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 September 30, 2001.
-------------------
Commission file number 000-21553
---------------------------------------------------------
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
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(216) 206-6000
- -------------------------------------------------------------------------------
(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 November 9, 2001, there were 8,126,709 common shares of the Registrant
issued and outstanding.
1
METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
as of September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2001 and 2000 5
Consolidated Statements of Changes in Shareholders' Equity for
the three and nine months ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 33-36
PART II. OTHER INFORMATION 36
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 6. Exhibits and Reports on Form 8-K 37-38
SIGNATURE 39
2
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
September 30, 2001 December 31, 2000
-------------------------------------
ASSETS
- -------------------------------------
Cash and due from banks $ 30,940 $ 17,010
Interest-bearing deposits in other banks 5,069 2,727
Securities available for sale 47,003 39,306
Securities held to maturity 15,180 15,480
Mortgage-backed securities available for sale 177,711 195,829
Loans held for sale 126,578 51,382
Loans receivable, net 1,035,861 1,235,441
Federal Home Loan Bank stock 16,658 20,624
Premises and equipment, net 70,727 66,393
Loan servicing rights, net 24,170 20,597
Accrued income, prepaid expenses and other assets 22,211 23,626
Real estate owned, net 3,542 4,262
Intangible assets 2,572 2,602
-----------------------------
Total assets $ 1,578,222 $ 1,695,279
=============================
LIABILITIES
- -------------------------------------
Noninterest-bearing deposits $ 101,515 $ 97,385
Interest-bearing deposits 1,017,472 1,048,882
-----------------------------
Total deposits 1,118,987 1,146,267
Borrowings 341,033 426,079
Other liabilities 28,588 29,724
Guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures 43,750 43,750
-----------------------------
Total liabilities $ 1,532,358 $ 1,645,820
-----------------------------
SHAREHOLDERS' EQUITY
- -------------------------------------
Preferred stock, 10,000,000 shares authorized,
none issued -- --
Common stock, no par value, 10,000,000 shares
Authorized, 8,120,677 and 8,099,852 shares
issued and outstanding, respectively -- --
Additional paid-in capital 20,954 20,882
Retained earnings 27,705 29,668
Accumulated other comprehensive loss (2,795) (1,091)
-----------------------------
Total shareholders' equity 45,864 49,459
-----------------------------
Total liabilities and shareholders' equity $ 1,578,222 $ 1,695,279
=============================
See notes to consolidated financial statements.
3
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months ended Sept. 30, Nine Months ended Sept. 30,
------------------------------------------------------------------------
2001 2000 2001 2000
INTEREST INCOME
Interest and fees on loans $23,604 $28,063 $75,944 $78,975
Interest on mortgage-backed securities 3,195 3,693 9,970 11,801
Interest and dividends on other investments 1,350 1,249 3,940 3,677
------------------------------------------------------------------------
Total interest income 28,149 33,005 89,854 94,453
INTEREST EXPENSE
Interest on deposits 13,387 15,899 43,187 43,605
Interest on borrowings 5,591 6,484 18,007 18,512
Interest on Junior Subordinated Debentures 998 998 2,995 2,995
------------------------------------------------------------------------
Total interest expense 19,976 23,381 64,189 65,112
NET INTEREST INCOME 8,173 9,624 25,665 29,341
Provision for loan losses 1,150 1,750 5,350 4,850
------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,023 7,874 20,315 24,491
NONINTEREST INCOME
Net gain on sale of loans 3,091 876 5,542 1,914
Loan servicing income, net (683) 313 (1,466) 861
Service charges on deposit accounts 499 392 1,392 1,039
Net gain on sale of securities 84 154 1,629 572
Other operating income 1,642 733 4,268 2,362
------------------------------------------------------------------------
Total noninterest income 4,633 2,468 11,365 6,748
NONINTEREST EXPENSE
Salaries and related personnel costs 5,935 5,331 18,028 15,377
Occupancy and equipment expense 1,931 1,433 5,714 4,282
Federal deposit insurance premiums 343 332 1,030 1,032
Data processing expense 459 311 1,384 981
Marketing expense 215 314 796 1,014
State franchise taxes -- 263 488 787
Amortization of intangibles 63 66 194 198
Other operating expenses 2,112 1,850 7,195 5,415
------------------------------------------------------------------------
Total noninterest expense 11,058 9,900 34,829 29,086
------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 598 442 (3,149) 2,153
Provision (benefit) for income taxes 60 143 (1,186) 700
------------------------------------------------------------------------
NET INCOME (LOSS) $ 538 $ 299 $(1,963) $1,453
========================================================================
Basic and diluted earnings (loss) per share $0.07 $0.04 $(0.24) $0.18
Weighted average shares outstanding for basic
earnings per share 8,117,288 8,086,298 8,110,567 8,077,358
Effect of dilutive options -- -- -- --
------------------------------------------------------------------------
Weighted average shares outstanding for diluted
earnings per share 8,117,288 8,086,298 8,110,567 8,077,358
See notes to consolidated financial statements.
4
METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30,
-------------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES $ 10,016 $ 2,808
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (199,693) (336,544)
Purchases of:
Loans (86,184) (80,648)
Mortgage-backed securities (19,395) --
Securities available for sale (115,111) (39)
Securities held to maturity -- (934)
Mortgage servicing rights (4,425) (9,940)
Premises and equipment (7,119) (23,681)
FHLB stock -- (5,819)
Proceeds from maturities and repayments of:
Loans 309,875 263,107
Mortgage-backed securities 37,998 27,276
Securities available for sale 108,540 --
Securities held to maturity 305 365
Proceeds from sale of:
Loans 86,029 75,437
Mortgage-backed securities -- 19,614
FHLB stock 5,000 --
Premises, equipment, and real estate owned 348 1,275
--------- ---------
Net cash provided by (used in) investing activities 116,168 (70,531)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts (27,280) 28,325
Proceeds from borrowings 20,000 160,901
Repayment of borrowings (39,046) (108,362)
Net activity on lines of credit (66,000) (23,100)
Proceeds from issuance of common stock 72 108
--------- ---------
Net cash provided by (used in) financing activities (112,254) 57,872
--------- ---------
Net change in cash and cash equivalents 13,930 (9,851)
Cash and cash equivalents at beginning of period 17,010 21,751
--------- ---------
Cash and cash equivalents at end of period $ 30,940 $ 11,900
========= =========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 66,469 $ 65,573
Income taxes 1,418 336
Transfer from loans receivable to real estate owned 607 833
Transfer from loans receivable to loans held for sale 75,578 --
Loans securitized 191,653 29,792
See notes to consolidated financial statements.
