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EXHIBIT 13
METROPOLITAN FINANCIAL CORP.
AND SUBSIDIARIES
ANNUAL REPORT
DECEMBER 31, 1996 AND 1995
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TO OUR SHAREHOLDERS
It is with great enthusiasm that we welcome you to the Metropolitan
Financial Corp. family. The year 1996 was important for Metropolitan in many
ways, however, the initial public offering of Common Shares, completed during
the fourth quarter, was the most significant. This action brought new capital
into Metropolitan which will be used to support future growth. Your confidence
in the management of Metropolitan is appreciated.
RESULTS
Metropolitan earned $3.5 million, or $1.09 per common share, during the
year ended December 31, 1996, excluding the one-time assessment to recapitalize
the Savings Association Insurance Fund ("SAIF") which was mandated by
legislation. Net income including the SAIF assessment was $1.5 million, or $0.48
per common share. While this one-time assessment to recapitalize the SAIF
reduced income for our industry in 1996, it will be positive for the future
earnings potential of Metropolitan, since the rate paid for insurance of
deposits beginning in 1997 has been reduced significantly. In addition, the
disparity between rates paid for insurance of deposits among institutions
insured by the Federal Deposit Insurance Corporation has been eliminated and the
competitive advantage enjoyed by some institutions, which paid a much lower
rate, has been mitigated. Our return on average assets excluding the one-time
assessment to recapitalize the SAIF was 0.51% and our return on average equity
excluding the one-time assessment was 12.98%.
Metropolitan's total assets increased to $769.1 million at December 31,
1996, a 30.3% increase from $590.1 million reported at December 31, 1995. Growth
is something of a tradition at Metropolitan, where assets have grown at a rate
in excess of 20% per year in each of the last five years. This has been possible
only because quality assets with interest rate and term characteristics
consistent with our long-term goals were available. The majority of the growth
in 1996 was funded by retail deposits which increased $118.4 million, or 23.5%
to $622.1 million at December 31, 1996. It was continued growth at existing
locations as well as two new retail sales offices opened late in 1995 that made
this growth possible. In addition, we opened our newest retail sales office
during the summer of 1996.
ASSET QUALITY AND CAPITAL
Metropolitan's asset quality ratios continue to be strong. Net charge-offs
in 1996 were only 0.04% of average total loans and non-performing assets were
only 0.70% of total assets at December 31, 1996. These ratios reflect our
emphasis on conservative underwriting standards. At December 31, 1996, nearly
70% of Metropolitan's loan portfolio was comprised of one- to four-family
residential loans, construction and land loans for the construction and
development of one- to four-family residential houses, and multifamily loans.
These are areas in which Metropolitan has developed special expertise over a
long period of time.
As a result of its commitment to growth, Metropolitan has made a conscious
decision to maintain its regulatory capital at the "adequately capitalized"
level. We feel that our capital resources are best utilized to fund asset growth
and in turn increase the earnings capacity of the Corporation. Our current plan
is to reinvest the earnings of Metropolitan in continued growth, and therefore
we do not anticipate paying dividends in the foreseeable future.
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LOOKING AHEAD
We are continually evaluating how best to compete in the financial
marketplace of the future and continue to implement strategies which will insure
Metropolitan a prominent position in the financial marketplace of the future.
For example, Business lending and Trust Services were introduced in 1995 and in
1996 Metropolitan began to make annuities and mutual funds available to its
customers.
We are excited about our prospects for the future. We have a talented team
of banking professionals at Metropolitan dedicated to enhancing the value of the
Bank. The directors, officers and staff of Metropolitan look forward to 1997 and
thank-you and our customers for your past and future support.
Sincerely,
Robert M. Kaye
Chairman of the Board and
Chief Executive Officer
David G. Lodge
President and Chief Operating Officer
CORPORATION PROFILE
Metropolitan Financial Corp. is a savings and loan holding company, and
parent of Metropolitan Savings Bank of Cleveland (the "Bank"), an Ohio chartered
stock savings association headquartered in Mayfield Heights, Ohio. The Bank
currently operates fifteen retail sales offices located in Northeastern Ohio and
five loan origination offices located in Ohio, Michigan, and Pennsylvania. The
Bank's principal business is the origination and purchase of mortgage loans,
primarily secured by multifamily residential properties, and origination of
other loans. In addition to these activities, the Bank services a portfolio of
$1.1 billion of mortgage loans for various investors and operates a trust
services department to manage investment assets for individual and institutional
clients. At December 31, 1996, the Corporation had assets of $769.1 million,
deposits of $622.1 million, and shareholders' equity of $30.2 million.
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FIVE YEAR SUMMARY OF SELECTED DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................. $769,076 $590,095 $479,384 $372,390 $300,500
Loans receivable, net......................... 637,493 478,345 424,944 284,288 216,688
Loans held for sale........................... 8,973 1,504 84 10,391 5,082
Mortgage-backed securities.................... 56,672 39,156 16,785 13,412 23,322
Securities.................................... 13,173 22,806 7,641 10,168 19,740
Costs in excess of fair value of net assets
acquired.................................... 3,239 3,188 3,409 3,631 3,853
Cost of loan servicing rights................. 8,051 9,130 4,825 2,295 1,541
Deposits...................................... 622,105 503,742 436,198 332,549 269,159
Other borrowings.............................. 101,874 46,874 15,504 15,745 11,820
Shareholders' equity.......................... 30,244 25,466 20,280 17,750 13,111
SELECTED OPERATIONS DATA:
Total interest income......................... $ 54,452 $ 43,435 $ 31,639 $ 24,448 $ 22,100
Total interest expense........................ 33,116 26,816 15,992 11,215 12,285
-------- -------- -------- -------- --------
Net interest income....................... 21,336 16,619 15,647 13,233 9,815
Provision for loan losses..................... 1,636 959 766 740 367
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................. 19,700 15,660 14,881 12,493 9,448
Loan servicing income, net.................... 1,204 1,068 642 601 490
Gain on sales of loans and securities......... 336 833 86 1,712 719
Other non-interest income..................... 2,233 2,323 873 1,067 578
Non-interest expense.......................... (20,839) (14,187) (11,058) (8,274) (6,339)
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in accounting method... 2,634 5,697 5,424 7,599 4,896
Income tax expense............................ (1,095) (2,155) (1,987) (2,829) (1,773)
Cumulative effect on prior years of change in
