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 March 31, 2002
---------------
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 Millcreek 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 May 10, 2002, there were 16,140,231 common shares of the Registrant issued
and outstanding.
METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
as of March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2002 and 2001 5
Consolidated Statements of Changes in Shareholders' Equity for
the three months ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-27
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 27-31
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURE 32
2
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS
Cash and due from banks $ 37,442 $ 46,699
Interest-bearing deposits in other banks 6,340 577
Securities available for sale 165,417 94,354
Securities held to maturity 14,832 14,829
Mortgage-backed securities available for sale 157,851 167,313
Loans held for sale 46,680 169,320
Loans receivable, net 1,005,697 974,452
Federal Home Loan Bank stock 17,076 16,889
Premises and equipment, net 68,841 62,831
Premises and equipment held for sale 2,000 8,669
Loan servicing rights, net 24,195 22,951
Accrued income, prepaid expenses and other assets 24,774 24,233
Real estate owned, net 5,581 2,791
Goodwill and other intangible assets 2,509 2,512
----------- -----------
Total assets $ 1,579,235 $ 1,608,420
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 127,815 $ 146,055
Interest-bearing deposits 979,427 996,339
----------- -----------
Total deposits 1,107,242 1,142,394
Borrowings 336,999 340,897
Other liabilities 26,514 35,862
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures 43,750 43,750
----------- -----------
Total liabilities 1,514,505 1,562,903
SHAREHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized,
none issued -- --
Common stock, no par value, 30,000,000 shares
authorized, 16,136,630 and 8,128,663 shares
issued and outstanding, respectively -- --
Additional paid-in capital 42,050 20,978
Retained earnings 26,261 26,100
Accumulated other comprehensive loss (3,581) (1,561)
----------- -----------
Total shareholders' equity 64,730 45,517
----------- -----------
Total liabilities and shareholders' equity $ 1,579,235 $ 1,608,420
=========== ===========
See accompanying notes to consolidated financial statements.
3
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months ended March 31,
----------------------------
2002 2001
INTEREST INCOME
Interest and fees on loans $ 19,981 $ 26,998
Interest on mortgage-backed securities 2,512 3,361
Interest and dividends on other investments 1,275 1,276
----------- -----------
Total interest income 23,768 31,635
INTEREST EXPENSE
Interest on deposits 10,101 15,130
Interest on borrowings 5,297 6,418
Interest on Junior Subordinated Debentures 1,039 998
----------- -----------
Total interest expense 16,437 22,546
NET INTEREST INCOME 7,331 9,089
Provision for loan losses 100 1,055
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,231 8,034
NONINTEREST INCOME
Net gain on sale of loans 1,707 669
Loan servicing loss, net (507) (109)
Service charges on deposit accounts 460 404
Net gain on sale of securities 991 400
Other operating income 1,949 1,056
----------- -----------
Total noninterest income 4,600 2,420
NONINTEREST EXPENSE
Salaries and related personnel costs 5,814 5,770
Occupancy and equipment expense 1,662 1,767
Federal deposit insurance premiums 327 347
Data processing expense 392 417
Marketing expense 222 279
State franchise taxes 60 244
Amortization of intangibles 3 69
Other operating expenses 3,133 2,325
----------- -----------
Total noninterest expense 11,613 11,218
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 218 (764)
Provision (benefit) for income taxes 57 (341)
----------- -----------
NET INCOME (LOSS) $ 161 $ (423)
=========== ===========
Basic and diluted earnings (loss) per share $ 0.02 $ (0.05)
=========== ===========
Weighted average shares outstanding for basic
earnings per share 8,576,956 8,103,437
Effect of dilutive options -- --
----------- -----------
Weighted average shares outstanding for diluted
earnings per share 8,576,956 8,103,437
=========== ===========
See accompanying notes to consolidated financial statements.
4
METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES $ 47,438 $ (5,020)
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (83,310) (45,060)
Purchases of:
Loans (89) (51,352)
Mortgage-backed securities (11,545) (10,299)
Securities available for sale (135,113) (1,319)
Mortgage servicing rights (1,128) 423
Premises and equipment (575) (3,469)
Interest bearing deposits in other banks (5,763) --
Proceeds from maturities and repayments of:
Loans 110,613 89,073
Mortgage-backed securities 16,991 4,194
Securities available for sale 64,394 10,000
Proceeds from sale of:
Loans 6,500 --
Premises, equipment, and real estate owned 308 348
--------- ---------
Net cash used in investing activities (38,717) (7,461)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts (35,152) 13,343
Proceeds from borrowings -- 20,000
Repayment of borrowings (1,898) (3,651)
Net activity on lines of credit -- (20,000)
Proceeds from issuance of common stock 19,072 25
--------- ---------
Net cash provided by (used in) financing activities (17,978) 9,717
--------- ---------
Net change in cash and cash equivalents (9,257) (2,764)
Cash and cash equivalents at beginning of period 46,699 7,010
--------- ---------
Cash and cash equivalents at end of period $ 37,442 $ 14,246
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 15,838 $ 22,675
Income taxes 402 1,174
Transfer from loans receivable to real estate owned 3,114 305
Transfer from loans receivable to loans held for sale 28,579 53,634
Transfer from loans held for sale to loans receivable 81,510 --
Loans securitized 82,848 27,753
Transfer from premises and equipment held for sale to premises
and equipment 6,669 --
Exchange of loan for common stock 2,000 --
See accompanying 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 DECEMBER 31, 2000 $ -- $20,882 $29,668 $(1,091) $49,459
Comprehensive income (loss):
Net income (423) (423)
Change in unrealized gain on
securities, net of tax and net
of reclassification of gain
of $102,000 from net income (998) (998)
-------
Total comprehensive income (loss) (1,421)
Issuance of shares of common stock
Stock purchase plan-8,181 shares 25 25
------- ------- ------- -------
BALANCE MARCH 31, 2001 $ -- $20,907 $29,245 $(2,089) $48,063
======= ======= ======= =======
BALANCE DECEMBER 31, 2001 $ -- $20,978 $26,100 $(1,561) $45,517
Comprehensive income (loss):
Net income 161 161
Change in unrealized gain on
securities, net of tax and net
of reclassification of gain
of $378,000 from net income (2,020) (2,020)
-------
Total comprehensive income (loss) (1,859)
Net proceeds from issuance of shares of
common stock
Stock offerings-8,000,000 shares 21,050 21,050
Stock purchase plan-7,967 shares 22 22
------- ------- ------- -------
BALANCE MARCH 31, 2002 $ -- $42,050 $26,261 $(3,581) $64,730
======= ======= ======= =======
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, dollar amounts in tables are in thousands, except
per share data.
