1
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 September 30, 1996.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- ---------------------
Commission file number 000-21553
---------------------------------------------------
METROPOLITAN FINANCIAL CORP.
---------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
- ----------------------------------- ----------------------
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
6001 Landerhaven Drive Mayfield Heights, Ohio 44124
- ------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(216) 646-1111
--------------
(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
------ ------
As of November 12, 1996, there were issued and outstanding 3,525,635 shares of
the Registrant's Common Stock.
2
METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of
September 30, 1996 and December 31, 1995 ........... 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1996 and 1995 .. 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996 and 1995 .. 5
Notes to Consolidated Financial Statements ......... 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 13-27
PART II. OTHER INFORMATION........................................... 28-29
SIGNATURES ........................................................... 30
2
3
PART I. FINANCIAL INFORMATION
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
September 30, December 31,
1996 1995
------------- ------------
(In Thousands)
ASSETS
Cash and cash equivalents $18,344 $18,170
Securities available for sale (Note 3) 12,186 22,806
Mortgage-backed securities available
for sale (Note 3) 42,255 39,156
Loans held for sale 6,877 1,504
Loans receivable, net (Note 4) 602,736 478,345
Federal Home Loan Bank stock, at cost 3,920 3,569
Accrued interest receivable 4,371 3,708
Premises and equipment, net 10,786 7,500
Real estate owned, net 1,503 258
Prepaid expenses and other assets 5,598 2,761
Cost of loan servicing rights (Note 5) 8,363 9,130
Cost in excess of fair value of net
assets acquired 3,029 3,188
-------- --------
Total assets $719,968 $590,095
======== ========
LIABILITIES
Deposits $584,749 $503,742
Other borrowings (Note 6) 90,424 46,874
Accrued interest payable 3,677 4,551
Official check float account 3,648 2,779
Other liabilities 11,934 6,683
-------- --------
Total liabilities 694,432 564,629
-------- --------
SHAREHOLDER'S EQUITY
Common stock, no par value, 250,000
shares authorized, one share issued
and outstanding
Additional paid-in capital 7,801 7,801
Retained earnings 17,380 16,928
Unrealized gain on securities available
for sale, net of tax 355 737
-------- --------
Total shareholder's equity 25,536 25,466
-------- --------
Total liabilities & shareholder's
equity $719,968 $590,095
======== ========
See notes to consolidated financial statements.
3
4
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------- ------- ------- -------
(In Thousands)
INTEREST INCOME
Interest and fees on loans $ 13,040 $10,220 $36,080 $29,536
Interest on mortgage-backed
securities 700 929 1,965 1,585
Interest and dividends on
other investments 268 255 951 650
-------- ------- ------- -------
Total interest income 14,008 11,404 38,996 31,771
-------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits 7,164 6,129 20,508 17,080
Interest on other borrowings 1,455 1,089 3,560 2,525
-------- ------- ------- -------
Total interest expense 8,619 7,218 24,068 19,605
-------- ------- ------- -------
NET INTEREST INCOME 5,389 4,186 14,928 12,166
Provision for loan losses 650 240 1,335 719
-------- ------- ------- -------
Net interest income after
provision for loan losses 4,739 3,946 13,593 11,447
-------- ------- ------- -------
Non-interest income
Gain on sale of loans 105 131 140 244
Loan servicing income, net 307 354 939 745
Loan option income 114 521 420
Loan credit discount income 406
Other operating income 840 361 1,812 992
-------- ------- ------- -------
Total non-interest income 1,366 846 3,412 2,807
-------- ------- ------- -------
Non-interest expense
Salaries and related
personnel cost 2,263 1,789 6,334 5,048
Occupancy and equipment expense 645 538 1,770 1,563
Federal deposit insurance
premiums 352 290 991 838
Federal deposit insurance
assessment 2,928 2,928
Data processing expense 155 106 450 433
Marketing expense 214 133 498 359
State franchise taxes 114 75 347 227
Amortization of intangibles 50 55 159 166
Other operating expenses 1,029 656 2,636 1,759
-------- ------- ------- -------
Total non-interest expense 7,750 3,642 16,113 10,393
-------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (1,645) 1,150 892 3,861
Provision for income taxes (516) 434 440 1,466
-------- ------- ------- -------
NET INCOME(LOSS) $ (1,129) $ 716 $ 452 $ 2,394
======== ======= ======= =======
See notes to consolidated financial statements.