accounting method........................... (300)
-------- -------- -------- -------- --------
Net income.................................... $ 1,539 $ 3,542 $ 3,437 $ 4,470 $ 3,123
======== ======== ======== ======== ========
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FIVE YEAR SUMMARY OF SELECTED DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- --------
PER SHARE DATA:(1)
Net income per share....................... $ 0.48 $ 1.13 $ 1.10 $ 1.43 $ 1.00
Book value per share....................... 8.58 8.15 6.49 5.68 4.19
Tangible book value per share.............. 7.68 7.04 5.26 4.32 2.71
PERFORMANCE RATIOS:
Return on average assets................... 0.23% 0.65% 0.82% 1.34% 1.13%
Return on average equity................... 5.75% 16.19% 17.83% 29.30% 27.01%
Interest rate spread....................... 3.07% 2.98% 3.71% 4.05% 3.86%
Net interest margin(2)..................... 3.34% 3.24% 3.94% 4.26% 3.88%
Average interest-earning assets to average
interest-bearing liabilities............. 105.39% 105.13% 105.53% 105.62% 100.33%
Non-interest expense to average assets..... 3.08% 2.61% 2.64% 2.49% 2.30%
Efficiency ratio(3)........................ 82.57% 68.28% 62.95% 49.42% 52.51%
ASSET QUALITY RATIOS:(4)
Non-performing loans to total loans........ 0.80% 0.68% 0.55% 1.08% 0.44%
Non-performing assets to total assets...... 0.70% 0.60% 0.51% 1.08% 0.40%
Allowance for losses on loans to total
loans.................................... 0.64% 0.57% 0.45% 0.43% 0.32%
Net charge-offs to average loans........... 0.04% 0.02% 0.03% 0.09% 0.07%
CAPITAL RATIOS:
Shareholders' equity to total assets(4).... 3.93% 4.32% 4.23% 4.77% 4.36%
Average shareholders' equity to average
assets................................... 3.96% 4.02% 4.60% 4.58% 4.18%
Tier 1 capital to total assets(5).......... 5.58% 5.77% 5.34% 5.81% 4.47%
Tier 1 capital to risk-weighted
assets(5)................................ 7.87% 8.20% 7.60% 8.33% 6.75%
OTHER DATA:
Loans serviced for others (000s)........... $1,102,514 $1,182,216 $739,425 $504,677 $396,703
Number of full service offices............. 14 13 11 9 8
Number of loan production offices.......... 5 5 4 1 --
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(1) Per share data has been calculated to reflect the 3,125,635-for-one stock
split which occurred in October 1996.
(2) Represents the ratio of net interest income to average interest-earning
assets.
(3) Equals non-interest expense less amortization of intangible assets divided
by net interest income plus non-interest income (excluding gains or losses
on securities transactions).
(4) Ratios are calculated on end of period balances except net charge-offs to
average loans.
(5) Ratios are for Metropolitan Savings Bank only.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The reported results of Metropolitan Financial Corp. ("Metropolitan" or the
"Corporation") primarily reflect the operations of Metropolitan Savings Bank of
Cleveland (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, gains or losses from sales of loans and securities and 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 average 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 included in average loan balances.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
INTEREST-EARNING ASSETS:
Loans receivable............... $574,502 $ 50,268 8.75% $458,423 $ 39,963 8.72% $361,627 $ 30,012 8.30%
Mortgage-backed securities
available for sale(1)........ 43,734 2,890 6.61 39,342 2,493 6.34 13,636 693 5.08
Other.......................... 20,417 1,294 6.34 14,610 979 6.70 22,261 934 4.20
-------- ------- -------- ------- -------- -------
Total interest-earning
assets....................... 638,653 54,452 8.53 512,375 43,435 8.48 397,524 31,639 7.96
------- ------- -------
Nonearning assets.............. 37,021 31,881 21,986
-------- -------- --------
Total assets................... $675,674 $544,256 $419,510
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits....................... $532,100 28,132 5.29 $439,286 23,522 5.35 $363,553 14,918 4.10
Other borrowings............... 73,899 4,984 6.74 48,066 3,294 6.85 13,146 1,074 8.17
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.................. 605,999 33,116 5.46 487,352 26,816 5.50 376,699 15,992 4.25
------- ------- -------
Noninterest-bearing
liabilities.................. 42,924 35,032 23,533
Shareholders' equity........... 26,751 21,872 19,278
-------- -------- --------
Total liabilities and
shareholders' equity......... $675,674 $544,256 $419,510
======== ======== ========
Net interest income and
interest rate spread......... $ 21,336 3.07 $ 16,619 2.98 $ 15,647 3.71
======= ======= =======
Net interest margin............ 3.34 3.24 3.94
Average interest-earning assets
to average interest-bearing
liabilities.................. 105.39% 105.13% 105.53%
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(1) The average balance of mortgage-backed securities and securities available
for sale are presented at historical cost.
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
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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.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------------------- --------------------------------
TOTAL CHANGE DUE CHANGE DUE TOTAL CHANGE DUE CHANGE DUE
CHANGE TO VOLUME TO RATE CHANGE TO VOLUME TO RATE
------- ---------- ---------- ------ ---------- ----------
(IN THOUSANDS)
INTEREST INCOME ON:
Loans receivable.................. $10,305 $ 10,157 $ 148 $9,951 $7,966 $1,985
Mortgage-backed securities........ 397 287 110 1,800 1,306 494
Other............................. 315 365 (50) 45 (321) 366
------- ------- ----- ------ ------ ------
Total interest income............. 11,017 $ 10,809 $ 208 11,796 $8,951 $2,845
------- ======= ===== ------ ====== ======
INTEREST EXPENSE ON:
Deposits.......................... 4,610 $ 4,903 $ (293) 8,604 $3,108 $5,496
Other borrowings.................. 1,690 1,741 (51) 2,220 2,853 (633)
------- ------- ----- ------ ------ ------
Total interest expense............ 6,300 $ 6,644 $ (344) 10,824 $5,961 $4,863
------- ======= ===== ------ ====== ======
Increase in net interest income... $ 4,717 $ 972
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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income. Net income for 1996 was $3.5 million, or $1.09 per common
share, excluding the one-time assessment mandated by legislation to recapitalize
the Savings Association Insurance Fund ("SAIF"). Net income including the SAIF
assessment was $1.5 million, or $0.48 per common share, as compared to $3.5
million, or $1.13 per common share for 1995. The decrease was primarily a result
of the $1.9 million, or $0.61 per common share SAIF assessment.
Interest Income. Total interest income increased 25.4% to $54.5 million
for 1996 as compared to $43.4 million for 1995. This increase primarily resulted
from a 24.6% increase in average interest-earning assets between the years. The
average balance of loans increased $116.1 million, which was a result of
Metropolitan's strategy of increasing assets when quality loans with acceptable
portfolio characteristics are available. Metropolitan originated and purchased
$263.4 million and $126.9 million in loans in 1996, as compared to $161.9
million and $103.7 million, respectively, for 1995. The weighted average yield
on interest-earning assets increased to 8.53% during 1996 as compared to 8.48%
during 1995.
