold during the second quarter
of 1999 by Metropolitan Capital Trust II and 8.60% preferred securities
sold during the second quarter of 1998 by Metropolitan Capital Trust I.
(3) The extraordinary item represents expenses associated with the early
retirement of the outstanding 10% subordinated notes.
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AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997 1996(1) 1995
---- ---- ---- ------- ----
PER SHARE DATA, RESTATED
FOR STOCK SPLITS:
Basic net income per share $ 0.57 $ 0.88 $ 0.75 $ 0.22 $ 0.52
Diluted net income per share 0.57 0.87 0.75 0.22 0.52
Book value per share 5.56 5.50 4.73 3.90 3.70
Tangible book value per share 5.26 5.15 4.34 3.48 3.24
PERFORMANCE RATIOS:
Return on average assets 0.30% 0.64% 0.69% 0.23% 0.65%
Return on average equity 10.09 17.16 17.58 5.75 16.19
Interest rate spread 2.52 2.90 3.20 3.07 2.98
Net interest margin 2.73 3.16 3.48 3.34 3.24
Average interest-earning
assets to average
interest-bearing liabilities 103.73 104.96 105.30 105.39 105.13
Noninterest expense to
average assets 2.17 2.39 2.40 3.08 2.61
Efficiency ratio(2) 71.05 64.45 62.75 82.57 68.28
ASSET QUALITY RATIOS:(3)
Nonperforming loans to total loans 0.79% 1.23% 0.44% 0.80% 0.69%
Nonperforming assets to total assets 0.91 1.34 0.56 0.70 0.60
Allowance for losses on loans to
total loans 0.92 0.66 0.79 0.64 0.57
Allowance for losses on loans to
nonperforming total loans 117.52 54.44 178.60 80.38 83.61
Net charge-offs to average loans 0.19 0.16 0.13 0.04 0.02
CAPITAL RATIOS:
Shareholders' equity to total assets 2.79% 3.13% 3.96% 3.93% 4.32%
Average shareholders' equity
to average assets 2.97 3.70 3.94 3.96 4.02
Tier 1 capital to total assets(4) 6.57 6.27 5.47 5.58 5.77
Tier 1 capital to risk-weighted assets(4) 8.58 7.85 7.75 7.87 8.20
OTHER DATA:
Loans serviced for others $ 1,653,065 $ 1,496,347 $ 1,190,185 $ 1,102,514 $ 1,182,216
Number of full service offices 20 17 15 14 13
Number of loan production offices 8 5 4 5 5
(1) Noninterest expense for 1996 includes a $2.9 million pre-tax or $1.9
million net of tax one-time assessment to recapitalize the Savings
Association Insurance Fund. All per share data and performance ratios
include the effect of this assessment.
(2) Equals noninterest expense less amortization of intangible assets
divided by net interest income plus noninterest income (excluding gains
or losses on securities transactions).
(3) Ratios are calculated on end of period balances except net charge-offs
to average loans.
(4) Ratios are for Metropolitan Bank and Trust Company only.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The reported results of Metropolitan Financial Corp. ("Metropolitan,"
the "Corporation," "we," "our," or "us") primarily reflect the operations of
Metropolitan Bank and Trust Company (the "Bank"). Our results of operations are
dependent on a variety of factors, including the general interest rate
environment, competitive conditions in the industry, governmental policies and
regulations and conditions in the markets for financial assets. Like most
financial institutions, the primary contributor to our income is net interest
income, the difference between the interest we earn on interest-earning assets,
such as loans and securities, and the interest we pay on interest-bearing
liabilities, such as deposits and borrowings. Our operations are also affected
by noninterest income, such as loan servicing fees, service charges on deposit
accounts, and gains or losses on the sale of loans and securities. Our principal
operating expenses, aside from interest expense, consist of compensation and
employee benefits, occupancy costs, and general and administrative expenses.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Income. Net income for 1999 decreased 33.6% from net income for
1998. Net income for 1999 was $4.5 million, or $0.57 per common share, and net
income for 1998 was $6.8 million, or $0.87 per common share. Net income for 1998
was reduced by an extraordinary expense of $245 thousand, net of tax, or $0.03
per common share. Net income before the extraordinary item was $7.0 million for
1998, or $0.91 per common share. This decrease in net income from 1998 was due
to a 138.1% increase in the provision for loan losses, declines in gain on sales
of loans due to rising interest rates during 1999, and higher operational costs
due to growth and expansion.
Total assets grew 17.9% to $1.6 billion at December 31, 1999 from $1.4
billion at December 31, 1998. Compared to 1998 and prior years, asset growth
slowed in 1999 due to the rising interest rate environment. We expect asset
growth to continue at approximately 15% annually, as long as we are able to find
assets with appropriate levels of credit and interest rate risk.
Interest Income. Total interest income increased 30.6% to $111.9
million for 1999 from $85.7 million for 1998. This increase was due to a 40.9%
increase in the average balance of interest-earning assets. The increase in
interest income attributable to the increase in the average balance of
interest-earning assets was partially offset by the decline in the weighted
average yield on interest-earning assets, particularly loans receivable. This
decline in weighted average yield is due primarily to nonresidential real estate
loans added to the loan portfolio late in 1998 which are still included in the
portfolio along with loan securitizations in 1998 and 1999.
Interest Expense. Total interest expense increased 36.9% to $73.6
million for 1999 from $53.8 million for 1998. Interest expense increased
primarily because the average balance of interest-bearing liabilities increased
42.6% from the prior year. We increased our average balance of interest-bearing
liabilities in order to fund our growth of interest-earning assets. The average
balance of interest-bearing deposits increased 37.2% from 1998 to 1999. The
average balance of borrowings increased 62.7% from the previous year. Due to a
decrease in market rates paid to deposit customers and the use of short-term
borrowings, the cost of funds declined to 5.37% in 1999 from 5.58% in 1998. This
decline in the cost of deposits and borrowings was partially offset by the
increased cost of the additional Junior Subordinated Debentures issued in 1999.
Net Interest Margin. Net interest margin refers to net interest income
divided by total interest-earning assets. Our net interest margin declined 43
basis points to 2.73% for 1999 from 3.16% for 1998. Net interest margin declined
because asset yields declined more than liability costs while average
interest-earning assets as a percent of average interest-bearing liabilities did
not change significantly between years. The yield on interest-earning assets
decreased due to the declining yield on loans. This decline in the yield on
interest-earning assets was partially offset by a decline in our cost of funds.
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Average Balances and Yields. The following table presents the total
dollar amount of interest income from average interest-earning assets and the
resulting rates, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates, and the net interest margin.
Net interest margin is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities. All average balances
are daily average balances. Nonaccruing loans are included in average loan
balances. The average balance of mortgage-backed securities and securities are
presented at historical cost.
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans receivable $ 1,160,771 $ 93,961 8.09% $ 848,931 $74,059 8.72% $ 673,809 $ 61,230 9.09%
Mortgage-backed securities 198,404 13,814 6.96 119,152 8,895 7.47 101,160 6,947 6.87
Other 66,136 4,146 7.13 43,423 2,774 6.39 18,923 1,169 6.18
----------- -------- ----------- ------- --------- --------
Total interest-earning assets 1,425,311 111,921 7.89 1,011,506 85,728 8.48 793,892 69,346 8.73
----------- -------- ----------- ------- --------- --------
Nonearning assets 78,162 57,804 44,727
----------- ----------- ---------
Total assets $ 1,503,473 $ 1,069,310 $ 838,619
=========== =========== =========
INTEREST-BEARING LIABILITIES:
Deposits $ 1,085,251 55,289 5.09 $ 790,897 42,537 5.38 $ 636,777 34,120 5.36
Borrowings 250,958 15,079 6.01 154,228 9,614 6.23 117,150 7,583 6.47
Junior Subordinated Debentures 37,858 3,418 9.03 18,577 1,633 8.79 -- -- --
----------- -------- ----------- ------- --------- --------
Total interest-bearing
liabilities 1,374,067 73,786 5.37 963,702 53,784 5.58 753,927 41,703 5.53
-------- ---- ------- ---- -------- ----
Noninterest-bearing liabilities 84,686 66,009 51,674
Shareholders' equity 44,720 39,599 33,018
----------- ----------- ---------
Total liabilities and
shareholders' equity $ 1,503,473 $ 1,069,310 $ 838,619
=========== =========== =========
Net interest income before capitalized
interest and interest rate spread 38,135 2.52% 31,944 2.90% 27,643 3.20%
-------- ==== ------- ==== -------- ====
Net interest margin 2.73% 3.16% 3.48%
Interest expense capitalized 142 -- --
-------- ------- --------
Net interest income $ 38,277 $31,944 $ 27,643
======== ======= ========
Average interest-earning assets
to average interest bearing
liabilities 103.73% 104.96% 105.30%
Rate and Volume Variances. Changes in the level of interest-earning
assets and interest-bearing liabilities (known as changes due to volume) and
changes in yields earned on assets and rates paid on liabilities (known as
changes due to rate) affect net interest income. The following table provides a
summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates. Changes attributable to the combined
impact of volume and rate have been allocated proportionately to change due to
volume and change due to rate.
YEARS ENDED DECEMBER 31,
------------------------
1999 VS. 1998 1998 VS. 1997
INCREASE (DECREASE) INCREASE (DECREASE)
------------------- -------------------
CHANGE CHANGE CHANGE CHANGE
TOTAL DUE TO DUE TO TOTAL DUE TO DUE TO
CHANGE VOLUME RATE CHANGE VOLUME RATE
------ ------ ---- ------ ------ ----
(IN THOUSANDS)
INTEREST INCOME ON:
Loans receivable $19,902 $24,763 $(4,861) $12,829 $15,162 $(2,333)
Mortgage-backed securities 4,919 5,473 (554) 1,948 1,308 640
Other 1,372 1,423 (51) 1,605 1,564 41
------- ------- ------- ------- ------- -------
Total interest income 26,193 $31,659 $(5,466) 16,382 $18,034 $(1,652)
------- ======= ======= ------- ======= =======
INTEREST EXPENSE ON:
Deposits 12,752 $14,858 $(2,106) 8,417 $ 8,289 $ 128
Borrowings 5,465 5,799 (334) 2,031 2,300 (269)
Junior Subordinated Debentures 1,785 1,738 47 1,633 1,633 --
------- ------- ------- ------- ------- -------
Total interest expense 20,002 $22,395 $(2,393) 12,081 $12,222 $ (141)
------- ======= ======= ------- ======= =======
Increase in net interest income $ 6,191 $ 4,301
======= =======
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Provision for Loan Losses. Our provision for loan losses increased $3.7
million to $6.3 million in 1999 from $2.7 million in 1998, an increase of
138.1%. Management increased the provision due to the ongoing analysis of the
appropriate allowance for loan losses as the Bank continues to grow and changes
its mix of loans, and not as a response to any increase in the level of
nonperforming loans. Nonperforming loans were $9.4 million at December 31, 1999,
compared to $12.7 million at December 31, 1998. Total loans, including loans
held for sale, increased 15.2% to $1.2 billion at December 31, 1999 from $1.0
billion at the same date a year earlier. The allowance for losses on loans at
December 31, 1999 was $11.0 million, or 0.92% of total loans, compared to $6.9
million, or 0.66% of total loans, at the same date in 1998. Management bases its
estimate of the adequacy of the allowance for losses on loans on an analysis of
various factors. These factors include historical loan loss experience, the
status of impaired loans, economic conditions affecting real estate markets and
regulatory considerations.
Noninterest Income. Total noninterest income decreased 2.2% to $7.2
million in 1999 from $7.3 million in 1998. This decrease occurred primarily
because of the decline in our gain on sale of loans which was offset by
increased loan servicing income, including a gain on the sale of loan servicing,
and increased service charges on deposit accounts.
Net gain on sale of loans decreased to $1.9 million in 1999 as compared
to $3.5 million in 1998. The primary reason for the decline in 1999 was the rise
in long term interest rates experienced in 1999 as compared to 1998. The
interest rate rise led to a decline in fixed rate loan origination and resulted
in less loans to sell. The proceeds of residential loan sales in 1999 was $126.4
million as compared to $258.1 million in 1998.
Net loan servicing income increased 72.3% to $1.4 million in 1999 from
$788 thousand in 1998. This increase in net loan servicing fees was a result of
the strategy to increase fee income. The portfolio of loans serviced increased
to $1.7 billion at December 31, 1999 as compared to $1.5 billion at December 31,
1998. Purchases of loan servicing rights and origination of loan servicing,
including the securitization of our loans, more than offset payoffs and
amortization of existing loans serviced. In 1999, we sold servicing rights for
approximately $400 million of loans in the fourth quarter, and recognized a gain
of $762 thousand. These loans are included in the total loans serviced at
year-end where they will remain until their transfer in the first quarter, 2000.
We remain committed to servicing loans for others and will continue to either
acquire or sell rights to service portfolios where the loan characteristics and
pricing are consistent with our long-term profitability and risk objectives. In
the fourth quarter of 1999, we acquired loan servicing rights to approximately
$200 million of loans which are not included in the total loans serviced at year
end. They will be transferred in the first quarter of 2000.
Service charges on deposit accounts increased 45.7% to $1.3 million in
1999 from $906 thousand in 1998. The primary reasons for the increase were the
overall growth in deposit accounts and increases in individual account charges
in 1999.
During 1999, we sold $31.3 million of mortgage-backed securities
available for sale for a net loss of $71 thousand. Also, during 1999, we sold
$1.3 million of securities available for sale in which no gain or loss was
recorded. We purchase or sell securities and mortgage-backed securities for a
variety of reasons. These reasons include the management of liquidity, interest
rate risk, capital levels, collateral levels for borrowings, and to take
advantage of favorable market conditions. We do not currently hold any
securities for trading purposes. Gains or losses from the sale of securities are
incidental to the sale of those securities for the reasons listed above.
Loan option income was $168 thousand in 1999 compared to $388 thousand
in 1998. In loan option transactions, we purchase loans and sell nonrefundable
options to a third party to purchase these same loans at a later date. At the
time the option is exercised or the option period expires, we recognize fee
income. The amount of loan option income depends upon the amount of loans for
which options are written and the price negotiated. Both of these factors are
affected by market conditions. During 1999, we did not purchase any loans for
option transactions compared to $17.9 million in 1998. The loan option income
recorded was for loans purchased in 1998 and sold in 1999.
Other operating income increased 3.1% to $1.8 million in 1999 from $1.7
million in 1998. This increase was primarily due to increased fee income from
the increased level of business and increased rental income. These increases
were partially offset by a writedown of $800 thousand of the Bank's investment
in a limited partnership which services residential real estate loans due to a
permanent decline in the value of the investment.
Noninterest Expense. Total noninterest expense increased 27.7% to $32.6
million in 1999 from $25.5 million in 1998. This increase in expenses resulted
primarily from growth in assets and increased staffing requirements due to
greater business volume.
Personnel related expenses increased 27.4% to $17.4 million in 1999
from $13.7 million in 1998. These increases were a result of increased staffing
levels to support expanded activities such as new retail sales
offices and
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new mortgage origination offices. We expect increases in personnel costs to
continue as we continue to open additional retail sales offices.
Occupancy and equipment expense increased 34.9% to $4.9 million in 1999
from $3.6 million in 1998. Generally, these expenses increased as a result of
three additional retail sales offices and three mortgage origination offices. As
part of the plan to expand mortgage banking operations, residential loan
production offices were opened in the Akron and Canton, Ohio areas and a
residential loan construction office was opened in the Columbus, Ohio market.