Metropolitan Financial Corp. ("Metropolitan" or the "Company") is a savings and
loan holding company and an Ohio corporation. Metropolitan is engaged in the
business of originating multifamily and commercial real estate loans primarily
in Ohio and Pennsylvania 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
Company 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 Company considers necessary for a fair
presentation of (a) the results of operations for the three-month periods ended
March 31, 2002 and 2001; (b) the financial condition at March 31, 2002 and
December 31, 2001; (c) the statement of cash flows for the three-month periods
ended March 31, 2002 and 2001; and (d) the statement of changes in shareholders'
equity for the three-month periods ended March 31, 2002 and 2001. The results of
operations for the three-month period ended March 31, 2002 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, 2001, contains
consolidated financial statements and related notes which should be read in
conjunction with the accompanying consolidated financial statements.
A summary of significant accounting policies follows:
CONSOLIDATION POLICY: The Company and its wholly-owned subsidiaries,
MetroCapital Corporation, Metropolitan Capital Trust I, Metropolitan Capital
Trust II, Metropolitan I Corporation and its subsidiary, and Metropolitan Bank
and Trust Company (the "Bank") and its subsidiaries, are included in the
accompanying consolidated financial statements. All significant intercompany
balances have been eliminated.
USE OF ESTIMATES: In preparing financial statements, management must
make estimates and assumptions. These estimates and assumptions affect the
amounts reported for assets, liabilities, revenues, and expenses as well as the
disclosures provided. Future results could differ from current estimates. Areas
involving the use of management's estimates and assumptions primarily include
the allowance for losses on loans, the valuation of loan servicing rights, the
value of loans held for sale, fixed assets held for sale, fair value of certain
securities, the carrying value and amortization of intangibles, the value of
real estate owned, the determination and carrying value of impaired loans, and
the fair value of financial instruments. Estimates that are more susceptible to
change in the near term include the allowance for loan losses, the valuation of
loan servicing rights, the value of loans held for sale, the value of real
estate owned, and the fair value of certain securities.
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 or loss by the weighted
average shares outstanding. Diluted earnings per share has been computed by
dividing net income or loss by the diluted weighted average shares outstanding.
Diluted weighted average shares were calculated assuming the exercise of stock
options less the treasury shares assumed to be purchased using the average
market price of the Company's stock. Stock options totaling 1,359,378 and
1,168,878, respectively were not considered in computing diluted earnings per
common share for March 31, 2002 and 2001 because they were antidilutive.
7
NEW ACCOUNTING PRONOUNCEMENTS: A new accounting standard requires all
business combinations to be recorded using the purchase method of accounting for
any transaction initiated after June 30, 2001. Under the purchase method, all
identifiable tangible assets and intangible assets and liabilities of the
acquired company must be recorded at fair value at date of acquisition, and the
excess of cost over fair value of net assets acquired is recorded as goodwill.
Identifiable intangible assets must be separated from goodwill. Identifiable
intangible assets with finite useful lives will be amortized under the new
standard, whereas goodwill, both amounts previously recorded and future amounts
purchased, ceased being amortized starting in 2002. Periodic impairment testing
will be required for goodwill with impairment being recorded if the carrying
amount of goodwill exceeds its implied fair value.
2. SUPERVISORY AGREEMENT
On July 26, 2001, the Company entered into a supervisory agreement with the
Office of Thrift Supervision, which required the Company to prepare and adopt a
plan for raising capital that uses sources other than increased debt or which
requires additional dividends from Metropolitan Bank. On January 31, 2002, the
Company initiated an offer of common stock for sale under a rights offering and
a concurrent offering to the public. Management used the net proceeds of the
2002 offerings to raise the capital required by this supervisory agreement.
Additionally, Metropolitan Bank entered into a separate supervisory agreement
with the OTS and the Ohio Department of Financial Institutions, which requires
Metropolitan Bank to do the following:
- Develop a capital improvement and risk reduction plan by
September 28, 2001, which date was extended to December 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, which
date was extended to March 31, 2002. The Company had achieved
a "well capitalized" level at March 31, 2002;
- Reduce investment in fixed assets by December 31, 2002;
- 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.
Both supervisory agreements also contain restrictions on adding,
entering into employment contracts with, or making golden parachute payments to
directors and senior executive officers and in changing responsibilities of
senior officers.
During January 2002, the regulatory authorities approved the capital
and risk reduction plan submitted by the Company.
8
If the Company or Metropolitan Bank is unable to comply with the terms
and conditions of the supervisory agreements, the OTS and the ODFI could take
additional regulatory action, including the issuance of a cease and desist order
requiring further corrective action such as raising additional capital,
obtaining additional or new management, requiring the sale of assets and a
reduction in the overall size of the Company, imposing operating restrictions on
Metropolitan Bank and restricting dividends from Metropolitan Bank to the
Company. These additional restrictions could make it impossible to service
existing debt of the Company.