Metropolitan's net interest margin rose 10 basis points to 3.34% for 1996
as compared to 3.24% for 1995, as a result of a modest decline in interest rates
paid for funds and an increase in the yield earned on assets. Rates paid on
deposits and other borrowings decreased in response to lower market interest
rates. The rates earned on interest-earning assets increased slightly due to the
change in mix of interest-earning assets.
Interest Expense. Total interest expense increased 23.5% to $33.1 million
for 1996 as compared to $26.8 million for 1995. Interest expense increased due
to a higher average balance of interest-bearing liabilities outstanding which
was only partially offset by a lower cost of funds during 1996. The average
balance of interest-bearing liabilities increased $118.6 million in 1996 from
1995 in order to fund the growth of interest-earning assets discussed above.
Metropolitan's cost of funds decreased to 5.46% in 1996 as compared to
5.50% in 1995 generally due to the lower overall level of interest rates.
Metropolitan's increased use of wholesale borrowings, whose cost was lower than
the incremental cost of time deposits, permitted the overall cost of deposits to
decline despite the significant growth experienced during 1996.
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Provision for Loan Losses. The provision for loan losses increased 70.5%
to $1.6 million in 1996 as compared to $959,000 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 (including loans held for
sale) increased 34.8% to $650.6 million at December 31, 1996 from $482.6 million
at the same date a year earlier. The allowance for losses on loans at December
31, 1996 was $4.2 million, or 0.64% of total loans, as compared to $2.8 million,
or 0.57% of total loans, at the same date in 1995, while net charge-offs were
only $225,000, or 0.04% of average loans during 1996. 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, the status of impaired loans,
economic conditions affecting real estate markets, regulatory considerations and
other matters.
Non-Interest Income. Total non-interest income decreased 10.7% to $3.8
million in 1996 as compared to $4.5 million in 1995. The following table sets
forth Metropolitan's non-interest income for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Loan servicing income, net....................... $1,204 $1,068 $ 642
Gain on sale of loans............................ 204 444 52
Gain on sale of securities....................... 133 389 34
Loan option income............................... 696 559 --
Loan credit discount income...................... -- 640 --
Other............................................ 1,536 1,124 872
------ ------ ------
Total............................................ $3,773 $4,224 $1,600
====== ====== ======
Net loan servicing income increased 12.7% to $1.2 million in 1996 as
compared to $1.1 million in 1995. The increase in 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 as a result of
normal runoff to $1.1 billion at December 31, 1996 compared to $1.2 billion at
the same date a year earlier, the average balance of loans serviced during the
year was actually higher in 1996 as compared to 1995 resulting in increased
servicing income. Metropolitan remains committed to this business and continues
to evaluate new acquisitions. Metropolitan will only acquire the rights to
service portfolios where the loan characteristics and pricing are consistent
with management's long-term profitability objectives.
Gain on sale of loans was $204,000 in 1996 as compared to $444,000 in 1995.
This income was dependent upon the amount of loans sold, secondary market
pricing, and the value allocated to mortgage servicing rights and these
variables were in turn directly affected by prevailing interest rates. The
proceeds of loans sold were $31.0 million during 1996 as compared to $59.8
million in 1995. The volume of loans sold was greater in 1995 as compared to
1996 due to a greater market demand for fixed rate loans in 1995. These loans
were sold in the secondary market in order to manage interest rate risk.
Gain on sale of securities was $133,000 in 1996 as compared to $389,000 in
1995. During 1996, Metropolitan sold mortgage backed securities available for
sale with a principal balance outstanding of $3.6 million at a gain of $133,000.
In 1995, $29.1 million of mortgage-backed securities available for sale were
sold at a net gain of $389,000. The decline in net gains is a result of the
reduced volume of sales which is consistent with availability. Metropolitan does
not actively purchase mortgage-backed securities for resale, however, the
existing portfolio of mortgage-backed securities available for sale is monitored
for opportunities to improve the yield, manage interest rate risk and increase
profits, and as a result, from time to time, certain mortgage-backed securities
have been sold.
Loan option income was $696,000 in 1996 as compared to $559,000 in 1995.
This income was dependent upon the amount of loans for which options were
written and the price negotiated, both of which are affected by market
conditions. During 1996, Metropolitan purchased $16.7 million of loans and sold
nonrefundable options to purchase those same loans at a specified price within a
specified time period, as compared to $16.4 million of loans purchased for
options in 1995.
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Other income increased 36.7% to $1.5 million in 1996 as compared to $1.1
million in 1995. This increase was primarily due to increased fee income earned
on checking accounts due to the increased size and number of business checking
accounts, an increase in ATM fees due to increases 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.
Non-Interest Expense. Total non-interest expense increased 46.9% to $20.8
million in 1996 as compared to $14.2 million in 1995. The following table sets
forth Metropolitan's non-interest expense for the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Personnel related costs....................... $ 8,670 $ 6,819 $ 5,349
Occupancy costs............................... 2,465 2,135 1,488
Federal deposit insurance..................... 4,211 1,132 929
Data processing expense....................... 599 586 381
Marketing expense............................. 695 543 392
State franchise tax........................... 461 307 284
Amortization of intangibles................... 256 220 222
Other operating expenses...................... 3,482 2,445 2,013
------- ------- -------
Total......................................... $20,839 $14,187 $11,058
======= ======= =======
Personnel related expenses increased $1.9 million, which represented 27.8%
of the increase in non-interest expense in 1996 as compared to 1995. The
increase was a result of having two additional full service retail sales offices
open in the 1996 period, the payment of incentives for loan and deposit
production, the addition to staff of several loan production officers, the full
effect of additions to staff in various departments late in 1995 and the effects
of merit increases.
Federal deposit insurance expense increased $3.1 million to $4.2 million
for 1996 as compared to $1.1 million for 1995 primarily as a result of the
one-time assessment to recapitalize the SAIF. This represents 46.3% of the
increase in non-interest expense in 1996 as compared to 1995. The SAIF
assessment was $2.9 million and represents 65.7 basis points of deposits held as
of March 31, 1995. The remaining increase represents an increase in insurance
premium paid and is a result of increased deposit levels.
Other operating expenses increased $1.0 million to $3.5 million for 1996 as
compared to $2.5 million for 1995, which represents 15.6% of the increase in
non-interest expense in 1996 as compared to 1995. The increase was primarily due
to increased credit card servicing costs as a result of the increased size of
the credit card portfolio, increased business development expenses incurred to
generate loan and deposit growth, an employee benefits consulting project aimed
at making Metropolitan's salary and benefit structure competitive with that of
its peers, and increases in other general and administrative expenses as a
result of the increased number of full service retail offices.
