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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 33-98380
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METROPOLITAN FINANCIAL CORP.
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(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
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(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
6001 Landerhaven Drive Mayfield Heights, Ohio 44124
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(Address of Principal Executive Offices) (Zip Code)
(216) 646-1111
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(Registrant's Telephone Number, Including Area Code)
- - - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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
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As of May 13, 1996, there was issued and outstanding one share of the
Registrant's Common Stock.
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METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of
March 31, 1996 and December 31, 1995 ..................... 3
Consolidated Statements of Income for the three months
ended March 31, 1996 and 1995 ............................ 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and 1995............ 5
Notes to Consolidated Financial Statements ................. 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 12-24
PART II. OTHER INFORMATION .......................................... 24
SIGNATURES ............................................................ 25
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PART I. FINANCIAL INFORMATION
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
March 31, December 31,
1996 1995
------- -------
(In Thousands)
ASSETS
Cash and cash equivalents $ 14,366 $ 18,170
Securities available for sale 17,398 22,806
Mortgage-backed securities 37,264 39,156
Loans held for sale 7,304 1,504
Loans receivable, net 531,993 478,345
Federal Home Loan Bank stock, at cost 3,631 3,569
Accrued interest receivable 3,971 3,708
Premises and equipment, net 8,051 7,500
Real estate owned 219 258
Prepaid expenses and other assets 3,239 2,761
Cost of loan servicing rights 8,841 9,130
Cost in excess of fair value of net
assets acquired 3,133 3,188
------- -------
Total Assets $639,410 $590,095
======= =======
LIABILITIES
Deposits $540,050 $503,742
Other borrowings 61,874 46,874
Accrued interest payable 3,476 4,551
Official check float account 3,187 2,779
Other liabilities 4,958 6,683
------- -------
Total Liabilities 613,545 564,629
------- -------
SHAREHOLDER'S EQUITY
Common stock, no par value, 250,000 shares
authorized, 1 share issued and outstanding
Additional paid-in capital 7,801 7,801
Retained earnings 17,644 16,928
Unrealized gain on securities available
for sale, net of tax 420 737
------- -------
Total Shareholder's Equity 25,865 25,466
------- -------
Total Liabilities & Shareholder's
Equity $639,410 $590,095
======= =======
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
March 31, March 31,
1996 1995
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(In Thousands)
INTEREST INCOME
Interest and fees on loans $11,322 $9,415
Interest on mortgage-backed securities 614 265
Interest and dividends on other investments 248 130
------- ------
Total interest income 12,184 9,810
------- ------
INTEREST EXPENSE
Interest on deposits 6,547 5,151
Interest on other borrowings 1,086 607
------- -------
Total interest expense 7,633 5,758
------- -------
NET INTEREST INCOME 4,551 4,052
Provision for loan losses 307 240
------- -------
Net interest income after provision
for loan losses 4,244 3,812
------- -------
Non-interest income
Gain on sale of loans 103 11
Loan servicing income, net 314 179
Loan option income 108
Other operating income 531 311
------- -------
Total non-interest income 1,056 501
------- -------
Non-interest expense
Salaries and related personnel cost 2,049 1,647
Occupancy and equipment expense 572 524
Federal deposit insurance premiums 309 274
Data processing expense 148 139
Marketing expense 126 107
State franchise taxes 118 76
Amortization of intangibles 55 55
Other operating expenses 756 515
------- -------
Total non-interest expense 4,133 3,337
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INCOME BEFORE INCOME TAXES 1,167 976
Provision for income taxes 451 344
------- -------
NET INCOME $ 716 $ 632
======= =======
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
March 31, March 31,
1996 1995
-------- -------
(In Thousands)
NET CASH USED BY
OPERATING ACTIVITIES $ (7,098) $ (2,111)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (4,092) (2,026)
Proceeds from sale of mutual fund 9,261
Disbursement of loan proceeds (59,037) (37,246)
Purchases of loans (20,980) (5,747)
Proceeds from principal repayments 26,069 15,631
Proceeds from mortgage-backed security
principal repayments and maturities 1,666 175
Proceeds from sale of real estate owned 39
Purchase of premises and equipment (694) (1,034)
Purchase of FHLB stock (62) (1,079)
Purchase of mortgage loan servicing rights (157)
-------- -------
Net cash used for investing activities (47,987) (31,326)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 36,281 12,392
Proceeds from borrowings 41,500 78,800
Repayment of borrowings (26,500) (60,250)
-------- -------
Net cash provided by financing
activities 51,281 30,942
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Net change in cash and cash equivalents (3,804) (2,495)
Cash and cash equivalent at beginning
of period 18,170 11,565
------- -------
Cash and cash equivalents at end
of period $ 14,366 $ 9,070
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,708 $ 5,600
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METROPOLITAN FINANCIAL CORP.