3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale and held to maturity at March 31, 2002
and December 31, 2001 are as follows:
March 31, 2002
----------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
AVAILABLE FOR SALE
Mutual funds $ 11,345 $ 11,345
FreddieMac preferred stock 7,500 $ (562) 6,938
FannieMae notes 5,002 (114) 4,888
Federal Home Loan Bank note 5,000 (96) 4,904
Treasury notes and bills 137,303 $ 73 (34) 137,342
Mortgage-backed securities 160,048 413 (2,610) 157,851
--------- --------- --------- ---------
326,198 486 (3,416) 323,268
HELD TO MATURITY
Tax-exempt municipal bond 14,352 (3,084) 11,268
Revenue bond 480 12 492
--------- --------- --------- ---------
14,832 12 (3,084) 11,760
--------- --------- --------- ---------
Total securities $ 341,030 $ 498 $ (6,500) $ 335,028
========= ========= ========= =========
December 31, 2001
----------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
AVAILABLE FOR SALE
Mutual funds $ 5,784 $ 5,784
FreddieMac preferred stock 7,500 $ (750) 6,750
FannieMae notes 10,003 (129) 9,874
Treasury notes and bills 72,056 $ 74 (184) 71,946
Mortgage-backed securities 165,508 1,895 (90) 167,313
--------- --------- --------- ---------
260,851 1,969 (1,153) 261,667
HELD TO MATURITY
Tax-exempt municipal bond 14,349 (2,737) 11,612
Revenue bond 480 15 495
--------- --------- --------- ---------
14,829 15 (2,737) 12,107
--------- --------- --------- ---------
Total securities $ 275,680 $ 1,984 $ (3,890) $ 273,774
========= ========= ========= =========
9
The tax-exempt municipal bond represents a single issue secured by a multifamily
property. The marketability and market value of the bond have declined between
December 31, 2001 and March 31, 2002. However, management does not believe
permanent impairment has occurred because the estimated underlying value of the
property is sufficient to secure the principal and interest of the bond.
4. LOANS RECEIVABLE
The composition of the loan portfolio at March 31, 2002 and December 31, 2001 is
as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Real estate loans
Construction loans:
One- to four-family $ 154,528 $ 150,705
Multifamily 7,367 6,360
Commercial 3,992 2,134
Land 73,608 74,305
Loans in process (78,280) (80,214)
----------- -----------
Construction loans, net 161,215 153,290
Permanent loans:
One- to four-family 149,752 171,813
Multifamily 251,921 224,542
Commercial 194,816 164,786
----------- -----------
Total real estate loans 757,704 714,431
Consumer loans 129,353 138,698
Business and other loans 130,269 133,684
----------- -----------
Total loans 1,017,326 986,813
Premiums on loans, net 6,262 6,969
Deferred loan fees, net (2,023) (2,080)
Allowance for losses on loans (15,868) (17,250)
----------- -----------
Total loans receivable $ 1,005,697 $ 974,452
=========== ===========
Activity in the allowance for losses on loans for the periods ended March 31,
2002 and 2001 is as follows:
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Balance at the beginning of the period $ 17,250 $ 13,951
Provision for loan losses 100 1,055
Charge-offs (1,546) (519)
Recoveries 64 --
-------- --------
Balance at end of period $ 15,868 $ 14,487
======== ========
Nonperforming loans are as follows at:
March 31, December 31,
2002 2001
---- ----
Loans past due over 90 days still on accrual $ 1,612 $ 85
Nonaccrual loans 25,281 30,602
Management analyzes loans both on an individual and collective 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
10
current information and events. Loans which are past due two payments or less
and that management feels are probable of being restored to current status
within 90 days are not considered to be impaired loans. All impaired loans are
included in nonperforming loans.
Information regarding impaired loans is as follows:
March 31, December 31,
2002 2001
------- -------
Balance of impaired loans $14,964 $15,260
Less portion for which no allowance
for losses on loans is allocated 2,852 3,147
------- -------
Balance of impaired loans for which
an allowance for loan losses is allocated $12,112 $12,113
======= =======
Portion of allowance for losses on loans
allocated to the impaired loan balance $ 3,476 $ 3,476
======= =======
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Average investment in impaired loans
during the period $14,964 $13,261
======= =======
Interest income recognized during
impairment $ 165 $ 983
======= =======
Interest income recognized on a
cash basis during the period $ 165 $ 983
======= =======
5. 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 March 31, 2002 and December 31, 2001 are summarized as follows:
March 31, December 31,
2002 2001
---- ----
Mortgage loan portfolios serviced for:
FreddieMac $1,437,439 $1,292,009
FannieMae 568,086 617,305
Other 273,228 294,559
---------- ----------
Total loans serviced for others $2,278,753 $2,203,873
========== ==========
Custodial balances maintained in noninterest-bearing checking accounts in
connection with the foregoing loan servicing were approximately $37.6 million
and $48.5 million at March 31, 2002 and December 31, 2001, respectively.
The following is an analysis of the changes in the cost of loan servicing rights
for the three-month periods ended March 31, 2002 and 2001:
11
Three Months Ended March 31,
-----------------------
2002 2001
---- ----
Balance at the beginning of the period $ 22,951 20,597
Acquired or originated 3,232 1,877
Recovery of impairment 736 --
Amortization (2,724) (1,488)
-------- --------
Balance at the end of the period $ 24,195 $ 20,986
======== ========
6. DEPOSITS
Deposits consist of the following:
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
Noninterest-bearing checking accounts $ 127,815 12% $ 146,055 13%
---------- ---------- ---------- ----------
Interest-bearing checking accounts 204,390 18 198,414 17
Passbook savings and statement savings 86,926 8 82,619 7
Certificates of deposit 688,111 62 715,306 63
---------- ---------- ---------- ----------
Total interest-bearing deposits 979,427 88 996,339 87
$1,107,242 100% $1,142,394 100%
========== ========== ========== ==========
At March 31, 2002, scheduled maturities of certificates of deposit were as
follows:
Year Weighted Average
Ended Amount Interest Rate
----- ------ -------------
2002 $380,031 4.55%
2003 218,487 5.82
2004 44,864 4.80
2005 9,439 3.73
2006 24,427 5.46
Thereafter 10,863 5.23
--------
$688,111 4.67%
========
Brokered and out-of-state deposits decreased from $127.8 million at December 31,
2001 to $107.8 million at March 31, 2002.
