1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001.
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Commission file number 000-21553
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METROPOLITAN FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
- ---------------------------------- --------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
22901 Mill Creek Blvd., Highland Hills, Ohio 44122
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(Address of Principal Executive Offices) (Zip Code)
(216) 206-6000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
-------- --------
As of August 3, 2001, there were 8,117,131 common shares of the Registrant
issued and outstanding.
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METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
as of June 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations for the
three and six months ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000 5
Consolidated Statement of Changes in Shareholders' Equity
for the three and six months ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7-19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20-32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 32-35
PART II. OTHER INFORMATION 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 6. Exhibits and Reports on Form 8-K 36-37
SIGNATURE 38
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METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
June 30, 2001 December 31, 2000
------------- -----------------
ASSETS
Cash and due from banks $ 29,587 $ 17,010
Interest-bearing deposits in other banks 473 2,727
Securities available for sale 99,810 39,306
Securities held to maturity 15,178 15,480
Mortgage-backed securities available for sale 198,826 195,829
Loans held for sale 139,409 51,382
Loans receivable, net 1,066,900 1,235,441
Federal Home Loan Bank stock 15,993 20,624
Premises and equipment, net 71,190 66,393
Loan servicing rights, net 22,474 20,597
Accrued income, prepaid expenses and other assets 25,154 23,626
Real estate owned, net 3,616 4,262
Intangible assets 2,637 2,602
--------- ---------
Total assets $1,691,247 $1,695,279
========= =========
LIABILITIES
Noninterest-bearing deposits $ 110,468 $ 97,385
Interest-bearing deposits 1,092,149 1,048,882
--------- ---------
Total deposits 1,202,617 1,146,267
Borrowings 365,751 426,079
Other liabilities 32,300 29,724
Guaranteed preferred beneficial interests in the
corporation's junior subordinated debentures 43,750 43,750
--------- ---------
Total liabilities 1,644,418 1,645,820
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized,
none issued --- --
Common stock, no par value, 10,000,000 shares
authorized, 8,112,996 and 8,099,852 shares
issued and outstanding, respectively --- --
Additional paid-in capital 20,928 20,882
Retained earnings 27,167 29,668
Accumulated other comprehensive loss (1,266) (1,091)
--------- ---------
Total shareholders' equity 46,829 49,459
--------- ---------
Total liabilities and shareholders' equity $1,691,247 $1,695,279
========= =========
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 25,342 $ 26,308 $ 52,340 $ 50,912
Interest on mortgage-backed securities 3,414 3,924 6,775 8,108
Interest and dividends on other investments 1,314 1,307 2,590 2,428
----------- ----------- ----------- -----------
Total interest income 30,070 31,539 61,705 61,448
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 14,670 14,187 29,800 27,706
Interest on borrowings 5,997 6,279 12,415 12,028
Interest on Junior Subordinated Debentures 999 999 1,997 1,997
----------- ----------- ----------- -----------
Total interest expense 21,666 21,465 44,212 41,731
----------- ----------- ----------- -----------
NET INTEREST INCOME 8,404 10,074 17,493 19,717
Provision for loan losses 3,145 1,600 4,200 3,100
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 5,259 8,474 13,293 16,617
----------- ----------- ----------- -----------
NONINTEREST INCOME
Net gain on sale of loans 1,782 729 2,451 1,038
Loan servicing income, net (674) 213 (783) 548
Service charges on deposit accounts 489 327 893 647
Net gain on sale of securities 1,145 85 1,545 418
Other operating income 1,569 811 2,625 1,629
----------- ----------- ----------- -----------
Total noninterest income 4,311 2,165 6,731 4,280
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and related personnel costs 6,323 4,869 12,093 10,046
Occupancy and equipment expense 2,016 1,509 3,783 2,849
Federal deposit insurance premiums 340 341 687 700
Data processing expense 508 339 925 670
Marketing expense 302 478 581 700
State franchise taxes 244 262 488 524
Amortization of intangibles 62 65 131 131
Other operating expenses 2,758 1,964 5,083 3,566
----------- ----------- ----------- -----------
Total noninterest expense 12,553 9,827 23,771 19,186
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (2,983) 812 (3,747) 1,711
Provision (benefit) for income taxes (905) 265 (1,246) 557
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (2,078) $ 547 $ (2,501) $ 1,154
=========== =========== =========== ===========
Basic and diluted earnings (loss) per share $ (0.26) $ 0.07 $ (0.31) $ 0.14
=========== =========== =========== ===========
Weighted average shares outstanding for basic
earnings per share 8,110,822 8,077,213 8,107,170 8,072,840
Effect of dilutive options -- -- -- --
----------- ----------- ----------- -----------
Weighted average shares outstanding for diluted
earnings per share 8,110,822 8,077,213 8,107,170 8,072,840
=========== =========== =========== ===========
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
-------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES $ (9,313) $ (10,067)
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (117,115) (199,027)
Purchases of:
Loans (46,187) (64,092)
Mortgage-backed securities (19,395) --
Securities available for sale (83,836) (25)
Securities held to maturity -- (100)
Mortgage servicing rights (2,228) (8,237)
Premises and equipment (6,679) (15,568)
FHLB stock -- (2,582)
Proceeds from maturities and repayments of:
Loans 205,812 158,946
Mortgage-backed securities 17,766 22,829
Securities available for sale 23,000 --
Securities held to maturity -- 365
Proceeds from sale of:
Loans 49,336 42,544
Mortgage-backed securities -- 16,938
FHLB stock 5,000 --
Premises, equipment, and real estate owned 348 1,275
--------- ---------
Net cash provided by (used in) investing activities 25,822 (46,734)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 56,350 (10,299)
Proceeds from borrowings 20,000 93,534
Repayment of borrowings (31,328) (56,236)
Net activity on lines of credit (49,000) 21,000
Proceeds from issuance of common stock 46 75
--------- ---------
Net cash provided by (used in) financing activities (3,932) 48,074
--------- ---------
Net change in cash and cash equivalents 12,577 (8,727)
Cash and cash equivalents at beginning of period 17,010 19,001
--------- ---------
Cash and cash equivalents at end of period $ 29,587 $ 10,274
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 43,246 $ 42,633
Income taxes 1,418 336
Transfer from loans receivable to real estate owned 593 833
Transfer from loans receivable to loans held for sale 60,759 --
Loans securitized 104,032 16,053
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share data)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
----- ------- -------- ------------- ------
BALANCE MARCH 31, 2000 $ -- $20,781 $28,778 $(5,627) $43,932
Comprehensive income (loss):
Net income 547 547
Change in unrealized gain on
securities, net of tax and net
of reclassification of gain
of $131,000 from net income (13) (13)
-------
Total comprehensive income (loss) 534
Issuance of shares of Common stock
Stock purchase plan-9,815 shares 38 38
------- ------- ------- -------
BALANCE JUNE 30, 2000 $ -- $20,819 $29,325 $(5,640) $44,504
======= ======= ======= =======
BALANCE DECEMBER 31, 1999 $ -- $20,744 $28,171 $(4,047) $44,868
Comprehensive income (loss):
Net income 1,154 1,154
Change in unrealized gain on
securities, net of tax and net
of reclassification of gain
of $643,000 from net income (1,593) (1,593)
-------
Total comprehensive income (loss) (439)
Issuance of shares of Common stock
Stock purchase plan-18,848 shares 75 75
------- ------- ------- -------
BALANCE JUNE 30, 2000 $ -- $20,819 $29,325 $(5,640) $44,504
======= ======= ======= =======
BALANCE MARCH 31, 2001 $ -- $20,907 $29,245 $(2,089) $48,063
Comprehensive income (loss):
Net income (2,078) (2,078)
Change in unrealized gain on
securities and derivatives, net of
of tax and net of reclassification
of gain of $744,000 from net income 823 823
-------
Total comprehensive income (loss) (1,255)
Issuance of shares of Common stock
Stock purchase plan-5,488 shares 21 21
------- ------- ------- -------
BALANCE JUNE 30, 2001 $ -- $20,928 $27,167 $(1,266) $46,829
======= ======= ======= =======
BALANCE DECEMBER 31, 2000 $ -- $20,882 $29,668 $(1,091) $49,459
Comprehensive income (loss):
Net income (2,501) (2,501)
Change in unrealized gain on
securities and derivatives, net of
tax and net of reclassification of gain
of $1,004,000 from net income (175) (175)
-------
Total comprehensive income (loss) (2,676)
Issuance of shares of Common stock
Stock purchase plan-13,144 shares 46 46
------- ------- ------- -------
BALANCE JUNE 30, 2001 $ -- $20,928 $27,167 $(1,266) $46,829
======= ======= ======= =======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is a savings
and loan holding company and an Ohio corporation. Metropolitan's primary
operating subsidiary is Metropolitan Bank and Trust Company (the "Bank").