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of Metropolitan Financial Corp.
("Metropolitan" or "Corporation") include the accounts of the Corporation and
the accounts of its wholly-owned subsidiaries MetroCapital Corporation and
Metropolitan Savings Bank of Cleveland (the "Bank"), and its wholly-owned
subsidiaries, Kimberly Construction Company, Incorporated, and Metropolitan
Savings Service Corporation, and its wholly-owned subsidiary Metropolitan
Securities Corporation. All significant intercompany transactions have been
eliminated. In the opinion of management, the accompanying unaudited 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 months ended March 31, 1996 and
1995; (b) the financial condition at March 31, 1996 and December 31, 1995; and
(c) the statement of cash flows for the three month periods ended March 31, 1996
and 1995. The results of operations for the three month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for a
full year. The annual report for Metropolitan for the year ended December 31,
1995, contains consolidated financial statements and related notes which should
be read in conjunction with the accompanying consolidated financial statements.
2. ACCOUNTING POLICIES
SECURITIES: Securities classified as held to maturity are those that management
has the positive intent and ability to hold to maturity. Securities held to
maturity are stated at cost, adjusted for amortization of premiums and accretion
of discounts.
Securities classified as available for sale are those that management intends to
sell or that could be sold for liquidity, investment management, or similar
reasons, even if there is not a present intention for such sale. Securities
available for sale are carried at fair value with unrealized gains and losses
included as a separate component of shareholder's equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method.
LOANS: Loans held for investment are stated at the principal amount outstanding
adjusted for amortization of premium and accretion of discount using the
interest method. Sales of loans are dependent upon various factors, including
interest rate movements, deposit flows, the availability and attractiveness of
other sources of funds, loan demand by borrowers, and liquidity and capital
requirements. The Bank reevaluates its intent to hold loans at each balance
sheet date based on
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the then current environment and, if appropriate, reclassifies loans as held for
sale and records them at the lower of cost or market. At March 31, 1996 and
December 31, 1995, management had the intent and the Bank had the ability to
hold all loans being held for investment purposes for the foreseeable future.
Gains and losses on the sale of loans are determined by the identified loan
method and are reflected in operations at the time of sale.
ALLOWANCE FOR LOSSES ON LOANS: An allowance for losses on loans is maintained
because some loans may not be repaid in full. Increases to the allowance are
recorded by a provision for loan losses charged to expense. 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 possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loans, the whole allowance is available for any loan charge-offs that
occur. A loan is charged off against the allowance by management as a loss when
deemed uncollectible, although collection efforts continue and future recoveries
may occur.
Statement of Financial Accounting Standards ("SFAS") No. 114 was adopted January
1, 1995. Under this standard, 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 cause the allowance for losses on loans to require an
increase, such an increase is reported as a provision for loan losses. Based
on the analysis prepared, no provision for loan losses was recorded in
connection with adopting this standard. As allowed, management excludes all
consumer loans and residential single family loans with balances less than
$200,000 from classification as impaired.
The Corporation's policy for recognition of interest on impaired loans including
how cash receipts are recorded is essentially unchanged as a result of the
adoption of SFAS Nos. 114 and 118. A loan (including a loan impaired under SFAS
No. 114) is classified as non-accrual when collectability is in doubt (this is
generally when the borrower is 90 days past due on contractual principal or
interest payments). When a loan is placed on non-accrual status, unpaid interest
is reversed. Income is subsequently recognized only to the extent that cash
payments are received. Loans are returned to accrual status when, in
management's judgment, the borrower has the ability and intent to make periodic
principal and interest payments (this generally requires that the loan be
brought current in accordance with its original contractual terms.)