7. BORROWINGS
Borrowings consist of the following at March 31, 2002 and December 31, 2001:
March 31,2002 December 31, 2001
------------- -----------------
Amount Rate Amount Rate
------------ ------- ---------- -------
Federal Home Loan Bank Advances $ 277,014 5.6% $ 278,912 6.2%
Reverse repurchase agreements 41,000 5.9 41,000 5.9
Commercial bank note payable 5,000 4.8 5,000 4.8
Loan from majority stockholder -- -- 2,000 0.0
Subordinated debt maturing January 1, 2005 13,985 9.6 13,985 9.6
---------- ----------
$ 336,999 $ 340,897
========== ==========
12
At March 31, 2002, scheduled payments on borrowings are as follows:
Weighted Average
Year Ended Amount Interest Rate
---------- ------ -------------
2002 $ 62,325 6.14%
2003 69,201 5.81
2004 69,495 6.14
2005 97,456 6.83
2006 4,292 6.61
Thereafter 34,230 6.40
-------- --------
Total $336,999 6.29%
========
At March 31, 2002, 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 $17.1 million, $147.9
million, $178.3 million, and $163.8 million, respectively.
The Company has a note payable with a commercial bank. At March 31, 2002, the
current balance outstanding was $5.0 million. The loan matures December 31,
2002. As collateral for the loan, the Company's largest shareholder, Robert
Kaye, has agreed to pledge a portion of his common shares of the Company in an
amount greater than 50% of the outstanding stock of the Company. In addition,
Mr. Kaye has agreed to pledge any additional shares of the Company he may
acquire in the future. The loan agreement with the commercial bank has a
covenant requiring a minimum return on assets for the previous nine months. If
the Company fails to meet this covenant the loan could become immediately due
and payable. If that happened the 1995 notes would also become due and payable.
The Company has met this requirement or the commercial bank has waived
compliance with this requirement for all periods through March 31, 2002.
In December 2001, the Company entered into a loan agreement with Robert Kaye,
their majority shareholder. The loan agreement is in the amount of $2.0 million
and bears no interest. The Company repaid the loan to Mr. Kaye with proceeds
from the stock offerings in March 2002.
During 1995, the Company issued subordinated notes ("1995 Subordinated Notes")
totaling $14.0 million. Interest on the notes is paid quarterly and principal
will be repaid when the notes mature January 1, 2005. Total issuance costs of
approximately $1.2 million are being amortized on a straight line basis over the
life of the notes. The notes are unsecured. Effective November 30, 2000, the
notes may be redeemed at par at any time.
8. 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 March 31, 2002, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $89.7 million
and $49.8 million, respectively. In addition, the Bank had firm
13
commitments to sell loans totaling $60.2 at March 31, 2002. The Bank's
commitments to originate and purchase loans are for loans with rates ranging
from 5.375% to 17.0% 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 contracts variable interest
based on 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 March 31, 2002 was an
unrealized loss of $2.5 million.
9. SEGMENT REPORTING
Metropolitan's operations include two major operating segments. A description of
those segments follows:
RETAIL AND COMMERCIAL BANKING--Retail and commercial banking is the
segment of the business that brings in deposits and lends those funds
out to businesses and consumers. The local market for deposits is the
consumers and businesses in the neighborhoods surrounding our 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 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, fixed rate loans are originated
for sale and adjustable rate loans may be originated for sale or be
retained in the portfolio. Loans being serviced include loans
originated and still owned by Metropolitan, loans originated by
Metropolitan but sold to others with servicing rights retained by
Metropolitan, and servicing rights to loans originated by others but
purchased by Metropolitan. The servicing rights Metropolitan purchases
may be located in a variety of states and are typically being serviced
for FannieMae or FreddieMac.
PARENT AND OTHER--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. The net interest income
that results from investing in assets and liabilities with different
terms to maturity or repricing has been eliminated from the two major
operating segments and is included in this category.
Operating results and other financial data for the current and preceding year
were as follows (in thousands):
14
AS OF OR FOR THE THREE MONTHS ENDED MARCH 31, 2002
- -------------------------------------------------------------------------------
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
---------- ---------- ---------- ----------
OPERATING RESULTS:
Net interest income $ 5,399 $ 3,544 $ (1,612) $ 7,331
Provision for losses on loans 90 10 -- 100
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 5,309 3,534 (1,612) 7,231
Noninterest income 808 2,547 1,245 4,600
Direct noninterest expense 5,045 2,668 494 8,207
Allocation of overhead 2,228 1,178 3,406
---------- ---------- ---------- ----------
Net income (loss) before income taxes $ (1,156) $ 2,235 $ (861) $ 218
========== ========== ========== ==========
FINANCIAL DATA:
Segment assets $ 912,949 $ 402,468 $ 263,818 $1,579,235
Depreciation and amortization 1,614 1,690 359 3,663
Expenditures for additions
to premises and equipment 436 139 575
AS OF OR FOR THE THREE MONTHS ENDED MARCH 31, 2001
- ------------------------------------------------------------------------------
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $ 4,845 $ 4,460 $ (216) $ 9,089
Provision for losses on loans 949 106 -- 1,055
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 3,896 4,354 (216) 8,034
Noninterest income 1,035 982 403 2,420
Direct noninterest expense 4,755 1,924 430 7,109
Allocation of overhead 2,925 1,184 4,109
----------- ----------- ----------- -----------
Net (loss) income before income taxes $ (2,749) $ 2,228 $ (243) $ (764)
=========== =========== =========== ===========
FINANCIAL DATA:
Segment assets $ 1,055,288 $ 487,764 $ 162,620 $ 1,705,672
Depreciation and amortization 686 1,340 91 2,117
Expenditures for additions
to premises and equipment 2,859 610 3,469
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.
15
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.