Provision for Income Taxes. The provision for income taxes decreased 49.2%
to $1.1 million in 1996 as compared to $2.2 million in 1995 due to the decline
in income before taxes. The effective tax rate was 41.1% for 1996 and 37.8% for
1995. The effective tax rate in 1996 was higher because expenses which are not
deductible for tax purposes, such as 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.
As a result of legislation enacted during 1996, savings associations like
the Bank will no longer be able to calculate their deduction for bad debts using
the percentage of taxable income method. Instead, savings associations will
generally be required to compute their deduction based on specific charge offs
during the
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taxable year. While this change, effective for the tax year 1996, will effect
the timing of payments, it will not effect the comparability of results among
years.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994.
Net Income. Net income for 1995 was $3.5 million, or $1.13 per common
share, as compared to $3.4 million for 1994, or $1.10 per common share, a 3.1%
increase. Net interest income and non-interest income increased 6.2% and 163.9%,
respectively, in 1995, as compared to 1994; however, in 1995 the provision for
loan losses and non-interest expense increased 25.2% and 28.3%, respectively.
Interest Income. Total interest income increased 37.3% to $43.4 million in
1995 as compared to $31.6 million in 1994. This increase primarily resulted from
a 28.9% increase in average interest-earning assets between the two periods. The
average balance of loans increased $96.8 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. Metropolitan
originated $161.9 million and purchased $103.7 million in loans in 1995, as
compared to $186.5 million and $74.1 million, respectively, for 1994. 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 1995
as compared to 7.96% during 1994.
Metropolitan's net interest margin declined 70 basis points to 3.24% for
1995 as compared to 3.94% for 1994, 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
increased cost of funds. The rate earned on interest-earning assets increased
more slowly during the period because (i) the portfolio of fixed rate loans
increased from 22.4% of the portfolio at December 31, 1994 to 31.7% of the
portfolio at December 31, 1995, and (ii) increases in rates of adjustable rate
mortgages generally lag the market due to contractual timing of adjustments
(i.e., monthly, annually).
Interest Expense. Total interest expense increased 67.7% to $26.8 million
for 1995 as compared to $16.0 million for 1994. Interest expense increased due
to a higher average balance of interest-bearing liabilities outstanding and due
to a higher cost of funds during 1995 as compared to 1994. In accordance with
Metropolitan's strategy of funding the increase in interest-earning assets
primarily with time and core deposits, the average balance of deposit accounts
increased $75.7 million, or 20.8%, from December 31, 1994 to December 31, 1995.
Metropolitan's cost of funds increased to 5.50% in 1995 as compared to
4.25% in 1994, due to the higher level of market interest rates and
Metropolitan's pursuit of higher deposit growth in order to fund the significant
growth in loans.
Provision for Loan Losses. The provision for loan losses increased 25.2% to
$959,000 in 1995 as compared to $766,000 in 1994. 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 (including loans held for sale)
increased 13.0% to $482.6 million at December 31, 1995 from $426.9 million at
the same date in 1994. The allowance for losses on loans at December 31, 1995
was $2.8 million, or 0.57% of total loans, as compared to $1.9 million, or 0.45%
of total loans, at the same date in 1994. 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, the status of impaired loans, economic
conditions affecting real estate markets, regulatory considerations, and other
matters.
Non-Interest Income. Total non-interest income increased 163.9% to $4.2
million in 1995 as compared to $1.6 million in 1994. Net loan servicing income
increased 66.4% to $1.1 million in 1995 as compared to $642,000 in 1994 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 $1.2 billion
at December 31, 1995 from $739.4 million at December 31, 1994.
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Gain on sale of loans was $444,000 in 1995 as compared to $52,000 in 1994.
This income was dependent upon both the amount of loans sold and secondary
market pricing, and these variables in turn were directly affected by prevailing
interest rates. The proceeds from sale of loans increased 17.4% to $59.8 million
during 1995 as compared to $51.0 million in the same period in 1994. The pricing
achieved in the 1995 period was more favorable due to the general stability of
interest rates even at higher levels. In addition, during 1995 the gain on sale
of loans was favorably effected by the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights," which requires lenders who sell originated loans and retain the
servicing rights to recognize the rights to service mortgage loans for others as
separate assets. Modest gains on loan sales during the last half of 1994
partially offset losses which were incurred in the early months of 1994 as
interest rates were increasing sharply.
Gain on sale of securities was $389,000 in 1995 as compared to $34,000 in
1994. During 1995, Metropolitan elected to securitize certain of its one- to
four-family loans into mortgage-backed securities guaranteed by the Federal
National Mortgage Association ("FNMA"), in order to reduce the risk-based
capital requirements, to reduce credit risk by acquiring the investor guarantee,
and to create collateral that is a more efficient source of funds in the market
place. These securities were classified as held-to-maturity upon securitization.
On November 15, 1995, the Financial Accounting Standard Board ("FASB") issued a
special report entitled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities.-- Questions
and Answers" ("Special Report"). The Special Report primarily provided
additional guidance for implementation of SFAS No. 115, based upon inquiries
made to the FASB since the statement was issued in May 1993. The Special Report
allowed an enterprise to reassess the appropriateness of the classifications of
all securities held at that time. In light of the guidance provided in the
Special Report, Metropolitan reclassified all the FNMA securities created
through securitization of the Bank originated one-to four-family loans to
available-for-sale. In addition $29.1 million of those securities, representing
the greatest degree of interest rate risk, were sold at a gain of $389,000.
Loan option income was $559,000 in 1995. This represented a new source of
non-interest income for the Bank in 1995. In these option 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 option fee was negotiated based on the
principal amount of loans involved. These option transactions provided the loan
broker a period of time to find a buyer who was willing to pay a higher price
for the loans.
Loan credit discount income was $640,000 in 1995. Since 1993, Metropolitan
has purchased 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 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 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 discount related to management's initial assessment of the deficiency
in collateral values is recognized as non-interest income.
Non-Interest Expense. Total non-interest expense increased 28.3% to $14.2
million in 1995 as compared to $11.1 million in 1994. Personnel related expenses
increased $1.5 million, which represented 47.0% of the increase in non-interest
expense in 1995 as compared to 1994. The increase was primarily a result of
having three additional full service retail sales offices open in 1995. In
addition, during 1995 Metropolitan staffed a business lending department, a
trust department and a facilities maintenance department, none of which existed
during 1994. Occupancy costs increased $647,000 which represented 20.7% of the
increase in 1995 over 1994, 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, business development, check processing and ATM expenses, increased
$432,000 which represented 13.8% of the increase in 1995 over 1994, as a result
of the overall increase in business levels, including an increase in loans,
deposits and servicing.