4
5
METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
1996 1995
--------- ---------
(In Thousands)
NET CASH PROVIDED(USED) BY
OPERATING ACTIVITIES $ (1,647) $ 6,543
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for
sale (117,191) (4,101)
Proceeds from sale of securities
available for sale 127,459
Disbursement of loan proceeds (195,109) (72,736)
Purchases of loans (44,071) (53,313)
Purchases of mortgage-backed securities
available for sale (8,705)
Proceeds from loan principal repayments 109,246 64,713
Proceeds from sale of loans 4,915
Proceeds from mortgage-backed securities
principal repayments and maturities 5,426 1,982
Proceeds from sale of real estate owned 41 102
Purchase of premises and equipment (3,761) (3,695)
Purchase of FHLB stock (157) (1,041)
Purchase of mortgage loan servicing rights (828) (5,359)
--------- ---------
Net cash used for investing activities (122,735) (73,448)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 81,006 40,568
Proceeds from borrowings 224,350 276,700
Repayment of borrowings (180,800) (247,730)
--------- ---------
Net cash provided by financing
activities 124,556 69,538
--------- ---------
Net change in cash and cash equivalents 174 2,633
Cash and cash equivalents at beginning
of period 18,170 11,565
--------- ---------
Cash and cash equivalents at end
of period $ 18,344 $ 14,198
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 24,941 $ 17,350
Income taxes 1,587 2,361
Transfer from loans receivable to
other real estate 1,326 280
Loans securitized 48,509
See notes to consolidated financial statements.
5
6
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 balances 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 and nine months ended September 30,
1996 and 1995; (b) the financial condition at September 30, 1996 and December
31, 1995; and (c) the statement of cash flows for the nine month periods ended
September 30, 1996 and 1995. The results of operations for the nine month period
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the entire 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 receivable, net are held for investment and 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 the then current environment and, if
appropriate, reclassifies loans as held for sale and records them at the lower
of cost or market. For multifamily and commercial real estate loans held for
sale, the Bank enters into a sales agreement concurrent with loan
origination/purchase. As such, these loans are recorded at cost, which
approximates market. At September 30, 1996 and December 31, 1995, management had
the intent and the Bank had the ability to
6
7
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.)
7
8
3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale at September 30, 1996 and December 31,
1995 are as follows (In Thousands):
September 30, 1996
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury securities $ 6,103 $ 32 $ (96) $ 6,039
Mutual funds 1,147 1,147
FNMA preferred stock 5,000 5,000
-------- --------- --------- -------
Total investment securities 12,250 32 (96) 12,186
-------- --------- --------- -------
Mortgage-backed securities 41,654 625 (24) 42,255
-------- --------- --------- -------
Totals $ 53,904 $ 657 $ (120) $54,441
======== ========= ========= =======
December 31, 1995
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury securities $ 12,195 $ 277 $ (30) $12,442
Mutual funds 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
======== ========= ========= =======
8
9
4. LOANS RECEIVABLE
The following table presents, for the periods indicated, the composition of the
loan portfolio (In Thousands):
September 30, December 31,
1996 1995
------------- ------------
Real estate loans
Construction loans
Residential single family $ 48,894 $ 37,118
Commercial 2,325 440
Loans in process (32,159) (23,373)
--------- ---------
Construction loans, net 19,060 14,185
Permanent loans
Residential single family 115,630 76,259
Residential apartments 271,675 231,459
Commercial 127,273 109,402
Other 14,726 10,652
--------- ---------
Total real estate loans 548,364 441,957
Consumer loans 48,915 32,213
Business and other loans 11,918 8,704
--------- ---------
Total loans 609,197 482,874
Premiums(discounts) on loans,net (308) (544)
Deferred loan fees (2,100) (1,220)
Allowance for losses on loans (4,053) (2,765)
--------- ---------
$ 602,736 $ 478,345
========= =========
Activity in the allowance for losses on loans for the periods indicated is as
follows (In Thousands):
Nine Months Ended September 30,
1996 1995
-------- --------
Balance at the beginning of the period $ 2,765 $ 1,910
Provision for loan losses 1,335 719
Net charge-offs (47) (78)
-------- --------
Balance at the end of the period $ 4,053 $ 2,551
======== ========
9
10
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 September 30, 1996 and December 31, 1995 is as follows (In Thousands):
September 30, December 31,
1996 1995
------------- ------------
Balance of impaired loans $ 3,257 $ 3,569
Less portion for which no allowance
for losses on loans is allocated 2,626 3,569
------- --------
Portion of impaired loans for which
an allowance for loan losses is
allocated $ 631 $
======= ========
Portion of allowance for losses on
loans allocated to the impaired
loan balance $ 156 $
======= ========
Information regarding impaired loans is as follows for the nine months ended
September 30, 1996 and the year ended December 31, 1995 (In Thousands):
September 30, December 31,
1996 1995
------------- ------------
Average investment in impaired loans
during the period $ 4,128 $ 2,144
Interest income recognized on impaired
loans including income recognized on
a cash basis during the period $ 48 $ 36
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 September 30, 1996 and December 31, 1995 are summarized as
follows (In Thousands):
September 30, December 31,
1996 1995
---------- ----------
Mortgage loans underlying pass-through
securities
FNMA $ 142,227 $ 112,657
Mortgage loan portfolios serviced for
FHLMC 721,245 781,402
FNMA 222,004 224,545
Other 30,073 63,611
---------- ----------
Total loans serviced for others $1,115,549 $1,182,215
========== ==========
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $15,191,000 and $14,198,000 at September 30, 1996
and December 31, 1995, respectively.