10. RIGHTS AND COMMON STOCK OFFERINGS
On March 22, 2002, the Company closed its offering to current shareholders of
non-transferable rights to purchase shares of Company common stock and also a
concurrent offering of shares of common stock in a public offering. The purpose
of these offerings was to raise funds to increase the equity capital of the
Metropolitan Bank as required under the supervisory agreements signed with the
Office of Thrift Supervision and the Ohio Department of Financial Institutions
on July 26, 2001 (the "supervisory agreement") and to make a $1.0 million
required principal payment on the commercial bank note. These offerings
generated gross proceeds of $22.0 million, substantially exceeding the $13.0
million minimum established for the offerings. As a result of the offerings, the
Bank's regulatory capital ratios are now in excess of the "well-capitalized"
capital requirements as of March 31, 2002.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
Three months ended March 31,
2002 2001
---- ----
Net income (loss) (in thousands) $161 $(423)
Basic and diluted earnings (loss) per share $0.02 $(0.05)
Return on average assets 0.04 % (0.10) %
Return on average equity 1.34 % (3.47) %
Noninterest expense to average assets 2.96 % 2.68 %
Efficiency ratio 106.12 % 100.37 %
Net interest margin 2.03 % 2.33 %
March 31, December 31, March 31,
2002 2001 2001
---- ---- ----
Total assets (in thousands) $1,579,235 $1,608,420 $1,705,672
Shareholders' equity (in thousands) 64,730 45,517 48,063
Shareholders' equity to total assets 4.10 % 2.83 % 2.82 %
Shares outstanding 16,136,630 8,128,663 8,107,208
Book value per share $4.01 $5.60 $5.93
Tangible book value per share $3.86 $5.29 $5.60
Closing share price of common stock $3.25 $3.05 $4.00
Nonperforming assets to total assets (1) 2.05 % 2.09 % 1.66 %
Allowance for losses on loans to total loans (1) 1.49 % 1.49 % 1.11 %
Net charge-offs to average loans (2) 0.43 % 0.26 % 0.16 %
(1) Ratios are based on period end balances.
(2) Annualized for comparative purposes.
17
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of the
Bank and the financing activities of the Company. Our results of operations are
dependent on a variety of factors, including the general interest rate
environment, competitive conditions in the industry, governmental policies and
regulations and conditions in the markets for financial assets. Like most
financial institutions, the primary contributor to our income is net interest
income, the difference between the interest we earn on interest-earning assets,
such as loans and securities, and the interest we pay on interest-bearing
liabilities, such as deposits and borrowings. Our operations are also affected
by noninterest income, such as loan servicing fees, servicing charges on deposit
accounts, and gains or losses on the sales of loans and securities. Our
principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, occupancy costs, and general and
administrative expenses.
RESULTS OF OPERATIONS
Net Income. Net income increased $584 thousand to $161 thousand for the first
quarter of 2002 as compared to a net loss of $423 thousand for the first
quarter, 2001. Noninterest income increased $2.2 million for the three months
ended March 31, 2002 over the same period in the prior year. The provision for
loan losses decreased to $100 thousand for the three months ended March 31, 2002
compared to $1.1 million from the same period in the prior year. For the three
months ended March 31, 2002, net interest income decreased $1.8 million and
noninterest expense increased $395 thousand compared to the same period in the
prior year. Noninterest expense increased to $11.6 million for the quarter ended
March 31, 2002 up from $11.2 million for the same quarter in the prior year.
The increase in income for the first three months of 2002 was primarily due to
an increase in noninterest income, specifically an increase in the net gain on
sale of loans of $1.0 million, improved rental and fee income of $945 thousand,
an increase in the net gain on sale of securities of $591 thousand and
reductions in the loan loss provision of $955 thousand. This increase was
partially offset by an increase in expenses related to loan servicing costs and
a decrease in net interest income of $1.8 million, a result of a decrease of
$203 million in average earning assets for the first quarter of 2002 compared to
the same period in the prior year.
Our net interest margin decreased 30 basis points to 2.03% for the three-month
period ended March 31, 2002, as compared to 2.33% for the comparable period in
2001. Short-term interest rates declined steadily from January through November
2001 and then leveled off through March 2002, with the prime-lending rate
falling from 9.50% to 4.75%. 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 2001 on earning
assets decreased faster than rates on deposits, further compressing
Metropolitan's net interest margin.
Interest Income. Total interest income for the quarter ended March 31, 2002
totaled $23.8 million, a decrease of 24.9% from the first quarter of 2001. These
results were primarily the effect of declining yields on interest-earning assets
to 6.59% in the three-month period ended March 31, 2002 from 8.13% for the same
period in 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 months ended March 31, 2002
18
compared to the same period in the prior year was primarily due to declines in
the level of short term interest rates from 2001 to 2002. As interest rates
continue to level off the decline in yields will gradually narrow.
Interest Expense. Total interest expense decreased 27.1% to $16.4 million for
the three-month period ended March 31, 2002 from $22.5 million for the same
period in 2001. Interest expense for the quarter ending March 31, 2002 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. The
average balance of interest-bearing deposits decreased $59.2 million, or 5.7%,
for the three-month period ended March 31, 2002 as compared to the same period
in 2001. Average borrowings decreased $83.8 million, or 19.8%, for the
three-month period ended March 31, 2002 as compared to the same period in 2001.
Metropolitan's cost of funds decreased to 4.87% for the first quarter of 2002 as
compared to 6.10% for the first quarter of 2001.
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.
19
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------------
2002 2001
--------------------------------------- ------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $ 1,105,234 $19,981 7.23% $1,282,003 $26,998 8.42%
Mortgage-backed securities 162,543 2,512 6.18% 195,207 3,361 6.89%
Other 176,543 1,275 2.96% 80,416 1,276 6.51%
------- ------- ----------- -------
Total interest-earning assets 1,444,320 23,768 6.59% 1,557,626 31,635 8.13%
------- -------
Noninterest-bearing assets 124,258 119,233
----------- ----------
Total assets $ 1,568,578 $1,676,859
=========== ==========
Interest-bearing liabilities:
Deposits $ 986,863 10,101 4.15% $1,046,048 15,130 5.87%
Borrowings 339,584 5,297 6.33% 423,391 6,646 6.37%
Junior Subordinated Debentures 43,750 1,039 9.51% 43,750 998 9.12%
----------- ------- ---------- ------
Total interest-bearing liabilities 1,370,197 16,437 4.87% 1,513,189 22,774 6.10%
------- ---- ------- ----
Noninterest-bearing liabilities 150,399 114,909
Shareholders' equity 47,982 48,761
----------- ----------
Total liabilities and
shareholders' equity $ 1,568,578 $1,676,859
=========== ==========
Net interest income before
capitalized interest 7,331 8,861
------- ------
Interest rate spread 1.73% 2.03%
==== ====
Net interest margin 2.03% 2.33%
Interest expense capitalized (1) -- 228
------- ------
Net interest income $ 7,331 $9,089
======= ======
Average interest-earning
assets to average
interest-bearing
liabilities 105.41% 102.94%
(1) Capitalized construction interest in 2001.