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3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale at March 31, 1996 and December 31, 1995
are as follows (In Thousands):
March 31, 1996
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
U.S. Treasury securities $ 12,176 $ 148 $ (121) $12,203
Mutual fund 1,117 1,117
Repurchase agreement 4,078 4,078
------- -------- --------- ------
Total investment securities 17,371 148 (121) 17,398
------- -------- --------- ------
Mortgage-backed securities 36,629 656 (21) 37,264
------- -------- --------- ------
Totals $ 54,000 $ 804 $ (142) $54,662
======= ======== ========= ======
December 31, 1995
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
U.S. Treasury securities $ 12,195 $ 277 $ (30) $12,442
Mutual fund 10,364 10,364
------- -------- --------- ------
Total investment securities 22,559 277 (30) 22,806
------- -------- --------- ------
Mortgage-backed securities 38,286 870 39,156
------- -------- --------- ------
Totals $ 60,845 $ 1,147 $ (30) $61,962
======= ======== ========= ======
4. LOANS RECEIVABLE
The composition of the loan portfolio at March 31, 1996 and December 31, 1995 is
as follows (In Thousands):
March 31, December 31,
1996 1995
--------- -----------
Real estate loans
Construction loans
Residential single family $ 33,972 $ 37,118
Commercial 2,325 440
Loans in process (20,987) (23,373)
-------- --------
Construction loans, net 15,310 14,185
Permanent loans
Residential single family 78,513 76,259
Residential apartments 249,675 231,459
Commercial 128,446 109,402
Other 12,031 10,652
-------- --------
Total real estate loans 483,975 441,957
Consumer loans 37,893 32,213
Business and other loans 14,603 8,704
-------- --------
Total loans 536,471 482,874
Premiums (Discounts) on loans 22 (544)
Deferred loan fees (1,434) (1,220)
Allowance for losses on loans (3,066) (2,765)
-------- --------
$ 531,993 $ 478,345
======== ========
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Activity in the allowance for losses on loans for the periods ended March 31,
1996 and 1995 is as follows (In Thousands):
March 31, March 31,
1996 1995
-------- --------
Balance at the beginning of the period $ 2,765 $ 1,910
Provision for loan losses 307 240
Net charge-offs (6) (16)
------ ------
Balance at the end of the period $ 3,066 $ 2,134
====== ======
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 terms of the contract. Information regarding impaired
loans at March 31, 1996 and December 31, 1995 is as follows (In Thousands):
March 31, December 31,
1996 1995
-------- --------
Balance of impaired loans $ 5,143 $ 3,569
Less portion for which no allowance
for losses on loans is allocated 3,211 3,569
------ ------
Portion of impaired loans for which
an allowance for loan losses is
allocated $ 1,932 $ 0
====== ======
Portion of allowance for losses on
loans allocated to the impaired
loan balance $ 175 $ 0
====== ======
Information regarding impaired loans is as follows for the three months ended
March 31, 1996 and the year ended December 31, 1995:
March 31, December 31,
1996 1995
-------- --------
Average investment in impaired loans
during the period $ 4,743 $ 2,144
Interest income recognized on impaired
loans including income recognized on
a cash basis $ 37 $ 36
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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, 1996 and December 31, 1995 are summarized as follows
(In Thousands):
March 31, December 31,
1996 1995
-------- --------
[S] [C] [C]
Mortgage loans underlying pass-through
securities
FNMA $ 120,247 $ 112,657
Mortgage loan portfolios serviced for
FHLMC 812,367 781,402
FNMA 173,886 224,545
Other 37,974 63,611
--------- ---------
Total loans serviced for others $1,144,474 $1,182,215
========= =========
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $7,971,000 and $14,198,000 at March 31, 1996 and
December 31, 1995, respectively.
The following is an analysis of the changes in cost of loan servicing rights for
the periods ended March 31, 1996 and 1995 (In Thousands):
March 31, March 31,
1996 1995
--------- ---------
Balance at the beginning of the period $ 9,130 $ 4,825
Acquired or originated 249 0
Amortization (538) (351)
------ ------
Balance at the end of the period $ 8,841 $ 4,474
====== ======
6. OTHER BORROWINGS
Other borrowings consisted of the following at March 31, 1996 and December 31,
1995 (In Thousands):
March 31, December 31,
1996 1995
--------- ---------
Federal Home loan Bank Advances
(5.3% and 5.7% at March 31, 1996
and December 31, 1995, respectively) $ 43,000 $ 28,000
Subordinated debt maturing December 31,
2001 (10% fixed rate) 4,874 4,874
Subordinated debt maturing January 1,
2005 (9.625% fixed rate) 14,000 14,000
------- -------
Total $ 61,874 $ 46,874
======= =======
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7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank can be a party to financial instruments with off-balance sheet risk in
the normal course of business to meet financing needs of its customers. These
financial 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.
The Bank had fixed and variable rate commitments to originate and/or purchase
loans (at market rates) of approximately $12,212,000 and $23,600,000, and
$18,543,000 and $11,152,000, at March 31, 1996 and December 31, 1995,
respectively. In addition, the Bank had commitments to sell loans totalling
$11,556,000 and $2,006,500, at March 31, 1996 and December 31, 1995,
respectively.
At March 31, 1996 and December 31, 1995, the Bank had outstanding options which
gave the holder the option to purchase certain loans at a specified price with a
specified time period. The Bank collected and recognized the non-refundable fee
on the date the options were issued. At March 31, 1996, loans with an unpaid
principal balance of $4,882,447 and a carrying value of $3,396,023 were held for
sale in connection with outstanding purchase options. At December 31, 1995, a
loan with an unpaid principal balance of $583,396 and a carrying amount of
$458,146 was held for sale in connection with and outstanding purchase option.