5
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS 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 JUNE 30, 2000 $ -- $20,819 $29,325 $(5,640) $44,504
Comprehensive income (loss):
Net income 299 299
Change in unrealized gain on
securities, net of tax and net
of reclassification of gain
of $102,000 from net income 1,304 1,304
--------
Total comprehensive income (loss) 1,603
Issuance of shares of Common stock
Stock purchase plan-8,181 shares 33 33
------- ------- ------- -------
BALANCE SEPTEMBER 30, 2000 $ -- $20,852 $29,624 $(4,336) $46,140
====== ====== ===== ======
BALANCE DECEMBER 31, 1999 $ -- $20,744 $28,171 $(4,047) $44,868
Comprehensive income (loss):
Net income 1,453 1,453
Change in unrealized gain on
securities, net of tax and net
of reclassification of gain
of $378,000 from net income (289) (289)
------
Total comprehensive income (loss) 1,164
Issuance of shares of Common stock
Stock purchase plan-27,029 shares 108 108
------- ------- ------- -------
BALANCE SEPTEMBER 30, 2000 $ -- $20,852 $29,624 $(4,336) $46,140
======= ======= ======= =======
BALANCE JUNE 30, 2001 $ -- $20,928 $27,167 $(1,266) $46,829
Comprehensive income (loss):
Net income 538 538
Change in unrealized gain on
securities and derivatives, net of
of tax and net of reclassification
of gain of $55,000 from net income (1,529) (1,529)
---------
Total comprehensive income (loss) (991)
Issuance of shares of Common stock
Stock purchase plan-7,681 shares 26 26
------- ------- ------- -------
BALANCE SEPTEMBER 30, 2001 $ -- $20,954 $27,705 $(2,795) $45,864
======= ======= ======= =======
BALANCE DECEMBER 31, 2000 $ -- $20,882 $29,668 $(1,091) $49,459
Comprehensive income (loss):
Net income (loss) (1,963) (1,963)
Change in unrealized gain on
securities and derivatives, net of
tax and net of reclassification of gain
of $1,075,000 from net income (1,704) (1,704)
-----------
Total comprehensive income (loss) (3,667)
Issuance of shares of Common stock
Stock purchase plan-20,825 shares 72 72
------- ------- ------- -------
BALANCE SEPTEMBER 30, 2001 $ -- $20,954 $27,705 $(2,795) $45,864
======= ======= ======= =======
6
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 nine month periods ended September 30, 2001 and
2000; (b) the financial condition at September 30, 2001 and December 31, 2000;
(c) the statement of cash flows for the nine month periods ended September 30,
2001 and 2000; and (d) the statement of changes in shareholders' equity for the
three and nine month periods ended September 30, 2001 and 2000. The results of
operations for the nine month period ended September 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
7
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 September 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, consumer 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
8
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 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
periods ended September 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 June, 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.
141, "Business Combinations," SFAS No. 142, "Goodwill and Other Intangible
Assets," and SFAS No. 143, "Accounting for Asset Retirement Obligations." In
August, 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The first two 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.
SFAS No. 143 and 144 address accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and related costs and
impairment or disposal of long-lived assets, respectively. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management does
not expect these pronouncements will have a material effect on the Corporation
or its earnings.
9
3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale and held to maturity at September 30,
2001 and December 31, 2000 were as follows (in thousands):
September 30, 2001
------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 682 $ 682
FreddieMac preferred stock 7,500 $ (750) 6,750
FannieMae notes 4,480 (16) 4,464
FHLB note 5,053 (36) 5,017
Treasury notes and bills 30,088 $ 2 30,090
Mortgage-backed securities 177,530 200 (19) 177,711
-------- ---- ------ -------
225,333 202 (821) 224,714
HELD TO MATURITY
Tax-exempt municipal bond 14,550 (2,910) 11,640
Revenue bond 630 630
-------- ---- ------ -------
15,180 (2,910) 12,270
-------- ---- ------ -------
Total securities $240,513 $202 $(3,731) $236,984
======= === ===== =======
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
======== === ====== ==========
The tax-exempt municipal bond represents a single issue secured by a
multifamily property. The trustee has advised the bank that the issuer of the
bond is currently supplementing operating revenue with cash held by the trustee
in order to pay taxes on the property. Therefore, the marketability and market
value of the bond have declined between December 31, 2000 and September 30,
2001. However, management does not believe impairment has occurred because the
estimated underlying value of the property is sufficient to secure the
principal and interest of the bond.
10
4. LOANS RECEIVABLE
The composition of the loan portfolio at September 30, 2001 and December 31,
2000 was as follows (in thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
Real estate loans
Construction loans:
One- to four-family $ 145,264 $ 125,989
Multifamily 6,036 7,502
Commercial 843 5,873
Land 69,847 54,100
Loans in process (84,266) (72,156)
----------- -----------
Construction loans, net 137,724 121,308
Permanent loans:
One- to four-family 231,126 288,352
Multifamily 218,174 273,358
Commercial 174,495 254,824
----------- -----------
Total real estate loans 761,519 937,842
Consumer loans 148,633 163,019
Business and other loans 137,696 143,329
----------- -----------
Total loans 1,047,848 1,244,190
Premiums on loans, net 7,331 7,393
Deferred loan fees, net (2,114) (2,191)
Allowance for losses on loans (17,204) (13,951)
----------- -----------
Total loans receivable $ 1,035,861 $ 1,235,441
=========== ===========
Activity in the allowance for losses on loans for the periods ended September
30, 2001 and 2000 was as follows (in thousands):
Nine Months Ended September 30,
-------------------------------
2001 2000
----------- -----------
Balance at the beginning of the period $ 13,951 $ 11,025
Provision for loan losses 5,350 4,850
Charge-offs (2,286) (2,803)
Recoveries 189 125
----------- -----------
Balance at end of period $ 17,204 $ 13,197
=========== ===========
Nonperforming loans were as follows at (in thousands):
September 30, December 31,
2001 2000
--------- ------------
Loans past due over 90 days still on accrual $ 65 $ 6,434
Nonaccrual loans 26,317 8,305
11
Nonperforming loans included all impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
Management analyzes loans on an individual basis and considers a loan to be
impaired when it is probable that all principal and interest amounts will not be
collected according to the loan contract based on current information and
events. Loans which are past due two payments or less and that management feels
are probable of being restored to current status within 90 days are not
considered to be impaired loans. All impaired loans are included in
nonperforming loans.