10
11
The following is an analysis of the changes in cost of loan servicing rights for
the nine month periods ended September 30, 1996 and 1995 (In Thousands):
Nine Months Ended September 30,
1996 1995
-------- --------
Balance at the beginning of the period $ 9,130 $ 4,825
Acquired or originated 828 5,359
Amortization (1,595) (1,035)
-------- --------
Balance at the end of the period $ 8,363 $ 9,149
======== ========
6. OTHER BORROWINGS
The following table presents, for the periods indicated, the composition of
other borrowings (In Thousands):
September 30, December 31,
1996 1995
-------- --------
Federal Home loan Bank Advances
(5.8% and 5.75% at September 30, 1996
and December 31, 1995, respectively) $ 61,550 $ 28,000
Reverse repurchase agreement (5.6% at
September 30, 1996) 10,000
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 $ 90,424 $ 46,874
======== ========
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 $10,056,000 and $23,724,000, and
$18,543,000 and $11,152,000, at September 30, 1996 and December 31, 1995,
respectively. In addition, the Bank had firm commitments to sell loans totalling
$2,685,000 and $2,006,000, at September 30, 1996 and December 31, 1995,
respectively; and optional commitments to sell loans totalling $5,439,000 and
$458,000, at December 31, 1995, respectively.
At September 30, 1996 and December 31, 1995, the Bank had outstanding options
which gave the holder the option to purchase certain loans at a specified price
within a specified time period. The Bank collected a non-refundable fee which is
recognized in income at the time the transaction is complete. At September 30,
1996, loans with an unpaid principal balance of $7,209,000
11
12
and a carrying value of $5,439,000 were held for sale in connection with
outstanding purchase options. At December 31, 1995, a loan with an unpaid
principal balance of $583,000 and a carrying amount of $458,000 was held for
sale in connection with an 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.
8. SUBSEQUENT EVENT
On November 1, 1996, the Corporation completed an initial public offering of
400,000 shares of its Common Stock, without par value, at a price of $10.00 per
share to the public. The net proceeds of the offering, approximately $3.4
million, will be added to the capital of the Bank. In connection with the
Corporation's initial public offering, the Corporation's sole shareholder sold
405,000 shares of Common Stock of Metropolitan at a price of $10.00 per share to
the public. The Corporation did not receive any of the proceeds from the sale of
Common Stock by the sole shareholder. In addition, immediately prior to the
offering, the Corporation effected a 3,125,635-for-one stock split.
12
13
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 dollars 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.
13
14
Three Months Ended September 30,
1996 1995
------------------------------------- ------------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ---- -------- ------- ----
Interest-earning assets:
Loans receivable $603,789 $ 13,040 8.64% $463,857 $10,220 8.81%
Mortgage-backed securities
available for sale (1) 41,601 700 6.73 58,571 929 6.34
Other (1) 16,857 268 6.36 17,765 255 5.74
-------- -------- -------- -------
Total interest-earning
assets 662,247 14,008 8.46 540,193 11,404 8.44
-------- -------
Nonearning assets 40,366 29,607
-------- --------
Total assets $702,613 $569,800
======== ========
Interest-bearing liabilities:
Deposits $540,225 7,164 5.28 $441,144 6,129 5.51
Other borrowings 87,320 1,455 6.63 63,926 1,089 6.76
-------- -------- -------- -------
Total interest-bearing
liabilities 627,545 8,619 5.46 505,070 7,218 5.67
-------- -------
Noninterest-bearing
liabilities 49,416 41,564
Shareholder's equity 25,652 23,166
-------- --------
Total liabilities and
shareholder's equity $702,613 $569,800
======== ========
Net interest income $ 5,389 $ 4,186
======== =======
Interest rate spread 3.00% 2.77%
==== =====
Net interest margin 3.25% 3.10%
Average interest-earning
assets to average
interest-bearing
liabilities 105.53% 106.95%
======== =========
14
15
Nine Months Ended September 30,
1996 1995
------------------------------------- -----------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $ 560,161 $ 36,080 8.59% $456,963 $ 29,536 8.62%
Mortgage-backed securities
available for sale (1) 39,401 1,965 6.65 33,313 1,585 6.34
Other (1) 20,099 951 6.31 14,991 650 5.78
------- ------ ------- ------
Total interest-earning
assets 619,661 38,996 8.39 505,267 31,771 8.38
------ ------
Nonearning assets 37,976 26,267
--------- --------
Total assets $ 657,637 $531,534
========= ========
Interest-bearing liabilities:
Deposits $ 518,191 20,508 5.29 $429,920 17,080 5.31
Other borrowings 70,252 3,560 6.77 47,990 2,525 7.03
------- ------ ------- ------
Total interest-bearing
liabilities 588,443 24,068 5.46 477,910 19,605 5.48
------ ------
Noninterest-bearing
liabilities 43,316 31,532
Shareholder's equity 25,878 22,092
------- -------
Total liabilities and
shareholder's equity $ 657,637 $531,534
========= ========
Net interest income $14,928 $12,166
======= =======
Interest rate spread 2.93% 2.90%
==== ====
Net interest margin 3.21% 3.21%
Average interest-earning
assets to average
interest-bearing
liabilities 105.31% 105.72%
====== ======
(1) The average balances of mortgage-backed securities and securities available
for sale are presented at historical cost.