Metropolitan is engaged in the business of originating multifamily and
commercial real estate loans primarily in Ohio, Pennsylvania, Michigan, and
Kentucky and purchasing 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. All significant intercompany transactions have been
eliminated. In the opinion of management, the accompanying financial statements
include all adjustments, consisting only of normal recurring accruals, which the
Corporation considers necessary for a fair presentation of (a) the results of
operations for the three and six month periods ended June 30, 2001 and 2000; (b)
the financial condition at June 30, 2001 and December 31, 2000; (c) the
statement of cash flows for the six month periods ended June 30, 2001 and 2000;
and (d) the statement of changes in shareholders' equity for the three and six
month periods ended June 30, 2001 and 2000. The results of operations for the
six month period ended June 30, 2001 are not necessarily indicative of the
results that may be expected for any other period. The annual report for
Metropolitan for the year ended December 31, 2000, contains consolidated
financial statements and related notes which should be read in conjunction with
the accompanying consolidated financial statements.
2. ACCOUNTING POLICIES
SECURITIES: The Corporation classifies debt securities 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 could sell
for liquidity, investment management, or similar reasons, even if there is not a
present intention for such 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.
Federal Home Loan Bank stock is sold and redeemed at par so fair value is equal
to historic cost.
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
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movements, deposit flows, the availability and attractiveness of other sources
of funds, loan demand by borrowers, and liquidity and capital needs.
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 June 30, 2001 and
December 31, 2000, management had the intent and the Bank had the ability to
hold all loans being held for investment purposes for the foreseeable future.
Loans held for sale are recorded at the lower of cost or market. This
determination is made in the aggregate. 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 accrual of interest should be discontinued based on the estimated
fair market value of the collateral. 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.
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 loan 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 continue and future recoveries may occur. There can be no assurance
that future losses will not exceed the existing allowance or that additional
provisions will not be required in future periods as conditions change. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the adequacy of the allowance for loss and such
agencies may require the company to make additions to the allowance for losses
on loans based on judgements that differ from those of management.
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, that increase is reported as a
provision for loan losses. 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. Management does not include all consumer loans in the review
for impaired loans. 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.
DERIVATIVES: Effective January 1, 2001, a new accounting standard requires all
derivatives to be recorded at fair value. Net interest income (expense)
resulting from the difference between fixed and floating rate interest payments
is recorded on the accrual basis to interest income (expense). The change in
fair value of the derivative is recorded as an increase (decrease) to
accumulated other comprehensive income (loss) if the derivative represents a
hedge and to the statement of operations if it is not a hedge.
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 (loss) by the
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weighted average shares outstanding. Diluted earnings per share has been
computed by dividing net income (loss) by the diluted weighted average shares
outstanding. Diluted weighted average common shares were calculated assuming the
exercise of stock options less treasury shares assumed to be purchased from the
proceeds using the average market price of the Corporation's stock. Outstanding
stock options of common stock were not considered in computing diluted earnings
per share for the period ended June 30, 2001 because they were antidilutive.
COMPREHENSIVE INCOME: Comprehensive income consists of net income (loss) and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale, equity investments, and derivatives
which are also recognized as a separate component of equity.
SECURITIZATIONS: Statement of Financial Accounting Standard No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" became effective for Metropolitan as of December 31, 2000 for
disclosures on existing securitizations and as of April 1, 2001 for application
of rules on transfers of financial assets. Under SFAS No. 140, Metropolitan will
recognize a sale or other transfer of financial assets only if significant
unrelated consideration is received and if Metropolitan transfers effective
control of the asset to an unrelated entity.
NEW ACCOUNTING PRONOUNCEMENTS: In July, 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." These statements will change the accounting for business combinations
and goodwill. SFAS No. 141 will require that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method will be prohibited. SFAS No. 142 will change the
accounting for goodwill and certain intangible assets from an amortization
method to an impairment-only method. Any goodwill arising from the result of
business combinations initiated after June 30, 2001 will not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, goodwill and certain intangible assets must be tested
for impairment and write-downs may be necessary. Additionally, amortization of
goodwill recorded for past business combinations will cease upon adoption of
SFAS No. 142 on January 1, 2002. Management expects a benefit associated with
the elimination of goodwill amortization in 2002. However, the benefit may be
more than, equal to, or less than any impairment that could occur in 2002. While
management does not anticipate any goodwill impairment in 2002, it could occur
as a result of changes in economic or market conditions.
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3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale and held to maturity at June 30, 2001
and December 31, 2000 were as follows (in thousands):
June 30, 2001
-------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 678 $ 678
FreddieMac preferred stock 7,500 $(1,012) 6,488
FannieMae notes 14,441 (92) 14,349
FHLB note 5,056 (13) 5,043
Treasury notes and bills 73,232 $ 21 (1) 73,252
Mortgage-backed securities 197,742 1,227 (143) 198,826
------- ----- ------ -------
298,649 1,248 (1,261) 298,636
HELD TO MATURITY
Tax-exempt municipal bond 14,548 (2,909) 11,639
Revenue bond 630 630
------- ----- ------ -------
15,178 0 (2,909) 12,269
------- ----- ------ -------
Total securities $313,827 $1,248 $(4,170) $310,905
======= ===== ====== =======
December 31, 2000
-------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 889 $ 889
FreddieMac preferred stock 7,500 $(1,350) 6,150
FreddieMac note 10,000 (14) 9,986
FannieMae notes 19,950 $ 10 (40) 19,920
Treasury notes and bills 2,361 2,361
Mortgage-backed securities 196,052 534 (757) 195,829
------- --- ---- -------
236,752 544 (2,161) 235,135
HELD TO MATURITY
Tax-exempt municipal bond 14,705 (145) 14,560
Revenue bond 775 9 784
------- --- ----- -------
15,480 9 (145) 15,344
------- --- ----- -------
Total securities $252,232 $553 $(2,306) $250,479
======= === ===== =======
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4. LOANS RECEIVABLE
The composition of the loan portfolio at June 30, 2001 and December 31, 2000 was
as follows (in thousands):
June 30, 2001 December 31, 2000
------------- -----------------
Real estate loans
Construction loans:
One- to four-family $ 144,991 $ 125,989
Multifamily 5,347 7,502
Commercial 4,736 5,873
Land 67,813 54,100
Loans in process (86,983) (72,156)
----------- -----------
Construction loans, net 135,904 121,308
Permanent loans:
One- to four-family 249,126 288,352
Multifamily 223,249 273,358
Commercial 179,637 254,824
----------- -----------
Total real estate loans 787,916 937,842
Consumer loans 154,377 163,019
Business and other loans 136,167 143,329
----------- -----------
Total loans 1,078,460 1,244,190
Premiums on loans, net 7,791 7,393
Deferred loan fees, net (2,323) (2,191)
Allowance for losses on loans (17,028) (13,951)
----------- -----------
Total loans receivable $ 1,066,900 $ 1,235,441
=========== ===========
Activity in the allowance for losses on loans for the periods ended June 30,
2001 and 2000 was as follows (in thousands):
Six Months Ended June 30,
-----------------------
2001 2000
-------- --------
Balance at the beginning of the period $ 13,951 $ 11,025
Provision for loan losses 4,200 3,100
Charge-offs (1,234) (1,412)
Recoveries 111 89
-------- --------
Balance at end of period $ 17,028 $ 12,802
======== ========
Nonperforming loans were as follows at (in thousands):
June 30, December 31,
2001 2000
-------- -------
Loans past due over 90 days still on accrual $ 3,665 $ 6,434
Nonaccrual loans 28,322 8,305
Nonperforming loans included all impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
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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 was as follows (in thousands):
June 30, December 31,
2001 2000
------- ------------
Balance of impaired loans $15,032 $ 4,869
Less portion for which no allowance
for losses on loans is allocated 267 4,796
------- -------
Balance of impaired loans for which
an allowance for loan losses is allocated $14,765 $ 220
======= =======
Portion of allowance for losses on loans
allocated to the impaired loan balance $ 3,510 $ 197
======= =======
June 30, June 30,
2001 2000
-------- --------
Average investment in impaired loans
during the period $11,082 $ 4,523
======= =======
Interest income recognized during
Impairment $ 230 $ 141
======= =======
Interest income recognized on a
cash basis during the period $ 230 $ 141
======= =======
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5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
June 30, December 31,
2001 2000
------- -------
Land $10,647 $10,535
Office buildings 33,447 11,718
Leasehold improvements 3,408 3,184
Furniture, fixtures, and equipment 20,650 17,948
Construction in progress 11,937 30,210
------- -------
Total 80,089 73,595
Accumulated depreciation 8,899 7,202
------- -------
Total premises and equipment $71,190 $66,393
======= =======
In the second quarter, 1999, the Corporation started the construction of a new
corporate headquarters building, a portion of which the bank now occupies. As a
result, interest expenses have been incurred to finance construction. These
costs are capitalized as they are incurred while the building is under
construction and are included as a portion of the historical cost to be
depreciated over the useful life of the building. Interest is also capitalized
on the construction of retail sales offices. Interest expense capitalized for
the six-month periods ended June 30, 2001 and 2000 were $339 and $281,
respectively.
6. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at June 30, 2001 and December 31, 2000 are summarized as follows (in
thousands):
June 30, December 31,
2001 2000
---------- ----------
Mortgage loan portfolios serviced for:
FreddieMac $1,099,914 $ 882,715
FannieMae 770,777 849,472
Other 236,857 205,312
---------- ----------
Total loans serviced for others $2,107,548 $1,937,499
========== ==========
Custodial balances maintained in noninterest-bearing checking accounts in
connection with the foregoing loan servicing were approximately $38,111 and
$25,484 at June 30, 2001 and December 31, 2000, respectively.
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The following is an analysis of the changes in the cost of loan servicing rights
for the six-month periods ended June 30, 2001 and 2000 (in thousands):
Six Months Ended June 30,
2001 2000
-------- --------
Balance at the beginning of the period $ 20,597 $ 10,374
Acquired or originated 5,443 8,999
Amortization (3,566) (1,516)
-------- --------
Balance at the end of the period $ 22,474 $ 17,857
======== ========
7. DEPOSITS
Deposits consisted of the following (in thousands):
June 30, December 31,
2001 2000
---------- ----------
Noninterest-bearing checking accounts $ 110,468 $ 97,385
Interest-bearing checking accounts 150,939 123,537
Passbook savings and statement savings 97,595 106,258
Certificates of deposit 843,615 819,087
---------- ----------
Total interest-bearing deposits 1,092,149 1,048,882
---------- ----------
$1,202,617 $1,146,267
========== ==========
At June 30, 2001, scheduled maturities of certificates of deposit were as
follows (in thousands):
Year Weighted Average
Ended Amount Interest Rate
----- ------ -------------
2001 $388,668 6.26%
2002 316,395 5.55%
2003 115,337 5.57%
2004 11,927 5.82%
2005 6,292 6.55%
Thereafter 4,996 5.92%
-----
$843,615 5.89%
=======
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15
8. BORROWINGS
Borrowings consisted of the following at June 30, 2001 and December 31, 2000 (in
thousands):
June 30, December 31,
2001 2000
-------- --------
Federal Home Loan Bank Advances (5.9% and 6.5% at
June 30, 2001 and December 31, 2000, respectively) $304,766 $365,094
Reverse repurchase agreements (5.9% at June 30, 2001
and December 31, 2000, respectively) 41,000 41,000
Commercial bank line of credit (8.8%) -- 6,000
Commercial bank note payable (7.0%) 6,000 --
Subordinated debt maturing January 1, 2005
(9.6% fixed rate) 13,985 13,985
-------- --------
$365,751 $426,079
======== ========
At June 30, 2001, scheduled payments on borrowings were as follows (in
thousands):
Weighted Average
Year Ended Amount Interest Rate
---------- ------ -------------
2001 $68,427 6.22%
2002 63,657 6.19
2003 69,201 5.18
2004 48,495 6.24
2005 58,000 5.20
Thereafter 57,971 7.14
--------
Total $365,751 6.00
========
At June 30, 2001, 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 $16 million, $258
million, $94 million, and $40 million, respectively.
The Corporation has a note payable with a commercial bank with a balance at June
30, 2001 of $6 million. The loan matures December 31, 2002. As collateral for
the loan, the Corporation's largest shareholder, Robert Kaye, has agreed to
pledge a portion of his common shares in an amount of at least equal to 50% of
the outstanding stock of the Corporation.
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16
9. OFF-BALANCE SHEET ACTIVITIES
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 commitments 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 these 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 June 30, 2001, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $126,954,000
and $56,703,000, respectively. In addition, the Bank had firm commitments to
sell loans totaling $110,271,000 at June 30, 2001. Metropolitan's commitments to
originate and purchase loans are for loans with rates ranging from 5.875% to 16%
and commitment periods up to one year.
The Bank maintains two standby letters of credit at the Federal Home Loan Bank
of Cincinnati for the benefit of Fannie Mae as secondary security for credit
risk on multifamily loans securitized in prior years. These standby letters of
credit, aggregating approximately $8.7 million, do not accrue interest and are
renewed on an annual basis.
The Bank has entered into two interest rate swap contracts to hedge variable
rate advances with each having a notional amount of $20.0 million. Both
contracts mature within five years and have the same counterparty, a nationally
recognized broker/dealer. The Bank receives from the respective contracts
variable interest based on one-month or three-month LIBOR. The Bank in turn pays
to the counterparty interest at fixed rates of 6.450% and 6.275%, respectively.
The counterparty has the option to terminate the interest rate swap in the event
LIBOR exceeds certain rates set on specific dates per the terms of the
contracts.
10. 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
communities surrounding our 24 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 Ohio and Western Pennsylvania. In
general, all fixed rate loans and most adjustable rate loans are originated for
sale. 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.
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17
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.
Operating results and other financial data for the current and preceding year
were as follows (in thousands):
As of or for the six months ended June 30, 2001
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $ 8,502 $ 9,556 $ (565) $ 17,493
Provision for losses on loans 3,893 307 -- 4,200
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 4,609 9,249 (565) 13,293
Noninterest income 3,814 2,942 (25) 6,731
Direct noninterest expense 10,126 4,266 983 15,375
Allocation of overhead 5,907 2,489 8,396
----------- ----------- ----------- -----------
Net loss before income taxes $ (7,610) $ 5,436 $ (1,573) $ (3,747)
=========== =========== =========== ===========
FINANCIAL DATA:
Segment assets $ 1,071,260 $ 441,586 $ 178,401 $ 1,691,247
Depreciation and amortization 1,908 2,771 474 5,153
Expenditures for additions
to premises and equipment 6,039 640 6,679
As of or for the six months ended June 30, 2000
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $13,649 $ 2,504 $ 3,564 $19,717
Provision for losses on loans 1,981 364 755 3,100
------- ------- ------- -------
Net interest income after
provision for loan losses 11,668 2,140 2,809 16,617
Noninterest income 2,880 1,360 40 4,280
Direct noninterest expense 9,535 3,291 199 13,025
Allocation of overhead 4,581 1,580 6,161
------- ------- ------- -------
Net income before income taxes $ 432 $(1,371) $ 2,650 $ 1,711
======= ======= ======= =======
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18
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
---------- -------- --------- --------
FINANCIAL DATA:
Segment assets $1,078,290 $447,792 $130,346 $1,656,428
Depreciation and amortization 1,173 1,394 259 2,826
Expenditures for additions
to premises and equipment 14,679 889 15,568
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 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 interest rate risk 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.