Information regarding impaired loans was as follows (in thousands):
September 30, December 31,
2001 2000
------------- -------------
Balance of impaired loans $15,508 $4,869
Less portion for which no allowance
for losses on loans is allocated 3,422 4,796
----- -----
Balance of impaired loans for which
an allowance for loan losses is allocated $12,086 $ 220
====== ======
Portion of allowance for losses on loans
allocated to the impaired loan balance $ 3,450 $ 197
====== ======
Nine Months Ended September 30,
2001 2000
------------- -------------
Average investment in impaired loans
during the period $12,834 $5,324
====== =====
Interest income recognized during
impairment $ 515 $ 150
======== ======
Interest income recognized on a
cash basis during the period $ 515 $ 150
======== ======
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
September 30, December 31,
2001 2000
------- --------
Land $10,647 $10,535
Office buildings 33,472 11,718
Leasehold improvements 3,216 3,184
Furniture, fixtures, and equipment 21,124 17,948
Construction in progress 12,073 30,210
------- --------
Total 80,532 73,595
Accumulated depreciation 9,805 7,202
------- --------
Total premises and equipment $70,727 $66,393
======= =======
12
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 nine-month periods ended September 30, 2001 and 2000 were $357 and $537,
respectively. The balance of construction in progress relates primarily to the
corporate headquarters building and represents the majority of the building at
December 31, 2001 and the portion of the building that remains unoccupied and
ready to be built out for tenants at September 30, 2001.
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 September 30, 2001 and December 31, 2000 are summarized as
follows (in thousands):
September 30, December 31,
2001 2000
---- ----
Mortgage loan portfolios serviced for:
FreddieMac $1,209,324 $ 882,715
FannieMae 704,207 849,472
Other 282,464 205,312
---------- ----------
Total loans serviced for others $2,195,995 $1,937,499
========= =========
Custodial balances maintained in noninterest-bearing checking accounts in
connection with the foregoing loan servicing were approximately $30,931 and
$25,484 at September 30, 2001 and December 31, 2000, respectively.
The following is an analysis of the changes in the cost of loan servicing rights
for the nine-month periods ended September 30, 2001 and 2000 (in thousands):
Nine Months Ended September 30,
2001 2000
----- ----
Balance at the beginning of the period $20,597 $10,374
Acquired or originated 9,317 11,742
Amortization (5,744) (2,476)
------ ------
Balance at the end of the period $24,170 $19,640
====== ======
13
7. DEPOSITS
Deposits consisted of the following (in thousands):
September 30, December 31,
2001 2000
---- ----
Noninterest-bearing checking accounts $ 101,515 $ 97,385
Interest-bearing checking accounts 181,090 123,537
Passbook savings and statement savings 86,317 106,258
Certificates of deposit 750,065 819,087
Total interest-bearing deposits 1,017,472 1,048,882
---------- ----------
$1,118,987 $1,146,267
========== ==========
At September 30, 2001, scheduled maturities of certificates of deposit were as
follows (in thousands):
Year Weighted Average
Ended Amount Interest Rate
----- ------ ----
2001 $155,653 5.79%
2002 416,886 5.22
2003 129,355 5.49
2004 24,293 5.43
2005 7,205 6.40
Thereafter 16,673 5.70
--------
$750,065 5.41%
========
Brokered and out-of-state deposits decreased from $177.0 million at December
31, 2000 to $141.0 million at September 30, 2001.
8. BORROWINGS
Borrowings consisted of the following at September 30, 2001 and December 31,
2000 (in thousands):
September 30, December 31,
2001 2000
--------- ----------
Federal Home Loan Bank Advances (6.2% and 6.5% at
September 30, 2001 and December 31, 2000, respectively) $280,048 $365,094
Reverse repurchase agreements (5.9% at September 30, 2001
and December 31, 2000, respectively) 41,000 41,000
Commercial bank line of credit (8.8%) -- 6,000
Commercial bank note payable (6.0%) 6,000 --
Subordinated debt maturing January 1, 2005
(9.6% fixed rate) 13,985 13,985
-------- --------
$341,033 $426,079
======== ========
14
At September 30, 2001, scheduled payments on borrowings were as follows (in
thousands):
Weighted Average
Year Ended Amount Interest Rate
---------- ------ -------------
2001 $1,715 6.59%
2002 64,653 6.18
2003 69,201 5.70
2004 69,495 6.14
2005 77,447 7.08
Thereafter 58,522 6.24
--------
Total $341,033 6.29%
========
At September 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 $17 million, $227
million, $134 million, and $66 million, respectively.
At September 30, 2001, the Bank exceeded its borrowing capacity by approximately
$24 million with an outstanding balance of $280 million. Under terms of the
borrowing agreement with the FHLB, the Bank has the ability to pledge additional
assets within a specified period of time to remedy the situation.
The Corporation has a note payable with a commercial bank with a balance at
September 30, 2001 of $6 million. The loan matures December 31, 2002, with a
partial payment of $1 million due December, 2001. 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 greater than 50% of the outstanding
stock of the Corporation. In addition, Mr. Kaye has agreed to pledge any
additional shares he may acquire in the future.
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 September 30, 2001, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $115,116,000
and $55,318,000, respectively. In addition, the Bank had firm commitments to
sell loans totaling $69,433,000 at September 30, 2001. Metropolitan's
commitments to originate and purchase loans are for loans with rates ranging
from 5.75% 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
15
one-month or three-month LIBOR, respectively. 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. The market value of the two swap contracts at September 30, 2001 was
an unrealized loss of $3.6 million.
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.