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.
20
Three Months Ended March 31,
2002 vs. 2001
Increase (Decrease)
-----------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------- ------- -------
(In thousands)
INTEREST INCOME ON:
Loans receivable $(7,017) $(3,723) $(3,294)
Mortgage-backed securities (849) (562) (287)
Other (1) 1,564 (1,565)
------- ------- -------
Total interest income (7,867) $(2,721) $(5,146)
------- ======= =======
INTEREST EXPENSE ON:
Deposits $(5,029) $ (856) $(4,173)
Borrowings (1,349) (1,315) (34)
Junior Subordinated Debentures 41 -- 41
------- ------- -------
Total interest expense (6,337) $(2,171) $(4,166)
======= =======
Decrease in net interest income $(1,530)
=======
Provision for Loan Losses. The provision for loan losses decreased to $100
thousand for the three-month period ended March 31, 2002 as compared to $1.1
million for the same period in 2001. Management decreased the provision for loan
losses, due to a strengthening economy and the significant provision that was
taken in the second quarter of 2001. Additionally, loan balances decreased for
Metropolitan in 2002, which allowed a smaller provision while continuing the
same coverage of total loans. As a result, the allowance for losses on loans at
March 31, 2002 was $15.9 million, or 1.49%, of total loans, as compared to $17.3
million, or 1.49%, of total loans at December 31, 2001.
Noninterest Income. Total noninterest income increased 90.1% to $4.6 million for
the three-month period ended March 31, 2002 as compared to $2.4 million for the
first quarter of 2001.
Gain on sale of loans was $1.7 million in the three-month period ended March 31,
2002 as compared to $0.7 million during the same period in 2001. The primary
reason for the increase in the first quarter of 2002 compared with the same
period in 2001 was a decrease in interest rates in mid to late 2001 and early
2002 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 three months
of 2002 were $260 million as compared to $115 million in the same period in
2001. Proceeds from the sale of multifamily and commercial real estate loans
were $6.5 million for the first three months of 2002 as compared to none for the
same period in 2001.
There were losses from net loan servicing of $507 thousand in the three-month
period ended March 31, 2002 as compared to losses of $109 thousand for the same
period in 2001. The primary reason for the decreased income was the increased
amortization of servicing rights due to an increase in prepayment of loans in
2002 compared to the same period in 2001. The portfolio of loans serviced for
others increased to $2.3 billion at March 31, 2002 as compared to $2.2 billion
at December 31, 2001.
The Company had $991 thousand in gains on the sale of securities in the
three-month period ended March 31, 2002 as compared to $400 thousand for the
same period in 2001. In both periods substantially all of the gains were the
result of securitizing one to four family loans and simultaneously selling those
securities.
21
Service charges on deposit accounts increased to $460 thousand in the
three-month period ended March 31, 2002 compared to $404 thousand for the same
period in 2001. The reasons for the increases were the overall growth in the
number of checking accounts and increases in deposit fees in 2002 as compared to
prior year periods.
Other noninterest income increased to $1.9 million in the three-month period
ended March 31, 2002 compared to $1.1 million for the same period in the
previous year. These increases were primarily due to increased trust fee income
and increased rental income from the corporate headquarters building in the
first three months of 2002.
Noninterest Expense. Total noninterest expense increased to $11.6 million in the
three-month period ended March 31, 2002 as compared to $11.2 million for the
same period in 2001.
Personnel related expenses increased $44 thousand in the three-month period
ended March 31, 2002 as compared to the same period in 2001. Since the Bank has
not opened any new branches in 2002 personnel related expenses have stabilized
in the last year. The Company does not expect to open any new branches in the
near future which should allow personnel related expenses to remain stable.
Occupancy costs decreased $105 thousand in the three-month period ended March
31, 2002 over the same period in 2001. Since no new offices have been opened in
2002 the Company's occupancy costs have stabilized over the last 12 months. The
Company does not expect to open any new branches in the near future which should
allow occupancy expenses to remain stable.
Data processing expense decreased $25 thousand in the three-month period ended
March 31, 2002 as compared to the same period in 2001. Data processing costs
have stabilized in 2002 after seeing significant growth in 2001 due to the
Bank's systems conversion in September 2000.
Marketing expense decreased $57 thousand in the three-month period ended March
31, 2002 compared to the same period in the prior year. Marketing costs in 2002
are limited to more routine activities as compared to prior years.
State franchise taxes decreased $184 thousand in the three-month period ended
March 31, 2002 as compared to the same period in 2001. The primary reason for
the decrease was a refinement of the allocation of taxes among the various
states where the Bank conducts business.
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 $808 thousand for the three-month period ended
March 31, 2002 as compared to the same period in 2001. These increases were
generally the result of increases in expenses pertaining to real estate owned,
legal expense, and increased business activities.
Provision for Income Taxes. Income tax expense increased $398 thousand for the
three months ended March 31, 2002 as compared to the prior year period. The
primary reason for the increase in the provision was due to the fact that the
Company had pre-tax income during the three-month period ended March 31, 2002 as
opposed to a pre-tax loss in the same period in the prior year.
22
ASSET QUALITY
The Bank undertakes 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.