The options may be exercised at the carrying value for an initial period. The
option price escalates after the initial period until the option expires.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of the
Bank. Metropolitan's 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 Metropolitan's income is net interest income, the difference
between the interest Metropolitan earns on interest-earning assets, such as
loans and securities, and the interest Metropolitan pays on interest-bearing
liabilities, such as deposits and borrowings. Metropolitan's operations are also
affected by non-interest income, such as loan servicing fees and gains or losses
from sales of loans and securities. From time to time, Metropolitan engages in
certain transactions aimed at increasing its non-interest income such as loan
option income. Metropolitan's principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, occupancy costs, federal
deposit insurance premiums, and other general and administrative expenses.
Average Balances and Yields. The following table presents, for the periods
indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollar and
rates, and the net interest margin. Net interest margin refers to net interest
income divided by total interest-earning assets and is influenced by the level
and relative mix of interest-earning assets and interest-bearing liabilities.
All average balances are daily average balances. Non-accruing loans are
considered in average loan balances.
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Three Months Ended March 31,
1996 1995
----------------------- -----------------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 522,200 $11,322 8.72% $446,579 $9,415 8.48%
Mortgage-backed securities
available for sale(1) 38,612 614 6.40 16,728 265 6.37
Other 17,113 248 5.83 11,119 130 4.70
-------- ------ ------- -----
Total interest-earning assets 577,925 12,184 8.48 474,426 9,810 8.32
------ -----
Nonearning assets 41,858 23,524
======== =======
Total assets $ 619,783 $497,950
======== =======
Interest-bearing liabilities:
Deposits $ 492,499 6,547 5.35 $421,084 5,151 4.92
Other borrowings 61,622 1,086 7.09 31,377 607 7.79
-------- ----- ------- -----
Total interest-bearing
liabilities 554,121 7,633 5.54 452,461 5,758 5.12
-----
Noninterest-bearing liabilities 36,554 24,085
Shareholder's equity 29,108 21,404
-------- -------
Total liabilities and
shareholder's equity $ 619,783 $497,950
======== =======
Net interest income and
interest rate spread $4,551 2.94% $4,052 3.20%
===== ==== ===== ====
Net interest margin 3.17% 3.43%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 104.30% 104.85%
====== ======
<FN>
(1) The average balance of mortgage-backed securities available for sale are
presented at historical cost.
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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 March 31,
1996 vs. 1995
Increase (Decrease)
--------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ----
INTEREST INCOME ON:
Loans receivable $ 1,907 $ 1,594 $ 313
Mortgage-backed securities 349 347 2
Other 118 70 48
------- ------ ------
Total interest income 2,374 $ 2,011 $ 363
------- ====== ======
INTEREST EXPENSE ON:
Deposits 1,396 874 522
Other borrowings 478 586 (108)
------- ------ ------
Total interest expense 1,874 $ 1,460 $ 414
------- ====== ======
Increase in net interest income $ 500
=======
RESULTS OF OPERATIONS
Net Income. Net income for the first quarter ended March 31, 1996 was $ 716,000
as compared to $ 632,000 for the same period in 1995. Net interest income and
non-interest income increased 12.3% and 110.6%, respectively, in the first
quarter ended March 31, 1996 as compared to the same period as 1995, however,
the provision for loan losses and non-interest expense increased 28.1% and
23.8%, respectively, in the first quarter March 31, 1996.
Interest Income. Total interest income increased 24.2% to $12.2 million in the
first quarter ended March 31, 1996 as compared to $9.8 million in 1995. This
increase primarily resulted from a 21.8% increase in average interest-earning
assets between the two periods. The average balance of loans increased $75.6
million which was a result of Metropolitan's consistent strategy of increasing
assets so long as quality loans with acceptable yield and term characteristics
are available. In addition, as a result of the generally higher interest rate
environment, the weighted average yield on interest-earning assets increased to
8.48% during the first quarter ended March 31, 1996 as compared to 8.32% during
the same period in 1995.
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Metropolitan's net interest margin declined 26 basis points to 3.17% for the
first quarter ended March 31, 1996 as compared to 3.43% for the same period in
1995, largely as a result of market-driven increases in interest rates and the
interest sensitivity of the Bank's balance sheet. Rates paid on deposits
increased in response to higher market interest rates and in order to fund the
significant growth in loans, resulting in an increased cost of funds.
Interest Expense. Total interest expense increased 32.6% to $7.6 million for the
first quarter ended March 31, 1996 as compared to $5.8 million for the same
period in 1995. Interest expense increased due to a higher average balance of
interest-bearing liabilities outstanding and due to a higher cost of funds
during the first quarter ended March 31, 1996 as compared to the same period in
1995. In accordance with Metropolitan's stated business strategy, the average
balance of deposit accounts increased $71.4 million, or 17.0%, from March 31,
1995 to March 31, 1996.