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 nine months ended September 30, 2001
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $ 13,064 $14,546 $(1,945) $ 25,665
Provision for losses on loans 4,942 408 -- 5,350
-------- ------- -------- --------
Net interest income after
provision for loan losses 8,122 14,138 (1,945) 20,315
Noninterest income 5,688 5,070 607 11,365
Direct noninterest expense 15,226 6,505 1,489 23,220
Allocation of overhead 8,134 3,475 11,609
-------- ------- -------- --------
Net loss before income taxes $(9,550) $ 9,228 $(2,827) $(3,149)
======== ======== ======== ========
16
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
FINANCIAL DATA:
Segment assets $1,051,917 $349,482 $176,823 $1,578,222
Depreciation and amortization 3,157 4,279 857 8,293
Expenditures for additions
to premises and equipment 6,401 718 7,119
As of or for the nine months ended September 30, 2000
OPERATING RESULTS:
Net interest income $ 19,767 $ 4,855 $ 4,719 $29,341
Provision for losses on loans 3,099 619 1,132 4,850
---------- -------- -------- -------
Net interest income after
provision for loan losses 16,668 4,236 3,587 24,491
Noninterest income 4,377 2,289 82 6,748
Direct noninterest expense 14,512 5,120 289 19,921
Allocation of overhead 6,775 2,390 9,165
---------- -------- -------- --------
Net income before income taxes $ (242) $ ( 985) $ 3,380 $ 2,153
========== ========= ======== =======
FINANCIAL DATA:
Segment assets $1,082,080 $452,956 $134,070 $1,669,106
Depreciation and amortization 1,751 2,297 360 4,408
Expenditures for additions
to premises and equipment 22,739 942 23,681
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.
17
11. SUPERVISORY AGREEMENTS
In July, 2001, the Corporation entered into a supervisory agreement with
the Office of Thrift Supervision and Metropolitan Bank and Trust, a subsidiary
of the Corporation, entered into a supervisory agreement with the Office of
Thrift Supervision and the Ohio Department of Financial Institutions.
The supervisory agreement to which the Corporation is a party includes, 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.
The Bank supervisory agreement includes, among other things, the following
requirements:
- Development of a capital improvement and risk reduction plan
by September 28, 2001.
- Achieve or maintain compliance with core and risk-based
capital standards at the well-capitalized level, including
a risk-based capital ratio of 10% by December 31, 2001;
- Reduce investments in fixed assets;
- Attain compliance with board approved interest rate risk
policy requirements;
- Reduce volatile funding sources, such as brokered and
out-of-state deposits;
- Increase earnings;
- Improve controls related to credit risk; and
- Restrict total assets to not more than $1.7 billion.
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.
12. PROPOSED RIGHTS AND COMMON STOCK OFFERING
On September 20, 2001, the Corporation filed a Form S-2 with the Securities and
Exchange Commission relating to an offering to current shareholders of
non-transferable rights to purchase shares of our common stock and also a
concurrent offering of shares of common stock to certain institutional and
high net-worth individuals. The purpose of these proposed offerings is to
raise funds to increase the equity capital of the Metropolitan Bank as
required under the supervisory agreements with the Office of Thrift
Supervision and the Ohio Department of Financial Institutions and to make a
$1 million required principal payment on our commercial bank loan. The
Corporation expects these concurrent offerings to conclude by December, 2001.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
Three months ended Sept. 30, Nine months ended Sept. 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) (in thousands) $ 538 $ 299 $ (1,963) $ 1,453
Basic and diluted earnings (loss) per share $ 0.07 $ 0.04 $ (0.24) $ 0.18
Return on average assets 0.13% 0.07% (0.16)% 0.12%
Return on average equity 4.65% 2.64% (5.50)% 4.34%
Noninterest expense to average assets 2.74% 2.37% 2.79% 2.38%
Efficiency ratio 86.43% 82.38% 97.84% 81.34%
Net interest margin 2.18% 2.44% 2.22% 2.53%
Sept. 30, December 31, Sept. 30,
2001 2000 2000
---- ---- ----
Total assets (in thousands) $ 1,578,222 $ 1,695,279 $ 1,669,106
Shareholders' equity (in thousands) 45,864 49,459 46,140
Shareholders' equity to total assets 2.91% 2.92% 2.76%
Shares outstanding 8,120,677 8,099,852 8,090,773
Book value per share $ 5.65 $ 6.11 $ 5.70
Tangible book value per share $ 5.33 $ 5.79 $ 5.42
Market value of common stock $ 2.80 $ 2.38 $ 3.88
Nonperforming assets to total assets (1) 1.90% 1.12% 0.83%
Allowance for losses on loans to total loans (1) 1.46% 1.07% 1.03%
Net charge-offs to average loans (2) 0.22% 0.27% 0.29%
(1) Ratios are based on period end balances.
(2) Annualized for comparative purposes.
19
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of the
Bank and the financing activities of the Corporation. 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.
As a result of the performance of the Company, on July 26, 2001, the
Corporation entered into a supervisory agreement with the Office of Thrift
Supervision ("OTS"), which requires us to prepare and adopt a plan for raising
capital that uses sources other than increased debt or which requires
additional dividends from Metropolitan Bank. Additionally, the Bank entered
into a separate supervisory agreement with the OTS and the Ohio Department of
Financial Institutions ("ODFI") on July 26, 2001. We, as well as the Bank, are
working to comply with all of the provisions of the supervisory agreements.
RESULTS OF OPERATIONS
Net Income. Net income increased $239,000 to $538,000 for the third quarter,
2001 as compared to net income of $299,000 for the third quarter, 2000.
Noninterest income increased $2.2 million for the three months ended September
30, 2001 over the same period in the prior year. The provision for loan losses
decreased to $1.2 million for the three months ended September 30, 2001 compared
to $1.8 million from the same period in the prior year. For the three months
ended September 30, 2001, net interest income decreased $1.5 million and
noninterest expense increased $1.2 million compared to the same period in the
prior year. Noninterest expense amounted to $11.1 million for the quarter ended
September 30, 2001 from $9.9 million for the same quarter in the prior year.
Net income for the nine-month period ended September 30, 2001 decreased $3.4
million to a net loss of $2.0 million as compared to net income of $1.4 million
for the first nine months of 2000. Noninterest income increased $4.6 million for
the nine months ended September 30, 2001 over the same period in the prior year.
The provision for loan losses for the nine months ended September 30, 2001
increased $0.5 million from the same period in the prior year. For the nine
months ended September 30, 2001, net interest income decreased $3.7 million and
noninterest expense increased $5.7 million compared to the same period in the
prior year. Noninterest expense amounted to $34.8 million for the nine-month
period ended September 30, 2001 from $29.1 million from the same period in the
prior year.