15
16
Rate and Volume Variances. Net interest income is affected by changes in the
level of interest-earning assets and interest-bearing liabilities and changes in
yields earned on assets and rates paid on liabilities. The following table sets
forth, for the periods indicated, a summary of the changes in interest earned
and interest paid resulting from changes in average asset and liability balances
and changes in average rates. Changes attributable to the combined impact of
volume and rate have been allocated proportionately to change due to volume and
change due to rate.
Three Months ended September 30,
1996 vs. 1995
Increase (Decrease)
-----------------------------
Change Change
Total Due to Due to
Change Volume Rate
------- ------- -----
INTEREST INCOME ON:
Loans receivable $ 2,820 $ 3,018 $(198)
Mortgage-backed securities (229) (290) 61
Other 13 (12) 25
------- ------- -----
Total interest income 2,604 $ 2,716 $(112)
------- ======= =====
INTEREST EXPENSE ON:
Deposits 1,035 1,351 (316)
Other borrowings 366 394 (28)
------- ------- -----
Total interest expense 1,401 $ 1,745 $(344)
------- ======= =====
Increase in net interest income $ 1,203
=======
Nine Months ended September 30,
1996 vs. 1995
Increase (Decrease)
------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ -----
INTEREST INCOME ON:
Loans receivable $6,544 $6,647 $(103)
Mortgage-backed securities 380 301 79
Other 301 238 63
------ ------ -----
Total interest income 7,225 $7,186 $ 39
------ ====== =====
INTEREST EXPENSE ON:
Deposits 3,428 3,509 (81)
Other borrowings 1,035 1,127 (92)
------ ------ -----
Total interest expense 4,463 $4,636 $(173)
------ ====== =====
Increase in net interest income $2,762
======
RESULTS OF OPERATIONS
Net Income/Loss. Metropolitan incurred a net loss of $1.1 million for the three
months ended September 30, 1996, a decrease in net income of $1.8 million from
net income of $716,000 for the same period in 1995. The reason for the decline
in net income was the special assessment on Savings Association Insurance Fund
("SAIF") insured deposits of $2.9 million ($1.9 million after tax) imposed by
the Federal Deposit Insurance Corporation which was recorded on September 30,
1996.
16
17
On September 30, 1996, President Clinton signed into law an Omnibus budget
reconciliation bill (the "Omnibus Bill") which included provisions designed to
recapitalize the SAIF and to mitigate the Bank Insurance Fund ("BIF")/SAIF
premium disparity. The Omnibus Bill required the FDIC to impose a special
assessment on SAIF-insured deposits which were held at March 31, 1995. The FDIC
has announced that the special assessment rate will be 65.7 basis points of
SAIF-insured deposits as of the assessment date. The assessment will be paid on
November 27, 1996 from working capital of the Bank. When the SAIF reaches its
required reserve ratio following the one-time assessment, the FDIC has indicated
that it will reduce the annual assessment rates for SAIF-insured institutions to
bring them in line with BIF assessment rates.
Net income declined to $452,000 for the nine months ended September 30, 1996, as
compared to $2.4 million for the same period in 1995. Similar to the three-month
decrease, the decline in net income was due to the $1.9 million after-tax effect
of the SAIF assessment recorded during the third quarter of 1996.
Metropolitan's net interest margin increased 15 basis points to 3.25% for the
three month period ended September 30, 1996 as compared to 3.10% for the same
period in 1995, largely as a result of the decline in cost of funds. Net
interest margin remained stable at 3.21% for the nine month period ended
September 30, 1996, as compared to the same period in 1995, largely as a result
of the changing mix of interest earning assets and a decline in costs paid for
deposits and borrowings.
Interest Income. Total interest income increased 22.8% and 22.7% to $14.0
million and $36.0 million in the three and nine month periods ended September
30, 1996, respectively, as compared to $10.2 million and $29.5 million in the
same periods in 1995. This increase primarily resulted from a 22.6% increase in
average interest-earning assets in each of the two respective periods. The
average balance of loans increased $139.9 million and $103.2 million,
respectively, 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. The weighted average yield on interest-earning
assets increased slightly to 8.46% and 8.39% during the three and nine month
periods ended September 30, 1996, respectively, as compared to 8.44% and 8.38%
during the same periods in 1995.
Interest Expense. Total interest expense increased 19.4% and 22.8% to $8.6
million and $24.1 million for the three and nine month periods ended September
30, 1996, respectively, as compared to $7.2 million and $19.6 million for the
same periods in 1995. Interest expense increased due to a higher average balance
of interest-bearing liabilities outstanding for the three and nine month periods
ending September 30, 1996 compared to the same periods in 1995. In accordance
with Metropolitan's strategy to fund its growth in assets primarily with
deposits, the average balance of deposit accounts increased $99.1 million, or
22.5%, during the three months ended September 30, 1996 compared to 1995, and
increased $88.3 million, or 20.5%, during the nine months ended September 30,
1996 compared to 1995.