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Provision for Income Taxes. The provision for income taxes was $2.2 million
in 1995 as compared to $2.0 million in 1994. The effective tax rate was 37.8%
for 1995 and 36.6% for 1994. The higher effective tax rate in the 1995 period
was largely due to premium payments for a key man life insurance policy, which
are not deductible for income tax purposes.
ASSET QUALITY
Non-Performing Assets. 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 collectibility 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 sets forth the amounts and categories of Metropolitan's
non-performing assets as of the dates indicated. At December 31, 1996, all loans
classified by management as impaired were also classified as non-performing.
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN THOUSANDS)
Non-accrual loans....................................... $4,923 $3,103 $2,240
Loans past due greater than 90 days, still accruing..... 271 204 128
------ ------ ------
Total non-performing loans.............................. 5,194 3,307 2,368
Real estate owned....................................... 177 258 53
------ ------ ------
Total non-performing assets............................. $5,371 $3,565 $2,421
====== ====== ======
Non-performing loans to total loans..................... 0.80% 0.69% 0.55%
Non-performing assets to total assets................... 0.70% 0.60% 0.51%
Non-performing assets were $5.4 million at December 31, 1996, an increase
of $1.8 million from the same date a year earlier, primarily due to two retail
strip shopping centers and one multifamily property. During the same time
period, total net loans receivable increased $166.6 million to $646.5 million at
December 31, 1996. One retail strip shopping center was sold to a third party at
sheriff's sale subsequent to year-end and Metropolitan recovered its full
investment. Based upon current appraisals, no loss is anticipated on the other
retail strip shopping center and a specific allowance for loss of $236,000 has
been recorded on the multifamily property.
Non-performing assets were $3.6 million at December 31, 1995, an increase
of $1.1 million from the same date a year earlier. The increase is primarily
reflected in the multifamily and consumer loan categories. During the same time
period total net loans receivable increased $54.8 million to $479.9 million at
December 31, 1995.
Allowance for Losses on Loans. The provision for loan losses and allowance
for losses on loans is based on an analysis of individual loans, prior loss
experience, growth in the loan portfolio, changes in the mix of the loan
portfolio and other factors including current economic conditions. See Note 1 of
Notes to Consolidated
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Financial Statements. The following table sets forth an analysis of
Metropolitan's allowance for losses on loans at the dates indicated:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING OF PERIOD.......................... $2,765 $1,911 $1,239
CHARGE-OFFS:
One- to four-family..................................... 22 23 23
Multifamily............................................. 119 -- 64
Commercial real estate.................................. -- 27 --
Construction and land................................... -- -- --
Consumer................................................ 95 56 14
Business................................................ -- -- --
----- ----- -----
Total charge-offs....................................... 236 106 101
----- ----- -----
RECOVERIES:
One- to four-family..................................... -- 1 1
Multifamily............................................. -- -- 6
Commercial real estate.................................. -- -- --
Construction and land................................... -- -- --
Consumer................................................ 11 -- --
Business................................................ -- -- --
----- ----- -----
Total recoveries........................................ 11 1 7
----- ----- -----
Net charge-offs......................................... 225 105 94
Provision for loan losses............................... 1,635 959 766
----- ----- -----
BALANCE AT END OF PERIOD................................ $4,175 $2,765 $1,911
===== ===== =====
Net charge-offs to average loans........................ 0.04% 0.02% 0.03%
Provision for loan losses to average loans.............. 0.28% 0.21% 0.21%
Allowance for losses on loans to total non-performing
loans at end of period................................ 77.73% 83.61% 80.70%
Allowance for losses on loans to total loans at end of
period................................................ 0.64% 0.57% 0.45%
The allowance for losses on loans as a percentage of total loans was 0.64%
at December 31, 1996 as compared to 0.57% at December 31, 1995 and 0.45% at
December 31, 1994. In each period, the provision for loan losses and allowance
for losses on loans were based on an analysis of individual credits, prior and
current loss experience, overall growth in the portfolio and current economic
conditions. Based on such analysis, Metropolitan increased the allowance for
losses on loans in excess of net charge-offs by $1.4 million and $854,000 at
December 31, 1996 and 1995, respectively.
COMPARISON OF DECEMBER 31, 1996 AND DECEMBER 31, 1995 FINANCIAL CONDITION
Total assets amounted to $769.1 million at December 31, 1996, as compared
to $590.1 million at December 31, 1995, an increase of $179.0 million, or 30.3%.
The increase in assets was funded with deposit growth of $118.4 million, an
increase in Federal Home Loan Bank ("FHLB") advances and other borrowings of
$55.0 million, and an increase in shareholders' equity of $4.8 million.
Securities decreased by $9.6 million, or 42.2%, to $13.2 million.
Securities available for sale are maintained by Metropolitan primarily to meet
the liquidity maintenance requirement of the 1995 Subordinated Notes and the
5.0% regulatory liquidity requirement. See "-- Liquidity and Capital Resources."
During 1996, the Bank shifted a significant portion of its liquidity portfolio
out of U.S. Treasury Securities into certain mortgage-backed securities which
qualify for liquidity to improve the overall yield on the liquidity portfolio.
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Mortgage-backed securities increased $17.5 million to $56.7 million at
December 31, 1996. The increase was primarily due to the securitization of $14.6
million of Bank originated one- to four-family loans into FHLMC mortgage-backed
securities. In addition, certain mortgage-backed securities which qualify for
regulatory liquidity were added during 1996.
Loans held for sale increased $7.5 million to $9.0 million at December 31,
1996, primarily as a result of the increased balance of loans for which
Metropolitan has issued a written loan option. These loans totalled $6.4 million
at December 31, 1996 as compared to $458,000 at the same date a year earlier.
Subsequent to year end the option for $3.3 million of that amount was exercised
and that loan has been sold.
Loans receivable increased $159.1 million, or 33.3% to $637.5 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. The mix of loan types did not change
significantly from 1995 to 1996. The following increases by loan category were
experienced: one- to four-family loans -- $38.5 million; multifamily
loans--$45.1 million; commercial real estate loans -- $26.2 million; consumer
loans--$22.0 million; construction and land loans (net of loans in
process) -- $15.1 million; and business loans -- $14.8 million.
Premises and equipment increased $3.8 million, or 51.1%, to $11.3 million.
This increase was directly a result of retail sales office expansion. Land and a
building were acquired and are undergoing renovations in Hudson for an office
which is expected to open in April 1997. Land was also acquired in Stow for
construction of a future retail sales office.
Deposits totalled $622.1 million at December 31, 1996, an increase of
$118.4 million, or 23.5%, over the balance at December 31, 1995. The increase
resulted from management's marketing efforts and growth at newer retail sales
offices.