The loss for the first nine months of 2001 was primarily due to compression of
the interest rate spread, costs associated with a computer conversion, an
increased provision for loan losses, provisions for real estate owned, and
compensation and occupancy expenses relating to new facilities opened during
2000 and 2001. Management increased the provision for loss on loans due to a
weakening in the economy, increased nonperforming loans, and problems with
specific borrowers. Interest rate compression is the concept that as rates fall
closer to zero,
20
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 net interest margin decreased 26 and 31 basis points to 2.18% and 2.22%,
respectively, for the three and nine-month periods ended September 30, 2001,
respectively, as compared to 2.44% and 2.53%, respectively, for the comparable
periods in 2000. Short-term interest rates rose modestly from January 2000 to
May 2000 then remained stable through November 2000. Rates declined steadily
from December 2000 through September 2001 with the prime-lending rate falling
from 9.50% to 6.00%. The most immediate impact of these rate changes in our
earning assets comes from loans which reprice based on the prime-lending rate.
In addition, loans without prepayment penalties refinance more rapidly during
periods where interest rates are declining. In contrast, many of our
interest-bearing liabilities are fixed rate instruments with maturities of three
to sixty months. As a result, the rates experienced during 2000 which were
stable but higher than the previous two years caused liability costs during the
first half of 2001 to be higher than the first half of 2000 even though asset
yields declined during that same period due the rapid repricing of prime rate
based loans and higher levels of refinancing of fixed-rate loans.
Interest Income. Total interest income for the quarter ended September 30, 2001
totaled $28.1 million, a decrease of 14.7% from the third quarter of 2000.
Total interest income for the nine months ended September 30, 2001 totaled
$89.9 million, a decrease of 4.9% from $94.5 million for the same period in
2000. These results were primarily the effect of declining yields on
interest-earning assets from 8.36% to 7.52% in the three-month period ended
September 30, 2001 and from 8.15% to 7.79% in the nine-month period ended
September 30, 2001. Decreases in average earning assets compared to the same
periods in the prior year also contributed to the decline in interest income.
The decline in the yield on earning assets for the three and nine-months ended
September 30, 2001 compared to the same periods in the prior year was
primarily due to declines in the level of short term interest rates from 2000
to 2001. An increase in the level of nonperforming loans during the first nine
months of 2001 also contributed to the decrease in interest income.
Interest Expense. Total interest expense decreased 14.6% and 1.4%, respectively,
to $20.0 million and $64.2 million, respectively, for the three and nine-month
periods ended September 30, 2001 from $23.4 million and $65.1 million,
respectively, for the same periods in 2000. Interest expense for the quarter
ending September 30, 2001 decreased generally due to a lower average balance of
interest-bearing liabilities outstanding and a lower cost of funds as opposed to
the prior year quarter. Similarly, the slightly lower interest expense
experienced in the first nine months of 2001 as compared to the prior year
period was due more to a lower balance of interest-bearing liabilities
outstanding and was less affected by the decreased cost of funds. The average
balance of interest-bearing deposits decreased $102.7 million and $13.8 million,
respectively, or 6.7% and 0.9%, respectively, for the three and nine-month
periods ended September 30, 2001 as compared to the same periods in 2000.
Average borrowings decreased $53.4 million and $3.9 million, or 13.3% and a
1.0%, respectively, for the three and nine-month periods ended September 30,
2001 as compared to the same periods in 2000. Metropolitan's cost of funds
decreased to 5.52% for the third quarter, 2001 as compared to 6.10% for the
third quarter, 2000. Similarly, for the nine-month period ended September 30,
2001, the cost of funds decreased slightly to 5.81% as compared to 5.84% for the
first nine months of 2000. In the nine-month periods ended September 30, 2001, a
slightly higher cost paid on deposits was offset by a lower cost paid on
borrowings.
21
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 September 30,
----------------------------------------------------------------------------------------
2001 2000
---------------------------------------- --------------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $1,209,578 $23,604 7.81% $ 1,289,134 $28,063 8.71%
Mortgage-backed securities 191,381 3,195 6.68% 217,280 3,693 6.80%
Other 100,645 1,350 5.49% 74,107 1,249 6.74%
----------- ------- ----------- -------
Total interest-earning assets 1,501,604 28,149 7.52% 1,580,521 33,005 8.36%
------- -------
Noninterest-bearing assets 112,778 91,543
----------- -----------
Total assets $1,614,382 $ 1,672,064
=========== ===========
Interest-bearing liabilities:
Deposits $1,045,759 13,387 5.08% $1,095,091 15,899 5.78%
Borrowings 348,014 5,609 6.39% 401,399 6,740 6.68%
Junior Subordinated Debentures 43,750 998 9.13% 43,750 998 9.13%
----------- -------- ----------- -------
Total interest-bearing liabilities 1,437,523 19,994 5.52% 1,540,240 23,637 6.10%
-------- ---- ------- ----
Noninterest-bearing liabilities 130,513 86,502
Shareholders' equity 46,346 45,322
----------- -----------
Total liabilities and
shareholders' equity $1,614,382 $1,672,064
========== ==========
Net interest income before
capitalized interest 8,155 9,368
-------- -------
Interest rate spread 2.00% 2.26%
==== ====
Net interest margin 2.18% 2.44%
Interest expense capitalized 18 256
-------- -------
Net interest income $ 8,173 $9,624
======== =======
Average interest-earning
assets to average
interest-bearing
liabilities 104.46% 103.21%
22
Nine Months Ended September 30,
----------------------------------------------------------------------------------------
2001 2000
---------------------------------------- --------------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $1,256,129 $75,944 8.06% $1,245,516 $78,975 8.45%
Mortgage-backed securities 196,951 9,970 6.75% 226,570 11,801 6.94%
Other 89,095 3,940 6.32% 72,624 3,677 6.75%
----------- ------- ---------- -------
Total interest-earning assets 1,542,175 89,854 7.79% 1,544,710 94,453 8.15%
------- -------
Noninterest-bearing assets 119,877 84,340
---------- ----------
Total assets $1,662,052 $1,629,050
========== ==========
Interest-bearing liabilities:
Deposits $1,055,952 43,187 5.47% $1,065,853 43,605 5.46%
Borrowings 386,500 18,364 6.35% 390,383 19,049 6.52%
Junior Subordinated Debentures 43,750 2,995 9.13% 43,750 2,995 9.13%
---------- ------- ---------- -------
Total interest-bearing liabilities 1,486,202 64,546 5.81% 1,499,986 65,649 5.84%
------- ---- ------- ----
Noninterest-bearing liabilities 128,296 84,417
Shareholders' equity 47,554 44,647
---------- ----------
Total liabilities and
shareholders' equity $1,662,052 $1,629,050