Metropolitan's cost of funds decreased to 5.46% in each of the three and nine
months ended September 30, 1996 as compared to 5.67% and 5.48% in the same
periods in 1995 due to a decline in the market interest rates paid for deposits
and the changing mix of other borrowings.
17
18
Provision for Loan Losses. The provision for loan losses increased $410,000 and
$616,000 in the three and nine month periods ended September 30, 1996,
respectively. While net charge-offs to average loans for the three and nine
months ended September 30, 1996 were only 0.02% and 0.01%, respectively,
management increased the provision for loan losses due to continued loan growth.
Non-performing loans as a percentage of total loans increased to 0.77% at
September 30, 1996, as compared to 0.68% at December 31, 1995. The allowance for
losses on loans at September 30, 1996 was $4.1 million or 0.66% of total loans,
as compared to $2.8 million, or 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 61.5% and 86.2% to $1.4
million and $3.4 million in the three and nine months ended September 30, 1996
as compared to $846,000 and $2.8 million in the same periods in 1995. The
following table sets forth Metropolitan's non-interest income for the periods
indicated.
Three Months ended Sept 30, Nine Months ended Sept 30,
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
Loan servicing income, net $ 307 $ 354 $ 939 $ 745
Gain on sale of loans 105 131 140 244
Loan option income 114 521 420
Loan credit discount income 406
Other 840 361 1,812 992
------ ------- ------ ------
Total $1,366 $ 846 $3,412 $2,807
====== ======= ====== ======
Net loan servicing income decreased 13.3% in the three month period ended
September 30, 1996, as compared to the same period in 1995, due to a decline in
the portfolio being serviced for others to $1.1 billion from $1.2 billion at
September 30, 1995. Net loan servicing income increased 26.0% to $939,000 in the
nine month period ended September 30, 1996, as compared to the same period in
1995 due to the increase in the average size of the portfolio being serviced for
others during the two nine month periods. 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. Although the portfolio of
loans serviced for others declined to $1.1 billion at September 30, 1996
compared to $1.2 billion at September 30, 1995, servicing rights for $371.2
million were only acquired in June of 1995 and had not been serviced long enough
to contribute to loan servicing income during the first nine months of 1995,
while the full nine month period in 1996 showed the benefit of this acquisition.
Gain on sale of loans was $105,000 and $140,000 in the three and nine month
periods ended September 30, 1996, as compared to $131,000 and $244,000 during
the same periods 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.
Loan option income was $114,000 and $521,000 in the three and nine month
18
19
periods ended September 30, 1996, respectively, as compared to zero and $420,000
in each of the same periods in 1995. Loan option income has been a source of
non-interest income for the Bank since the second quarter of 1995. In these
transactions Metropolitan purchased loans and sold nonrefundable options to a
third party to purchase these same loans at a specified price within a specified
time period. The third party was a loan broker and the loan option fee was
negotiated based on the principal amount of the loans involved. These option
transactions provided the loan broker a period time to find a buyer who was
willing to pay a higher price for the loans.
Loan credit discount income was $406,000 during the nine month period ended
September 30, 1995. Metropolitan frequently purchases multifamily and commercial
real estate loans in the secondary market. These loans are often purchased at a
discount based on a comparison of loan rates to market interest rates. The
portion of the discount attributable to interest rate is accreted to interest
income over the life of the loan. From time to time, however, Metropolitan
purchases loans at a discount due to Metropolitan's assessment of credit risk
and the value of the underlying collateral. These collateral discounts are not
recognized in income over the life of the loan. When these loans payoff, if
Metropolitan receives the full contractual principal due, any unamortized
discount related to management's initial assessment of the deficiency in
collateral values is recognized as non-interest income. Metropolitan had no loan
credit discount income in the nine months ended September 30, 1996 and does not
expect this source of non-interest income to be recurring.
Other noninterest income increased $479,000 and $820,000 in the three and the
nine month periods ended September 30, 1996, compared to the same periods in the
previous year. This increase was primarily due to increased fee income earned on
checking accounts due primarily to the increased size and number of business
checking accounts, an increase in ATM fees due to an increase in transaction
fees and the number of ATM transactions, an increase in credit card fees due to
the increase in the credit card portfolio and increased credit card transactions
and an increase in miscellaneous fee income due to the increased size and number
of retail sales offices.