Presently, we plan to open four retail sales offices by the end of 2000. In
addition, we commenced the construction of our new corporate headquarters in
Highland Hills, Ohio during 1999. The new headquarters is expected to be
completed and occupied in the fourth quarter, 2000. When completed, we will
partially occupy the building with capacity available to lease to other parties.
Occupancy costs are expected to increase as more retail sales offices are opened
in the future.
Federal deposit insurance premiums increased 37.1% to $943 thousand in
1999 as compared to $688 thousand in 1998. The reason for the increase was the
overall increase in deposits, which is the basis for the premium amount.
Marketing expense decreased 20.5% to $722 thousand for 1999 from $908
thousand for 1998. This reduction was the result of a decision to decrease
advertising at a time when rates have increased and less loan activity is taking
place.
State franchise taxes increased 28.3% to $799 thousand for 1999 as
compared to $623 thousand in 1998. The primary reason for the increase is the
greater amount of capital at the Bank, which is the basis for the tax.
Data processing expense increased 139.3% to $1.2 million for the year
1999 as compared to $0.5 million in 1998. This increase was the result of
expenses incurred for consulting services and Year 2000 testing and data
processing costs related to the new retail sales and origination offices.
Other operating expenses, which includes miscellaneous general and
administrative costs such as loan servicing, business development, check
processing and ATM expenses, increased 21.5% to $6.4 million for 1999 from $5.3
million for 1998. Generally, these increases were due to expenses pertaining to
increased business activities, real estate owned expenses, and increased costs
for professional services.
Provision for Income Taxes. The provision for income taxes decreased to
$2.0 million in 1999 from $4.0 million in 1998 due to the decrease in income
before taxes. The effective tax rate was 30.9% for 1999 and 36.5% for 1998. The
effective tax rate in 1999 was lower because lower taxable income reduced our
statutory tax rate and due to an increase in the level of tax-exempt interest in
1999 as compared to 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Income. Net income for 1998 increased 17.1% from net income for
1997. Net income for 1998 was $6.8 million, or $0.88 per common share, and net
income for 1997 was $5.8 million, or $0.75 per common share. Net income for 1998
was reduced by an extraordinary expense of $245 thousand, net of tax, or $0.03
per common share. This extraordinary expense represented the cost of retiring
our 10.0% subordinated debt with part of the proceeds from our issuance of 8.60%
cumulative trust preferred securities in April 1998. Net income before the
extraordinary item was $7.0 million for 1998, or $0.91 per common share, which
was a 21.3% increase over 1997 net income of $5.8 million. This increase in net
income was due to growth in interest-earning assets and noninterest income.
Total assets grew 47.4% to $1.4 billion at December 31, 1998 from
$925.0 million at December 31, 1997. Net income increased at a slower rate than
assets during 1998 because asset growth did not take place uniformly during the
year. Asset growth was concentrated in the second half of the year. Asset growth
in 1998 was greater than usual because both capital and quality assets were
available.
Noninterest income grew 76.7% to $7.3 million in 1998 from $4.1 million
in 1997. This growth was primarily due to a 607% increase in gain on sale of
loans. Our gain on sale of loans increased to $3.5 million in 1998 from $488
thousand in 1997. We restructured our residential lending operations late in
1997 in order to increase our market share in the greater Cleveland area. As
part of the restructuring, Metropolitan hired additional commissioned loan
officers. These efforts, along with increased residential refinancing activity,
resulted in significant increases in residential loan originations, loan sales,
and gain on sale of loans.
Interest Income. Total interest income increased 23.6% to $85.7 million
for 1998 from $69.3 million for 1997. This increase was due to a 27.4% increase
in the average balance of interest-earning assets. Average interest-earning
assets grew as a result of our strategy to increase assets if loans with
acceptable portfolio
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characteristics are available. The increase in interest income attributable to
the increase in the average balance of interest-earning assets was partially
offset by the decline in the weighted average yield on loans receivable. This
decline in weighted average yield to 8.48% during 1998 from 8.73% during 1997
was caused by the following factors:
- an overall decline in market interest rates;
- the narrowing of spreads on nonresidential loans caused by
competition from other lenders; and
- a $500,000 decline in prepayment penalties.
Interest Expense. Total interest expense increased 29.0% to $53.8
million for 1998 from $41.7 million for 1997. Interest expense increased
primarily because the average balance of interest-bearing liabilities increased
27.8% from the prior year. We increased our average balance of interest-bearing
liabilities in order to fund our growth of interest-earning assets. Cost of
funds increased slightly to 5.58% in 1998 from 5.53% in 1997. We paid higher
rates on new borrowings and deposits to lengthen maturities. In addition, we
paid higher rates on retail deposits to increase our market share to fund asset
growth.
Net Interest Margin. Our net interest margin declined 32 basis points
to 3.16% for 1998 from 3.48% for 1997. The yield on interest-earning assets
decreased due to the declining interest rate environment in 1998. We experienced
increases in deposit and borrowing costs in 1998 despite the declining interest
rate environment. These increases resulted from our efforts to lengthen
maturities on deposits and borrowings and our issuance of additional debt.
Provision for Loan Losses. Our provision for loan losses increased
13.2% to $2.7 million in 1998 from $2.3 million in 1997. This increase was
related to the increase in total loans and management's estimate of the adequacy
of the allowance for losses on loans. Total loans, including loans held for
sale, increased 46.0% to $1.0 billion at December 31, 1998 from $707.9 million
at the same date a year earlier. The allowance for losses on loans at December
31, 1998 was $6.9 million, or 0.66% of total loans, compared to $5.6 million, or
0.79% of total loans, at the same date in 1997. Management bases its estimate of
the adequacy of the allowance for losses on loans on an analysis of various
factors. These factors include historical loan loss experience, the status of
impaired loans, economic conditions affecting real estate markets, and
regulatory considerations.
Noninterest Income. Total noninterest income increased 76.7% to $7.3
million in 1998 from $4.1 million in 1997. This increase occurred primarily
because of the increase in our gain on sale of loans.
In late 1997, we restructured our residential lending operation. We
expanded our product offerings and hired additional loan origination personnel.
We also restructured our compensation plans to increase incentives to produce
additional profitable volume. During 1998 long-term interest rates were
declining and were at lower levels than in 1997. This decline in rates
stimulated customer demand for fixed rate loans for purchases and refinances. In
addition, we generally sell fixed rate residential loans within 60 to 90 days of
origination in order to limit the risk of declining net interest income from
rising interest rates. All of these factors combined to bring about the
following increases for all types of loans:
YEAR ENDED
DECEMBER 31,
------------ PERCENTAGE
1998 1997 INCREASE
---- ---- --------
(IN THOUSANDS)
Loans originated for sale $211,677 $ 36,732 476%
Loans purchased for sale 49,447 10,654 364%
Sale of loans 258,064 51,402 402%
Gain on sale of loans 3,453 488 607%
Net loan servicing income decreased 39.0% to $788 thousand in 1998 from
$1.3 million in 1997. This decrease in net loan servicing fees was a result of
the writedown of purchased and originated mortgage servicing rights. The
writedown occurred because a decline in long-term interest rates caused a high
level of prepayments during 1998. When loans prepay, the servicing rights
associated with those loans are written off. Management believes that based on
the current level of long-term interest rates, the high level of prepayments may
continue. The portfolio of loans serviced for others increased to $1.5 billion
at December 31, 1998 from $1.2 billion at the same date a year earlier. This
increase was a result of the sale of $233.6 million of residential loan
production, the securitization of $101.0 million of commercial real estate loans
during the fourth quarter of 1998, and the continued acquisition of loan
servicing portfolios. These increases more than offset prepayments and
amortization of existing loans serviced for others. We remain committed to
servicing loans for others and will continue to acquire the rights
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to service portfolios where the loan characteristics and pricing are consistent
with our long-term profitability and risk objectives.
Service charges on deposit accounts increased 26.5% to $906 thousand in
1998 from $716 thousand in 1997. The primary reason for the increase was the
increase in the level of passbook, statement savings and transaction accounts.
During 1998, we sold $43.2 million of mortgage-backed securities
available for sale for a net gain of $70 thousand. During 1997, we sold $16.6
million of securities available for sale at a net gain of $92 thousand. We
purchase or sell securities and mortgage-backed securities for a variety of
reasons. These reasons include the management of liquidity, interest rate risk,
capital levels, collateral levels for borrowings, and to take advantage of
favorable market conditions. We do not currently hold any securities for trading
purposes. Gains or losses from the sale of securities are incidental to the sale
of those securities for the reasons listed above.
Loan option income was $388 thousand in 1998 compared to $320 thousand
in 1997. The amount of loan option income depends upon the amount of loans for
which options are written and the price negotiated. Both of these factors are
affected by market conditions. During 1998, we purchased $17.9 million of loans
for option transactions compared to $10.6 million in 1997.
Other operating income increased 39.0% to $1.7 million in 1998 from
$1.2 million in 1997. This increase was primarily due to increased fee income
from credit cards and ATMs and greater rental income at branch locations.
Noninterest Expense. Total noninterest expense increased 26.7% to $25.5
million in 1998 from $20.1 million in 1997. This increase in expenses resulted
primarily from growth in assets and increased staffing requirements due to
greater business volume.
Personnel related expenses increased 28.1% to $13.7 million in 1998
from $10.7 million in 1997. This increase was caused by the following factors:
- increases in staffing due to the growth of the Bank;
- the payment of incentives for loan and deposit production;
- the addition of staff to increase loan production; and
- the effects of merit increases.
We expect increases in personnel costs to continue as we continue to
grow.
Occupancy and equipment expense increased 18.9% to $3.6 million in 1998
from $3.0 million in 1997. Generally, these expenses increased because of the
following factors:
- the addition of two full service branch offices;
- maintenance costs; and
- the leasing of additional space at the executive office to
support the increased business volume.
Marketing expense increased $222 thousand to $908 thousand for 1998
from $686 thousand in 1997. This increase was the result of marketing efforts to
increase lending and deposits.
Other operating expenses include miscellaneous general and
administrative costs such as loan servicing, loan processing costs, business
development, check processing and ATM expenses. Other operating expenses
increased $1.4 million to $5.3 million for 1998 from $3.9 million for 1997.
Generally, this increase was due to:
- greater expenses relating to increased loan
origination/purchase volume;
- real estate owned expenses; and
- increased loan servicing costs associated with the higher
level of prepayments.
Provision for Income Taxes. The provision for income taxes increased to
$4.0 million in 1998 from $3.5 million in 1997 due to the increase in income
before taxes. The effective tax rate was 36.5% for 1998 and 37.6% for 1997. The
effective tax rate in 1998 was lower because expenses which are not deductible
for tax
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purposes, such as amortization of intangibles, were less significant in
relationship to pre-tax income compared to 1997 as a result of increased pre-tax
income.
ASSET QUALITY
Nonperforming Assets. Our goal is to maintain high quality loans in the
loan portfolio through conservative lending policies and prudent underwriting.
We undertake detailed reviews of the loan portfolio regularly to identify
potential problem loans or trends early and to provide for adequate estimates of
potential losses. In performing these reviews, management considers, among other
things, current economic conditions, portfolio characteristics, delinquency
trends, and historical loss experiences. We normally consider loans to be
nonperforming when payments are 90 days or more past due or when the loan review
analysis indicates that repossession of the collateral may be necessary to
satisfy the loan. In addition, a loan is considered impaired when, in
management's opinion, it is probable that the borrower will be unable to meet
the contractual terms of the loan. When loans are classified as nonperforming,
we assess the collectibility of the unpaid interest. Interest determined to be
uncollectible is reversed from interest income. Future interest income is
recorded only if the loan principal and interest due is considered collectible
and is less than the estimated fair value of the underlying collateral.
The table below provides the amounts and categories of our
nonperforming assets as of the dates indicated. At December 31, 1999, all loans
classified as impaired were also classified as nonperforming.
DECEMBER 31,
------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccrual loans
One-to-four family $ 1,183 $ 512 $ 792 $ 950 $ 293
Multifamily -- -- -- 871 2,138
Commercial real estate 1,696 6,123 198 2,032 391
Construction and land 42 1,824 -- -- 15
Consumer 3,755 2,038 1,562 802 266
Business 2,257 1,734 211 268 --
------- ------- ------- ------- -------
Total nonaccrual loans 8,933 12,231 2,763 4,923 3,103
Loans past due greater than 90 days, still accruing 448 460 384 271 204
------- ------- ------- ------- -------
Total nonperforming loans 9,381 12,691 3,147 5,194 3,307
Real estate owned 5,263 5,534 2,037 177 258
------- ------- ------- ------- -------
Total nonperforming assets $14,644 $18,225 $ 5,184 $ 5,371 $ 3,565
======= ======= ======= ======= =======
Nonperforming loans to total loans 0.79% 1.23% 0.44% 0.80% 0.69%
Nonperforming assets to total assets 0.91% 1.34% 0.56% 0.70% 0.60%
For the years ended December 31, 1999 and 1998, gross interest income
which would have been recorded had the nonaccrual loans been current in
accordance with their original terms amounted to $669 thousand and $788
thousand, respectively. The amounts that were included in interest income on
these loans were $379 thousand and $291 thousand for the years ended 1999 and
1998, respectively.
Overall asset quality improved from December 31, 1998 to December 31,
1999. Despite the overall growth in the loan portfolio experienced in 1999,
nonperforming assets decreased $3.6 million to $14.6 million at December 31,
1999 from the prior year. The decrease in nonperforming loans was the result of
decreases in the commercial and construction and land development categories
which were partially offset by increases in one- to four family loans, business
loans, and consumer loans. Real estate owned decreased $271 thousand for the
same period.
Nonperforming one- to four-family loans increased $600 thousand due to
two large residential loans in this category. Most of the nonperforming loans in
this category are less than $100 thousand.
Nonperforming commercial real estate loans decreased $4.4 million due
to the transfer to real estate owned and subsequent sale in 1999 of the $4.0
million loan financing a waterpark in Southern California. The sale of this
property was completed in the fourth quarter, 1999.
Nonperforming construction and land development loans decreased $1.7
million from 1998 to 1999. The two loans in this category are model home
construction loans. Based on appraised values and current market research, we do
not anticipate losses on these two loans.
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Nonperforming business loans increased $500 thousand in 1999. This
increase is consistent with the growth in this business line. We began making
business loans in 1995. This area of lending has grown to its 1999 year end
balance of $114.3 million as compared to $82.3 million in 1998. Total
nonperforming business loans are $2.3 million or 2.0% of that loan category.
Unlike the real estate secured lending which comprises over 79% of our loan
portfolio, business loans often depend on the successful operation of the
business or depreciable collateral. Therefore, we expect nonperforming loans and
losses to be higher for business loans than for real estate loans. We are
aggressively pursuing collection of all nonperforming loans.
Nonperforming consumer loans have increased $1.7 million to $4.2
million at December 31, 1999. Nonperforming consumer loans represent 2.9% of the
consumer portfolio. The increase in these loans is primarily attributable to
subprime loans purchased prior to 1999. The aggregate balance of the subprime
portfolio at December 31, 1999 was $4.1 million or less than one percent of
total loans. All consumer loans that are delinquent 120 days or more are 100%
covered by loan insurance or included in the allowance for loan losses in an
amount equal to the net book value for that loan.