========== ==========
Net interest income before
capitalized interest 25,308 28,804
------- -------
Interest rate spread 1.98% 2.31%
==== ====
Net interest margin 2.22% 2.53%
Interest expense capitalized 357 537
------- -------
Net interest income $25,665 $29,341
======= =======
Average interest-earning
assets to average
interest-bearing
liabilities 103.77% 102.98%
</Table>
23
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 September 30,
2001 vs. 2000
Increase (Decrease)
------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------- ------- -------
(In thousands)
INTEREST INCOME ON:
Loans receivable $(4,459) $(1,665) $(2,794)
Mortgage-backed securities (498) (433) (65)
Other 101 211 (110)
------- ------- -------
Total interest income (4,856) $(1,887) $(2,969)
------- ======= =======
INTEREST EXPENSE ON:
Deposits $(2,512) $ (706) $(1,806)
Borrowings (1,131) (885) (246)
Junior Subordinated Debentures -- -- --
------- ------- -------
Total interest expense (3,643) $(1,591) $(2,052)
======= =======
Interest expense capitalized (238)
-------
Decrease in net interest income $(1,451)
=======
Nine Months Ended September 30,
2001 vs. 2000
Increase (Decrease)
------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------- ------- -------
(In thousands)
INTEREST INCOME ON:
Loans receivable $(3,031) $ 680 $(3,711)
Mortgage-backed securities (1,831) (1,507) (324)
Other 263 365 (102)
------- ------- -------
Total interest income (4,599) $ (462) $(4,137)
------- ======= =======
INTEREST EXPENSE ON:
Deposits $ (418) $ (448) $ 30
Borrowings (685) (193) (492)
Junior Subordinated Debentures -- -- --
------- ------- -------
Total interest expense (1,103) $ (641) $ (462)
======= =======
Interest expense capitalized (180)
-------
Decrease in net interest income $(3,676)
=======
24
Provision for Loan Losses. The provision for loan losses decreased to $1.2
million and increased to $5.4 million, respectively, for the three and
nine-month periods, respectively, ended September 30, 2001 as compared to $1.8
million and $4.9 million, respectively, for the same periods in 2000.
Management increased the provision for loan losses during the second quarter of
2001 as compared to 2000 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 September 30, 2001
was $17.2 million or 1.46% of total loans, as compared to $14.0 million, or
1.07% of total loans at December 31, 2000.
Noninterest Income. Total noninterest income increased 87.7% to $4.6 million for
the three month period ended September 30, 2001 as compared to $2.5 million for
the third quarter, 2000 and increased $4.6 million, or 68.4%, to $11.4 million
for the first nine months of 2001 as compared to $6.7 million for the first nine
months of 2000.
Gain on sale of loans was $3.1 million in the three-month period ended September
30, 2001, as compared to $0.9 million during the same period in 2000. For the
nine-month period ended September 30, 2001, gain on sale of loans was $5.5
million as compared to $1.9 million for the prior year period. The primary
reason for the increase in the third quarter and first nine months 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 from sales of residential loans held for sale in the first nine months
of 2001 were $235.1 million as compared to $88.2 million in the same period in
2000. Proceeds from the sale of multifamily and commercial real estate loans
were $86.0 million for the first nine months of 2001 as compared to $74.3
million for the same period in 2000.
There were losses from net loan servicing of $683,000 and $1.5 million in the
three and nine-month periods ended September 30, 2001 as compared to income of
$313,000 and $861,000, 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 $2.2 billion at
September 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. If interest rates continue to decline in the fourth quarter of 2001,
the Bank could experience impairment of servicing rights in addition to high
levels of amortization of servicing rights.
Service charges on deposit accounts increased to $499,000 in the three-month
period ended September 30, 2001 compared to $392,000 for the same period in 2000
and increased to $1.4 million for the nine months ended September 30, 2001 as
compared to $1.0 million 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 $0.1 million and $1.6 million, respectively,
for the three and nine-month periods ended September 30, 2001 as compared to
$0.2 million and $0.6 million, respectively, for the same periods in 2000. The
gains in the first nine months of 2001 were the result of the sales of loans
originated, securitized, and sold by Metropolitan to FreddieMac. The gains in
the first nine months 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 in 2000.
25
Other noninterest income increased to $1.6 million and $4.3 million,
respectively, in the three and nine-month periods ended September 30, 2001
compared to $0.7 million and $2.4 million, respectively, for the same periods in
the previous year. These increases were primarily due to increased trust fee
income and increased rental income from the new corporate headquarters
building in the first nine months of 2001.
Noninterest Expense. Total noninterest expense increased to $11.1 million and
$34.8 million, respectively, in the three and nine-month periods ended September
30, 2001 as compared to $9.9 million and $29.1 million, respectively, for the
same periods in 2000.
Personnel related expenses increased $0.6 million and $2.7 million,
respectively, in the three and nine-month periods ended September 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, 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 $498,000 and $1.4 million, respectively, in the three
and nine-month periods ended September 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 $148,000 and $403,000, respectively, in the
three and nine-month periods ended September 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 September, 2000.
Marketing expense decreased $99,000 and $218,000, respectively, in the three and
nine-month periods ended September 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.
State franchise taxes decreased $263,000 and $299,000, respectively, in the
three and nine-month periods ended September 30, 2001 as compared to the same
periods in 2000. The primary reason for the decrease was a refinement of the
allocation of taxes among the various states where we do business for the
current year.
Other operating expenses, which include 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 $0.3 million and $1.8 million,
respectively, for the three and nine-month periods ended September 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.
26
Provision for Income Taxes. Income tax expense decreased $83,000 for the three
months ended September 30, 2001 as compared to the prior year period and $1.9
million for the first nine months of 2001 as compared to the same period in
2000. The primary reason for the decrease in the provision was due to the
decline of pretax income and the reduction of the effective tax rate for 2001 as
a result of the net loss recorded year-to-date.
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 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.