11. SUBSEQUENT EVENT
In July, 2001, the Corporation and its subsidiary, Metropolitan Bank and Trust,
have agreed to certain actions under Supervisory Agreements with the Office of
Thrift Supervision and the Ohio Department of Financial Institutions.
The Supervisory Agreements include, among other things, an agreement by the
Corporation to prepare and adopt a plan for raising capital that uses sources
other than increased debt or which requires additional dividends from the Bank.
The Supervisory Agreement does not prohibit the Corporation from making payments
on its Trust Preferred Securities or its other obligations.
In addition, the Bank has entered a separate supervisory agreement that
includes, among other things, the following requirements:
- Development of a capital improvement and risk reduction plan
by September 28, 2001. This plan is expected to increase the
Bank's core and risk-based capital from its present
"adequately capitalized" status to "well capitalized" by
December 31, 2001;
- Reduction in fixed assets;
18
19
- Attain compliance with approved interest rate policy
requirements, thus reducing the Bank's interest rate risk;
- Reduction in volatile funding sources, such as brokered and
out-of-state deposits;
- Improving credit risk controls; and
- Restricting growth.
The Supervisory Agreements for the Corporation and the Bank also contain
restrictions on adding, entering into employment contracts with, or making
golden parachute payments to directors and senior executive officers and in
changing position responsibilities of senior officers.
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20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) (in thousands) $(2,078) $547 $(2,501) $1,154
Basic and diluted earnings (loss) per share $(0.26) $0.07 $(0.31) $0.14
Return on average assets (0.49)% 0.14% (0.30)% 0.14%
Return on average equity (17.52)% 4.95% (10.40)% 5.21%
Noninterest expense to average assets 2.96% 2.43% 2.82% 2.39%
Efficiency ratio 107.95% 80.32% 104.24% 80.81%
Net interest margin 2.14% 2.62% 2.24% 2.58%
June 30, December 31, June 30,
2001 2000 2000
---- ---- ----
Total assets (in thousands) $1,691,247 $1,695,279 $1,656,428
Shareholders' equity (in thousands) 46,829 49,459 44,504
Shareholders' equity to total assets 2.77% 2.92% 2.69%
Shares outstanding 8,112,996 8,099,852 8,082,592
Book value per share $5.77 $6.11 $5.51
Tangible book value per share $5.45 $5.79 $5.22
Market value of common stock $3.80 $2.38 $4.75
Nonperforming assets to total assets (1) 2.11% 1.12% 0.84%
Allowance for losses on loans to total loans (1) 1.39% 1.07% 1.01%
Net charge-offs to average loans (2) 0.18% 0.27% 0.22%
(1) Ratios are based on period end balances.
(2) Annualized for comparative purposes.
20
21
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of 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,
servicing charges on deposit accounts, and gains or losses on the sales 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.
RESULTS OF OPERATIONS
Net Income. Net income decreased $2.6 million to a net loss of $2.1 million for
the second quarter, 2001 as compared to net income of $0.5 million for the
second quarter, 2000. Noninterest income increased $2.1 million for the three
months ended June 30, 2001 over the same period in the prior year. The provision
for loan losses increased to $3.1 million for the three months ended June 30,
2001 compared to $1.6 million from the same period in the prior year. For the
three months ended June 30, 2001, net interest income decreased $1.7 million and
noninterest expense increased $2.7 million compared to the same period in the
prior year. Noninterest expense amounted to $12.6 million for the quarter ended
June 30, 2001 from $9.8 million from the same quarter of the prior year.
Net income for the six-month period ended June 30, 2001 decreased $3.7 million
to a net loss of $2.5 million as compared to net income of $1.2 million for the
first six months of 2000. Noninterest income increased $2.5 million for the six
months ended June 30, 2001 over the same period in the prior year. The provision
for loan losses for the six months ended June 30, 2001 increased $1.1 million
from the same period in the prior year. For the six months ended June 30, 2001,
net interest income decreased $2.2 million and noninterest expense increased
$4.6 million compared to the same period in the prior year. Noninterest expense
amounted to $23.8 million for the six-month period ended June 30, 2001 from
$19.2 million from the same period in the prior year.
The losses for the second quarter, 2001 and the first six months of 2001 were
primarily due to increased loan loss provisions, provisions for real estate
owned, compression of the interest rate spread, costs associated with a computer
conversion, and compensation and occupancy expenses relating to new facilities
opened during 2000 and the first half of 2001. Management increased the
provision for loss on loans due to a weakening in the economy, increased
nonperforming loans, and problems with specific borrowers.
Our net interest margin decreased forty-eight and thirty-four basis points to
2.14% and 2.24%, respectively, for the three and six-month periods ended June
30, 2001, respectively, as compared to 2.62% and 2.58%, respectively, for the
comparable periods in 2000. The decrease in net interest margin resulted
primarily from declines in market interest rates which resulted in declines on
yields of prime-based loans and adjustable rate investment securities while our
deposit costs increased during the three and six month periods ended June 30,
2001 compared to the same periods in the prior year.
Interest Income. Total interest income for the quarter ended June 30, 2001
decreased 4.7% from the second quarter of 2000 and increased slightly for the
six months ended June 30, 2001 as compared to the six-month period ended
21
22
June 30, 2000, to $30.1 million and $61.7 million, respectively, as compared to
$31.5 million and $61.4 million, respectively, in the same periods in 2000.
These results were primarily the effect of declining yields on interest-earning
assets in the three and six-month periods ended June 30, 2001 despite increases
in average earning assets of 2.0% and 2.4% compared to the same periods in the
prior year. An increase in the level of nonperforming loans during the first
half of 2001 also contributed to the decrease in interest income.
Interest Expense. Total interest expense increased 0.9% and 5.9%, respectively,
to $21.7 million and $44.2 million, respectively, for the three and six-month
periods ended June 30, 2001 as compared to $21.5 million and $41.7 million,
respectively, for the same periods in 2000. Interest expense for the quarter
ending June 30, 2001 increased generally due to a higher average balance of
interest-bearing liabilities outstanding as opposed to the prior year quarter.
In contrast, the higher interest expense experienced in the first six months of
2001 as compared to the prior year period was due more to an increased cost of
funds and was affected only slightly by the greater balance of interest-bearing
liabilities outstanding. The average balance of interest-bearing deposits
increased $28.3 million and $10.1 million, respectively, or 2.7% and 1.0%,
respectively, for the three and six-month periods ended June 30, 2001 as
compared to the same periods in 2000. Average borrowings decreased $8.6 million
and increased $21.2 million, or a 2.2% decrease and a 5.5% increase,
respectively, for the three and six-month periods ended June 30, 2001 as
compared to the same periods in 2000. Metropolitan's cost of funds decreased
slightly to 5.79% for the second quarter, 2001 as compared to 5.83% for the
second quarter, 2000. Conversely, for the six-month period ended June 30, 2001,
Metropolitan's cost of funds increased to 5.95% as compared to 5.73% for the
first six months of 2000. In both the three and six-month periods ended June 30,
2001, a higher cost paid on deposits was partially offset by a lower cost paid
on borrowings.