In December 1998, we acquired title to a motel in Northeastern Ohio and
a marina in California. We transferred the loan balance related to these
properties to real estate owned. At that time, we adjusted the balances to their
estimated fair value of $3.4 million and $1.3 million, respectively, at the time
of acquisition. In December, 1999, we provided an additional $556 thousand
allowance for loss on the marina bringing the net book value to $671 thousand
and provided an additional $200 thousand allowance for the loss on the hotel
bringing the net book value to $3.3 million. Currently, we are actively pursuing
the sale of both properties.
In addition to the nonperforming assets included in the table above, we
identify potential problem loans which are still performing but have a weakness
which causes us to classify those loans as substandard for regulatory purposes.
There were no loans in this category at December 31, 1999.
Allowance for Losses on Loans. The provision for loan losses and
allowance for losses on loans is based on an analysis of individual loans, prior
loss experience, growth in the loan portfolio, changes in the mix of the loan
portfolio and other factors including current economic conditions. The following
table provides an analysis of the allowance for losses on loans at the dates
indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING OF PERIOD $ 6,909 $ 5,622 $ 4,175 $ 2,765 $ 1,911
Charge-offs:
One- to four-family 12 5 32 22 23
Multifamily 31 39 494 119 --
Commercial real estate 104 -- -- -- 27
Consumer 1,944 809 363 95 56
Business 148 565 10 -- --
------- ------- ------- ------- -------
Total charge-offs 2,239 1,418 899 236 106
Recoveries: 45 55 6 11 1
------- ------- ------- ------- -------
Net charge-offs 2,194 1,363 893 225 105
Provision for loan losses 6,310 2,650 2,340 1,635 959
------- ------- ------- ------- -------
BALANCE AT END OF PERIOD $11,025 $ 6,909 $ 5,622 $ 4,175 $ 2,765
======= ======= ======= ======= =======
Net charge-offs to average loans 0.19% 0.16% 0.13% 0.04% 0.02%
Provision for loan losses to average loans 0.54% 0.31% 0.35% 0.28% 0.21%
Allowance for losses on loans to total
nonperforming loans at end of period 117.52% 54.44% 178.68% 80.38% 83.61%
Allowance for losses on loans to total
loans at end of period 0.92% 0.66% 0.79% 0.64% 0.57%
In 1999, loans receivable increased 15.2% in 1999 to $1.2 billion while
the allowance for losses on loans increased 59.6% to $11.0 million. Management
increased the provision due to the ongoing analysis of the appropriate allowance
for loan losses. We expect to continue to increase the allowance for loan losses
when necessary as the loan portfolio continues to increase and the portfolio mix
changes. We considered the following factors in determining that this increased
level of allowance for loan losses was adequate.
- Charge-offs in 1999 were 58% higher than in 1998 and at the
highest level in our history.
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11
- Consumer loan charge-offs continued to increase. This increase
was due primarily to acquisitions of subprime and mobile home
loans. We are currently retracting in both of these lending
areas. The current balance in this portfolio is $4.1 million.
- We separately evaluated individual nonperforming loans for the
adequacy of collateral values. We consider several of these
loans to be large because they each exceed $1 million. While
in most instances, we were able to determine that our
principal balance is well secured, we have provided specific
reserves in those instances where it was deemed necessary. We
reached this determination by reviewing current or updated
appraisals, brokers' price opinions, and other market surveys.
- The possibility of an economic slowdown and a related increase
in delinquencies and losses increases with each year as the
current domestic economic expansion is the longest in several
decades.
After careful consideration of all of these factors, we concluded that
it was necessary to increase the allowance for loan losses at a rate greater
than loan growth in 1999. Therefore, the provision for loan losses was increased
138.1% to $6.3 million in 1999 which resulted in an increase in the allowance
for loan losses to $11.0 million.
COMPARISON OF DECEMBER 31, 1999 AND DECEMBER 31, 1998 FINANCIAL CONDITION
Total assets amounted to $1.6 billion at December 31, 1999 compared to
$1.4 billion at December 31, 1998. Total assets increased $244.7 million, or
17.9%. The increase in assets was funded primarily with increased borrowings of
$144.9 million, deposit growth of $85.3 million, and the issuance of $16.0
million in additional preferred securities by a new subsidiary, Metropolitan
Capital Trust II.
Securities available for sale increased by $16.4 million to $35.8
million at December 31, 1999 from $19.4 million the prior year. This increase
was primarily due to our purchase of a $10.0 million FreddieMac note and a $10.0
million FannieMae note. Securities available for sale are primarily maintained
to meet regulatory liquidity requirements and the liquidity maintenance
requirement of our subordinated notes maturing January 1, 2005.
Mortgage-backed securities increased $57.4 million to $255.7 million at
December 31, 1999 from $198.3 million a year earlier. Our securitization of
multifamily real estate loans of $108.8 million and purchases of $30.0 million
of mortgage-backed securities were partially offset by repayments of $45.2
million and sales of $31.3 million of mortgage-backed securities. During the
fourth quarter of 1999, we completed the securitization of $108.8 million of
multifamily real estate loans with FannieMae in a transaction that used an
insurance policy to assume a portion of the credit risk. We will consider
similar transactions in the future because they improve our credit risk profile
by converting whole loans to mortgage-backed securities. In addition, these
transactions provide high quality collateral for wholesale borrowings.
Loans receivable, including loans held for sale, increased $157.4
million, or 15.2%, to $1.2 billion. This increase was consistent with our
overall strategy of increasing assets while adhering to prudent underwriting
standards and preserving our capital status as "adequately capitalized" or "well
capitalized."
We experienced the following increases by loan category:
- one-to four-family loans--$105.9 million;
- consumer loans--$47.5 million;
- business loans--$32.0 million;
- commercial real estate loans--$18.6 million; and
- construction and land loans (net of loans in process)--
$9.5 million.
The decrease in multifamily loans of $45.4 million was primarily the
result of the previously discussed loan securitization which more than offset
the growth experienced in this category in 1999.
Federal Home Loan Bank ("FHLB") stock increased 80.8% to $10.9 million
at December 31, 1999 as compared to $6.1 million at the prior year-end. The
increase is primarily the result of stock purchases of $4.3 million, which are
required by the FHLB as borrowings increase, and dividends of $0.6 million.
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12
Premises and equipment increased $12.7 million, or 66.5%, to $31.8
million. This increase was the result of expenditures for land, architectural
work and construction costs for our new corporate headquarters, the purchase of
computer equipment to accommodate continued growth, and current retail sales
office and loan production office expansion. The new corporate headquarters is
expected to be completed in the fourth quarter, 2000. Costs incurred for the new
headquarters were $4.2 million through December 31, 1999, with an additional
$26.4 million expected to be incurred prior to completion. We plan on opening an
additional 5 retail sales offices in 2000.
Loan servicing rights decreased 22.7% to $10.4 million at December 31,
1999 as compared to $13.4 million at December 31, 1998. The primary reason for
the decline, other than amortization, was the sale of loan servicing in the
fourth quarter along with the associated servicing rights, which had book value
of approximately $4.7 million.
Accrued income, prepaid expenses and other assets increased to $27.4
million at December 31, 1999 as compared to $20.3 million at December 31, 1998.
The reason for the increase is an increase in accounts receivable related to the
previously discussed loan servicing sale. Accrued income, prepaid expenses and
other assets includes an investment in a limited partnership which services
residential real estate loans. The loans in the partnership's servicing
portfolio prepaid more quickly than anticipated in 1998 due to the lower level
of long-term interest rates. The general partner of the limited partnership
advised the Bank that, as a result of this prepayment activity and to comply
with certain debt covenants financing the partnership, it restructured the
underlying portfolio in April of 1999. As a result of these events, the Bank's
investment has been permanently impaired and a writedown of $800 thousand was
taken in 1999. The Bank continues to monitor its investment in this asset,
however, there can be no guarantee that the remaining value of $200 thousand can
be realized.
Deposits totaled $1.1 billion at December 31, 1999, an increase of
$85.3 million, or 8.1%, from December 31, 1998. The increase resulted primarily
from management's marketing efforts, continued growth at newer retail sales
offices, increased custodial checking balances and payment of competitive rates
to increase certificate of deposit balances. In addition, $15.3 million of this
increase was attributable to a greater balance of out-of-state time deposits.
The use of out-of-state time deposits is a strategy management has employed to
fund the opportunistic acquisitions of assets. The strategy is ultimately to
replace out of state time deposits with retail deposits.
Borrowings increased $144.9 million to $360.4 million at December 31,
1999, from $215.5 million at December 31, 1998. This increase was the result of
our increased use of Federal Home Loan Bank advances and the commercial bank
repurchase agreement which were utilized in addition to deposits to fund the
asset growth discussed previously.
Other liabilities decreased to $22.5 million at December 31, 1999 from
$26.2 million at the prior year-end. The decrease was the result of lower
clearing account, escrow account, and accounts payable balances.
During 1999, Metropolitan's wholly owned subsidiary, Metropolitan
Capital Trust II, issued $16.0 million of 9.50% cumulative trust preferred
securities. This subsidiary invested the proceeds of the offering in 9.50%
junior subordinated debentures of Metropolitan. The net proceeds from these
securities were used to repay the $12.0 million outstanding balance on the
commercial bank line of credit and for a $5.0 million additional capital
contribution to the Bank to support growth.
Shareholders' equity increased $2.2 million, or 5.2%, to $44.9 million,
due largely to the retention of net income, the issuance of 300,000 shares of
common stock, and the stock purchase plan which were partially offset by the
increase in the unrealized holding loss.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to our ability to generate
adequate amounts of cash for funding loan originations, loan purchases, deposit
withdrawals, maturities of borrowings and operating expenses. Our primary
sources of internally generated funds are principal repayments and payoffs of
loans, cash flows from operations, and proceeds from sales of assets. External
sources of funds include increases in deposits and borrowings and public or
private securities offerings by Metropolitan.
In addition to debt or equity offerings, the primary source of funds
for Metropolitan, at the holding company level, is dividends from the Bank. The
payment of these dividends are subject to restrictions imposed by federal bank
regulatory agencies. At December 31, 1999, Metropolitan had liquid assets of
$1.1 million and had $6.0 million available to borrow on its commercial bank
line of credit. Currently, Metropolitan primarily uses funds for interest
payments on its existing debt. The covenants associated with its subordinated
notes maturing January 1, 2005 require Metropolitan to maintain liquid assets
sufficient to pay six months interest, or approximately $675 thousand.
Metropolitan could also use funds for additional capital contributions to the
Bank, other operating expenses, purchase of investment securities, or the
acquisition of other assets.
20
13
Sources of funds for the Bank such as loan repayments and deposit
flows, are greatly influenced by prevailing interest rates, economic conditions
and competition. Other sources of funds such as borrowings and maturities of
securities are more reliable or predictable. The Bank currently has a $75
million cash management line of credit with the Federal Home Loan Bank and the
ability to borrow $60.1 million through a commercial bank repurchase agreement.
These sources of funds are available to meet liquidity needs. As of December 31,
1999, the balance on the FHLB line was $26.1 million and the commercial bank
repurchase agreement was $55.0 million. We regularly review cash flow needs to
fund operations. We believe that the resources described above are adequate to
meet our requirements for the foreseeable future.
When evaluating sources of funds, we consider the cost of various
alternatives such as local retail deposits, Federal Home Loan Bank advances, and
other wholesale borrowings. One option we have considered and used in the past
has been the acceptance of out-of-state time deposits from individuals and
entities, predominantly financial institutions. These deposits typically have
balances of $90,000 to $100,000 and have a term of one year or more. At December
31, 1999, approximately $181.6 million of certificates of deposits, or 16.0% of
our total deposits, were held by these individuals and entities. If we were
unable to replace these deposits upon maturity, our liquidity could be adversely
affected. We monitor these maturities to attempt to minimize any potential
adverse effect on liquidity.
At December 31, 1999, $164.4 million, or 14.5%, of our total deposits
were in the form of accounts of $100,000 and over. If a large number of these
certificates of deposits matured at approximately the same time and were not
renewed, our liquidity could be adversely affected. We monitor maturities
regularly to attempt to minimize any potential adverse effect on liquidity. In
addition, $28.4 million of the certificates of deposit of $100,000 or more are
also included in out of state time deposits discussed above.
Historically, the Bank has been subject to a regulatory liquidity
requirement. In November 1997, liquidity regulations were changed significantly.
These new regulations require the Bank to maintain liquid assets equal to at
least 4% of the Bank's liquidity base on a monthly basis. Liquid assets
generally include all unpledged cash in banks, investment securities maturing
within five years, and securities issued by the Government National Mortgage
Association, FannieMae, or FreddieMac regardless of maturity. The liquidity base
includes amounts due banks and deposits and borrowings maturing in less than one
year. The Bank's liquidity ratio for December 1999 was 8.75%.
Capital. Our total shareholders' equity at December 31, 1999 was $44.9
million, an increase of $2.2 million, or 5.2%, from equity of $42.6 million at
December 31, 1998. This increase was due to net income of $4.5 million, the
issuance of 300,000 additional shares of common stock for $2.2 million, and
unrealized losses on securities available for sale, net of tax, of $4.5 million.
No dividends were paid in 1999, 1998 or 1997. The terms of our subordinated
notes maturing January 1, 2005 and the commercial bank line of credit prohibit
the payment of dividends unless tangible equity divided by total assets is
greater than 7.0%. At December 31, 1999, Metropolitan's tangible equity divided
by tangible assets was 3.10%. In 1999, Metropolitan's wholly owned subsidiary,
Metropolitan Capital Trust II, issued $16.0 million of 9.50% cumulative trust
preferred securities. Similarly, in 1998, Metropolitan Capital Trust I, issued
$27.8 million of 8.60% cumulative trust preferred securities. Sources of future
capital could include, but would not be limited to, our earnings or additional
offerings of debt or equity securities.
The Office of Thrift Supervision imposes capital requirements on
savings associations. Savings associations are required to meet three minimum
capital standards. These standards are a leverage requirement, a tangible
capital requirement, and a risk-based capital requirement.
These standards must be no less stringent than those applicable to
national banks. In addition, the Office of Thrift Supervision is authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The Office of Thrift Supervision leverage requirement expressly
requires that savings associations maintain core capital in an amount not less
than 3% of adjusted total assets. The Office of Thrift Supervision has taken the
position, however, that the prompt corrective action regulations have
effectively raised the leverage ratio requirement for all but the most highly
rated savings associations to 4%. Core capital is defined to include
shareholders' equity less intangibles other than qualifying supervisory goodwill
and certain qualifying intangibles, less investments in subsidiaries engaged in
activities not permissible for national banks.
Under the tangible capital requirement, savings associations must
maintain tangible capital in an amount equal to at least 1.5% of adjusted total
assets. Tangible capital is defined as core capital less all intangible assets,
except a limited amount of qualifying purchased mortgage servicing rights.
Adjusted total assets, for the purpose of the tangible capital ratio, include
total assets less all intangible assets except qualifying purchased mortgage
servicing rights.
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The risk-based capital requirement is calculated based on the risk
weight assigned to on-balance sheet assets and off-balance sheet commitments.