Metropolitan's cost of funds increased to 5.54% in the first quarter ended March
31, 1996 as compared to 5.12% in the same period in 1995 due to the higher level
of market interest rates, in order to fund the significant growth in loans, and
due to the cost of subordinated debt issued during the fourth quarter of 1995.
Provision for Loan Losses. The provision for loan losses increased 28.1% to
$307,000 in the first quarter ended March 31, 1996 as compared to $240,000 in
the same period in 1995. The increase was related to the increase in total loans
and management's estimate of the adequacy of the allowance for losses on loans.
Total loans (excluding loans held for sale) increased 11.2% to $532.0 million at
March 31, 1996 from $478.3 million at December 31, 1995. The allowance for
losses on loans at March 31, 1996 was $3.6 million or 0.57% of total loans, as
compared to $2.8 million, also 0.57% of total loans, at December 31, 1995.
Management's estimate of the adequacy of the allowance for losses on loans is
based upon an analysis of such factors as historical loan loss experience, an
analysis of impaired loans, economic conditions affecting real estate markets,
regulatory considerations, and other matters.
Non-Interest Income. Total non-interest income increased 110.6% to $1.1 million
in the first quarter ended March 31, 1996 as compared to $501,000 in the same
period in 1995. The following table sets forth Metropolitan's non-interest
income for the periods indicated.
Three Months ended March 31,
1996 1995
---- ----
(In thousands)
Loan servicing income, net $ 314 $ 179
Gain on sale of loans 103 11
Loan option income 108
Other 531 311
------ ------
Total $ 1,056 $ 501
====== ======
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Net loan servicing income increased 74.8% to $314,000 in the first quarter ended
March 31, 1996 as compared to $179,000 in the same period in 1995 due to the
increase in the portfolio being serviced for others. The increase in the
servicing portfolio and related net loan servicing fees was a result of
Metropolitan's strategy of increasing non-credit based fee income. In that
regard, the portfolio of loans serviced for others was increased to $1.1 billion
at March 31, 1996 from $708.9 million at March 31, 1995.
Gain on sale of loans was $103,000 in the first quarter ended March 31, 1996 as
compared to $11,000 for the same period in 1995. This income was dependent upon
both the amount of loans sold, secondary market pricing, and the value allocated
to mortgage servicing rights, and these variables in turn were directly affected
by prevailing interest rates. The proceeds from sale of loans increased $10.4
million to $11.2 million during the first quarter ended March 31, 1996 as
compared to $744,000 in the same period of 1995.
Loan option income was $108,000 in the first quarter ended March 31, 1996. This
represents a new source of non-interest income for the Bank. In these
transactions Metropolitan purchased loans and sold nonrefundable options to a
third party to purchase these same loans at a later date.
Non-Interest Expense. Total non-interest expense increased 23.8% to $4.1 million
in the first quarter ended March 31, 1996 as compared to $3.3 million for the
same period in 1995. The following table sets forth Metropolitan's non-interest
expense for the periods indicated:
Three Months ended March 31,
1996 1995
---- ----
(In thousands)
Personnel related costs $ 2,049 $ 1,647
Occupancy costs 572 524
Federal deposit insurance 309 274
Data processing expense 148 139
Amortization of intangibles 55 55
State franchise tax 118 76
Marketing expense 126 107
Other operating expenses 756 515
------- ------
Total $ 4,133 $ 3,337
======= ======
Personnel related expenses increased $402,000, which represented 50.5% of the
increase in the first quarter ended March 31, 1996 over the same period in 1995.
The increase was primarily a result of having two additional full service retail
sales offices open in the 1996 period and reflects the effects of merit
increases over the two time periods. Occupancy costs increased $48,000 which
represented 6.0% of the increase in the first quarter ended March 31, 1996 over
1995, generally as a
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result of an increase in the number of full service retail sales offices. Other
operating expenses, which include miscellaneous general and administrative costs
in addition to certain loan servicing and loan processing costs, increased
$241,000 which represented 30.4% of the increase in 1996 over the same period in
1995 as a result of the overall increase in business levels (loans, deposits,
and servicing).
Provision for Income Taxes. The provision for income taxes increased 31.2% to
$451,000 in the first quarter ended March 31, 1996 as compared to $344,000 in
the same period in 1995. The effective tax rate was 38.7% for the first quarter
ended March 31, 1996 and 35.3% for the same period in 1995. The higher effective
tax rate in the 1996 period was largely due to premium payments for a key man
life insurance policy, which are not deductible for income tax purposes.