19
20
Non-Interest Expense. Total non-interest expense increased to $7.8 million and
$16.1 million in the three and nine month periods ended September 30, 1996,
respectively, as compared to $3.6 million and $10.4 million for the same periods
in 1995. The following table sets forth Metropolitan's non-interest expense for
the periods indicated:
Three Months ended Sept 30, Nine Months ended Sept 30,
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
Personnel related costs $ 2,263 $ 1,789 $ 6,334 $ 5,048
Occupancy costs 645 538 1,770 1,563
Federal deposit insurance
premiums 352 290 991 838
Federal deposit insurance
assessment 2,928 2,928
Data processing expense 155 106 450 433
Amortization of intangibles 50 55 159 166
State franchise tax 114 75 347 227
Marketing expense 214 133 498 359
Other operating expenses 1,029 656 2,636 1,759
-------- ------- ------- -------
Total $ 7,750 $ 3,642 $16,113 $10,393
======== ======= ======= =======
The primary cause for the increase in non-interest expense in the three and nine
month periods ended September 30, 1996, was the one-time assessment to
recapitalize the SAIF. The assessment is computed based upon deposits as of
March 31, 1995 at a rate of 65.7 basis points, or $2.9 million.
Personnel related expenses increased $474,000 and $1.3 million, which
represented 11.5% and 22.4% of the increase in total non-interest expense in the
three and nine month periods ended September 30, 1996, respectively, over the
same periods in 1995. The increase was primarily a result of having two
additional full service retail sales offices open in the 1996 periods, the
payment of incentives for loan and deposit production, the addition to staff of
loan production officers, the full effect of additions to staff in various
departments late in 1995 and the effects of merit increases. Occupancy costs
increased $107,000 and $207,000, which represented 2.6% and 3.6% of the increase
in total non-interest expense in the three and nine month periods ended
September 30, 1996, respectively, over the same periods in 1995, generally as a
result of an increase in the number of full service retail sales offices. Other
operating expenses, which include miscellaneous general and administrative costs
such as loan servicing, loan processing costs, business development, check
processing and ATM expenses, increased $373,000 and $876,000, which represented
9.1% and 15.3% of the increase in total non-interest expense in the three and
nine month periods ended September 30, 1996, respectively, over the same periods
in 1995, generally as a result of an increase in the number of full service
retail offices.
Provision for Income Taxes. The provision for income taxes was a benefit of
$516,000 in the three month period ended September 30, 1996, as a result of the
pre-tax loss generated by the one-time special assessment to recapitalize the
SAIF. The provision for income taxes was $440,000 in the nine month period ended
September 30, 1996. The effective tax rate was 49.3% for the nine month period
ended September 30, 1996, as compared to 38.0% for the same period in 1995. The
effective tax rate is higher in the 1996 period because
20
21
permanent differences, such as those which are not deductible for tax purposes
like amortization of intangibles, have increased in relationship to pre-tax
income as a result of the unfavorable effect the one-time assessment to
recapitalize the SAIF had on pre-tax income.
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.
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.
September 30, December 31,
1996 1995
---- ----
(Dollars in thousands)
Non-accrual loans $4,479 $3,103
Loans past due greater than
90 days or impaired, still accruing 224 204
------ ------
Total non-performing loans 4,703 3,307
Real estate owned 1,503 258
------ ------
Total non-performing assets $6,206 $3,565
====== ======
Allowance for losses on loans $4,053 $2,765
====== ======
Non-performing loans to total loans 0.77% 0.68%
Non-performing assets to total assets 0.87% 0.60%
Net charge-offs to average loans 0.01%(1) 0.02%
Provision for loan losses to
average loans 0.48%(1) 0.21%
Allowance for losses on loans to
total non-performing loans at
end of period 65.31% 83.61%
Allowance for losses on loans to
total loans at end of period 0.66% 0.57%
<FN>
(1) Annualized for comparative purposes.
21
22
Non-performing assets at September 30, 1996 increased $2.6 million, or 74.1% to
$6.2 million as compared to $3.6 million at December 31, 1995. The increase was
due to four large credits, two secured by multifamily properties and two
secured by retail strip shopping centers. One multifamily property has already
been foreclosed and is included in real estate owned. Management will likely
move to foreclose on the three remaining properties and therefore expects the
status of those loans to remain non-performing through the rest of 1996 and
into 1997. 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 the loans to be impaired because
it does not expect that all principal and interest amounts will be collected
according to the terms of the loan contract.
Non-performing assets at 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. The apartment building has been reconstructed. Under the terms
of a loan workout agreement the borrower has resumed regular principal and
interest payments, and is also repaying interest accrued during the
reconstruction period. This loan is no longer considered impaired by management
because management expects that deferred interest and principal will be fully
collected.
Non-performing loans include $3.3 million and $3.6 million of loans at September
30, 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 $720.0 million at September 30, 1996, as compared to
$590.1 million at December 31, 1995, an increase of $129.9 million, or 22.0%.
The increase in assets was funded with deposit growth of $81.0 million and an
increase in Federal Home Loan Bank ("FHLB") advances and other borrowings of
$43.6 million.
Securities decreased $10.6 million, or 46.6%, to $12.2 million. The decline is
largely due to a reduction in excess short-term liquidity which was used to fund
loan purchases early in 1996.
Net loans receivable increased $124.4 million, or 26.0% to $602.7 million at
September 30, 1996. This increase was consistent with Metropolitan's overall
strategy of increasing assets while adhering to prudent underwriting standards
and preserving its adequately capitalized status. The loan growth was
proportionate and the mix of loan types has not changed significantly compared
to December 31, 1995.