Risk weights range from 0% to 100% of the book value of the asset and are based
upon the risk inherent in the asset. The risk weights assigned by the Office of
Thrift Supervision for principal categories of assets are:
- 0% for cash and securities issued by the U.S. Government or
unconditionally backed by the full faith and credit of the
U.S. Government;
- 20% for securities, other than equity securities, issued by
U.S. Government sponsored agencies, and for mortgage-backed
securities issued by, or fully guaranteed as to principal and
interest, by FannieMae or FreddieMac except for those classes
with residual characteristics or stripped mortgage-related
securities;
- 50% for the following loans:
- prudently underwritten permanent one-to four-family
first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not
more than 80% at origination unless insured to that
ratio by an insurer approved by FannieMae or
FreddieMac;
- certain qualifying multifamily first lien mortgage
loans;
- residential construction loans; and
- 100% for all other loans and investments, including consumer
loans, commercial loans, repossessed assets, and loans more
than 90 days delinquent.
The risk-based requirement mandates total capital of 8.0% of
risk-weighted assets. Total capital consists of core capital and supplementary
capital. Supplementary capital consists of certain permanent and maturing
capital instruments that do not qualify as core capital as well as general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only to the extent of core capital.
The Bank's regulatory capital ratios at December 31, 1999 were in
excess of the capital requirements specified by the Office of Thrift Supervision
regulations as shown by the following table:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
(DOLLARS IN THOUSANDS)
CAPITAL AMOUNT:
Actual $105,573 6.56% $105,653 6.57% $113,840 9.25%
Required 24,132 1.50% 64,355 4.00% 98,484 8.00%
-------- ---- -------- ---- -------- ----
Excess $ 81,441 5.06% $ 41,298 2.57% $ 15,356 1.25%
======== ==== ======== ==== ======== ====
The Bank is also subject to the capital adequacy requirements under the
Federal Deposit Insurance Corporation Improvement Act of 1991. The additional
capital adequacy ratio imposed on the Bank in this evaluation is the Tier 1
risk-based capital ratio which at December 31, 1999 was 8.58% compared to the
required ratio of 4%.
The Bank's primary sources of capital are the earnings of the Bank and
additional capital investments from Metropolitan. At year end, the Bank was
"adequately capitalized." Our strategy is to contribute additional capital to
the Bank as growth occurs to maintain risk-based capital at "adequately
capitalized" or "well capitalized" levels as defined by the Office of Thrift
Supervision regulations. We believe that under current regulations, the Bank
will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond our control, such as increases in interest rates
or a downturn in the economy, could adversely affect future earnings and,
consequently, the ability of the Bank to meet its future capital requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Metropolitan, like other financial institutions, is subject to market
risk. Market risk is the risk that a company can suffer economic loss due to
changes in the market values of various types of assets or liabilities. As a
financial institution, we make a profit by accepting and managing various types
of risks. The most significant of these risks are credit risk and interest rate
risk. See "--Asset Quality" for a comprehensive discussion of credit risk. The
principal market risk for us is interest rate risk. Interest rate risk is the
risk that changes in market interest rates
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15
will cause significant changes in net interest income because interest-bearing
assets and interest-bearing liabilities mature at different intervals and
reprice at different times.
The Office of Thrift Supervision currently looks to the Thrift Bulletin
13a, issued December 1, 1998, to evaluate interest rate risk at institutions
they supervise. They categorize interest rate risk as minimal, moderate,
significant, or high based on a combination of the projected Net Portfolio Value
("NPV") level after a 200 basis point change in interest rates and the size of
that change in NPV due to a 200 basis point change in interest rates.
We manage interest rate risk in a number of ways. Some of the tools
used to monitor and quantify interest rate risk include:
- annual budgeting process;
- weekly review of certificate of deposit maturities by day;
- monthly forecast of balance sheet activity;
- monthly review of listing of liability rates and maturities by
month;
- monthly shock report of effect of sudden interest rate changes
on net interest income;
- monthly shock report of effect of sudden interest rate changes
on net value of portfolio equity; and
- monthly analysis of rate and volume changes in historic net
interest income.
We have established an asset and liability committee to monitor
interest rate risk. This committee is made up of senior officers from finance,
lending and deposit operations. The committee meets at least quarterly, reviews
our current interest rate risk position, and determines strategies to pursue for
the next quarter. The activities of this committee are reported to the Board of
Directors of the Bank quarterly. Between meetings the members of this committee
are involved in setting rates on deposits, setting rates on loans and serving on
loan committees where they work on implementing the established strategies.
During 1998 and 1999, like many financial institutions, we had exposure
to potential declines in net interest income from rising interest rates. This is
because Metropolitan has had more short-term interest rate sensitive liabilities
than short-term interest rate sensitive assets. One of the ways we monitor
interest rate risk quantitatively is to measure the potential change in net
interest income based on various immediate changes in market interest rates. The
following table shows the expected change in net interest income for immediate
sustained parallel shifts of 1% and 2% in market interest rates as of the end of
the last two years.
EXPECTED CHANGE IN NET INTEREST INCOME
--------------------------------------
CHANGE IN INTEREST RATE DECEMBER 31, 1999 DECEMBER 31, 1998
- ----------------------- ----------------- -----------------
+2% -18% -19%
+1% -9% -10%
-1% +8% +9%
-2% +15% +18%
The change in net interest income from a change in market rates is a
short-term measure of interest rate risk. The results above indicate that we
have a significant short-term exposure to rising rates but that the exposure has
remained at a stable level over the past year.
Another quantitative measure of interest rate risk is the change in the
market value of all financial assets and liabilities based on various immediate
sustained shifts in market interest rates. This concept is also known as net
portfolio value and is the methodology used by the Office of Thrift Supervision
in measuring interest rate risk. The following table shows the expected change
in net portfolio value for immediate sustained parallel shifts of 1% and 2% in
market interest rates as of the end of the last two years.
23
16
EXPECTED CHANGE IN NET PORTFOLIO VALUE
--------------------------------------
CHANGE IN INTEREST RATE DECEMBER 31, 1999 DECEMBER 31, 1998
- ----------------------- ----------------- -----------------
+2% -51% -39%
+1% -25% -20%
-1% +24% +25%
-2% +47% +55%
The change in net portfolio value is a long-term measure of interest
rate risk. It assumes that no significant changes in assets or liabilities held
would take place if there were a sudden change in interest rates. Because we
monitor interest rate risk regularly and actively manage that risk, these
projections serve as an expected worst case scenario assuming no reaction to
changing rates. The results above indicate that the post-shock NPV has declined
during 1999. This was due to the fact that we had an exposure to declines in NPV
as interest rates rise and interest rates have risen during 1999. Under TB 13a,
Metropolitan falls in the high interest rate risk category as of December 31,
1999, based upon current sensitivity to interest rate changes and the current
level of regulatory capital.
Our strategies to limit interest rate risk from rising interest rates
are as follows:
- originate one- to four-family adjustable rate loans for the
portfolio;
- originate one- to four-family fixed rate loans for sale;
- originate the majority of business loans to float with prime
rates;
- increase core deposits which have low interest rate
sensitivity;
- increase certificates of deposit with maturities over one
year;
- borrow funds with maturities greater than a year; and
- increase the volume of loans serviced since the value of that
asset rises as rates rise.
We also follow strategies that increase interest rate risk in limited
ways including:
- originating and purchasing fixed rate multifamily and
commercial real estate loans limited to ten year maturities;
and
- originating and purchasing fixed rate consumer loans with
terms from two to fifteen years.
The result of these strategies taken together is that Metropolitan has
taken on long-term interest rate risk by adding some ten year fixed rate loans
and financing those loans with certificates of deposit and borrowings with terms
from one to five years and short-term borrowings. We made a conscious decision
to add this long-term interest rate risk during 1998 and 1999 because these
loans met our credit quality, rate, and geographic diversity requirements.
The Bank's level of interest rate risk as of December 31, 1999, is
outside the limits set by the Bank's Board of Directors. Therefore, management
has implemented a strategy to decrease interest rate risk during 2000 by
focusing on:
- limiting ten year fixed rate commercial real estate loans to
those that can be readily sold;
- limiting the purchase of fixed rate consumer loans to those
with high enough yields to be profitable when matched with
similar borrowing maturities; and
- extending liability maturities when long term rates are
favorable.
We are also aware that any method of measuring interest rate risk
including the two used above has certain shortcomings. For example, certain
assets and liabilities may have similar maturities or repricing dates but their
repricing rates may not follow the general trend in market interest rates. Also,
as a result of competition, the interest rates on certain assets and liabilities
may fluctuate in advance of changes in market interest rates while rates on
other assets and liabilities may lag market rates. In addition, any projection
of a change in market rates requires that prepayment rates on loans and early
withdrawal of certificates of deposits be projected and those projections may be
inaccurate. We focus on the change in net interest income and the change in net
portfolio value as a result of
24
17
immediate and sustained parallel shifts in interest rates as a balanced approach
to monitoring interest rate risk when used with budgeting and the other tools
noted above.
At the present time we do not hold any trading positions, foreign
currency positions, or commodity positions. Equity investments are approximately
1% of assets and half of that amount is held in Federal Home Loan Bank stock
which can be sold to the Federal Home Loan Bank of Cincinnati at par. Therefore,
we do not consider any of these areas to be a source of significant market risk.
YEAR 2000
Due to the Bank's extensive preparation and planning, the recent
year-end was completed without incident. In an effort to dispel customer's
uneasiness, all of the Bank's retail sales offices were open January 1, 2000 for
normal business. The Bank, and all supporting functions, were verified as
accurate and reliable prior to the opening of the retail sales offices that day.
As a result, we were able to make this transition without event and were able to
attract additional new business as well.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 addresses the
accounting for derivative instruments and certain derivative instruments
embedded in other contracts and hedging activities. The statement standardizes
the accounting for derivative instruments by requiring that an entity recognize
those items as assets or liabilities in the statement of financial position and
measure them at fair value. This statement is effective for all fiscal years
beginning after June 15, 1999. The adoption date of Statement No. 133 was
subsequently deferred by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133." Under Statement No. 137 issued in June , 1999, the effective date was
delayed to all fiscal quarters beginning after June 15, 2000. We do not expect
this statement to have a material effect on the Company's consolidated financial
position or results of operation.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes included in this
prospectus have been prepared in accordance with generally accepted accounting
principles. These principles require the measurement of financial position and
operating results in terms of historical dollars without consideration of
changes in relative purchasing power of money over time due to inflation. The
impact of inflation is reflected in the increased cost of our operations.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are influenced by changes in the inflation
rate, they do not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation and in monetary and fiscal policies. Our ability to
match the interest rate sensitivity of our financial assets to the interest
sensitivity of our financial liabilities in our asset/liability management may
tend to minimize the effect of changes in interest rates on our financial
performance.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "expects,"
"believes," and similar expressions as they relate to Metropolitan, the Bank or
their respective management are intended to identify such forward looking
statements. Metropolitan's actual results, performance, or achievements may
materially differ from those expressed or implied in the forward looking
statements. Risks and uncertainties that could cause or contribute to such
material differences include, but are not limited to, general economic
conditions, interest rate environment, competitive conditions in the financial
services industry, changes in law, governmental policies and regulations, and
rapidly changing technology affecting financial services.
25
18
REPORT OF MANAGEMENT
The management of Metropolitan Financial Corp. is responsible for the
preparation, accuracy, and fair presentation of the financial statements and
establishing and maintaining effective internal controls over financial
reporting presented in conformity with both generally accepted accounting
principles and the Office of Thrift Supervision instructions for Thrift
Financial Reports (regulatory report instructions). The internal control system
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
The objective of internal control is to provide reasonable, but not
absolute, assurance as to the integrity and reliability of financial statements.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls; therefore, the effectiveness of an internal control
system may vary over time.
Management assessed the Corporation's internal controls over financial
reporting presented in conformity with both generally accepted accounting
principles and regulatory report instructions as of December 31, 1999. This
assessment was based on criteria for effective internal control over financial
reporting described in Statement on Auditing Standards No. 78 "Internal Control
in a Financial Statement Audit" issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants. Based on this assessment,
management believes that, as of December 31, 1999, Metropolitan Financial Corp.
maintained effective internal controls over financial reporting presented in
conformity with both generally accepted accounting principles and regulatory
report instructions.
Mayfield Heights, Ohio
February 25, 2000 /s/ Robert M. Kaye
---------------------------
Robert M. Kaye
Chairman and
Chief Executive Officer
Metropolitan Financial Corp.
/s/ Kenneth T. Koehler
---------------------------
Kenneth T. Koehler
President and
Chief Operating Officer
Metropolitan Financial Corp.
/s/ Donald F. Smith
---------------------------
Donald F. Smith
Executive Vice President and
Chief Financial Officer
Metropolitan Bank & Trust
26
19
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Metropolitan Financial Corp.
Mayfield Heights, Ohio
We have audited the accompanying consolidated statements of financial
condition of Metropolitan Financial Corp. and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Corporation'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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metropolitan
Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Cleveland, Ohio
February 25, 2000
27
20
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(In thousands)
1999 1998
---- ----
ASSETS
Cash and due from banks $ 19,001 $ 19,811
Interest-bearing deposits in other banks 2,750 9,275
----------- -----------
Cash and cash equivalents 21,751 29,086
Securities available for sale, at fair value 35,829 19,443
Securities held to maturity 15,879 16,217
Mortgage-backed securities available for sale, at fair value 255,727 198,295
Loans held for sale 6,718 15,017
Loans receivable, net 1,183,954 1,018,271
Federal Home Loan Bank stock 10,948 6,054
Premises and equipment, net 31,820 19,114
Real estate owned, net 5,263 5,534
Intangible assets 2,461 2,724
Loan servicing rights, net 10,374 13,412
Accrued income, prepaid expenses and other assets 27,395 20,267
----------- -----------
Total assets $ 1,608,119 $ 1,363,434
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 70,891 $ 63,717
Interest-bearing deposits 1,065,739 987,640
Borrowings 360,396 215,486
Other liabilities 22,475 26,197
Guaranteed Preferred Beneficial Interests in the
Corporation's Junior Subordinated Debentures 43,750 27,750
----------- -----------
Total liabilities 1,563,251 1,320,790
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, 10,000 shares authorized, none issued -- --
Common stock, no par value, 10,000 shares authorized
8,064 and 7,756 shares issued and outstanding, respectively -- --
Additional paid-in-capital 20,744 18,505
Retained earnings 28,171 23,660
Accumulated other comprehensive (loss) income (4,047) 479
----------- -----------
Total shareholders' equity 44,868 42,644
----------- -----------
Total liabilities and shareholders' equity $ 1,608,119 $ 1,363,434
=========== ===========
See accompanying notes to consolidated financial statements.