ASSET QUALITY
Metropolitan's goal is to maintain the above average asset quality of its loan
portfolio through conservative lending policies and prudent underwriting.
Detailed reviews of the loan portfolio are undertaken regularly to identify
potential problem loans or trends early and to provide for adequate estimates of
potential losses. In performing these reviews, Metropolitan's management
considers, among other things, current economic conditions, portfolio
characteristics, delinquency trends, and historical loss experiences.
Metropolitan normally considers loans to be non-performing 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, Metropolitan considers loans to be 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 non-performing, an assessment is
made as to the collectability of the unpaid interest. Interest determined to be
uncollectible is reversed from interest income and 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.
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The table below provides information concerning Metropolitan's non-performing
assets and the allowance for losses on loans as of the dates indicated. All
loans classified by management as impaired were also classified as
non-performing.
At March 31, December 31,
1996 1995
---- ----
(Dollars in thousands)
Non-accrual loans $5,018 $3,103
Loans past due greater than
90 days or impaired, still accruing 1,082 204
----- -----
Total non-performing loans 6,100 3,307
Real estate owned 219 258
----- -----
Total non-performing assets $6,319 $3,565
===== =====
Allowance for losses on loans $3,066 $2,765
===== =====
Non-performing loans to total loans 1.12% 0.69%
Non-performing assets to total assets 0.99% 0.60%
Net charge-offs to average loans 0.00%(1) 0.02%
Provision for loan losses to
average loans 0.24%(1) 0.21%
Allowance for losses on loans to
total non-performing loans at
end of period 50.26% 83.61%
Allowance for losses on loans to
total loans at end of period 0.57% 0.57%
<FN>
(1) Annualized for comparative purposes.
Non-performing loans at March 31, 1996 increased $2.8 million, or 84.5% to $6.1
million as compared to $3.3 million at December 31, 1995. The increase was due
to three large credits, two secured by multifamily properties and one secured by
commercial real estate. One multifamily loan is current despite a debt service
coverage ratio below 1.0. Management will likely move to foreclose on the
remaining two properties and expects that non-accrual status will continue for
an extended period of time. Based upon recent appraisals of the underlying
collateral the loans are adequately secured by the collateral value and no
material losses are anticipated. Management considers all three of these loans
to be impaired.
Non-accrual loans at March 31, 1996 and December 31, 1995 included a $1.5
million loan secured by an apartment building in Southern California which was
damaged in the January 1994 earthquake. A loan workout has been negotiated and
construction work to rebuild the apartment building is currently under way.
Construction is anticipated to be completed in July 1996 and rent up will begin.
The loan is expected to return to accrual status by September 30, 1996.
Management
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currently expects that deferred interest and principal will be fully
collected.
Non-performing loans include $5.1 million and $3.6 million at March 31, 1996 and
December 31, 1995, respectively, considered by management to be impaired. The
circumstances and trends associated with these loans have been included in
management's consideration of the adequacy of the allowance for losses on loans.
FINANCIAL CONDITION
Total assets amounted to $639.4 million at March 31, 1996, as compared to $590.0
million at December 31, 1995, an increase of $49.4 million, or 8.4%. The
increase in assets was funded with deposit growth of $36.3 million and an
increase in Federal Home Loan Bank ("FHLB") advances and other borrowings of
$15.0 million.
Cash and cash equivalents decreased $3.8 million, or 20.9%, to $14.4 million.
The decline is due to a lower volume of transactions in process at month-end
March 31, 1996.
Securities decreased $5.4 million, or 23.7%, to $17.4 million. The decline
represents a reduction in excess short-term liquidity which was used to fund
loan purchases during the first quarter ended March 31, 1996.
Loans receivable increased $57.0 million, or 11.9% to $535.4 million. This
increase was consistent with Metropolitan's overall strategy of increasing
assets while adhering to prudent underwriting standards and preserving its
adequately capitalized status.
Deposits totalled $540.0 million at March 31, 1996, an increase of $36.3
million, or 7.2%, over the balance at December 31, 1995. The increase resulted
from management's marketing efforts, continued growth at newer retail sales
offices and increased custodial checking balances which are maintained for the
benefit of investors in the loan servicing segment of the business.
Other borrowings increased $15.0 million to $61.9 million at March 31, 1996, as
compared to $46.9 million at December 31, 1995. Based on the lower cost of
wholesale funds as compared to comparable maturity retail deposits, management
chose to fund a portion of the loan growth discussed above with wholesale funds.
FHLB advances were the source of borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to Metropolitan's ability to generate
adequate amounts of cash to meet its needs, typically for funding loan
originations and purchases. Metropolitan's primary sources of internally
generated funds are principal repayments and payoffs of loans receivable, cash
flows from operations and proceeds from sales of
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loans. External sources of funds include increases in deposits, FHLB
advances, and reverse repurchase agreements.