September 30, December 31,
2001 2000
---- ----
(Dollars in thousands)
Nonaccrual loans $ 26,317 $ 8,305
Loans past due greater than
90 days or impaired, still accruing 65 6,434
---------- ----------
Total nonperforming loans 26,382 14,739
Real estate owned 3,542 4,262
---------- ----------
Total nonperforming assets $ 29,924 $ 19,001
========== ==========
Allowance for losses on loans $ 17,204 $ 13,951
========== ==========
Nonperforming loans to total loans 2.27% 1.15%
Nonperforming assets to total assets 1.90% 1.12%
Net charge-offs to average loans(1) 0.22% 0.27%
Provision for loan losses to average loans(1) 0.57% 0.51%
Allowance for losses on loans to total
nonperforming loans at end of period 65.21% 94.65%
Allowance for losses on loans to
total loans at end of period 1.46% 1.07%
(1) Annualized for comparative purposes.
27
Nonperforming loans at September 30, 2001 increased $11.6 million to $26.4
million as compared to $14.7 million at December 31, 2000. Real estate owned
decreased $0.7 million over the same period. On March 26, 2001, based on
financial projections provided by the borrowers on March 12, 2001, $14.7
million of business loans to several entities affiliated with each other were
put on nonaccrual and calculated to be impaired in the amount of $3.5 million.
These loans are business loans secured by junior liens on several nursing homes
and assisted living centers. The borrowers did not make any payments on these
loans during the first quarter of 2001. The estimate of the impairment was the
result of comparing the book value of the loans to the present value of cash
flows expected to be received based on the most likely workout scenario. In
May, 2001, the borrowers began making interest payments on these loans. These
loans were brought current as of September 30, 2001 through payments by the
borrowers and a reduction in the rates charged on these loans. However, due to
the continuing weakness of the borrowers, these loans are still considered
impaired and nonperforming at September 30, 2001. Management determined the
amount of the impairment of these loans to be $3.2 million as of September 30,
2001. Management will charge off these balances when it becomes clear that the
borrowers have exhausted all possible efforts to improve the value of the
underlying collateral through enhancement of the businesses' operating
performance or the possibility of the borrowers obtaining alternate sources of
financing.
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 deterioration,
net charge-offs declined from the prior year period.
The provision for loan losses decreased for the three-month period ended
September 30, 2001 as compared to the same period in 2000 and increased for the
nine-month period ended September 30, 2001 as compared to the prior year period.
The increased provision for loan losses during the second quarter of 2001
compared to the prior year was 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 $3.7 million of loans in this category at September 30, 2001, compared to
$4.7 million of such loans at December 31, 2000.
FINANCIAL CONDITION
Total assets amounted to $1.578 billion at September 30, 2001, as compared to
$1.695 billion at December 31, 2000, a decrease of $117 million. The decrease in
assets was concentrated in loans and was partially 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 available for sale increased $7.7 million to $47.0 million at
September 30, 2001 as compared to $39.3 million at December 31, 2000. The
primary reason for the increase was the purchase of $9.5 million of U.S. agency
notes.
Loans receivable, net decreased $199.6 million, or 16.2%, to $1.04 billion at
September 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
nine months of 2001. Decreases experienced in particular loan categories were
$80.3 million in
28
commercial real estate loans, $57.2 million in one- to four-family loans, and
$55.2 million in multifamily loans and modest decreases in other loan
categories. These decreases were partially offset by a $28.5 million increase
in construction loans.
Loans held for sale increased $75.2 million to $126.6 million at September 30,
2001 from $51.4 million at December 31, 2000. The primary reasons for the
increase are the large volume of residential loan originations in the third
quarter of 2001 and transfers from loans receivable, net of $75.6 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 to
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 $4.0 million to $16.7 million at
September 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 $0.7 million, or 16.9%, to $3.5 million at September
30, 2001. The primary reason for the decrease was the $0.7 million provision for
loss on real estate owned for the nine month period ended September 30, 2001.
While the certain properties were priced for sale at prices consistent with
subject appraisals, a lack of qualified offers over an extended period of time
caused the Bank to reassess their market values, resulting in the $0.7 million
provision.
Premises and equipment, net increased $4.3 million to $70.7 million at September
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 $1.119 billion at September 30, 2001, a decrease of $27.3
million from the balance of $1.146 billion at December 31, 2000. The decrease
resulted principally from decreased certificates of deposit balances of $69.0
million and passbook and statement savings of $19.9 million, which were
partially offset by an increase of $57.6 million of interest-bearing checking
accounts. During the first nine months of 2001 the bank increased the
proportion of certificates of deposit due to mature more than one year in the
future in order to reduce interest rate risk. Management anticipates that this
trend will continue for the rest of the year.
Borrowings decreased $85.0 million, or 20.0%, from December 31, 2000 to
September 30, 2001. The decrease was the result of the paydown of Federal Home
Loan Bank advances with the proceeds from asset sales.
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,
29
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 September 30, 2001, the
Corporation, excluding the Bank, had cash and readily convertible investments of
$0.9 million. At September 30, 2001, the Corporation held $0.2 million in liquid
assets available to pay expenses and interest. This does not include $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 September 2001 was 9.54%. 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. At September 30, 2001, the
Bank had approximately $31 million in cash, $30 million in U.S. Treasury
securities and $9 million in Fannie Mae and Ginnie Mae mortgage-backed
securities which were available to sell or to pledge to meet liquidity needs. In
addition, the Bank held a privately issued mortgage-backed security with a face
value of $72 million which had been previously pledged to secure a commercial
bank repurchase agreement and could be used for that purpose again.
While principal repayments and Federal Home Loan Bank advances had been 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
adjusts loan and deposit rates as needed to balance cash available with cash
needs.
We had access to wholesale borrowings based on the availability of eligible
collateral. The Federal Home Loan Bank 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 Federal Home Loan
Bank under its blanket pledge agreement of approximately $256 million at
September 30, 2001. The Bank exceeded its borrowing capacity with an
outstanding balance of $280 million at September 30, 2001.To remedy this
situation, the Bank has the ability to pledge additional assets including cash
or mortgage backed securities. Also, the Bank's credit rating should improve
in the near future due to the positive financial results of the recent quarter.
If this situation is not resolved by December 15, 2001, the Bank will have to
pay down existing borrowings or provide additional collateral.