28
21
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)
1999 1998 1997
---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 93,961 $ 74,059 $ 61,230
Interest on mortgage-backed securities 13,814 8,895 6,947
Interest and dividends on other investments 4,146 2,774 1,169
----------- ----------- -----------
Total interest income 111,921 85,728 69,346
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 55,289 42,537 34,120
Interest on borrowings 14,937 9,614 7,583
Interest on Junior Subordinated Debentures 3,418 1,633 --
----------- ----------- -----------
Total interest expense 73,644 53,784 41,703
----------- ----------- -----------
NET INTEREST INCOME 38,277 31,944 27,643
Provision for loan losses 6,310 2,650 2,340
----------- ----------- -----------
Net interest income after
provision for loan losses 31,967 29,294 25,303
----------- ----------- -----------
NONINTEREST INCOME
Net gain on sale of loans 1,852 3,453 488
Loan servicing income, net 1,358 788 1,293
Service charges on deposit accounts 1,320 906 716
Gain on sale of loan servicing 762 -- --
Loan option income 168 388 320
Net (loss) gain on sale of securities (71) 70 92
Other operating income 1,766 1,712 1,232
----------- ----------- -----------
Total noninterest income 7,155 7,317 4,141
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and related personnel costs 17,413 13,669 10,671
Occupancy and equipment expense 4,881 3,619 3,044
Federal deposit insurance premiums 943 688 595
Marketing expense 722 908 686
State franchise taxes 799 623 543
Data processing expense 1,175 491 441
Amortization of intangibles 263 263 263
Other operating expenses 6,395 5,262 3,906
----------- ----------- -----------
Total noninterest expense 32,591 25,523 20,149
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 6,531 11,088 9,295
Provision for income taxes before extraordinary item 2,020 4,049 3,492
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 4,511 7,039 5,803
----------- ----------- -----------
Extraordinary item, net of tax -- (245) --
-----------
NET INCOME $ 4,511 $ 6,794 $ 5,803
=========== =========== ===========
Basic earnings per share:
Before extraordinary item $ 0.57 $ 0.91 $ 0.75
Extraordinary item -- (0.03) --
----------- ----------- -----------
Basic earnings per share $ 0.57 $ 0.88 $ 0.75
=========== =========== ===========
Diluted earnings per share:
Before extraordinary item $ 0.57 $ 0.90 $ 0.75
Extraordinary item -- (0.03) --
----------- ----------- -----------
Diluted earnings per share $ 0.57 $ 0.87 $ 0.75
=========== =========== ===========
Weighted average shares for basic earnings per share 7,950,637 7,756,393 7,756,393
Effect of dilutive stock options 1,848 82,412 12,899
----------- ----------- -----------
Weighted average shares for diluted earnings per share 7,952,485 7,838,805 7,769,292
=========== =========== ===========
See accompanying notes to consolidated financial statements.
29
22
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
----- ------- -------- ------ ------
BALANCE JANUARY 1, 1997 $ 11,101 $ 18,467 $ 676 $ 30,244
Comprehensive income:
Net income 5,803 5,803
Change in unrealized gain (loss)
on securities, net of
tax and net of
reclassification of gain
of $60 from net income 614 614
--------
Total comprehensive income 6,417
-------- -------- -------- -------- --------
BALANCE DECEMBER 31, 1997 -- 11,101 24,270 1,290 36,661
Comprehensive income:
Net income 6,794 6,794
Change in unrealized gain (loss)
on securities, net of
tax and net of
reclassification of gain of
$46 from net income (811) (811)
--------
Total comprehensive income 5,983
--------
10% stock dividend -- 7,404 (7,404) --
-------- -------- -------- -------- --------
BALANCE DECEMBER 31, 1998 18,505 23,660 479 42,644
Comprehensive income:
Net income 4,511 4,511
Change in unrealized gain (loss)
on securities, net of tax
and net of reclassification
of loss of $46 from
net income (4,526) (4,526)
--------
Total comprehensive income (15)
Issuance of shares of Common stock
Secondary offering-300 shares 2,197 2,197
Stock purchase plan-7 shares 42 42
-------- -------- -------- -------- --------
BALANCE DECEMBER 31, 1999 -- $ 20,744 $ 28,171 $ (4,047) $ 44,868
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
30
23
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,511 $ 6,794 $ 5,803
Adjustments to reconcile net income to
net cash provided by operating activities:
Net amortization and depreciation 4,913 4,338 4,533
(Gain)/Loss on sale of securities 71 (70) (92)
Provision for loan and REO losses 7,066 2,850 2,340
Deferred tax provision (1,219) (710) (1,131)
Loans originated for sale (121,124) (211,677) (36,732)
Loans purchased for sale -- (49,447) (10,654)
Proceeds from sale of loans 126,391 258,064 51,402
Repayments on loans held for sale 4,599 -- 39
(Gain )/Loss on sale of premises, equipment
and real estate owned (210) 123 105
(Gain)/Loss on sale of mortgage servicing rights (762) -- --
FHLB stock dividend (576) (400) (349)
Changes in other assets (4,188) (3,865) (866)
Changes in other liabilities (3,905) 6,889 (561)
--------- --------- ---------
Net cash provided by (used in) operating
activities 15,567 12,889 13,837
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (487,599) (450,712) (288,659)
Purchases of:
Loans (176,214) (280,336) (103,062)
Mortgage-backed securities (29,994) (45,663) (6,365)
Securities available for sale (20,052) (38,557) (5,101)
Securities held to maturity -- (16,213) (4,740)
Mortgage loan servicing rights (2,795) (4,282) (2,056)
FHLB stock (4,318) (304) (1,012)
Premises and equipment (16,832) (6,617) (3,714)
Proceeds from maturities and repayments of:
Loans 305,885 287,096 208,025
Mortgage-backed securities 45,211 46,348 18,111
Securities available for sale -- 8,000 --
Securities held to maturity 345 4,740 --
Proceeds from sale of:
Loans 72,719 13,471 14,088
Mortgage-backed securities 31,221 43,187 --
Securities available for sale 1,275 12,800 16,583
Mortgage loan servicing rights 6,273 -- --
Premises, equipment and
real estate owned 5,108 1,226 551
Additional investment in real estate owned (595) (52) (88)
Premium paid for credit card relationships -- -- (10)
--------- --------- ---------
Net cash used for investing activities (270,362) (425,868) (157,449)
--------- --------- ---------
Continued
31
24
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-CONTINUED
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts $ 85,238 $ 313,502 $ 115,604
Proceeds from borrowings 162,598 217,007 115,219
Repayment of borrowings (68,388) (172,291) (76,223)
Proceeds from issuance of
Guaranteed preferred Beneficial
Interests in the corporation's
Junior Subordinated Debentures 15,073 26,436 --
Net activity on lines of credit 50,700 34,900 (5,000)
Proceeds from issuance of common stock 2,239 -- --
--------- --------- ---------
Net cash provided by financing activities 247,460 419,554 149,600
--------- --------- ---------
Net change in cash and cash equivalents (7,335) 6,575 5,988
Cash and cash equivalents at beginning of year 29,086 22,511 16,523
--------- --------- ---------
Cash and cash equivalents at end of year $ 21,751 $ 29,086 $ 22,511
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 73,503 $ 51,545 $ 42,551
Income taxes 1,288 4,218 4,871
Transfer from loans receivable to other real estate 4,122 4,844 2,283
Transfer from loans receivable to loans held for sale -- -- 9,678
Loans securitized 108,812 100,710 98,325
See accompanying notes to consolidated financial statements.
32
25
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, amounts are in thousands, except per share
data.
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is a
savings and loan holding company and an Ohio corporation. Metropolitan is
engaged in the business of originating multifamily and commercial real estate
loans primarily in Ohio, Pennsylvania, Michigan, and Kentucky and purchases
multifamily and commercial real estate loans throughout the United States.
Metropolitan offers full service banking services to communities in Northeast
Ohio where its additional lending activities include originating one- to
four-family residential real estate, construction, business and consumer loans.
The accounting policies of the Corporation conform to generally accepted
accounting principles and prevailing practices within the financial services
industry. A summary of significant accounting policies follows:
CONSOLIDATION POLICY: The Corporation and its wholly owned
subsidiaries, MetroCapital Corporation, Metropolitan Capital Trust I,
Metropolitan Capital Trust II, and Metropolitan Bank and Trust Company (the
"Bank"), formerly known as Metropolitan Savings Bank of Cleveland and its
wholly-owned subsidiaries, are included in the accompanying consolidated
financial statements. All significant intercompany balances have been
eliminated.
USE OF ESTIMATES: In preparing financial statements, Management must
make estimates and assumptions. These estimates and assumptions affect the
amounts reported for assets, liabilities, revenues, and expenses as well as
affecting the disclosures provided. Future results could differ from current
estimates. Areas involving the use of management's estimates and assumptions
primarily include the allowance for losses on loans, the valuation of loan
servicing rights, the value of loans held for sale, fair value of certain
securities, the carrying value and amortization of intangibles, the value of
real estate owned, the determination and carrying value of impaired loans, and
the fair value of financial instruments. Estimates that are more susceptible to
change in the near term include the allowance for loan losses, the valuation of
servicing rights, the value of loans held for sale, and the value of real estate
owned, and the fair value of securities.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial
instruments are estimated using relevant market information and other
assumptions, as more fully disclosed in Note 17. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market conditions
could significantly affect the estimates. The fair value estimates of existing
on- and off-balance sheet financial instruments do not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
STATEMENT OF CASH FLOWS: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, interest bearing
deposits, overnight repurchase agreements and federal funds sold. Generally,
federal funds and overnight repurchase agreements are sold for one-day periods.
The Corporation reports net cash flows for deposit transactions and activity on
line of credit borrowings.
SECURITIES: The Corporation classifies debt and mortgage-backed
securities as held to maturity or available for sale. The Corporation classifies
marketable equity securities as available for sale.
Securities classified as held to maturity are those that management has
the positive intent and ability to hold to maturity. Securities held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts.
Securities classified as available for sale are those that management
intends to sell or that could be sold for liquidity, investment management, or
similar reasons, even if there is not a present intention for such a sale.
Securities available for sale are carried at fair value with unrealized gains
and losses included as a separate component of shareholders' equity, net of tax
and recognized as part of comprehensive income. Gains or losses on dispositions
are based on net proceeds and the adjusted historic cost of securities sold,
using the specific identification method.
LOANS: All loans are held for investment unless specifically designated
as held for sale. When the Bank originates or purchases loans, it makes a
determination whether or not to classify loans as held for sale. The Bank
re-evaluates its intention to hold or sell loans at each balance sheet date
based on the current environment and, if appropriate, reclassifies loans as held
for sale. Sales of loans are dependent upon various factors including interest
rate movements, deposit flows, the availability and attractiveness of other
sources of funds, loan demand by borrowers, and liquidity and capital
requirements.
33
26
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans held for investment are stated at the principal amount
outstanding adjusted for amortization of premiums and deferred costs and
accretion of discounts and deferred fees using the interest method. At December
31, 1999 and 1998, management had the intent and the Bank had the ability to
hold all loans being held for investment for the foreseeable future.
Loans held for sale are recorded at the lower of cost or market. When
the Bank purchases real estate loans and simultaneously writes an option giving
the holder the right to purchase those loans, those loans are designated as held
for sale. Gains and losses on the sale of loans are determined by the identified
loan method and are reflected in operations at the time of the settlement of the
sale.
Interest on loans is accrued over the term of the loans based upon the
principal outstanding. Management reviews loans that are delinquent 90 days or
more to determine if interest accrual should be discontinued based on the
estimated fair market value of the collateral. The carrying values of impaired
loans are periodically adjusted to reflect cash payments, revised estimates of
future cash flows and increases in the present value of expected cash flows due
to the passage of time.
ALLOWANCE FOR LOSSES ON LOANS: The allowance for losses on loans is
established by a provision for loan losses charged against income. Estimating
the risk of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover probable losses based on past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time. While management may periodically
allocate portions of the allowance for specific problem loans, the whole
allowance is available for any loan charge-offs that occur. A loan is charged
off against the allowance by management as a loss when deemed uncollectible,
although collection efforts often continue and future recoveries may occur.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by allocating a
portion of the allowance for losses on loans to such loans. If these allocations
require an increase in the allowance for losses on loans, such increase is
reported as a provision for loan losses. Management excludes all consumer loans
from its review for impairment. However, these loans are considered in
determining the appropriate level of the allowance for loss on loans. All
impaired loans are placed on nonaccrual status.
LOAN FEES AND COSTS: Origination and commitment fees received for
loans, net of direct origination costs, are deferred and amortized to interest
income over the contractual life of the loan using the level yield method. When
a loan is placed on nonaccrual status, accrued and unpaid interest is charged
against income. Payments received on nonaccrual loans are applied against
principal until the recovery of the remaining balance is reasonably assured. The
net amount deferred is reported in the consolidated statements of financial
condition as a reduction of loans.
LOAN SERVICING RIGHTS: Purchased mortgage servicing rights are
initially valued at cost. When originated loans are sold or securitized and
servicing rights are retained, those rights are valued by allocating the book
value of the loans between the loans or securities and the servicing rights
based on the relative fair value of each. Servicing rights are amortized in
proportion to and over the period of estimated servicing income. Servicing
rights are assessed for impairment periodically by estimating the future net
servicing income of the portfolio based on management's estimate of remaining
loan lives. For purposes of measuring impairment, management stratifies loans by
loan type, interest rate, and investor.
LOAN OPTION INCOME: Periodically the Bank purchases real estate loans
for sale and simultaneously writes an option giving the holder the option to
purchase those loans at a specified price within a specified time period. At the
time the transaction is complete the Bank recognizes a non-refundable fee in
income.
REAL ESTATE OWNED: Real estate owned is comprised of properties
acquired through a foreclosure proceeding or acceptance of a deed in lieu of
foreclosure. These properties are recorded at the lower of fair value, less
estimated selling costs or cost at the date of foreclosure. Any reduction from
the carrying value of the related loan to fair value at the time of acquisition
is accounted for as a charge-off. Any subsequent reduction in fair value is
reflected in a valuation allowance account through a charge to income. Expenses
to carry real estate owned are charged to operations as incurred.
PREMISES AND EQUIPMENT: Premises and equipment, including leasehold
improvements and software, are recorded at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets for financial reporting
purposes. For tax purposes, depreciation on certain assets is computed using
accelerated methods. Maintenance and repairs are charged to expense as incurred
and improvements are capitalized.
34
27
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If
impaired, the assets are recorded at fair value based on discounted cash flows.
INTANGIBLE ASSETS: Intangible assets resulting from the acquisition of
the Bank are being amortized to expense on a straight-line basis over a period
of 25 years beginning in July 1987. This amount is a reduction from the Bank's
shareholder's equity in calculating tangible capital for regulatory purposes.
Identifiable intangible assets are amortized over the estimated periods of
benefit.
INCOME TAXES: The Corporation and its subsidiaries, excluding
Metropolitan Capital Trust I and Metropolitan Capital Trust II, are included in
the consolidated federal income tax return of the Corporation. Income taxes are
provided on a consolidated basis and allocated to each entity based on its
proportionate share of consolidated income. Deferred income taxes are provided
on items of income or expense that are recognized for financial reporting
purposes in one period and recognized for income tax purposes in a different
period. A valuation allowance, if needed, reduces deferred tax assets to the
amount expected to be realized.
STOCK OPTIONS: Expense for employee compensation under stock option
plans is based on Accounting Principles Board Opinion No. 25 with expense
reported only if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are provided as if the fair
value method of Statement of Financial Accounting Standard No. 123 was used for
stock based compensation. For the periods presented, no expense has been
recognized as the option price of the common shares equaled or exceeded the
market price on the grant date.
TRUST DEPARTMENT ASSETS AND INCOME: Property held by the Corporation in
a fiduciary or other capacity for its trust customers is not included in the
accompanying consolidated financial statements since such items are not assets
of the Corporation.