While principal repayments and FHLB advances are fairly stable sources of funds,
deposit flows and loan prepayments are greatly influenced by prevailing interest
rates, economic conditions, and competition. Metropolitan regularly reviews cash
flow needed to fund its operations and believes that the aforementioned
resources are adequate for its foreseeable requirements.
The Bank is required by regulation to maintain a liquidity ratio (average daily
balance of liquid assets to average daily balance of net withdrawable accounts
and short-term borrowings) of 5%. The Bank's liquidity ratio for March 1996 was
6.66%. Historically, Metropolitan has maintained its liquidity close to the
required minimum 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.
The Corporation's primary source of funds currently is dividends from the Bank,
which are subject to restrictions imposed by federal bank regulatory agencies.
The Corporation's primary use of funds is for interest payments on its existing
debt. At March 31, 1996, the Corporation, excluding the Bank, had cash of $4.2
million.
Metropolitan's liquidity, represented by cash equivalents, is a result of its
operating, investing, and financing activities. These activities are summarized
as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
---- ----
Net cash used for operating
activities $ (7,098) $ (2,111)
Net cash used for investing
activities (47,987) (31,326)
Net cash provided by
financing activities 51,281 30,942
-------- --------
Net change in cash and
cash equivalents (3,804) (2,495)
Cash and cash equivalents
at beginning of period 18,170 11,565
-------- --------
Cash and cash equivalents
at end of period $ 14,366 $ 9,070
======== ========
Cash provided or used by operating activities is determined largely by changes
in the level of loans held for sale. The level of loans held for sale depends on
the level of loan originations and the time until an investor funds the purchase
of the loan from the Bank.
Cash provided from investing activities consists primarily of principal
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payments on loans and mortgage-backed securities. The level of these payments
increases and decreases depending on the size of the loan and mortgage-backed
securities portfolios and the general trend and level of interest rates, which
influences the level of refinancings and mortgage repayments. During the three
months ended March 31, 1996 and 1995, net cash was used in investing activities,
primarily to fund and purchase new loans.
Cash provided from financing activities consists primarily of increased deposits
but also includes wholesale borrowings like FHLB advances and reverse repurchase
agreements.
At March 31, 1996, $43.0 million, or 8.0%, of Metropolitan's deposits were in
the form of certificates of deposit of $100,000 and over. If a large number of
these certificates of deposits matured at approximately the same time and were
not renewed there could be an adverse effect on Metropolitan's liquidity.
Metropolitan monitors maturities to attempt to minimize the potential adverse
effect on liquidity.
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, 1996 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 $34,783 5.48% $35,101 5.53% $37,681 8.06%
Required 9,513 1.50 25,381 4.00 37,395 8.00
------ ------ ------
Excess $25,270 3.98% $ 9,720 1.53% $ 286 0.06%
====== ====== ======
Metropolitan anticipates that under the current regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future. At
March 31, 1996, the Corporation held $4.2 million of cash for future capital
contributions to the Bank. However, events beyond the control of the Bank, such
as increased interest rates or a downturn in the economy, could adversely affect
future earnings and consequently, the ability of the Bank to meet its future
capital requirements.
In late 1995, Congress passed legislation as part of its balanced budget bill
providing for the merger of the Bank Insurance Fund ("BIF") and the
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Savings Association Insurance Fund ("SAIF") effective January 1, 1998. Prior to
such a merger, however, the legislation authorizes the Federal Deposit Insurance
Corporation ("FDIC") to impose a one-time special assessment on SAIF-insured
deposits in and amount equal to approximately 85 cents per $100 in insured
deposits for the purpose of recapitalizing SAIF. Based upon deposits at March
31, 1996, such an assessment would be approximately $4.6 million, or $3.0
million after-tax. The Corporation has over $4 million available to contribute
to the capital of the Bank and therefore, management does not believe that such
an assessment will have a material adverse effect on the Bank or Metropolitan.
The balanced budget bill of which this legislation was a part was vetoed by the
President in December 1995. This may become a stand-alone bill, however; there
is currently no action which would indicate that this will be handled before the
end of June 1996. There can be no assurance as to the ultimate form this
legislation will take or its impact on the Bank.
ASSET/LIABILITY MANAGEMENT
Metropolitan, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. The Bank's Asset and Liability Committee, which
includes representatives of senior management, monitors the level and relative
mix of its interest-earning assets and interest-bearing liabilities. The
principal strategy used by Metropolitan to manage interest rate risk has been to
build a portfolio of adjustable rate interest-earning assets.