Premises and equipment increased $3.3 million, or 43.8%, to $10.8 million at
September 30, 1996. This increase was due to a major expansion undertaken at
one existing retail sales office location and the purchase of land and a
building for two future full service retail sales office locations. This
expansion and planned expansion is consistent with Metropolitan's strategy to
fund its asset growth primarily with retail deposits.
Deposits totalled $584.7 million at September 30, 1996, an increase of $81.0
million, or 16.1%, 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 $43.6 million to $90.4 million at September 30, 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,
22
23
management chose to fund a portion of the loan growth discussed above with FHLB
advances and reverse repurchase agreements.
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 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 September 1996
was 5.24%. 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 September 30, 1996, the Corporation, excluding the Bank, had cash of
$1.1 million.
Metropolitan's liquidity, represented by cash equivalents, is a result of its
operating, investing, and financing activities. These activities are summarized
as follows:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
Net cash provided (used) for
operating activities $ (1,647) $ 6,544
Net cash used for investing
activities (122,735) (73,449)
Net cash provided by
financing activities 124,556 69,538
--------- ---------
Net change in cash and
cash equivalents 174 2,633
Cash and cash equivalents
at beginning of period 18,170 11,565
--------- ---------
Cash and cash equivalents
at end of period $ 18,344 $ 14,198
--------- ---------
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
23
24
purchase of the loan from the Bank.
Cash provided from investing activities consists primarily of principal 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 nine months ended
September 30, 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 September 30, 1996, $49.9 million, or 8.5%, 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 and competetively prices selected deposit
maturities to minimize the potential adverse effect on liquidity.
Capital. On November 1, 1996, the Corporation completed an initial public
offering of 400,000 shares of its Common Stock, without par value, at a price of
$10.00 per share to the public. The net proceeds of the offering, approximately
$3.4 million, will be added to the capital of the Bank. In connection with the
Corporation's initial public offering, the Corporation's sole shareholder sold
405,000 shares of Common Stock of Metropolitan at a price of $10.00 per share to
the public. The Corporation did not receive any of the proceeds from the sale of
Common Stock by the sole shareholder. In addition, immediately prior to the
offering, the Corporation effected a 3,125,635-for-one stock split.
The Office of Thrift Supervision ("OTS") imposes capital requirements on savings
associations. Savings associations are required to meet three minimum capital
standards: (i) a leverage requirement, (ii) a tangible capital requirement, and
(iii) a risk-based capital requirement. Such standards must be no less stringent
than those applicable to national banks. In addition, the OTS is authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The Bank's regulatory capital ratios at September 30, 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 $38,192 5.33% $38,463 5.37% $41,623 8.26%
Required 10,743 1.50 28,659 4.00 40,301 8.00
------- ------- -------
Excess $27,449 3.83% $ 9,804 1.37% $ 1,322 0.26%
======= ======= =======
Metropolitan anticipates that under the current regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future.
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
24
25
consequently, the ability of the Bank to meet its future capital requirements.
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.
In general, the steps being taken by the Bank to manage interest rate risk
include: (i) continuing to focus on originating and purchasing adjustable rate
assets for portfolio; (ii) selling fixed rate one- to four-family loans with
servicing retained; (iii) focusing on shortening the term of fixed rate lending
by increasing the percent of the fixed rate loan portfolio represented by
consumer loans; (iv) increasing business lending which generally will result in
loans with 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.
25
26
Presented below, as of September 30, 1996 and December 31, 1995, is an analysis
of the Bank'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 and other 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.
September 30, 1996 December 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)% $(30,112) (55)% $(13,476) (27)%
+300 (50) (22,201) (41) (9,576) (19)
+200 (25) (14,916) (27) (5,946) (12)
+100 (10) (7,502) (14) (2,778) (6)
-100 (10) 7,305 13 4,197 9
-200 (25) 16,328 30 9,481 19
-300 (50) 27,614 51 17,571 36
-400 (75) 40,107 74 27,856 57
The Bank's sensitivity to rising rates at September 30, 1996 has increased
compared to the sensitivity at December 31, 1995 due to the changing mix of
assets and increased dependence on short-term funding. At September 30, 1996,
the Bank was outside the Board established limits for +100 and +200 basis
point changes in interest rates. Metropolitan is implementing the following
steps to return the interest rate risk profile to a level which is within the
Board established guidelines: i) review the term of funding sources and extend
where possible the term of deposits and borrowings; and ii) limit the volume of
all future fixed rate business. Although these steps are currently underway,
interim changes in interest rates and the time it takes to effect changes in
the asset and liability structure of the balance sheet, it may take more than
one quarter to return interest rate risk to a level which is within the Board
established guidelines.
As illustrated in the table, Metropolitan's NPV is unfavorably affected in the
rising rate scenarios. This occurs principally because the interest rates paid
on deposits would increase more rapidly than interest 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.
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
26
27
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.
ACCOUNTING DEVELOPMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on a financial components approach that focuses on
control. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be prospectively applied. Management is currently evaluating the impact
of adoption of SFAS no. 125 on its financial position and results of
operations.