EARNINGS PER SHARE: Basic and diluted earnings per share are computed
based on weighted average shares outstanding during the period. Basic earnings
per share has been computed by dividing net income by the weighted average
shares outstanding. Diluted earnings per share has been computed by dividing net
income by the diluted weighted average shares outstanding. Diluted weighted
average shares were calculated assuming the exercise of stock options less the
treasury shares assumed to be purchased from the proceeds using the average
market price of the Corporation's stock. The Corporation declared a 100% stock
split in the form of a dividend in 1997. During 1998, the Corporation declared a
10% stock dividend which was recorded by a transfer, equal to the fair value of
the shares issued, from retained earnings to additional paid in capital. All per
share information has been retroactively adjusted to reflect the effect of the
stock dividend and stock split. Stock options for 726,300 shares of common stock
were not considered in computing diluted earnings per common share for 1999
because they were antidilutive.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale and equity investments which are
also recognized as separate components of equity. The accounting standard that
requires reporting comprehensive income first applies for 1998, with prior
information restated to be comparable.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2000, a new
accounting standard and related amendment will require all derivatives to be
recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
recorded. This is not expected to have a material effect but the effect will
depend on derivative holdings when this standard applies.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such matters
that will have a material effect on the financial statements.
INDUSTRY SEGMENT: Internal financial information is primarily reported
and aggregated in two lines of business, retail and commercial banking and
mortgage banking.
35
28
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL STATEMENT PRESENTATION: Certain previously reported
consolidated financial statement amounts have been reclassified to conform to
the 1999 presentation.
NOTE 2. SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values
of investment securities at December 31, 1999 and 1998 are as follows:
1999
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 835 $ 835
FreddieMac preferred stock 7,500 $ (1,350) 6,150
FreddieMac note 10,000 (236) 9,764
FannieMae notes 19,935 (855) 19,080
Mortgage-backed securities 259,446 $ 228 (3,947) 255,727
--------- --------- --------- ---------
297,716 228 (6,388) 291,556
HELD TO MATURITY
Tax-exempt municipal bond 14,699 176 14,875
Revenue bond 1,180 1,180
--------- --------- --------- ---------
15,879 176 16,055
--------- --------- --------- ---------
Total securities $ 313,595 $ 404 $ (6,388) $ 307,611
========= ========= ========= =========
1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 2,059 $ 2,059
FreddieMac preferred stock 7,500 7,500
FannieMae term note 9,921 $ (37) 9,884
Mortgage-backed securities 197,520 $ 954 (179) 198,295
--------- --------- --------- ---------
217,000 954 (216) 217,738
HELD TO MATURITY
Tax-exempt municipal bond 14,817 14,817
Revenue bond 1,400 1,400
--------- --------- --------- ---------
16,217 16,217
--------- --------- --------- ---------
Total securities $ 233,217 $ 954 $ (216) $ 233,955
========= ========= ========= =========
The amortized cost and fair value of debt securities at December 31,
1999, by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties:
AMORTIZED FAIR
COST VALUE
---- -----
Securities available for sale:
Due one through five years $ 20,000 $ 19,459
Due after five years through ten years 9,935 9,385
Mortgage-backed securities available for sale 259,446 255,727
-------- --------
Total securities available for sale 289,381 284,571
Securities held to maturity:
Due one through five years 1,180 1,180
Due after ten years 14,699 14,875
-------- --------
Total securities held to maturity 15,879 16,055
-------- --------
Total debt securities $305,260 $300,626
======== ========
36
29
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 2. SECURITIES (CONTINUED)
Proceeds from the sale of mortgage-backed securities available for sale
were $31,221 in 1999 and proceeds from the sale of mortgage-backed securities
available for sale were $43,187 in 1998. Proceeds from the sale of securities
available for sale were $1,275 in 1999, $12,800 in 1998 and $16,583 in 1997.
Gross gains realized on those sales were $108 in 1998 and $103 in 1997. Gross
losses of $71, $38 and $11 were realized in 1999, 1998 and 1997, respectively.
Securities with a carrying value of $28,063 and a market value of
$26,713 at December 31, 1999, were pledged to secure FHLB advances. Certain
securities with an amortized cost of $211,704 and a market value of $208,710 at
December 31, 1999, were pledged to secure reverse repurchase agreements. Other
securities with an amortized cost of $561 and a market value of $560 were
pledged to the State of Ohio to enable Metropolitan to engage in trust
activities and the Federal Reserve Bank to enable Metropolitan to receive
treasury, tax and loan payments.
NOTE 3. LOANS RECEIVABLE
The composition of the loan portfolio at December 31, 1999 and 1998 is
as follows:
1999 1998
---- ----
Real estate loans
Construction loans
Residential single family $ 111,005 $ 81,584
Commercial 447 19,129
Land 43,989 34,990
Loans in process (56,212) (46,001)
----------- -----------
Construction loans, net 99,229 89,702
Permanent loans
Residential single family 295,061 189,182
Multifamily 292,015 337,412
Commercial 247,455 228,824
Other 671 1,320
----------- -----------
Total real estate loans 934,431 846,440
Consumer loans 143,585 96,115
Business loans and other loans 114,333 82,318
----------- -----------
Total loans 1,192,349 1,024,873
Premium on loans, net 7,178 5,320
Deferred loan fees, net (4,548) (5,013)
Allowance for losses on loans (11,025) (6,909)
----------- -----------
Total loans receivable $ 1,183,954 $ 1,018,271
=========== ===========
Loans with adjustable rates, included above, totaled $657,328 and
$505,359 at December 31, 1999 and 1998, respectively.
Metropolitan's real estate loans are secured by property in the
following states:
1999 1998
---- ----
Ohio 53% 50%
California 19 19
Pennsylvania 7 8
New York 3 2
Other 18 21
--- ---
100% 100%
=== ===
37
30
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 3. LOANS RECEIVABLE (CONTINUED)
Activity in the allowance for losses on loans is as follows:
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 6,909 $ 5,622 $ 4,175
Provision for loan losses 6,310 2,650 2,340
Net charge-offs (2,194) (1,363) (893)
-------- -------- --------
$ 11,025 $ 6,909 $ 5,622
======== ======== ========
Nonperforming loans were as follows:
1999 1998
---- ----
Loans past due over 90 days still on accrual $ 448 $ 460
Nonaccrual loans 8,933 12,231
Nonperforming loans included all impaired loans and smaller balance
homogeneous loans, such as residential mortgage and consumer loans, that are
collectively evaluated for impairment.
Management analyzes loans on an individual basis and considers a loan
to be impaired when it is probable that all principal and interest amounts will
not be collected according to the loan contract based on current information and
events. Loans which are past due two payments or less and that management feels
are probable of being restored to current status within 90 days are not
considered to be impaired loans. All impaired loans are included in
nonperforming loans.
Information regarding impaired loans is as follows at December 31:
1999 1998
---- ----
Balance of impaired loans $ 4,593 $10,142
Less portion for which no allowance for losses
on loans is allocated 3,521 9,002
------- -------
Portion of impaired loan balance for which an
allowance for losses on loans is allocated $ 1,072 $ 1,140
======= =======
Portion of allowance for losses on loans allocated to the impaired loan balance $ 1,054 $ 1,012
======= =======
Information regarding impaired loans is as follows for the year ended December 31:
1999 1998 1997
---- ---- ----
Average investment in impaired loans during the year $ 6,392 $11,510 $ 944
Interest income recognized during impairment 256 191 17
Interest income recognized on cash basis
during the year 256 191 17
38
31
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
DECEMBER 31,
------------
1999 1998
---- ----
Land $ 7,081 $ 4,284
Office buildings 9,254 6,186
Leasehold improvements 3,308 2,940
Furniture, fixtures and equipment 12,313 8,805
Construction in progress 5,639 1,236
------- -------
Total 37,595 23,451
Accumulated depreciation 5,775 4,337
------- -------
Total premises and equipment $31,820 $19,114
======= =======
Depreciation expense was $1,876, $1,282 and $978 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The Bank leases certain of its branches and corporate headquarters
space under operating lease agreements whose lease terms are renewable
periodically. Rent expense for the years ended December 31, 1999, 1998 and 1997
was $1,252, $990, and $923, respectively.
The future minimum annual rental commitments as of December 31, 1999
for all noncancelable leases are as follows:
2000 $1,194
2001 482
2002 400
2003 324
2004 297
Thereafter 702
------
Total rental commitments $3,399
=====
In the second quarter, 1999, the Corporation started the construction
of a new corporate headquarters building. As a result, interest expenses have
been incurred to finance construction. These costs, along with those related to
the construction of retail sales offices, are capitalized as incurred while the
buildings are under construction and are included as a portion of the historical
cost to be depreciated over the useful life of the buildings. Interest expense
capitalized for the year ended December 31, 1999 was $142.
NOTE 5. REAL ESTATE OWNED
Activity in the allowance for loss on real estate owned is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
Balance at beginning of year $200 $ -- $ 57
Provision for loss 756 200 --
Charge-offs -- -- (57)
---- ---- ----
Balance at end of year $956 $200 $ --
==== ==== ====
39
32
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 6. LOAN SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans are summarized as follows:
DECEMBER 31,
------------
1999 1998
---- ----
Mortgage loan portfolios serviced for:
FreddieMac $ 746,688 $ 794,286
FannieMae 725,045 587,476
Others 181,332 114,585
---------- ----------
Total loans serviced for others $1,653,065 $1,496,347
========== ==========
Custodial balances maintained in noninterest-bearing deposit accounts
with the Bank in connection with the foregoing loan servicing were approximately
$29,958 and $28,066 at December 31, 1999 and 1998, respectively.
Following is an analysis of the changes in loan servicing rights
acquired for the year ended December 31:
1999 1998
---- ----
Balance at beginning of year $ 9,894 $ 7,660
Additions 2,795 4,282
Sales (5,425) --
Amortization (1,816) (2,048)
------- -------
Balance at end of year $ 5,448 $ 9,894
======= =======
Following is an analysis of the changes in loan servicing rights
originated for the year ended December 31:
1999 1998
---- ----
Balance at beginning of year $ 3,518 $ 1,564
Additions 2,452 2,700
Sales (86) --
Amortization (958) (746)
------- -------
Balance at end of year $ 4,926 $ 3,518
======= =======
The Corporation did not have a valuation allowance associated with loan
servicing rights at any time during the years ended December 31, 1999, 1998 and
1997.
NOTE 7. DEPOSITS
Deposits consist of the following:
DECEMBER 31,
------------
1999 1998
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Noninterest-bearing deposits $ 70,891 6% $ 63,717 6%
Interest-bearing checking
accounts--1.97% to 3.50% 57,136 5 54,159 5
Passbook savings and statement
savings--1.99% to 5.00% 200,168 18 212,710 20
Certificates of deposit 808,435 71 720,771 69
---------- --- ---------- ---
Total interest-bearing deposits 1,065,739 94 987,640 94
---------- --- ---------- ---
Total deposits $1,136,630 100% $1,051,357 100%
========== === ========== ===
40
33
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 7. DEPOSITS (CONTINUED)
At December 31, 1999, scheduled maturities of certificates of deposit
are as follows:
WEIGHTED
AVERAGE
YEAR INTEREST
ENDED AMOUNT RATE
- ----- ------ ----
2000 $633,683 5.50%
2001 134,790 5.83%
2002 13,868 6.02%
2003 7,785 5.99%
2004 18,170 5.92%
Thereafter 139 5.87%
--------
$808,435 5.58%
========
The aggregate amount of certificates of deposit with balances of $100
or more was approximately $164.4 million and $129.4 million at December 31, 1999
and 1998, respectively. The Bank also accepts out-of-state time deposits from
individuals and corporations, predominantly credit unions. The balance of these
deposits at December 31, 1999 was $181.6 million. In addition, $28.4 million of
the certificate of deposits of $100 or more are also included in the
out-of-state time deposits discussed above.
NOTE 8. BORROWINGS
Borrowings consisted of the following:
DECEMBER 31,
------------
1999 1998
---- ----
Federal Home Loan Bank advances (5.6% and 5.4% at
December 31, 1999 and 1998, respectively) $205,352 $111,236
Reverse repurchase agreements (5.6% and 5.6%
December 31, 1999 and 1998, respectively) 80,044 82,250
Commercial bank repurchase agreement (7.7% at December 31, 1999) 55,000 --
Commercial bank line of credit (8.5% and 7.7% at
December 31, 1999 and 1998, respectively) 6,000 8,000
Subordinated debt maturing January 1, 2005
(9.625% fixed rate) 14,000 14,000
-------- --------
$360,396 $215,486
======== ========
At December 31, 1999, scheduled payments on borrowings are as follows:
WEIGHTED
AVERAGE
YEAR INTEREST
ENDED AMOUNT RATE
- ----- ------ ----
2000 $182,878 6.49%
2001 7,307 6.06%
2002 90,980 5.81%
2003 38,239 5.59%
2004 12,820 6.49%
Thereafter 28,172 7.77%
--------
$360,396 6.31%
=======
At December 31, 1999, Federal Home Loan Bank advances are
collateralized by all of our FHLB stock, one-to-four family first mortgage
loans, multifamily loans, and securities with aggregate carrying values of
approximately $296 million, $28 million and $28 million, respectively.
41
34
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 8. BORROWINGS (CONTINUED)
The Corporation has a commercial line of credit agreement with a
commercial bank. The maximum borrowing under the line is $12,000. The balance
outstanding at December 31, 1999 was $6,000. The line matures annually on May
30. During the second quarter, by mutual agreement, the line was extended to May
31, 2000. The interest rate on the line is tied to LIBOR or prime at our option.
All other terms remain unchanged. As collateral for the loan, the Corporation's
largest shareholder, Robert Kaye, has agreed to pledge a portion of his common
shares of Metropolitan in an amount at least equal to 200% of any outstanding
balance.
In November, 1999, the Bank entered into a commercial bank repurchase
agreement involving a transaction which allows a line of credit for use by the
Bank. The agreement reprices monthly based on LIBOR. The agreement allows
commercial loans securitized by Metropolitan to be used as collateral. The
balance of this line of credit at December 31, 1999 was $55,000.
In 1993 and early 1994, the Corporation issued subordinated notes
("1993 Subordinated Notes") totaling $4,874. These subordinated notes were
retired in 1998 with the proceeds of a new offering (see note 9). The early
retirement of the 1993 Subordinated Notes required the payment of a 6% premium
and the write-off of the unamortized issuance costs totaling $376. This amount,
net of tax, is included in the extraordinary item on the face of the income
statement.
During 1995, the Corporation issued subordinated notes ("1995
Subordinated Notes") totaling $14,000. Interest on the notes is paid quarterly
and principal will be repaid when the notes mature January 1, 2005. Total
issuance costs of approximately $1,170 are being amortized on a straight line
basis over the life of the notes. The notes are unsecured. From December 1, 1999
through November 30, 2000, the notes may be redeemed by paying a 1.5% premium.
Thereafter, the notes may be redeemed at par.