Other borrowings increased $55.0 million to $101.9 million at December 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 during
1996, management chose to fund a large portion of the loan growth discussed
above with wholesale funds. FHLB advances were the predominant source of
borrowings.
Shareholders' equity increased $4.8 million, or 18.8%, to $30.2 million,
due largely to the net proceeds from issuance of 400,000 shares of Common Stock
by the Corporation in an Initial Public Offering which was completed on October
29, 1996.
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
December 1996 was 5.52%. 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
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payments on its existing debt. At December 31, 1996, the Corporation, excluding
the Bank, had cash and readily convertible investments of $2.2 million.
Metropolitan's liquidity, represented by cash equivalents, is a result of
its operating, investing, and financing activities. These activities are
summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Net cash provided (used) by operating
activities................................... $ (3,849) $ 8,204 $ 15,553
Net cash used for investing activities......... (174,379) (100,340) (146,949)
Net cash provided by financing activities...... 176,580 98,740 103,234
-------- -------- --------
Net change in cash and cash equivalents........ (1,648) 6,604 (28,162)
Cash and cash equivalents at beginning of
period....................................... 18,170 11,566 39,728
-------- -------- --------
Cash and cash equivalents at end of period..... $ 16,522 $ 18,170 $ 11,566
======== ======== ========
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
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 1994, 1995
and 1996, net cash was used in investing activities, primarily to fund and
purchase new loans.
At December 31, 1996, $58.5 million, or 9.4%, 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.
When evaluating sources of funds Metropolitan considers the cost of various
alternatives such as local retail deposits, FHLB advances and other wholesale
borrowings. One option considered and utilized in the past has been the
acceptance of out-of-state time deposits from individuals and entities,
predominantly credit unions. These deposits typically have balances of $90,000
to $100,000 and have a term of one year or more. They are not accepted through
brokers. At December 31, 1996, approximately $61.5 million of time deposits, or
9.9% of Metropolitan's total deposits, were held by these individuals and
entities. Of that amount, $6.6 million were in the form of certificates of
deposit of $100,000 and over. If Metropolitan were unable to replace these
deposits upon maturity, it could have an adverse effect on Metropolitan's
liquidity.
Metropolitan has access to wholesale borrowings based on the availability
of eligible collateral. The FHLB makes funds available for housing finance based
upon the blanket or specific pledge of certain one- to four-family loans and
various types of investment and mortgage-backed securities. The Bank had
borrowing capacity at the FHLB under its blanket pledge agreement of
approximately $77.0 million at December 31, 1996, of which $59.5 million was
utilized. The financial market makes funds available through reverse repurchase
agreements by accepting various investment and mortgage-backed securities as
collateral. The Bank had borrowing capacity for reverse repurchase agreements of
approximately $40.0 million at December 31, 1996, of which $23.5 million was
utilized.
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.
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The OTS leverage requirement expressly requires that core capital be
maintained in an amount not less than 3% of adjusted total assets. The OTS has
taken the position, however, that the Prompt Corrective Action regulatory scheme
has effectively raised the leverage ratio requirement for all but the most
highly rated savings associations to 4%. Core capital is defined to include
shareholders' equity less intangibles other than qualifying supervisory goodwill
and certain qualifying intangibles, less investments in subsidiaries engaged in
activities not permissible for national banks.
Under the tangible capital requirement, tangible capital (defined as core
capital less all intangible assets) must be maintained in an amount equal to at
least 1.5% of adjusted total assets. Adjusted total assets, for the purpose of
the tangible capital ratio, include total assets less all intangible assets
except qualifying purchased mortgage servicing rights.
The risk-based capital requirement is calculated based on the risk weight
assigned to on-balance sheet assets and off-balance sheet commitments, which
ranges from 0% to 100% of the book value of the asset and is based upon the risk
inherent in the asset. The risk weights assigned by the OTS for principal
categories of assets are (i) 0% for cash and securities issued by the U.S.
Government or unconditionally backed by the full faith and credit of the U.S.
Government; (ii) 20% for securities (other than equity securities) issued by
U.S. Government sponsored agencies and mortgage-backed securities issued by, or
fully guaranteed as to principal and interest by, the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent one-
to four-family first lien mortgage loans not more than 90 days delinquent and
having a loan to value ratio of not more that 80% at origination unless insured
to such ratio by an insurer approved by FNMA or FHLMC, certain qualifying
multifamily first lien mortgage loans and residential construction loans; and
(iv) 100% for all other loans and investments, including consumer loans,
commercial loans, repossessed assets and loans more than 90 days delinquent. The
risk-based requirement mandates total capital of 8.0% of risk-weighted assets.
Total capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and maturing
capital instruments that do not qualify as core capital and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital.
The Bank's regulatory capital ratios at December 31, 1996 were in excess of
the capital requirements specified by OTS regulations as shown by the following
table:
TANGIBLE RISK-BASED
CAPITAL CORE CAPITAL CAPITAL
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
CAPITAL AMOUNT:
Actual................................. $42,342 5.54% $42,592 5.58% $45,761 8.46%
Required............................... 11,454 1.50 30,545 4.00 43,274 8.00
------- ------- -------
Excess................................. $30,888 4.04% $12,047 1.58% $ 2,487 0.46%
======= ======= =======
The Corporation maintains a $4.0 million line of credit with the Huntington
National Bank which it could access to make future contributions to capital of
the Bank. At December 31, 1996, there was no outstanding balance under the line
of credit.
There are currently no regulatory capital requirements applicable to the
Corporation. Future capital of the Corporation is expected to come from retained
earnings, however, Metropolitan could issue additional debt or equity securities
in a public or private placement transaction to supplement retained earnings or
to make future contributions to capital of 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.
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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) the sale of 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 will generally 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.
As part of its effort to monitor and manage interest rate risk, the Bank
uses the Net Portfolio Value ("NPV") methodology adopted by the OTS as part of
OTS capital regulations. 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 application
of the methodology attempts to quantify interest rate risk as the change in NPV
which would result from theoretical instantaneous and sustained parallel shifts
of 100 basis points in market interest rates.
Presented below, as of December 31, 1996 and 1995, is an analysis of
Metropolitan's interest rate risk measured by the NPV methodology. 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.
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
CHANGES IN INTEREST RATE BOARD LIMIT CHANGE PERCENTAGE CHANGE CHANGE PERCENTAGE CHANGE
(BASIS POINTS) PERCENTAGE CHANGE IN NPV IN NPV IN NPV IN NPV
- ------------------------ ----------------- -------- ----------------- -------- -----------------
(DOLLARS IN THOUSANDS)
+400 (75)% $(26,596) (44)% $(13,476) (27)%
+300 (50) (19,790) (33) (9,576) (19)
+200 (25) (12,853) (21) (5,946) (12)
+100 (10) (6,302) (10) (2,778) (6)
-100 (10) 6,294 10 4,197 9
-200 (25) 14,644 24 9,481 19
-300 (50) 26,402 44 17,571 36
-400 (75) 40,742 68 27,856 57
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 the loan 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.