March 31, December 31,
2002 2001
---- ----
(Dollars in thousands)
Nonaccrual loans $ 25,281 $ 30,602
Loans past due greater than
90 days or impaired, still accruing 1,612 85
---------- ----------
Total nonperforming loans 26,893 30,687
Real estate owned 5,581 2,791
---------- ----------
Total nonperforming assets $ 32,474 $ 33,478
========== ==========
Allowance for losses on loans $ 15,868 $ 17,250
========== ==========
Nonperforming loans to total loans 2.54% 2.68%
Nonperforming assets to total assets 2.05% 2.09%
Net charge-offs to average loans(1) 0.43% 0.26%
Provision for loan losses to average loans(1) 0.04% 0.53%
Allowance for losses on loans to total
nonperforming loans at end of period 59.00% 56.21%
Allowance for losses on loans to
total loans at end of period 1.49% 1.49%
(1) Annualized for comparative purposes.
Nonperforming loans at March 31, 2002 decreased $3.8 million to $26.9 million as
compared to $30.7 million at December 31, 2001. Real estate owned increased $2.8
million over the same period. These changes were primarily due to a transfer of
$3.1 million of loans to real estate owned during the first quarter of 2002. 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 March 31,
23
2002 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 March 31, 2002.
Management determined the amount of the impairment of these loans to be $3.2
million as of March 31, 2002. Management will charge off these balances if 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 provision for loan losses decreased for the three-month period ended March
31, 2002 as compared to the same period in 2001. Management did not increase the
provision for loan losses significantly, due to a strengthening economy and the
significant provision that was taken in the second quarter of 2001.
Additionally, loan balances decreased for Metropolitan in 2002, which allowed a
smaller provision while continuing the same coverage of total loans.
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 $2.6 million of loans in this category at March 31, 2002 compared to $1.3
million of such loans at December 31, 2001.
FINANCIAL CONDITION
Total assets amounted to $1.579 billion at March 31, 2002 as compared to $1.608
billion at December 31, 2001, a decrease of $29 million. The decrease in assets
was concentrated in loans and was partially offset by increases in securities.
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 $71.1 million to $165.4 million at March
31, 2002 as compared to $94.3 million at December 31, 2001. The primary reason
for the increase was the purchase of $120.4 million of U.S. agency notes and
bills partially offset by $55.1 million of maturities of U.S. agency notes and
bills.
Loans receivable, net increased $31.2 million, or 3.2%, to $1.006 billion at
March 31, 2002 from $974.5 million at December 31, 2001. This increase was due
to transfers of commercial and multi-family loans of $81.5 million from held for
sale to loans receivable. This was partially offset by decreases due to loan
sales and repayments in the first three months of 2002.
Loans held for sale decreased $122.6 million to $46.7 million at March 31, 2002
from $169.3 million at December 31, 2001. The primary reasons for the decrease
in this category are the loans sales that have occurred in the first three
months of 2002 and the decision to transfer all multi-family and commercial real
estate loans from the loans held for sale category back into the loan portfolio,
due to an improvement in the Bank's capital position.
Federal Home Loan Bank stock increased $187 thousand to $17.1 million at March
31, 2002 as compared to the December 31, 2001 balance. The reason for the
increase was the payment of stock dividends to the Bank from the Federal Home
Loan Bank.
Real estate owned increased $2.8 million, or 100.0%, to $5.6 million at March
31, 2002. The primary reason for the increase was the $3.1 million transfer into
real estate owned of two properties in the first quarter of 2002. This was
partially offset by a $325 thousand additional provision taken in the first
quarter.
24
Total deposits were $1.107 billion at March 31, 2002, a decrease of $35.2
million from the balance of $1.142 billion at December 31, 2001. The decrease
resulted principally from decreased certificates of deposit balances of $27.2
million and non-interest bearing checking accounts of $18.2 million, which were
partially offset by an increase of $6.0 million of interest-bearing checking
accounts. During 2001 and continuing through the first quarter of 2002, 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 foreseeable future.
Borrowings decreased $3.99 million, or 1.1%, from December 31, 2001 to March 31,
2002. The decrease was the result of the paydown of Federal Home Loan Bank
advances and the $2.0 million repayment of the loan to the Company's majority
shareholder.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to our ability to generate adequate
amounts of cash for funding loan originations, loan purchases, deposit
withdrawals, maturities of borrowings, and operating expenses. Our primary
sources of internally generated funds are principal repayments and payoffs of
loans, cash flows from operations, and proceeds from sales of assets. External
sources of funds include increases in deposits and borrowings, and public or
private securities offerings by Metropolitan.
The Company'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 Company's primary use of funds is for
interest payments on its existing debt. At March 31, 2002, the Company,
excluding the Bank, had cash and readily convertible investments of $8.9
million. At March 31, 2002, the Company held $8.5 million in liquid assets
available to pay expenses and interest. This does not include $0.4 million the
Company 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 March 31, 2002 was 28.70%. 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. However, the balance of liquid
assets during the first quarter of 2002 was substantially higher because the
level of loan payoffs was high while the demand for loans was only high for
one-to four-family fixed rate loans which are sold after they are originated. At
March 31, 2002, the Bank had approximately $44 million in cash, $70 million in
U.S. Treasury securities and $15 million in Fannie Mae and Ginnie Mae
mortgage-backed securities which were available to sell or to pledge to meet
liquidity needs.
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 $33 million at March 31, 2002.
25
At March 31, 2002, $281.8 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 March 31, 2002, approximately $12.2 million,
or 1.1%, of our deposits were held by these individuals and entities. Of these
out-of-state time deposits, $3.0 million were also included in the $100,000 and
over time deposits discussed above. During 2001, the Bank received regulatory
approval and began accepting brokered deposits. At March 31, 2002, brokered
deposits totaled $95.5 million. The total of all certificates of deposits from
brokers, out-of-state sources, and other certificates of deposit of $100,000 and
over was $291.0 million at March 31, 2002, or 26.3%, of total deposits. The
supervisory 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 $127.8 million
at December 31, 2001 to $107.7 million at March 31, 2002. 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. 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. 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 $46.7 million of
loans we own that are classified as held for sale at March 31, 2002. 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 March 31, 2002.