The following tables set forth certain information about borrowings
during the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
MAXIMUM MONTH-END BALANCES:
FHLB advances $205,352 $119,000
1993 subordinated notes -- 4,874
1995 subordinated notes 14,000 14,000
Commercial bank repurchase agreement 55,000 --
Commercial bank line of credit 12,000 8,000
Reverse repurchase agreements 88,380 97,983
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
AVERAGE BALANCE:
FHLB advances $140,001 $65,714
1993 subordinated notes -- 1,999
1995 subordinated notes 14,000 14,000
Commercial bank repurchase agreement 7,708 --
Commercial bank line of credit 7,891 2,147
Reverse repurchase agreements 81,507 70,368
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances 5.60% 5.68%
1993 subordinated notes -- 10.47
1995 subordinated notes 10.48 10.48
Commercial bank repurchase agreement 7.34 --
Commercial bank line of credit 7.96 8.49
Reverse repurchase agreements 5.60 5.66
42
35
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 9. GUARANTEED PREFERED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR
SUBORDINATED DEBENTURES
On May 14, 1999, the Corporation issued 1,600,000 shares ($10
liquidation amount per security), of 9.50% cumulative trust preferred securities
(the "Trust Preferred") through a newly formed, wholly-owned subsidiary,
Metropolitan Capital Trust II (the "Trust Issuer") and 300,000 Common shares of
Metropolitan Financial Corp. The Trust Issuer invested the total proceeds from
the sale of the Trust Preferred in the 9.50% Junior Subordinated Deferrable
Interest Debentures (the "Junior Subordinated Debentures") issued by the
Corporation which mature on June 30, 2029. The Corporation used the net proceeds
from the sale of the Junior Subordinated Debentures and the common shares to
repay the $12.0 million outstanding balance on the commercial bank line of
credit and for a $5 million additional capital contribution to the Bank to
support growth. The remainder is available for working capital at the
Corporation. The Trust Preferred securities are listed on the NASDAQ Stock
Market's National Market under the symbol "METFO."
The Corporation also issued trust preferred securities in 1998 through its
subsidiary, Metropolitan Capital Trust I. A description of the trust preferred
securities currently outstanding is presented below:
ISSUING DATE OF SHARES INTEREST MATURITY PRINCIPAL AMOUNT DECEMBER 31
ENTITY ISSUANCE ISSUED RATE DATE 1999 1998
------ -------- ------ ---- ---- ----------------- -----------------
Metropolitan Capital Trust I April 27, 1998 2,775,000 8.60% June 30, 2028 $27,750 $27,750
Metropolitan Capital Trust II May 14, 1999 1,600,000 9.50% June 30, 2029 16,000 --
------- -------
$43,750 $27,750
======= =======
NOTE 10. INCOME TAXES
The provision for income taxes before extraordinary item consists of
the following components:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
Current tax provision:
Federal expense $ 3,179 $ 4,681 $ 4,478
State expense 60 78 145
------- ------- -------
Total current expense 3,239 4,759 4,623
Deferred federal benefit (1,219) (710) (1,131)
------- ------- -------
$ 2,020 $ 4,049 $ 3,492
======= ======= =======
43
36
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 10. INCOME TAXES (CONTINUED)
Deferred income taxes are provided for temporary differences. The
components of the Corporation's net deferred tax asset (liability) consist of
the following:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
Deferred tax assets
Deferred loan fees $ 105
Provision for loan losses $ 4,131 1,998
Loan servicing rights -- 297
Equity in partnership 102 --
Other 252 126
------- -------
4,485 2,526
------- -------
Deferred tax liabilities
Equity in partnership -- (100)
Deferred loan fees (527) --
Loan servicing rights (157) --
Employment contract (87) (94)
Depreciation expense (11) (53)
Stock dividends on FHLB stock (632) (430)
Other (7) (4)
------- -------
(1,421) (681)
------- -------
Net deferred tax asset $ 3,064 $ 1,845
======= =======
A reconciliation from income taxes at the statutory rate to the
effective provision for income taxes is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
Statutory rate 35% 35% 35%
Income taxes at statutory rate $ 2,286 $ 3,881 $ 3,253
Officer's life premium 4 13 10
Amortization of purchased intangibles 71 91 92
Stock dividend exclusion (92) (71) --
Tax exempt income (327) (66) (64)
State taxes, net of federal impact 39 51 94
Utilization of capital loss carryforward -- -- (35)
Business expense limitation 74 74 63
Other (35) 76 79
------- ------- -------
Provision for income taxes $ 2,020 $ 4,049 $ 3,492
======= ======= =======
Taxes attributable to securities gains and (losses) totaled ($25), $25 and ($3)
for the years ended December 31, 1999, 1998 and 1997, respectively.
Prior to January 1, 1996, the Bank was able to use the
percentage-of-taxable income method of computing its tax bad debt deduction if
it was more favorable than the specific charge-off method. During 1996,
legislation was passed which removed the option of using the percentage of
taxable income method of computing the tax bad debt deduction. The change was
retroactive to 1988 with the additional tax due over a six year period beginning
in 1996, 1997, or 1998 based on the current level of loan activity.
44
37
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 11. EXTRAORDINARY ITEM
In the second quarter, 1998, earnings were affected by an extraordinary
expense of $376, $245 net of tax, or $0.03 per common share, pertaining to the
Corporation's early retirement of $4,874 of 10% Subordinated Notes which were
scheduled to mature December 31, 2001. This amount represents the write-off of
the unamortized issuance costs and the prepayment premium resulting from the
early retirement. The retirement of the 10% Subordinated Notes was funded
through the issuance of the 8.60% Guaranteed Preferred Beneficial Interests in
the Junior Subordinated Debentures.
NOTE 12. SALARY DEFERRAL--401(k) PLAN
The Corporation maintains a 401(k) plan covering substantially all
employees who have attained the age of 21 and have completed thirty days of
service with the Corporation. This is a salary deferral plan, which calls for
matching contributions by the Corporation based on a percentage (50%) of each
participant's voluntary contribution (limited to a maximum of six percent (6%)
of a covered employee's annual compensation). The matching contributions by the
Corporation commence after one year of service. In addition to the Corporation's
required matching contribution, a contribution to the plan may be made at the
discretion of the Board of Directors. Employee voluntary contributions are
vested at all times, whereas employer contributions vest 20% per year through
year five at which time employer contributions are fully vested. The
Corporation's matching contributions were $220, $206 and $167 for the years
ended December 31, 1999, 1998 and 1997, respectively. No discretionary
contributions have been made by the Corporation for the periods presented.
NOTE 13. STOCK PURCHASE AND STOCK OPTION PLANS (SHARES AND OPTION PRICES
NOT IN THOUSANDS)
In July, 1999, the Board of Directors of Metropolitan Financial Corp.
authorized the adoption of a Stock Purchase Plan permitting directors, officers,
and employees of the Corporation and its subsidiaries and certain affiliated
companies to make purchases of the Corporation's common shares at 95% of the
fair market value. If the director, officer, or employee subsequently sell the
stock before waiting a one year holding period, they are required to repay the
Corporation an amount equal to the discount received at the time of purchase.
The plan authorized the issuance of an additional 160,000 common shares for
purchases made under the plan. The purchases under the plan commenced in the
fourth quarter, 1999.
On October 28, 1997, the Board of Directors of Metropolitan adopted the
Metropolitan Financial Corp. 1997 Stock Option Plan for key employees and
officers of the Corporation. The Plan is intended to encourage their continued
employment with Metropolitan and to provide them with additional incentives to
promote the development and long-term financial success of Metropolitan.
Subject to adjustment under certain circumstances, the maximum number
of Common Shares that may be issued under the plan is 915,000, which reflects
adjustments for the 2-for-1 stock split completed in December, 1997, the 10%
stock dividend completed in December, 1998, and the addition of 200,000 shares
in 1999. The Plan provides for the grant of options, which may qualify as either
incentive stock options or nonqualified options. Grants of options are made by
the Compensation and Organization Committee of the Board of Directors.
The exercise price of an option, whether an incentive stock option or a
nonqualified option, will not be less than the fair market value of the Common
Shares on the date of grant. On October 28, 1997, the Compensation and
Organization Committee of the Board of Directors approved grants of 88,000
incentive stock options and 352,000 nonqualified options. On May 19, 1998, the
Board of Directors approved grants of an additional 39,600 incentive stock
options and 77,000 nonqualified options. Additional grants were made in January,
1999 and November, 1999 of 144,000 and 50,000 shares, respectively. There are
currently 178,700 options available for grant.
45
38
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 13. STOCK PURCHASE AND STOCK OPTION PLANS (CONTINUED)
An option may be exercised in one or more installments at the time or
times provided in the option instrument. One-half of the options granted to
employees will become exercisable on the third anniversary, and one-fourth of
the Common Shares covered by the option on the fourth and fifth anniversary of
the date of grant. No options currently outstanding are exercisable. Currently
outstanding options will become exercisable in 2000 through 2004. Options
granted under the Plan will expire no later than ten years after grant in the
case of an incentive stock option and ten years and one month after grant in the
case of a nonqualified option.
A summary of option activity is presented below:
STOCK OPTION ACTIVITY:
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
----------------------- --------------------
SHARES OPTION PRICE SHARES OPTION PRICE
------ ------------ ------ ------------
Outstanding at January 1, 1998 88,000 $9.21 352,000 $9.21 - $10.13
Granted 39,600 $14.44 77,000 $14.44 - $15.88
Exercised -- --
Forfeited (2,200) $9.21 --
------- -------
Outstanding at December 31, 1998 125,400 $9.21 - $14.44 429,000 $9.21 - $15.88
------- -------
Granted 94,000 $5.38 - $11.00 100,000 $11.00 - $12.10
Exercised -- --
Forfeited (12,100) $9.21 - $14.44 --
------- -------
Outstanding at December 31, 1999 207,300 $5.38 - $14.44 529,000 $9.21 - $15.88
======= =======
Estimated fair value of options granted:
INCENTIVE NONQUALIFIED
STOCK OPTIONS OPTIONS
------------- -------
1998:
Granted at $14.44 $5.57 $3.02
Granted at $15.88 $1.90
1999:
Granted at $11.00 $5.42 $3.05
Granted at $12.10 $2.26
Granted at $5.38 $2.65
Granted at $6.18 $2.24
Assumptions used:
Expected option life 10 years 5 years
Risk-free interest rate--1998 4.69% 4.87%
Risk-free interest rate--1999 6.79% 6.48%
Expected stock price volatility--1998 32.22% 32.22%
Expected stock price volatility--1999 43.77% 43.77%
Expected dividends -- --
Weighted average life of options 9.0 years 3.5 years
PRO FORMA DISCLOSURES:
For purposes of providing the required disclosures under Statement of
Financial Accounting Standard No. 123, "Accounting for Stock Based
Compensation," the Black Scholes option pricing model was used to estimate the
value of these options. The Black Scholes model was developed to estimate the
fair value of equity options. Had compensation costs been determined in
accordance with Statement of Financial Accounting Standard No. 123, net income
and earnings per share would be effected as summarized in the schedule below:
1999 1998 1997
---- ---- ----
Net income--as reported (In thousands) $4,511 $6,794 $5,803
Net income--pro forma (In thousands) 4,124 6,529 5,614
Earnings per share--as reported $0.57 $0.88 $0.75
Earnings per share--pro forma 0.52 0.84 0.72
46
39
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 14. CAPITAL AND EXTERNAL REQUIREMENTS
The Board of Directors approved a 2-for-1 stock split in the fourth
quarter, 1997, increasing the number of shares outstanding to 7,051,270. In
December, 1998, the Board of Directors approved a 10% stock dividend, further
increasing the outstanding number of shares to 7,756,393. As discussed in Note
9, the issuance of Trust Preferred shares occurred contemporaneously with the
issuance of 300,000 additional shares of common stock in 1999. In 1999, the
Board of Directors of Metropolitan Financial Corp. authorized the adoption of a
Stock Purchase Plan permitting directors, officers, and employees of the
Corporation and its subsidiaries and certain affiliated companies to make
purchases of the Corporation's common shares of stock at 95% of the fair market
value. The purchases made under the plan will result in increased capital for
the Corporation.
Prior to 1996, the Bank was permitted, under the Internal Revenue Code,
to determine taxable income after deducting a provision for loan losses in
excess of such provision recorded in the financial statements. Accordingly,
retained earnings at December 31, 1999 and 1998, includes approximately $2,883
for which no provision for federal income taxes has been made. If this portion
of retained earnings is used in the future for any purpose other than to absorb
loan losses, it will be added to future taxable income.
The Bank is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept certain deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year end, the Bank's actual capital levels and minimum required levels were:
MINIMUM REQUIRED
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------ -----------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
1999
Total capital (to risk
weighted assets) $113,840 9.25% Less than or equal to $98,484 Less than or equal to 8.0%
Tier 1 (core) capital
(to risk weighted assets) 105,653 8.58 Less than or equal to 49,242 Less than or equal to 4.0
Tier 1 (core) capital
(to adjusted total assets) 105,653 6.57 Less than or equal to 64,355 Less than or equal to 4.0
Tangible capital
(to adjusted total assets) 105,573 6.56 Less than or equal to 24,132 Less than or equal to 1.5
1998
Total capital
(to risk weighted assets) $ 89,086 8.22% Less than or equal to $86,731 Less than or equal to 8.0%
Tier 1 (core) capital
(to risk weighted assets) 85,113 7.85 Less than or equal to 43,366 Less than or equal to 4.0
Tier 1 (core) capital
(to adjusted total assets) 85,113 6.27 Less than or equal to 54,296 Less than or equal to 4.0
Tangible capital
(to adjusted total assets) 84,935 6.26 Less than or equal to 20,361 Less than or equal to 1.5
MINIMUM
REQUIRED
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
ACTION REGULATIONS
------------------
AMOUNT RATIO
------ -----
1999
Total capital (to risk
weighted assets) Less than or equal to $123,105 Less than or equal to 10.0%
Tier 1 (core) capital
(to risk weighted assets) Less than or equal to 73,863 Less than or equal to 6.0
Tier 1 (core) capital
(to adjusted total assets) Less than or equal to 80,444 Less than or equal to 5.0
Tangible capital
(to adjusted total assets) N/A
1998
Total capital
(to risk weighted assets) Less than or equal to $108,414 Less than or equal to 10.0%
Tier 1 (core) capital
(to risk weighted assets) Less than or equal to 65,048 Less than or equal to 6.0
Tier 1 (core) capital
(to adjusted total assets) Less than or equal to 67,870 Less than or equal to 5.0
Tangible capital
(to adjusted total assets) N/A
47
40
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 14. CAPITAL AND EXTERNAL REQUIREMENTS (CONTINUED)
The Bank at year-end 1999 was categorized as adequately capitalized. At
December 31, 1999, the most restrictive regulatory consideration of the payment
of dividends from the Bank to the holding company and the retention of the
adequately capitalized status was the total capital (to risk weighted capital)
ratio. Management is not aware of any event or circumstances after December 31,
1999 that would change the capital category.
A savings association which fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
Office of Thrift Supervision requiring the following: an increase in capital;
reduction of rates paid on savings accounts; cessation of or limitations on
deposit-taking and lending; limitations on operational expenditures; an increase
in liquidity; and such other actions deemed necessary or appropriate by the
Office of Thrift Supervision. In addition, a conservator or receiver may be
appointed under certain circumstances.
The appropriate federal banking agency has the authority to reclassify
a well-capitalized institution as adequately capitalized, and to treat an
adequately capitalized or undercapitalized institution as if it were in the next
lower capital category, if it is determined, after notice and an opportunity for
a hearing, to be in an unsafe or unsound condition or to have received and not
corrected a less-than-satisfactory rating for any of the categories of asset
quality, management, earnings or liquidity in its most recent examination. As a
result of such classification or determination, the appropriate federal banking
agency may require an adequately capitalized or under-capitalized institution to
comply with certain mandatory and discretionary supervisory actions. A
significantly undercapitalized savings association may not be reclassified,
however, as critically undercapitalized.