At December 31, 1996 and 1995, the Bank was within the Board established limits
for various changes in interest rates, however, the Bank's sensitivity to rising
interest rates has increased from 1995 to 1996. The increased sensitivity, which
management monitors closely, was a result of: (i) the use of time deposits with
12 to 24 month terms to fund asset growth; (ii) the increase in one to
four-family residential ARMs in the loan portfolio which are fixed for three or
five years before they become annual adjustable rate loans (i.e., the 5/1 and
3/1 ARM programs); and (iii) the slight increase in the level of fixed rate
loans in the portfolio.
The principal strategy used by Metropolitan to manage interest rate risk
has been to build a portfolio of adjustable rate interest-earning assets. At
December 31, 1996, 67.9% of the total loan portfolio had adjustable rates. In
order to remain competitive in the mortgage loan market and meet customer needs,
Metropolitan also offers a variety of fixed rate products. Metropolitan has
managed its investment in fixed rate loans in several ways in order to minimize
interest rate risk. It has long been Metropolitan's policy to sell the majority
of its fixed rate one- to four-family loan production in the secondary market.
At December 31, 1996, Metropolitan had only 6.1% of its total loans comprised of
fixed rate residential one- to four-family loans. The fixed rate residential
loans held in the loan portfolio typically have maturities of 15 years. Within
the remaining fixed rate portfolio, Metropolitan has focused on short-term loan
types. Fixed rate multifamily and commercial real estate loans comprised 18.0%
of total loans at December 31, 1996, and had a weighted average contractual term
to maturity of approximately six years. Fixed rate consumer loans, with a
weighted average contractual term of maturity of approximately seven years,
comprised 6.8% of total loans at
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December 31, 1996. These are contractual terms to maturity and very often, for
various reasons, consumers repay loans before their contractual maturity
shortening the effective term to maturity.
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.
ACCOUNTING DEVELOPMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No.
128 simplifies the calculation of earnings per share ("EPS") by replacing
primary EPS with basic EPS. Basic EPS includes no dilution and is computed by
dividing net income by weighted-average shares outstanding. The Corporation
expects SFAS No. 128 to have no effect on its earnings per share calculation,
other than changing terminology.
In June 1996, the 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 extinguishment 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 extinguishment of liabilities
occurring after December 31, 1996 applied prospectively. SFAS No. 125 supersedes
SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 125 expands
the requirements of SFAS No. 122 by introducing the concept of adequate
compensation into the determination of the value of servicing assets. Management
does not anticipate that the adoption of SFAS No. 125 will effect comparability
of results among years.
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
December 31, 1996, the value of these originated servicing rights on the balance
sheet was $764,000. The fair value of such rights was in excess of that amount.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement was amended in October 1994 by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." SFAS No. 114 requires that impaired loans be measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or at the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends certain accounting and disclosure requirements
set forth in SFAS No. 114. The provisions of these statements were adopted
effective 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 loan losses to
such loans. If these allocations cause the allowance for loan losses to require
an increase, such increase is reported as bad debt expense. Based on the
analysis prepared, no bad debt expense was recorded by Metropolitan in
connection with adopting this standard. As allowed, management excludes all
consumer loan and residential single family loans with balances less than
$200,000 from possible classification as impaired.
Effective January 1, 1994, Metropolitan adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires the classification of debt and equity securities as held to
maturity, trading or available for sale upon their acquisition. Securities
classified as
17
19
trading would be carried at market value with the unrealized holding gain or
loss recorded in the statement of operations. Securities available for sale are
carried at their estimated market value with the unrealized holding gain or loss
reflected as a separate component of shareholders' equity. The cumulative effect
on Metropolitan's shareholder's equity at January 1, 1994, of adopting SFAS No.
115, is included as a separate component of shareholder's equity in the
consolidated statement of financial condition and represents the after-tax
effect of adjusting securities available for sale to fair value. Securities
classified as held to maturity are carried at amortized cost unless there is a
permanent impairment in value.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes included herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in relative purchasing power
of money over time due to inflation. The impact of inflation is reflected in the
increased cost of Metropolitan's operations.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are influenced by changes in the inflation
rate, they do not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as changes in monetary and fiscal policies.
Metropolitan's ability to match the interest rate sensitivity of its financial
assets to the interest sensitivity of its financial liabilities in its
asset/liability management may tend to minimize the effect of changes in
interest on its financial performance.
18
20
REPORT OF MANAGEMENT
The Management of Metropolitan Financial Corp. is responsible for the
preparation, accuracy and fair presentation of the financial statements and
related information in the Annual Report.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded. These controls include written
policies and procedures which establish and maintain effective internal controls
through proper delegation of authority and division of responsibility, proper
recording of transactions and fair presentation of financial results in
accordance with generally accepted accounting principles. These systems of
controls are reviewed by our internal auditors and independent auditors who have
free access to the Audit Committee.
Management assessed the Corporation's internal control structure and
believes that the system provides reasonable assurances that financial
transactions are recorded properly, and that the Corporation is in compliance
with federal and state laws and regulations as well as safety and soundness laws
and regulations.
/s/ ROBERT M. KAYE
-----------------------
Robert M. Kaye
Chairman and Chief Executive Officer
Metropolitan Financial Corp.
/s/ DAVID G. LODGE
-----------------------
David G. Lodge
President and Chief Operating
Officer
Metropolitan Financial Corp.
/s/ PATRICK W. BEVACK
-----------------------
Patrick W. Bevack
Executive Vice President and Chief
Financial Officer
Metropolitan Savings Bank of
Cleveland
19
21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Metropolitan Financial Corp.
Mayfield Heights, Ohio
We have audited the accompanying consolidated statements of financial
condition of Metropolitan Financial Corp. as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metropolitan
Financial Corp. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Corporation changed
its method of accounting for mortgage servicing rights and impaired loans in
1995 and for certain investment securities in 1994 to comply with new accounting
guidance.