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 March 31, 2002 were in excess of the "well capitalized" capital
requirements. The following table summarizes the Bank's position against the
"well capitalized" requirements:
26
WELL CAPITALIZED
----------------
PERCENT OF
AMOUNT ASSETS
-------- --------
Tangible Capital:
Actual $116,745 7.40%
Requirement 31,533 2.00
-------- --------
Excess (Deficiency) $ 85,212 5.40%
======== ========
Core Capital:
Actual $116,745 7.40%
Requirement 78,833 5.00
-------- --------
Excess (Deficiency) $ 37,912 2.40%
======== ========
Risk-based Capital:
Actual $125,465 10.60%
Requirement 118,371 10.00
-------- --------
Excess (Deficiency) $ 7,094 0.60%
======== ========
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are subject to assumptions, risks and uncertainties.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include the words "believe,"
"expect," "anticipate," "likely," "intend," "plan," "estimate" or words of
similar meaning, or future or conditional verbs such as "will," "would,"
"should," "could" or "may." Actual results could differ materially from those
contained in or implied by such forward-looking statements for a variety of
factors including:
- changes in interest rates;
- continued weakening in the economy and other factors that
would materially impact credit quality trends, real estate
lending and the ability of the Bank to generate loans;
- the level of success achieved by the Company in the rights
offering and concurrent public offering described in this
report;
- 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 Company and the Bank to timely meet their
obligations under their respective supervisory agreements;
- the status of the relevant markets in which the Company and
the Bank may sell various assets;
- increase in the dollar amount of nonperforming loans held by
the Bank;
- increased competition which raises rates paid on demand and
time deposits offered by the Bank;
- adverse developments in material collection and other lawsuits
involving the Bank;
27
- 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;
- the ability of the Bank to continue to use the Federal Home
Loan Bank as a source of liquidity; and
- changes in accounting, tax, or regulatory practices or
requirements.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans that may, in turn, affect our results of operations.
In light of the significant uncertainties inherent in the forward-looking
information included in this prospectus, you should not regard the inclusion of
such information as our representation that we will achieve any strategy,
objectives or other plans. The forward-looking statements contained in this
prospectus speak only as of the date of this prospectus as stated on the front
cover, and we have no obligation to update publicly or revise any of these
forward-looking statements.
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;
28
- monthly analysis of rate and volume changes in historic net
interest income;
- semi-monthly forecast of balance sheet activity.
- weekly review of certificate of deposit offering rates and
maturities by day; and
The Bank has 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 twice a month, 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. 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.
One of the ways the Bank monitors interest rate risk quantitatively is to
measure the potential change in net interest income based on various immediate
changes in market interest rates. The following table shows the change in net
interest income for immediate sustained parallel shifts of 1% and 2% in market
interest rates for year-end 2001 and the most recent quarter. The results for a
downward parallel shift of 2% at March 31, 2002 and December 31, 2001 are not
meaningful because some rates such as the Federal Funds Rate are already less
than 2%
EXPECTED CHANGE IN NET INTEREST INCOME
--------------------------------------
CHANGE IN INTEREST RATE MARCH 31, 2002 DECEMBER 31, 2001
- ----------------------- -------------- -----------------
+2% +7% +7%
+1% +3% +3%
-1% -2% -1%
-2% N/A N/A
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,
2001 we had exposure to falling rates but would benefit from rising rates. In
fact rates have risen from December 31, 2001 to March 31, 2002 but the Bank has
not seen a corresponding increase in net interest income. That happened because
the changes were in stages and not immediate and the increases were concentrated
in the short end of the yield curve. The expected change in net interest income
at March 31, 2002 indicates that our asset and liability maturities remain
evenly matched and that our exposure to falling rates has increased.
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
2001 and the most recent quarter. The results for a downward parallel shift of
2% at March 31, 2002 and December 31, 2001 are not meaningful because some rates
such as the Federal Funds Rate are already less than 2%
29
EXPECTED CHANGE IN NET PORTFOLIO VALUE
--------------------------------------
CHANGE IN INTEREST RATE MARCH 31, 2002 DECEMBER 31, 2001
- ----------------------- -------------- -----------------
+2% -9% -16%
+1% -4% -8%
-1% -1% +0%
-2% N/A N/A
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
marginally. Under Thrift Bulletin 13a, Metropolitan falls in the minimal
interest rate risk category as of March 31, 2002, based upon current sensitivity
to interest rate changes and the current level of regulatory capital.
Our strategies to limit interest rate risk from rising interest rates are as
follows:
- originate one- to four-family 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.
We are also aware that any method of measuring interest rate risk, including the
two used above, has certain shortcomings. For example, certain assets and
liabilities may have similar maturities or repricing dates but their repricing
rates may not follow the general trend in market interest rates. Also, as a
result of competition, the interest rates on certain assets and liabilities may
fluctuate in advance of changes in market interest rates while rates on other
assets and liabilities may lag market rates. In addition, any projection of a
change in market rates requires that prepayment rates on loans and early
withdrawal of certificates of deposits be projected and those projections may be
inaccurate. We focus on the change in net interest income and the change in net
portfolio value as a result of immediate and sustained parallel shifts in
interest rates as a balanced approach to monitoring interest rate risk when used
with budgeting and the other tools noted above.
30
At the present time we do not hold any trading positions, foreign currency
positions, or commodity positions. Equity investments are approximately 1.6% of
assets and 69.5% 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.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, and 5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
10.1 Second Addendum to Sixth Amendment to the Restated Loan
Agreement by and between The Huntington National Bank,
Robert M. Kaye as guarantor and the Company dated as of
January 7, 2002 (filed as Exhibit 10.9 to the Company's
Form 10-K filed on March 26, 2002 and incorporated
herein by reference).
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the three
months ended March 31, 2002.
31
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/Kenneth T. Kohler
-----------------------------------------
Kenneth T. Kohler,
President & Chief Operating Officer
(on behalf of the Registrant)
By: /s/Timothy W. Esson
-----------------------------------------
Timothy W. Esson,
Vice President-Finance for the Bank
(as Principal Accounting Officer)
Date: May 15, 2002
32