22
23
Average Balances and Yields. The following tables present the total dollar
amount of interest income from average interest-earning assets and the resulting
yields, 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 considered in average loan balances. The average
balances of mortgage-backed securities and securities are presented at
historical cost.
Three Months Ended June 30,
---------------------------------------------------------------------------------
2001 2000
-------------------------------------- --------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $1,277,603 $25,342 7.93% $ 1,238,399 $26,308 8.50%
Mortgage-backed securities 204,307 3,414 6.68% 222,525 3,924 7.05%
Other 86,002 1,314 6.26% 75,872 1,307 6.89%
---------- ------- ----------- -------
Total interest-earning assets 1,567,912 30,070 7.68% 1,536,796 31,539 8.21%
------- -------
Noninterest-bearing assets 127,689 81,915
---------- -----------
Total assets $1,695,601 $ 1,618,711
========== ===========
Interest-bearing liabilities:
Deposits $1,076,052 14,670 5.47% $ 1,047,703 14,187 5.45%
Borrowings 388,922 6,108 6.30% 397,546 6,442 6.52%
Junior Subordinated Debentures 43,750 999 9.13% 43,750 999 9.13%
---------- ------- ----------- -------
Total interest-bearing liabilities 1,508,724 21,777 5.79% 1,488,999 21,628 5.83%
------- ----- ------- ----
Noninterest-bearing liabilities 139,431 85,494
Shareholders' equity 47,446 44,218
---------- -----------
Total liabilities and
shareholders' equity $1,695,601 $ 1,618,711
========== ===========
Net interest income before
capitalized interest 8,293 9,911
------- -------
Interest rate spread 1.89% 2.38%
===== ====
Net interest margin 2.14% 2.62%
Interest expense capitalized 111 163
-------- -------
Net interest income $ 8,404 $10,074
======= =======
Average interest-earning
assets to average
interest-bearing
liabilities 103.92% 103.21%
23
24
Six Months Ended June 30,
-------------------------------------------------------------------------------------
2001 2000
------------------------------------- ---------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $1,279,791 $52,340 8.18% $1,223,468 $50,912 8.32%
Mortgage-backed securities 199,782 6,775 6.78% 231,267 8,108 7.01%
Other 83,224 2,590 6.54% 71,873 2,428 6.76%
---------- ------- ---------- -------
Total interest-earning assets 1,562,797 61,705 7.91% 1,526,608 61,448 8.05%
------- -------
Noninterest-bearing assets 123,485 80,699
---------- ----------
Total assets $1,686,282 $1,607,307
========== ==========
Interest-bearing liabilities:
Deposits $1,061,133 29,800 5.66% $1,051,073 27,706 5.30%
Borrowings 406,061 12,754 6.33% 384,816 12,309 6.43%
Junior Subordinated Debentures 43,750 1,997 9.13% 43,750 1,997 9.13%
---------- ------- ---------- ------
Total interest-bearing liabilities 1,510,944 44,551 5.94% 1,479,639 42,012 5.73%
------- ---- ------- ----
Noninterest-bearing liabilities 127,221 83,359
Shareholders' equity 48,117 44,309
---------- ----------
Total liabilities and
shareholders' equity $1,686,282 $1,607,307
========== ==========
Net interest income before
capitalized interest 17,154 19,436
------- -------
Interest rate spread 1.97% 2.32%
==== ====
Net interest margin 2.24% 2.58%
Interest expense capitalized 339 281
------- --------
Net interest income $17,493 $19,717
======= =======
Average interest-earning
assets to average
interest-bearing
liabilities 103.43% 103.17%
24
25
Rate and Volume Variances. Net interest income is affected by changes in the
level of interest-earning assets and interest-bearing liabilities and changes in
yields earned on assets and rates paid on liabilities. The following table sets
forth, for the periods indicated, a summary of the changes in interest earned
and interest paid resulting from changes in average asset and liability balances
and changes in average 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.
Three Months Ended June 30,
2001 vs. 2000
Increase (Decrease)
----------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------- ------- -------
(In thousands)
INTEREST INCOME ON:
Loans receivable $ (966) $ 883 $(1,849)
Mortgage-backed securities (510) (311) (199)
Other 7 22 (15)
------- ------- -------
Total interest income (1,469) $ 594 $(2,063)
------- ======= =======
INTEREST EXPENSE ON:
Deposits $ 483 $ 419 $ 64
Borrowings (334) (133) (201)
Junior Subordinated Debentures -- -- --
------- ------- -------
Total interest expense 149 $ 286 $ (137)
======= =======
Interest expense capitalized (52)
-------
Decrease in net interest income $(1,670)
=======
Six Months Ended June 30,
2001 vs. 2000
Increase (Decrease)
----------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------- ------- -------
(In thousands)
INTEREST INCOME ON:
Loans receivable $ 1,428 $ 2,280 $ (852)
Mortgage-backed securities (1,333) (1,075) (258)
Other 162 204 (42)
------- ------- -------
Total interest income 257 $ 1,409 $(1,152)
------- ======= =======
INTEREST EXPENSE ON:
Deposits $ 2,094 $ 257 $ 1,837
Borrowings 445 616 (171)
Junior Subordinated Debentures -- -- --
------- ------- -------
Total interest expense 2,539 $ 873 $ 1,666
======= =======
Interest expense capitalized 58
-------
Decrease in net interest income $(2,224)
=======
25
26
Provision for Loan Losses. The provision for loan losses increased to $3.1
million and $4.2 million, respectively, for the three and six-month periods
ended June 30, 2001 as compared to $1.6 million and $3.1 million, respectively,
for the same periods in 2000. Management increased the provision for loan losses
based on increased risk of loss due to a weakening in the economy, increased
nonperforming loans, and problems noted with specific borrowers. As a result,
the allowance for losses on loans at June 30, 2001 was $17.0 million or 1.39% of
total loans, as compared to $12.8 million, or 1.01% of total loans at June 30,
2000.
Noninterest Income. Total noninterest income increased 99.1% to $4.3 million for
the three month period ended June 30, 2001 as compared to $2.2 million for the
second quarter, 2000 and increased $2.5 million to $6.7 million, or 57.3%, for
the first six months of 2001 as compared to $4.3 million for the first six
months of 2000.
Gain on sale of loans was $1.8 million in the three-month period ended June 30,
2001, as compared to $0.7 million during the same period in 2000. For the
six-month period ended June 30, 2001, gain on sale of loans was $2.5 million as
compared to $1.0 million for the prior year period. The primary reason for the
increase in the second quarter and first half of 2001 compared with the same
periods in 2000 was a decrease in interest rates in 2001 which has caused an
increase in refinance activity resulting in increased origination volumes and,
therefore, an increase in loans available to sell. The proceeds of residential
loan sales in the first six months of 2001 were $91.0 million as compared to
$50.0 million in the same period in 2000. Proceeds from the sale of multifamily
and commercial real estate loans were $49.3 million for the first six months of
2001 as compared to $42.2 million for the same period in 2000.
There were losses from net loan servicing of $674,000 and $783,000 in the three
and six-month periods ended June 30, 2001 as compared to income of $213,000 and
$548,000, respectively, for the same periods in 2000. The primary reason for the
decreased income was the increased amortization of servicing rights due to an
increase in paid off loans in 2001 compared to the prior year. The portfolio of
loans serviced for others increased to $2.1 billion at June 30, 2001 as compared
to $1.9 billion at December 31, 2000. Origination of loan servicing offset
payoffs and the amortization of existing loans serviced.
Service charges on deposit accounts increased to $489,000 in the three-month
period ended June 30, 2001 compared to $327,000 for the same period in 2000 and
increased to $893,000 for the six months ended June 30, 2001 as compared to
$647,000 for the same period in the prior year. The reasons for the increases
were the overall growth in the number of checking accounts and increases in
deposit fees in 2001 as compared to prior year periods.