In May 1995, the 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
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
September 30, 1996 and December 31, 1995, the fair value of such rights was in
excess of the amount capitalized.
FEDERAL TAXATION
Recently enacted legislation eliminates the percentage of taxable income method
for deducting additions to the tax bad debt reserve for all thrifts for tax
years beginning after December 31, 1995. The new legislation requires
Metropolitan to recapture the excess of its bad debt reserve at December 31,
1995 over the balance of the tax bad debt reserve outstanding at the end of the
base year which is 1988. The tax due would be paid ratably over a six year
period. Metropolitan has provided deferred taxes for this excess as required by
current accounting rules and therefore the change in this legislation should not
have a material adverse effect on the results of operation. Going forward,
Metropolitan will use the direct write-off method for deducting tax bad debts,
under which charge-offs are deducted and recoveries are taken into taxable
income as incurred.
27
28
PART II. OTHER INFORMATION
ITEM 1 Not applicable.
ITEM 2. CHANGES IN SECURITIES
In connection with its initial public offering of shares of
Common Stock, the Corporation amended and restated its Articles of Incorporation
to increase the number of authorized shares of Common Stock, no par value to
10,000,000. The amendment also effected a 3,125,635-for-one stock split of the
single share of Common Stock then outstanding. The Amended and Restated Articles
of Incorporation also give the Board of Directors the authority, without further
action by the shareholders, to issue up to 5,000,000 shares of Class A Preferred
Stock, without par value, and 5,000,000 shares of Class B Preferred Stock,
without par value. Issuance of preferred shares could be effected without
shareholder approval and could result in the dilution of the voting power of the
shares of Common Stock, adversely affect holders of Common Stock in the event of
liquidation of the Corporation or delay, defer or prevent a change in control of
the Corporation. The Corporation has no present plans to issue any Class A
Preferred Stock or Class B Preferred Stock.
Similarly, in connection with its initial public offering, the
Corporation also amended and restated its Code of Regulations to (i) require
reasonable advance notice by a shareholder of a proposal or director nomination
that such shareholder desires to present at any shareholders' meeting; (ii)
provide for a classified Board of Directors and for the removal of directors by
the shareholders only upon the affirmative vote of holders of at least
three-quarters of the shares entitled to vote; and (iii) require the holders of
at least three-quarters of the voting stock to approve any amendment to certain
provisions of the Regulations, including provisions regarding the number and
classification of directors, filling Board vacancies, the removal of Directors,
advance notice of shareholder proposals, and nominations.
ITEM 3. Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Prior to the closing of Metropolitan's initial public offering on
November 1, 1996, the Corporation had a sole shareholder. In an action without a
meeting dated October 22, 1996, the sloe shareholder (i) approved the
Corporation's Amended and Restated Articles of Incorporation, which, among other
things, authorized a 3,125,635-for-one stock split of the Corporation's Common
Stock, and (ii) approved the Corporation's Amended and Restated Code of
Regulations.
ITEM 5. Not applicable.
28
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of
Metropolitan Financial Corp. (incorporated by
reference to Exhibit 3.2 to Metropolitan's
Form 8-A filed with the Securities and Exchange
Commission on October 15, 1996).
3.2 Amended and Restated Code of Regulations of
Metropolitan Financial Corp. (incorporated by
reference to Exhibit 3 to Metropolitan's
Form 8-A filed with the Securities and Exchange
Commission on October 15, 1996).
27 Financial Data Schedule(1)
99.1 Specimen Subordinated Note relating to the 9 5/8%
Subordinated Notes due January 1, 2005 (found at
Sections 2.2 and 2.3 of the Form of Indenture filed
as Exhibit 4.1 to Metropolitan's Amendment No. 1 to
Registration Statement on Form S-1, filed
November 13, 1995 and incorporated herein by
reference).
99.2 Form of Indenture entered into on December 1, 1995
between the Corporation and Boatmen's Trust Company
(filed as Exhibit 4.1 to Metropolitan's Amendment
No. 1 to Registration Statement on Form S-1, filed
November 13, 1995 and incorporated herein by
reference).
99.3 Specimen Note relating to the 10% Subordinated Notes
due December 31, 2001 (filed as Exhibit 4.1 to
Metropolitan's Amendment No. 1 to Registration
Statement on Form S-1, filed November 13, 1995 and
incorporated herein by reference).
99.4 The Restated Loan Agreement by and between The
Huntington National Bank and the Corporation, dated
as of October 16, 1996 (filed as Exhibit 99.4
to Metropolitan's Amendment No. 1 to Registration
Statement on Form S-1, filed October 18, 1996 and
incorporated herein by reference).
b. Reports on Form 8-K - No reports on Form 8-K were filed by
Metropolitan during the first nine months of 1996.
(1) Filed only in electronic format pursuant to item 601(b)(27) of
Regulation S-K.
29
30
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, Assistant Secretary,
Assistant Treasurer, and Director
(principal financial and
accounting officer)
Date: November 14, 1996