The terms of the 1995 subordinated notes and related indenture
agreement prohibit the Corporation from paying cash dividends unless the
Corporation's ratio of tangible equity to total assets exceeds 7.0%. The
commercial bank line of credit also prohibits Metropolitan from paying cash
dividends unless the Corporation's ratio of tangible equity to tangible assets
exceeds 7%. As a result, the Corporation is currently prohibited from paying
dividends to its shareholders.
NOTE 15. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK. The Bank can be a
party to financial instruments with off-balance sheet risk in the normal course
of business to meet financing needs of its customers. These financial
instruments include commitments to make loans. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument for commitments to make loans is represented by the contractual
amount of those instruments. The Bank follows the same credit policy to make
such commitments as is followed for those loans recorded in the financial
statements.
As of December 31, 1999, the Bank had fixed and variable rate
commitments to originate and/or purchase loans (at market rates) of
approximately $42,451 and $78,913, respectively. In addition, the Bank had firm
commitments to sell loans totaling $4,568 at December 31, 1999. Metropolitan's
commitments to originate and purchase loans are for loans at rates ranging from
6.375% to 16.0% and commitment periods up to one year.
During 1998, the Corporation purchased approximately $44,385 of loans
and sold non-refundable options to a third party to purchase these same loans at
a later date. There were no purchases of this type in 1999. The Corporation
recognized a fee of $168, $388, and $320 on the sale of options during the years
ended December 31, 1999, 1998, and 1997, respectively. During 1998, certain
options were sold with an agreement to share in the gain on sale of the loans in
lieu of an option fee. The Corporation recognized a gain of $251 on the sale of
these loans during the year ended December 31, 1998. At December 31, 1999, loans
with a carrying value of $852 were held for sale in connection with outstanding
purchase options.
At December 31, 1999, commitments on various construction contracts
were approximately $5,109.
RESERVE REQUIREMENTS. The Bank was required to maintain $4,292 of cash
on hand or on deposit with the Federal Reserve to meet regulatory reserve
requirements at December 31, 1999. These funds do not earn interest.
LIQUIDITY REQUIREMENT. The Corporation is required to maintain cash or
short-term investments equal to six months interest on the 1995 subordinated
notes, or approximately $675, as a condition of the indenture agreement related
to the 1995 subordinated notes.
48
41
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 16. RELATED PARTY TRANSACTIONS
In the years ended December 31, 1999, 1998 and 1997 the Corporation
expensed $96 per year for management fees relating to services provided by a
company with the same majority shareholder as the corporation.
The Bank has had, and expects to have in the future, banking
transactions in the ordinary course of business with Metropolitan's and the
Bank's directors, officers, significant shareholders and associates on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the time for comparable transactions with other persons,
and that do not involve more than the normal risk of collectibility or present
other unfavorable terms. Loans to such related parties totaled $1,611 and $461
at December 31, 1999 and 1998, respectively.
Related party deposits totaled $1,752 and $2,115 at December 31, 1999
and 1998, respectively.
In the third quarter, 1999, Robert Kaye purchased from Metropolitan
Financial Corp. the cash surrender value of a life insurance policy on Mr. Kaye
in which Metropolitan Financial Corp. was both the owner and beneficiary. The
amount paid to Metropolitan Financial Corp. was in excess of the book value of
the policy on the date of the transaction.
NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Statement of
Financial Accounting Standards No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value estimates presented do not reflect the underlying fair
value of the Corporation. While these estimates are based on management's
judgment of the most appropriate factors, there is no assurance that the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. As such, the
estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at year
end. The following table shows those financial instruments and the related
carrying values. Financial instruments are excluded from this table in the case
of carrying amount and fair value being equal.
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
Financial assets:
Securities $ 51,708 $ 51,884 $ 35,660 $ 35,660
Mortgage-backed securities 255,727 255,727 198,295 198,295
Loans, net 1,190,672 1,202,368 1,033,288 1,072,891
Loan servicing rights 10,374 12,944 13,412 14,846
Financial liabilities:
Time deposits (808,435) (808,074) (720,771) (725,384)
Borrowings (360,396) (357,997) (215,486) (216,579)
Trust Preferred securities (43,750) (25,832) (27,750) (24,975)
49
42
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair
value of financial instruments:
CASH AND EQUIVALENTS--The carrying amount of these items is a
reasonable estimate of the fair value.
SECURITIES AND MORTGAGE-BACKED SECURITIES--The estimated fair
value is based on quoted market prices or dealer estimates.
LOANS, NET--For loans held for sale, the fair value was
estimated based on quoted market prices. The fair value of other loans
is estimated by discounting the future cash flows and estimated
prepayments using the current rates at which similar loans would be
made to borrowers with similar credit ratings for the same remaining
term. Some loan types were valued at carrying value because of their
floating rate or expected maturity characteristics.
FEDERAL HOME LOAN BANK STOCK--The fair value is based upon the
redemption value of the stock which equates to its carrying value.
ACCRUED INTEREST RECEIVABLE--The carrying amount and fair
value are equal.
LOAN SERVICING RIGHTS--The fair value is based upon the
discounted cash flow analysis.
DEMAND AND SAVINGS DEPOSITS--The fair value is the amount
payable on demand at the reporting date.
TIME DEPOSITS--the fair value of fixed maturity certificates
of deposit is estimated by discounting the estimated future cash flows
using the rates offered at year end for similar remaining maturities.
BORROWINGS--The fair value of borrowings is estimated by
discounting the estimated future cash flows using the rates offered at
year end for similar remaining maturities.
ACCRUED INTEREST PAYABLE--The carrying amount and fair value
are equal.
COMMITMENTS--The estimated fair value is not materially
different from the nominal value.
TRUST PREFERRED SECURITIES--The estimated fair value is based
upon quoted market prices.
NOTE 18. SEGMENT REPORTING
Metropolitan's operations include two major operating segments. A
description of those segments follows:
RETAIL AND COMMERCIAL BANKING--Retail and commercial banking
is the segment of the business that brings in deposits and lends those
funds out to businesses and consumers. The local market for deposits is
the consumers and businesses in the neighborhoods surrounding our 20
retail sales offices in Northeastern Ohio. The market for lending is
Ohio and the surrounding states for originations and throughout the
United States for purchases. The majority of loans are secured by
multifamily and commercial real estate. Loans are also made to
businesses secured by business assets and consumers secured by real or
personal property. Business and consumer loans are concentrated in
Northeastern Ohio.
MORTGAGE BANKING--Mortgage banking is the segment of our
business that originates, sells and services permanent or construction
loans secured by one- to four-family residential properties. These
loans are primarily originated through commissioned loan officers
located in Northeastern Ohio and Southeastern Michigan. In general,
fixed rate loans are originated for sale and adjustable rate loans are
originated to be retained in the portfolio. Loans being serviced
include loans originated and still owned by Metropolitan, loans
originated by Metropolitan but sold to others with servicing rights
retained by Metropolitan, and servicing rights to loans originated by
others but purchased by Metropolitan. The servicing rights Metropolitan
purchases may be located in a variety of states and are typically being
serviced for FannieMae or FreddieMac.
The category below labeled Parent and Other consists of the
remaining segments of Metropolitan's business. It includes corporate
treasury, interest rate risk, and financing operations which do not
generate revenue from outside customers.
50
43
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 18. SEGMENT REPORTING (CONTINUED)
Operating results and other financial data for the current year and
preceding two years are as follows:
As of or for the year ended December 31, 1999
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $ 27,817 $ 6,127 $ 4,333 $ 38,277
Provision for losses on loans 5,662 648 -- 6,310
---------- -------- -------- ----------
Net interest income after
provision for loan losses 22,155 5,479 4,333 31,967
Noninterest income 4,380 3,504 (729) 7,155
Direct noninterest expense 16,751 6,330 315 23,396
Allocation of overhead 6,673 2,522 -- 9,195
---------- -------- -------- ----------
Net income before income taxes $ 3,111 $ 131 $ 3,289 $ 6,531
========== ======== ======== ==========
FINANCIAL DATA:
Segment assets $1,089,666 $399,219 $119,234 $1,608,119
Depreciation and amortization 1,850 2,634 430 4,913
Expenditures for additions
to premises and equipment 15,593 1,239 16,832
As of or for the year ended December 31, 1998
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $ 21,733 $ 6,837 $ 3,374 $ 31,944
Provision for losses on loans 2,642 8 -- 2,650
---------- -------- -------- ----------
Net interest income after
provision for loan losses 19,091 6,829 3,374 29,294
Noninterest income 3,823 3,553 (59) 7,317
Direct noninterest expense 13,178 4,971 310 18,459
Allocation of overhead 5,129 1,935 -- 7,064
---------- -------- -------- ----------
Net income before income taxes $ 4,607 $3,476 $ 3,005 $ 11,088
========== ======== ======== ==========
FINANCIAL DATA:
Segment assets $ 898,126 $383,075 $ 82,232 $1,363,434
Depreciation and amortization 1,375 2,612 352 4,338
Expenditures for additions
to premises and equipment 5,459 1,158 6,617
As of or for the year ended December 31, 1997
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $ 19,658 $ 3,494 $ 4,491 $ 27,643
Provision for losses on loans 2,105 235 -- 2,340
---------- -------- -------- ----------
Net interest income after
provision for loan losses 17,553 3,259 4,491 25,303
Noninterest income 2,220 1,674 247 4,141
Direct noninterest expense 10,647 3,568 339 14,554
Allocation of overhead 4,195 1,398 2 5,595
---------- -------- -------- ----------
Net income before income taxes $ 4,931 $ (33) $ 4,397 $ 9,295
========== ======== ======== ==========
FINANCIAL DATA:
Segment assets $ 605,867 $226,885 $ 92,233 $ 924,985
Depreciation and amortization 1,556 2,627 350 4,533
Expenditures for additions
to premises and equipment 3,148 566 3,714
51
44
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 18. SEGMENT REPORTING (CONTINUED)
The financial information provided for each major operating segment has
been derived from the internal profitability system used to monitor and manage
financial performance and allocate resources. The internal profitability system
has been in place for three years. Prior to the adoption of the internal
profitability system the Company operated as one segment.
The measurement of performance for the operating segments is based on
the organizational structure of Metropolitan and is not necessarily comparable
with similar information for any other financial institution. The information
presented is also not indicative of the segments' financial condition and
results of operations if they were independent entities.
Metropolitan evaluates segment performance based on contribution to
income before income taxes. Certain indirect expenses have been allocated based
on various criteria considered by management to best reflect benefits derived.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Indirect expense allocations and
accounting policies have been consistently applied for the periods presented.
There are no differences between segment profits and assets and the consolidated
profits and assets of Metropolitan. The net interest income that results from
investing in assets and liabilities with different terms to maturity or
repricing has been eliminated from the two major operating segments and is
included in the category labeled Parent and Other.
NOTE 19. CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Metropolitan Financial
Corp. (parent company only). In this information, the parent's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of the
subsidiaries since acquisition. This information should be read in conjunction
with the consolidated financial statements.
PARENT COMPANY ONLY
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------
1999 1998
---- ----
ASSETS
Cash and due from banks $ 245 $ 155
Securities available for sale 835 2,059
Loans receivable 50 50
Investment in Metropolitan Bank and Trust Company 103,944 88,177
Intangible assets 44 47
Prepaid expenses and other assets 5,951 3,666
--------- ---------
Total assets $ 111,069 $ 94,154
========= =========
LIABILITIES
Borrowings $ 20,000 $ 22,000
Other liabilities 2,451 1,760
Guaranteed Preferred Beneficial
Interests In the Corporation's
Junior Subordinated Debentures 43,750 27,750
--------- ---------
Total liabilities 66,201 51,510
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock -- --
Common stock -- --
Additional paid-in-capital 20,744 18,505
Retained earnings 28,171 23,660
Accumulated other comprehensive income (loss) (4,047) 479
--------- ---------
Total shareholders' equity 44,868 42,644
--------- ---------
Total liabilities and shareholders' equity $ 111,069 $ 94,154
========= =========
52
45
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 19. CONDENSED FINANCIAL INFORMATION (CONTINUED)
PARENT COMPANY ONLY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
Interest on loans and securities $ 240 $ 471 $ 107
Interest on borrowings (2,234) (1,917) (1,997)
Interest on Junior Subordinated Debentures (3,418) (1,633) --
------- ------- -------
Net interest expense (5,412) (3,079) (1,890)
Noninterest income
Dividends from Metropolitan Bank and Trust Company 2,000 500 1,500
Other operating income 3 4 4
------- ------- -------
2,003 504 1,504
------- ------- -------
Noninterest expense
Amortization of intangibles 4 4 4
State franchise taxes -- 23 21
Other operating expenses 310 283 246
------- ------- -------
314 310 271
------- ------- -------
Income before income taxes (3,723) (2,885) (657)
Federal income tax benefit (1,941) (1,171) (723)
------- ------- -------
Income before equity in undistributed net
income of Metropolitan Bank and Trust Company (1,782) (1,714) (66)
Equity in undistributed net income of Metropolitan
Bank and Trust Company 6,293 8,753 5,737
------- ------- -------
Income before extraordinary item 4,511 7,039 5,803
Extraordinary item -- (245) --
------- ------- -------
Net income $ 4,511 $ 6,794 $ 5,803
======= ======= =======
53
46
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 19. CONDENSED FINANCIAL INFORMATION (CONTINUED)
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,511 $ 6,794 $ 5,803
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net income of Metropolitan
Bank and Trust Company (6,293) (8,753) (5,737)
Amortization 4 4 4
Change in other assets and liabilities (668) (655) (203)
-------- -------- --------
Net cash from operating activities (2,446) (2,610) (133)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities 1,275 13,153 400
Purchase of securities available for sale (51) (12,800) (97)
Capital contributions to Metropolitan Bank and Trust Company (14,000) (26,000) (1,500)
-------- -------- --------
Net cash from investing activities (12,776) (25,647) (1,197)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Guaranteed
Preferred Beneficial Interests in the
Corporation's Junior Subordinated Debentures 15,073 26,436 --
Repayment of borrowings -- (4,874) --
Net activity on lines of credit (2,000) 6,500 1,500
Proceeds from issuance of common stock 2,239 -- --
-------- -------- --------
Net cash from financing activities 15,312 28,062 1,500
-------- -------- --------
Net change in cash and cash equivalents 90 (195) 170
Cash and cash equivalents
at beginning of year 155 350 180
-------- -------- --------
Cash and cash equivalents
at end of year $ 245 $ 155 $ 350
======== ======== ========
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47
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1999, 1998, AND 1997
NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR THE THREE MONTHS ENDED:
---------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999
Interest income $25,894 $27,374 $29,095 $29,557
Net interest income 8,976 9,648 10,098 9,555
Provision for loan losses 650 1,600 1,800 2,260
Net income 1,438 1,504 875 694
Basic earnings per share $ 0.19 $ 0.19 $ 0.11 $ 0.09
Diluted earnings per share $ 0.19 $ 0.19 $ 0.11 $ 0.09
1998
Interest income $19,213 $20,301 $21,366 $24,848
Net interest income 7,556 7,631 7,875 8,882
Provision for loan losses 450 910 690 600
Income before extraordinary item 1,987 1,551 1,621 1,880
Extraordinary item 245
Net income 1,987 1,306 1,621 1,880
Basic earnings per share $ 0.26 $ 0.17 $ 0.21 $ 0.24
Diluted earnings per share $ 0.26 $ 0.17 $ 0.21 $ 0.24
55