Gains on sale of securities were $1.1 million and $1.5 million, respectively,
for the three and six-month periods ended June 30, 2001 as compared to $85,000
and $418,000, respectively, for the same periods in 2000. The gains in the first
six months of 2001 were the result of the sales of loans originated,
securitized, and sold by Metropolitan to FreddieMac. The gains in the first half
of 2000 were the result of the sale of FannieMae securities which were part of
the 1999 multifamily securitization and FreddieMac securities comprised of
residential loans. The higher level of gains in 2001 was due primarily to
higher loan origination volume than a year ago.
Other noninterest income increased to $1.6 million and $2.6 million,
respectively, in the three and six-month periods ended June 30, 2001 compared to
$0.8 million and $1.6 million, respectively, for the same periods in the
previous year. These increases were primarily due to increased fee income
principally from checking accounts generated from the increased level of
business and increased rental income from the new corporate headquarters
building in the first six months of 2001.
26
27
Noninterest Expense. Total noninterest expense increased to $12.6 million and
$23.8 million, respectively, in the three and six-month periods ended June 30,
2001 as compared to $9.8 million and $19.2 million, respectively, for the same
periods in 2000.
Personnel related expenses increased $1.5 million and $2.0 million,
respectively, in the three and six-month periods ended June 30, 2001 as compared
to the same periods in 2000. These increases were primarily a result of
increased staffing levels to support expanded activities such as new retail
sales offices locations and new mortgage origination offices and temporary
employees used to transition to a new computer system. As the Bank is not
planning to open any new offices in the next twelve months, personnel costs are
expected to stabilize over that period.
Occupancy costs increased $507,000 and $934,000, respectively, in the three and
six-month periods ended June 30, 2001, over the same periods in 2000. This
increase was generally the result of occupancy costs for the new corporate
headquarters, three additional retail sales offices and six residential mortgage
origination offices. Since no new offices are anticipated in the next twelve
months, the only significant increases anticipated in occupancy costs will be
depreciation on vacant corporate headquarters space which will be built out and
rented to unrelated parties.
Data processing expense increased $169,000 and $255,000, respectively, in the
three and six-month periods ended June 30, 2001 as compared to the same periods
in 2000. The primary reason for the increase was greater costs incurred for data
processing following the systems conversion in 2000.
Marketing expense decreased $176,000 and $119,000, respectively, in the three
and six-month periods ended June 30, 2001 compared to the same periods in the
prior year. During the second quarter of 2000, we incurred costs for a checking
account promotion and promotion of a new retail sales office. Marketing costs in
2001 were limited to more routine activities.
Other operating expenses, which includes miscellaneous general and
administrative costs such as loan servicing, loan processing costs, business
development, check processing, ATM expenses and expenses pertaining to real
estate owned and professional expenses, increased $0.8 million and $1.5
million, respectively, for the three and six-month periods ended June 30, 2001
as compared to the same periods in 2000. These increases were generally the
result of increases in expenses pertaining to real estate owned, professional
services, and increased business activities.
Provision for Income Taxes. The benefit for income taxes was $905,000 and $1.2
million, respectively, for the three and six-month periods ended June 30, 2001
as compared to the provision of $265,000 and $557,000, respectively, for the
same periods in 2000. The primary reason for the decrease in the provision was
the loss recorded for the quarter and six-month period ended June 30, 2001. The
effective tax rates were 30.3% and 33.3%, respectively, for the three and
six-month periods ended June 30, 2001 as compared to 32.6% for both the three
and six-month periods ending June 30, 2000.
ASSET QUALITY
Metropolitan's 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 probable losses.
In performing these reviews, management considers, among other things, current
economic conditions, portfolio characteristics, delinquency
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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 information concerning Metropolitan's nonperforming
assets and the allowance for losses on loans as of the dates indicated. All
loans classified by management as impaired were also classified as
nonperforming.
June 30, December 31,
2001 2000
---------- ----------
(Dollars in thousands)
Nonaccrual loans $ 28,322 $ 8,305
Loans past due greater than
90 days or impaired, still accruing 3,665 6,434
---------- ----------
Total nonperforming loans 31,987 14,739
Real estate owned 3,616 4,262
---------- ----------
Total nonperforming assets $ 35,603 $ 19,001
========== ==========
Allowance for losses on loans $ 17,028 $ 13,951
========== ==========
Nonperforming loans to total loans 2.65% 1.15%
Nonperforming assets to total assets 2.11% 1.12%
Net charge-offs to average loans(1) 0.18% 0.27%
Provision for loan losses to average loans(1) 0.66% 0.51%
Allowance for losses on loans to total
nonperforming loans at end of period 53.23% 94.65%
Allowance for losses on loans to
total loans at end of period 1.39% 1.07%
(1) Annualized for comparative purposes.
Nonperforming loans at June 30, 2001 increased $17.2 million to $32.0 million as
compared to $14.7 million at December 31, 2000. Real estate owned decreased $0.6
million over the same period. The primary reason for the increase in
nonperforming loans was the inclusion of $14.7 million of business loans to
related borrowers which became nonperforming in the first quarter, 2001.
Management has estimated the impairment to be approximately $3.5 million.
The previously discussed $14.7 million of business loans that became
nonperforming in the first quarter, 2001 are the primary reason for the decline
of the asset quality ratios from year-end 2000. In spite of this decline, net
charge-offs declined from the prior year period.
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The provision for loan losses increased for both the three and six-month periods
ended June 30, 2001 as compared to the same periods in 2000. Management
increased the provision for loan losses based on increased risk of loss due to a
weakening in the economy, increased nonperforming loans, and problems noted with
specific borrowers.
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
was $3.5 million of loans in this category at June 30, 2001, compared to $4.7
million of such loans at December 31, 2000.
FINANCIAL CONDITION
Total assets amounted to $1.691 billion at June 30, 2001, as compared to $1.695
billion at December 31, 2000, a slight decrease of $4.0 million. The decrease in
assets was concentrated in loans and was offset by increases in cash and
interest bearing deposits, securities, and premises and equipment. Under the
Supervisory Agreement we have committed that quarter end assets for the Bank
will not exceed $1.702 billion during the term of the Agreement.
Securities increased $60.2 million to $115.0 million at June 30, 2001 as
compared to $54.8 million at December 31, 2000. The primary reason for the
increase was the purchase of $74.3 million of U.S. Treasury securities and $9.5
million of U.S. agency notes, which were offset by the redemption of $20.0
million of U.S. agency notes. The Treasury securities were purchased to invest
idle cash derived primarily from loan sales and subsequently matured in the
beginning of the third quarter, 2001.
Loans receivable, net decreased $168.5 million, or 13.6%, to $1.07 billion at
June 30, 2001 from $1.24 billion at December 31, 2000. This decrease was due to
loan sales, paydowns, and transfers to loans held for sale in the first six
months of 2001. Decreases experienced in particular loans categories were $75.2
million in commercial loans, $50.1 million in multifamily loans, and $39.2
million in one- to four-family loans and modest decreases in other loan
categories which were partially offset by a $14.6 million increase in
construction loans.
Loans held for sale increased $88.0 million to $139.4 million at June 30, 2001
from $51.4 million at December 31, 2000. The primary reasons for the increase
are the large volume of loan originations in the first six months of 2001 and
transfers from Loans receivable, net of $60.8 million. Transfers to loans held
for sale related to the Bank's ongoing attempt to meet the Board directed
requirements to get to a "well capitalized" status and meet certain interest
rate risk goals. Loans held for sale consists of one- to four-family,
multifamily, and commercial loans. One- to four-family loans are placed in this
category based on the type of loan and the marketability of the loan. In regards
to multifamily and commercial loans, loans are selected for this category after
reviewing current loan production and determining the impact of a potential sale
on risk-based capital and interest rate risk.
Federal Home Loan Bank Stock decreased $4.6 million to $16.0 million at June 30,
2001 as compared to the December 31, 2000 balance. The reason for the decrease
was the redemption of $5.0 million of stock during the second quarter. The Bank
was no longer required to hold the stock due to paydowns on Federal Home Loan
Bank advances.