At September 30, 2001, $285.7 million, or 25.5%, 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 September 30, 2001,
approximately $40.1 million, or 3.6% of our deposits were held by these
individuals and entities. Of these out-of-state time deposits, $7.9 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 September 30, 2001, brokered deposits totaled $100.9 million. The
regulatory approval to accept brokered deposits expires December 31, 2001 and,
at that time, Metropolitan must re-apply to continue to accept 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 $317.9
million at September 30, 2001, or 28.4%, of total deposits. The supervisory
30
agreement requires that the Bank reduce its reliance on volatile funding
sources, including but not limited to, brokered and out-of-state deposits.
Brokered and out-of-state deposits have decreased from $177.0 million at
December 31, 2000 to $141.0 million at September 30, 2001. The supervisory
agreement does not call for a specific amount of reduction or a specific time
frame in which to make the reduction. Since many of these depositors are not
located near our retail sales offices and do not have other accounts, these
deposits tend to be less stable and less likely to renew if our rates are not
competitive with national rates. Our dependence on these wholesale types of
deposits creates the risk that we might experience a liquidity shortage
if we stopped issuing or renewing these types of certificates of deposit or that
we would have to pay high rates to renew or replace these funds which would
negatively impact our profitability. In order to minimize these risks, we
monitor the maturity of these types of funds so their maturities are staggered.
We also deal with several brokers and compare rates among them to be sure we are
paying competitive rates. During the fourth quarter, there will be $14.2 million
of brokered and out-of-state deposits maturing. It is anticipated that the vast
majority of these will be paid off and not renewed. However, based on the
Federal Home Loan Bank collateral requirements, the Bank may have to use
brokered or out-of-state certificates of deposit for liquidity purposes.
In accordance with our supervisory agreements with regulators, management
is pursuing ways to reach well-capitalized status by December 31, 2001. If
that happens, the Bank would not need regulatory approval to continueto
issue brokered deposits. If a liquidity shortage occurs despite all of these
steps, we have the ability to generate additional liquidity beyond the cash and
securities mentioned above by stopping the issuance of commitments to make new
loans and selling some or all of the $126.6 million of loans we own that are
classified as held for sale at September 30, 2001. Such a liquidation of loans
held for sale could have a negative impact on net interest income.
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 September 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 September 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 $103,788 6.59% $103,788 6.59% $114,553 9.12%
Required 23,624 1.50 62,997 4.00 100,485 8.00
-------- ---- -------- ---- --------- ----
Excess $ 80,164 5.09% $ 40,791 2.59% $ 14,068 1.12%
========= ==== ======== ==== ========== =====
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 submitted a plan for increasing capital to regulatory authorities on
September 28, 2001. The following table summarizes the Bank's status compared to
the supervisory agreement requirements:
31
Tangible Capital Core Capital Risk-Based Capital
---------------- ------------ ------------------
(Dollars in thousands)
Capital amount
Actual $103,788 6.59% $ 103,788 6.59% $ 114,553 9.12%
Required 31,481 2.00 78,702 5.00 125,656 10.00
-------- ---- --------- ---- --------- -----
Excess $ 72,307 4.59% $ 25,086 1.59% $ (11,103) (0.88%)
======== ==== ========= ==== ========= ======
At September 30, 2001, the Bank's risk-based capital was $11.1 million less than
the requirement for a well-capitalized institution. Pursuant to the rights
offering and concurrent offering to standby purchasers, the Corporation
expects to raise $20.0 million, of which approximately $18.0 million will be
contributed to the Bank. Therefore, the rights offering and the concurrent
direct offering to standby purchasers, if successful, will satisfy the capital
requirements of the supervisory agreements. If the Corporation raises
substantially less than $20.0 in capital, the Bank could reach well-capitalized
status by stopping the issuance of new loan commitments and selling some or all
of the $126.6 million of loans classified as held for sale at September 30,
2001.
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 based upon 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; increased
competition which raises rates paid on demand and time deposits offered by
Metropolitan Bank; adverse developments in material collection and other
lawsuits involving Metropolitan Bank; 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.
32
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.
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
33
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 SEPTEMBER 30, 2001 DECEMBER 31, 2000
- ----------------------- ------------------ -----------------
+2% -14% -27%
+1% -7% -14%
-1% +5% +13%
-2% +8% +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 at December 31,
2000 we had exposure to rising rates but would benefit from falling rates. In
fact rates have fallen from December 31, 2000 to September 30, 2001 but the Bank
has not seen a corresponding increase in net interest income. That happened
because the changes were in stages and not immediate, the decreases were
concentrated in the short end of the yield curve and because competition
prevented us from fully realizing anticipated savings in core deposit
liabilities. The expected change in net interest income at September 30, 2001
indicates that our asset and liability maturities are more evenly matched and
that our exposure to rising rates has decreased.
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 SEPTEMBER 30, 2001 DECEMBER 31, 2000
- ----------------------- ------------------ -----------------
+2% -12% -26%
+1% -4% -12%
-1% -1% +12%
-2% -7% +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 our exposure to rising rates as measured by
post-shock NPV has decreased while our exposure to falling rates has increased.
Under TB 13a, Metropolitan falls in the minimal interest rate risk category as
of September 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 nine months 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.
34
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.
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
or five year terms to repricing; 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 nine months 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 September 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:
- Proposed rights/stock offering to raise $18 million of new
capital for the Bank
- 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
35
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 1.5% of
assets and 71.2% 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.
A Special Meeting of Shareholders of Metropolitan Financial Corp. was held on
September 25, 2001, at 8:30 a.m. at 22901 Mill Creek Blvd., Highland Hills,
Ohio.
At the Special Meeting, the shareholders of Metropolitan considered and voted
upon a proposed amendment to the Corporation's Amended and Restated Articles of
Incorporation to increase the authorized number of shares of common stock. The
shares represented at the Special Meeting in person or by proxy were voted as
follows with respect to the proposal:
PROPOSAL #1 FOR AGAINST ABSTAIN
--- ------- -------
Increase the number of Authorized shares
of Common Stock 7,758,033 189,804 4,221
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).
3.3 Certificate of Amendment by Shareholders to the
Amended and Restated Articles of Incorporation of
Metropolitan Financial Corp. dated September 26, 2001.
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).
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).
37
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 Addendum to Sixth Amendment to Restated Loan Agreement
between Metropolitan Financial Corp. and Huntington
National Bank dated as of October 16, 2001.
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
nine month period ended September 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: November 13, 2001
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