Presented below, as of March 31, 1996 and 1995, is an analysis of Metropolitan's
interest rate risk measured using Net Portfolio Value ("NPV") methodology.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and outgoing cash flows on
interest-bearing and other liabilities. The table also contains the policy
limits set by the Board of Directors of the Bank established with consideration
of the dollar impact of various rate changes and the Bank's capital position.
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
CHANGES IN
INTEREST RATE BOARD LIMIT CHANGE IN % CHANGE CHANGE IN % CHANGE
(BASIS POINTS) % CHANGE NPV IN NPV NPV IN NPV
- - - ------------- ----------- --------- ------ --------- -------
(DOLLARS IN THOUSANDS)
+400 (75)% $(14,025) (27)% $(8,913) (27)%
+300 (50) (9,884) (19) (6,147) (19)
+200 (25) (6,054) (12) (3,643) (11)
+100 (10) (2,647) (5) (1,524) (5)
-100 (10) 2,737 5 525 2
-200 (25) 7,099 19 429 1
-300 (50) 13,528 26 900 3
-400 (75) 23,825 45 2,149 6
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As illustrated in the table, Metropolitan's NPV is unfavorably affected in the
rising rate scenarios. This occurs principally because the interest paid on
deposits would increase more rapidly than rates earned on assets because
deposits generally have shorter periods to repricing. In addition, the fixed
rate assets in portfolio will only reprice as the loans are repaid and new loans
at higher rates are made. Furthermore, even for the adjustable rate assets,
repricing may lag behind the rate change due to contractual time frames.
The Bank's sensitivity to rising rates at March 31, 1996 is very similar to the
sensitivity at the same point in time in 1995. At March 31, 1996 and 1995, the
Bank was within the Board established limits for various changes in interest
rates.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes 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 interest rates on other
types of assets and liabilities may lag behind changes in market rates. Further,
in the event of a change in interest rates, expected rates of repayment on
assets and early withdrawal levels from certificates of deposit would likely
deviate from those scheduled. Despite its limitations, management considers NPV
the best method for monitoring interest rate risk since core repricing and
maturity relationships are very clearly seen. The clarity of the risk relations
is enhanced by the simplicity of the rate changes and the fact that all rates,
short-term and long-term, change by the same degree.
The steps being taken by the Bank to manage interest rate risk include: (i) the
continued focus of originating and purchasing adjustable rate assets for
portfolio; (ii) the sale of fixed rate one- to four-family loans with servicing
retained; (iii) focus on shortening the term of fixed rate lending by increasing
the percent of the fixed rate loan portfolio represented by consumer loans; (iv)
introducing business lending which will result in loans with generally
adjustable rates and shorter terms; (v) increasing the loan servicing portfolio;
(vi) emphasizing transaction account deposit products which are less susceptible
to repricing in a rising interest rate environment; (vii) maintaining
competitive pricing on longer term certificates of deposit; and (viii) utilizing
term advances and other borrowings rather than short-term funds.
ACCOUNTING DEVELOPMENTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
122, "Accounting for Mortgage Servicing Rights." This statement requires lenders
who sell originated loans and retain the servicing rights to recognize as
separate assets the rights to service
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mortgage loans for others. It also requires that capitalized mortgage servicing
rights be assessed for impairment based on the fair value of those rights.
Management elected to adopt this statement effective January 1, 1995. At March
31, 1996 and December 31, 1995, the fair value of such rights was in excess of
the amount capitalized.
PART II. OTHER INFORMATION
Items 1-5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Description
3.1 Articles of Incorporation of Metropolitan Financial
Corp. (incorporated by reference to Exhibit 3.1 to
Metropolitan's Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on November
28, 1995 (Registration No. 33-98380), as amended).
3.2 Code of Regulations of Metropolitan Financial Corp.
(incorporated by reference to Exhibit 3.2 to
Metropolitan's Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on November
28, 1995 (Registration No. 33-98380), as amended).
27 Financial Data Schedule (1)
99.1 The Loan Agreement by and between The Huntington
National Bank and Metropolitan Financial Corp., dated
February 22, 1995, relating to the Huntington Bank Loan
(incorporated by reference to Exhibit 99.2 to
Metropolitan's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on
November 28, 1995 (Registration No. 33-98380), as
amended), as amended by Amendments 1, 2, and 3 filed
herewith.
b. Reports on Form 8-K - No reports on Form 8-K were filed by
Metropolitan during the first three months of 1996.
(1) Filed only in electronic format pursuant to item 601(b)(27) of
Regulation S-K.
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METROPOLITAN FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of Sections 13 and 15 (d) 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/ David G. Lodge
----------------------------
David G. Lodge,
President and (principal
financial and accounting
officer)
Date: May 15, 1996
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