Real estate owned decreased $0.6 million, or 15.2%, to $3.6 million at June 30,
2001. The primary reason for the decrease was the $0.7 million provision for
loss on real estate owned for the six month period ended June 30, 2001. This
provision will be used to make certain properties more attractive for
disposition.
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Premises and equipment, net increased $4.8 million to $71.2 million at June 30,
2001. This increase was the result of costs associated with the completion of
the new headquarters. The Bank will have additional costs in the building to
complete space leased to tenants. Otherwise, we do not anticipate opening any
new retail locations during the next twelve months.
Total deposits were $1.203 billion at June 30, 2001, an increase of $56.3
million from the balance of $1.146 billion at December 31, 2000. The increase
resulted principally from an increased balance of interest-bearing checking
accounts of $27.4 million and certificates of deposit of $24.5 million, which
were partially offset by smaller declines in other deposit categories.
Borrowings decreased $60.3 million, or 14.2% from December 31, 2000 to June 30,
2001. The decrease was the result of decreased use of Federal Home Loan Bank
advances from year end.
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.
The Corporation's primary sources of funds currently are dividends from the
Bank, which are subject to restrictions imposed by federal bank regulatory
agencies and debt and equity offerings. The Corporation's primary use of funds
is for interest payments on its existing debt. At June 30, 2001, the
Corporation, excluding the Bank, had cash and readily convertible investments of
$1.7 million. At June 30, 2001 the Corporation held $1.0 million in liquid
assets available to pay expenses and interest. This does not include the $0.7
million the Corporation holds in liquid assets as a requirement of the
subordinated notes due January 1, 2005.
The Bank's liquidity ratio (average daily balance of liquid assets to average
daily balance of net withdrawable accounts and short-term borrowings) for the
quarter ending June 2001 was 6.33%. Historically, Metropolitan has maintained
its liquidity close to 4.0% since the yield available on qualifying investments
is lower than alternative uses of funds and is generally not at an attractive
spread over incremental cost of funds.
While principal repayments and FHLB advances are fairly stable sources of funds,
deposit flows and loan prepayments are greatly influenced by prevailing interest
rates, economic conditions, and competition. Metropolitan regularly reviews cash
flow needed to fund its operations and believes that the existing resources are
adequate for its foreseeable requirements.
At June 30, 2001, $262.2 million, or 16.8%, of Metropolitan's deposits were in
the form of certificates of deposit of $100,000 and over. Metropolitan has also
accepted out-of-state time deposits from individuals and entities, predominantly
credit unions. These deposits typically have balances of $90,000 to $100,000 and
have a term of one year or more. At June 30, 2001, approximately $63.6 million,
or 5.3% of our deposits were held by these individuals and entities. Of these
out-of-state time deposits, $20.8 million were also included in the $100,000 and
over time deposits discussed above. During 2000, the Bank received regulatory
approval and began accepting brokered deposits. At June 30, 2001, brokered
deposits totaled $141.1 million. The regulatory approval to accept brokered
deposits expires December 31, 2001 and, at that time, Metropolitan must re-apply
to continue to accept
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new brokered deposits. The approval is at the discretion of the appropriate
regulatory agency. The total of all certificates of deposits from brokers,
out-of-state sources, and other certificates of deposit of $100,000 and over was
$446.1 million at June 30, 2001, or 37.1% of total deposits. We monitor
maturities to attempt to minimize any potential adverse effect on liquidity. In
accordance with the Supervisory Agreement, we intend to reduce our reliance on
brokered and out-of-state deposits over the term of the Agreement.
We have access to wholesale borrowings based on the availability of eligible
collateral. The FHLB makes funds available for housing finance based upon the
blanket or specific pledge of certain one- to four-family and multifamily loans
and various types of investment and mortgage-backed securities. The Bank had
borrowing capacity at the FHLB under its blanket pledge agreement of
approximately $334 million at June 30, 2001, of which $305 million was utilized.
The financial market makes funds available through reverse repurchase agreements
by accepting various investment and mortgage-backed securities as collateral.
The Bank had borrowings through reverse repurchase agreements of $41.0 million
at June 30, 2001.
Capital. The Office of Thrift Supervision ("OTS") imposes capital requirements
on savings associations. Savings associations are required to meet three minimum
capital standards: (i) a leverage requirement, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. Such standards must be
no less stringent than those applicable to national banks. In addition, the OTS
is authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The Bank's regulatory capital ratios at June 30, 2001 were in excess of the
capital requirements specified by OTS regulations as shown by the following
table:
Tangible Capital Core Capital Risk-based Capital
---------------- ------------ ------------------
(Dollars in thousands)
Capital amount
Actual $104,567 6.20% $104,567 6.20% $115,219 8.71%
Required 25,298 1.50 67,463 4.00 105,827 8.00
-------- -------- -------- -------- -------- --------
Excess $ 79,269 4.70% $ 37,104 2.20% $ 9,392 0.71%
======== ======== ======== ======== ======== ========
It is the Bank's goal, as well as required by the Bank's Supervisory Agreement,
to increase risk-based capital to reach the "well capitalized" risk-based
capital level of 10.00% by December 31, 2001. Under the Supervisory Agreement,
the Bank will submit a plan for increasing capital to regulatory authorities by
September 28, 2001. The following table summarizes the Bank's status compared to
the Supervisory Agreement requirements:
Tangible Capital Core Capital Risk-based Capital
---------------- ------------ ------------------
(Dollars in thousands)
Capital amount
Actual $ 104,567 6.20% $ 104,567 6.20% $ 115,219 8.71%
Required 33,732 2.00 84,329 5.00 132,348 10.00
--------- --------- --------- --------- --------- ---------
Excess $ 70,835 4.20% $ 20,238 1.20% $ (17,129) (1.29%)
========= ========= ========= ========= ========= =========
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RECENT ACCOUNTING DEVELOPMENTS
In June, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
Statement No. 141 requires that all business combinations initiated after June
30, 2001 be accounted for using the purchase method, rather than the
pooling-of-interests method.
SFAS No. 142 addresses accounting for goodwill and intangible assets both at
acquisition and subsequent to acquisition. Under this statement, goodwill
arising from business combinations will no longer be amortized, but will be
assessed regularly for impairment. Such impairment will be recognized as a
reduction in earnings in the period identified. We expect no significant impact
due to the adoption of SFAS No. 141 and No. 142.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements that are subject to
assumptions, risks, and uncertainties. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts. They often include the words "believe," "expect," "anticipate," "likely,"
"intend," "plan," "estimate," or words of similar meaning, or future or
conditional verbs such as "will," "would," "should," "could," or "may." Actual
results could differ materially from those contained in or implied by such
forward-looking statements for a variety of factors including: changes in
interest rates; continued softening in the economy and other factors which would
materially impact credit quality trends, real estate leasing and the ability of
the Bank to generate loans: business and other factors affecting the economic
outlook of individual borrowers of the Bank and their ability to repay loans as
agreed; the ability of the Corporation and the Bank to timely meet their
obligations under their respective supervisory agreements; delay in or inability
to execute strategic initiatives designed to grow revenues and/or manage
expenses; changes in law imposing new legal obligations or restrictions or
unfavorable resolution of litigation; and changes in accounting, tax, or
regulatory practices or requirements.
ITEM 3. 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. The
principal market risk for us is interest rate risk. Interest rate risk is the
risk that changes in market interest rates 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")
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.
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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;
- quarterly forecasting process;
- 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;
- monthly analysis of rate and volume changes in historic net
interest income;
- weekly review of certificate of deposit offering rates and
maturities by day; and
- weekly forecast of balance sheet activity.
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 2001, 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 change in net interest income for immediate sustained
parallel shifts of 1% and 2% in market interest rates for year-end 2001 and the
most recent quarter.
EXPECTED CHANGE IN NET INTEREST INCOME
--------------------------------------
CHANGE IN INTEREST RATE JUNE 30, 2001 DECEMBER 31, 2000
- ----------------------- ------------- -----------------
+2% -11% -27%
+1% -6% -14%
-1% -1% +13%
-2% -3% +27%
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 some
short-term exposure to rising rates and the exposure has decreased during the
first half of 2001.
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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 change in net portfolio value for immediate
sustained parallel shifts of 1% and 2% in market interest rates for year-end
2000 and the most recent quarter.
EXPECTED CHANGE IN NET PORTFOLIO VALUE
--------------------------------------
CHANGE IN INTEREST RATE JUNE 30, 2001 DECEMBER 31, 2000
- ----------------------- ------------- -----------------
+2% -23% -26%
+1% -9% -12%
-1% -2% +12%
-2% -6% +28%
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 a worst case scenario assuming no reaction to changing rates. The
results above indicate that the post-shock NPV has improved slightly during
2001. Under TB 13a, Metropolitan falls in the moderate interest rate risk
category as of June 30, 2001, based upon current sensitivity to interest rate
changes and the current level of regulatory capital.
Both the change in expected net interest income and the net portfolio value
indicate a decrease in our exposure to rising rates. This was due to the
lengthening of liability maturities as interest-bearing liabilities matured over
the first half of 2001. Both analyses also indicate an increase in exposure to
falling rates. This was caused by interest rate compression. Interest rate
compression is the concept that as rates fall relatively closer to zero, the
lower rates (typically liability rates) will begin to fall a proportional
distance to zero rather than by the same absolute magnitude that the higher rate
assets yields typically decline.
Our strategies to limit interest rate risk from rising interest rates are as
follows:
- originate one- to four-family loans primarily for sale;
- originate the majority of business loans to float with prime
rates;
- increase core deposits which have low interest rate
sensitivity;
- borrow funds with maturities greater than a year;
- borrow funds with maturities matched to new long-term assets
acquired;
- increase the volume of loans serviced since they rise in value
as rates rise; and
- consider the use of derivatives to reduce interest rate risk
when economically practical.
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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 five 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 made
progress in reducing interest rate risk by lengthening liability maturities. In
the first half of 2001, we have strived to fund all significant additions of
fixed rate assets with borrowings with similar repayment terms. We plan to
continue this funding pattern throughout the remainder of 2001.
The Bank's level of interest rate risk as of June 30, 2001, is outside the
limits set by the Bank's Board of Directors. Therefore, management has
implemented a strategy to decrease interest rate risk during the remainder of
2001 by focusing on:
- limiting new five 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;
- continuing to extend liability maturities when long term rates
are favorable; and
- considering the sale of assets with long-term fixed rates.
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 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 1.3% of
assets and 71.1% 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.
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PART II. OTHER INFORMATION
Items 1, 2, 3, and 5 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of Metropolitan Financial Corp. was held on
April 24, 2001, at 9:00 a.m. ("the Annual Meeting") at 22901 Mill Creek Blvd.,
Highland Hills, Ohio.
At the Annual Meeting, the shareholders of Metropolitan considered and voted
upon proposals to (i) elect Robert R. Broadbent, Marjorie M. Carlson, James A.
Karman, and Ralph D. Ketchum as directors of Metropolitan to serve for the term
expiring at the Annual Meeting of Shareholders to be held in the year 2004 and
(ii) ratify the appointment of Crowe, Chizek and Company LLP as independent
auditors for the fiscal year ending December 31, 2001. The terms of (a) Malvin
E. Bank, Robert M. Kaye, and David P. Miller, which expire at the 2002 annual
meeting and (b) Lois K. Goodman, Marguerite B. Humphrey, Kenneth T. Koehler, and
Alfonse M. Mattia, which expire at the 2003 annual meeting, continued after the
meeting. The shares represented at the Annual Meeting in person or by proxy were
voted as follows with respect to each of the proposals:
PROPOSAL #1 FOR AGAINST
--- -------
Election of Directors
Robert R. Broadbent 7,825,234 99,329
Marjorie M. Carlson 7,828,394 96,169
James A. Karman 7,810,973 113,590
Ralph D. Ketchum 7,826,794 97,769
PROPOSAL #2 FOR AGAINST ABSTAIN
--- ------- -------
Ratification of appointment of Crowe,
Chizek and Company LLP 7,853,484 42,418 28,661
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of
Metropolitan (filed as Exhibit 2 to the Corporation's
Form 8-A filed October 15, 1996 and incorporated herein
by reference).
3.2 Amended and Restated Code of Regulations of Metropolitan
(filed as Exhibit 3.2 on Form 10-K, filed April 2, 2001
and incorporated herein by reference).
4.1 Indenture, dated as of April 30, 1998, of the
Corporation relating to the 8.60% Junior Subordinated
Debentures due June 30, 2028 (filed as Exhibit 4.1 to
the Corporation's Form 10-Q, filed May 15, 1998 and
incorporated herein by reference).
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4.2 Amended and Restated Trust Agreement, dated as of April
30, 1998, of Metropolitan Capital Trust I (filed as
Exhibit 4.2 to the Corporation's Form 10-Q, filed May
15, 1998 and incorporated herein by reference).
4.3 Guarantee of Metropolitan relating to the Trust
Preferred Securities dated April 30, 1998 (filed as
Exhibit 4.3 to the Corporation's Form 10-Q, filed May
15, 1998 and incorporated herein by reference).
4.4 Agreement as to Expenses and Liabilities, dated as of
April 30, 1998 (filed as Exhibit 4.4 to Metropolitan's
Form 10-Q, filed May 15, 1998 and incorporated herein by
reference).
4.5 Indenture, dated as of May 14, 1999, of Metropolitan
relating to the 9.50% Junior Subordinated Debentures due
June 30, 2029 (filed as Exhibit 4.1 to the Corporation's
Form S-1, filed May 11, 1999 and incorporated herein by
reference).
4.6 Amended and Restated Trust Agreement, dated as of May
14, 1999, of Metropolitan Capital Trust II (filed as
Exhibit 4.4 to the Corporation's Form S-1, filed May 11,
1999 and incorporated herein by reference).
4.7 Guarantee of the Corporation relating to the Trust
Preferred Securities dated May 14, 1999 (filed as
Exhibit 4.6 to the Corporation's Form S-1, filed May 11,
1999 and incorporated herein by reference).
4.8 Agreement as to Expenses and Liabilities, dated as of
May 14, 1999 (filed as Exhibit D to Exhibit 4.4 to the
Corporation's Form S-1, filed May 11, 1999 and
incorporated herein by reference).
10.1 Sixth Amendment to Restated Loan Agreement by and
between the Huntington National Bank and the Corporation
dated as of May 31, 2001.
10.2 Supervisory Agreement dated July 26, 2001 between
Metropolitan Financial Corp. and the Office of Thrift
Supervision.
10.3 Supervisory Agreement dated July 26, 2001 between
Metropolitan Bank and Trust Company, the State of Ohio,
Division of Financial Institutions, and the Office of
Thrift Supervision.
b. Reports on Form 8-K.
August 3, 2001 - Item 5. Other Events. Financial
Statements and Exhibits. Reporting that on August 3,
2001, the Registrant issued a press release announcing
its financial results for the second quarter of 2001,
that it and its wholly-owned subsidiary, Metropolitan
Bank & Trust Company, have each entered into Supervisory
Agreements with the Office of Thrift Supervision and
Ohio Department of Financial Institutions, and that the
Company has engaged an investment banking firm to
explore strategic alternatives, including a
recapitalization.
No other reports on Form 8-K were filed during the three
month period ended June 30, 2001.
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METROPOLITAN FINANCIAL CORP.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METROPOLITAN FINANCIAL CORP.
By: /s/ Donald F. Smith
-----------------------------------
Donald F. Smith,
Chief Financial Officer
(on behalf of the Registrant and as
Principal Financial and Accounting
Officer)
Date: August 14, 2001
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