/s/ CROWE, CHIZEK AND COMPANY LLP
CROWE, CHIZEK AND COMPANY LLP
Cleveland, Ohio
February 28, 1997
20
22
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
Cash and cash equivalents (Note 13)............................. $ 10,522,577 $ 18,170,473
Federal funds and other cash investments........................ 6,000,000
------------ ------------
Cash and cash equivalents..................................... 16,522,577 18,170,473
Securities available for sale (Note 2).......................... 13,173,458 22,806,178
Mortgage-backed securities (Notes 2 and 9)...................... 56,672,294 39,155,500
Loans held for sale............................................. 8,972,946 1,504,348
Loans receivable, net (Notes 3 and 9)........................... 637,492,935 478,345,398
Federal Home Loan Bank stock, at cost (Note 9).................. 3,988,600 3,568,700
Accrued interest receivable (Note 4)............................ 4,790,661 3,707,742
Premises and equipment, net (Note 5)............................ 11,332,239 7,499,939
Real estate owned, net (Note 6)................................. 177,300 257,593
Cost in excess of fair value of net assets acquired............. 3,238,839 3,188,412
Cost of loan servicing rights (Note 7).......................... 8,050,837 9,129,558
Prepaid expenses and other assets............................... 4,663,157 2,761,156
------------ ------------
Total assets.................................................. $769,075,843 $590,094,997
============ ============
LIABILITIES
Deposits (Note 8)............................................... $622,104,517 $503,742,420
Other borrowings (Note 9)....................................... 101,873,673 46,873,673
Accrued interest payable........................................ 4,120,163 4,551,061
Official checks................................................. 3,882,671 2,778,632
Other liabilities............................................... 6,850,450 6,682,796
------------ ------------
Total liabilities............................................. 738,831,474 564,628,582
------------ ------------
Commitments (Notes 10 and 13)
SHAREHOLDERS' EQUITY (Note 14)
Common stock, no par value, 10,000,000 shares authorized,
3,525,635 shares issued and outstanding....................... 100
Additional paid-in capital...................................... 11,101,383 7,801,283
Retained earnings............................................... 18,466,986 16,928,083
Unrealized gain on securities available for sale, net of tax.... 676,000 736,949
------------ ------------
Total shareholders' equity.................................... 30,244,369 25,466,415
------------ ------------
Total liabilities and shareholders' equity................. $769,075,843 $590,094,997
============ ============
See accompanying notes to consolidated financial statements.
21
23
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans........................ $50,267,618 $39,963,189 $30,012,666
Interest on mortgage-backed securities............ 2,890,437 2,492,744 692,673
Interest and dividends on other investments....... 1,293,828 979,566 933,594
----------- ----------- -----------
Total interest income........................ 54,451,883 43,435,499 31,638,933
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits.............................. 28,131,837 23,521,751 14,917,447
Interest on other borrowings...................... 4,984,212 3,294,520 1,074,344
----------- ----------- -----------
Total interest expense....................... 33,116,049 26,816,271 15,991,791
----------- ----------- -----------
NET INTEREST INCOME................................. 21,335,834 16,619,228 15,647,142
Provision for loan losses (Note 3).................. 1,635,541 958,573 765,664
----------- ----------- -----------
Net interest income after provision for loan
losses............................................ 19,700,293 15,660,655 14,881,478
----------- ----------- -----------
Non-interest income
Loan servicing income, net........................ 1,203,779 1,067,767 641,625
Gain on sale of loans............................. 202,621 444,313 52,443
Net gain on sale of securities.................... 133,706 388,581 34,204
Loan option income (Note 13)...................... 695,798 559,256
Loan credit discount income (Note 3).............. 640,262
Other operating income............................ 1,536,711 1,123,536 872,132
----------- ----------- -----------
Total non-interest income.................... 3,772,615 4,223,715 1,600,404
----------- ----------- -----------
Non-interest expense
Salaries and related personnel costs.............. 8,669,705 6,819,383 5,348,509
Occupancy and equipment expense................... 2,464,926 2,134,862 1,487,558
Federal deposit insurance premiums (Note 18)...... 4,211,869 1,132,125 928,969
Data processing expense........................... 599,150 586,260 381,431
Marketing expense................................. 694,898 542,838 392,481
State franchise taxes............................. 461,127 306,518 283,503
Amortization of intangibles....................... 255,720 220,115 221,996
Other operating expenses.......................... 3,481,610 2,445,150 2,013,503
----------- ----------- -----------
Total non-interest expense................... 20,839,005 14,187,251 11,057,950
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.......................... $ 2,633,903 $ 5,697,119 $ 5,423,932
Provision for income taxes (Note 11)................ 1,095,000 2,154,700 1,987,143
----------- ----------- -----------
NET INCOME.......................................... $ 1,538,903 $ 3,542,419 $ 3,436,789
=========== =========== ===========
Earnings per share (Note 1)......................... $ 0.48 $ 1.13 $ 1.10
=========== =========== ===========
Weighted average shares (Note 1).................... 3,192,302 3,125,635 3,125,635
=========== =========== ===========
See accompanying notes to consolidated financial statements.
22
24
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
UNREALIZED
GAIN/(LOSS)
ADDITIONAL ON SECURITIES TOTAL
COMMON PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
STOCK CAPITAL EARNINGS FOR SALE EQUITY
------ ----------- ----------- ------------- -----------
Balance, January 1, 1994............. $ 100 $ 7,801,283 $ 9,948,875 $17,750,258
Unrealized gain on securities
available for sale upon adoption of
SFAS No. 115 on January 1, 1994
(Note 1)........................... $ 16,255 16,255
Net income........................... 3,436,789 3,436,789
Change in unrealized gain/(loss) on
securities available for sale, net
of tax............................. (923,325) (923,325)
------ ----------- ----------- ------------- -----------
Balance, December 31, 1994........... 100 7,801,283 13,385,664 (907,070) 20,279,977
Net income........................... 3,542,419 3,542,419
Change in unrealized gain/(loss) on
securities available for sale, net
of tax............................. 1,644,019 1,644,019
------ ----------- ----------- ------------- -----------
Balance, December 31, 1995........... 100 7,801,283 16,928,083 736,949 25,466,415
Net income........................... 1,538,903 1,538,903
Issuance of 400,000 shares of common
stock, net of costs................ 3,300,000 3,300,000
Change in stated value of common
stock.............................. (100) 100
Change in unrealized gain/(loss) on
securities available for sale, net
of tax............................. (60,949) (60,949)
------ ----------- ----------- ------------ -----------
Balance, December 31, 1996........... $ 0 $11,101,383 $18,466,986 $ 676,000 $30,244,369
====== =========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
23
25
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 1,538,903 $ 3,542,419 $ 3,436,789
Adjustments to reconcile net income to net cash
provided by operating activities
Net amortization and depreciation........... 3,022,358 2,036,614 1,737,049
Gain on sale of securities.................. (133,706) (388,581) (34,204)
Provision for loan and REO losses........... 1,677,541 958,573 765,664
Deferred taxes.............................. (183,303) (9,326) (121,000)
Loans originated for sale................... (35,235,545) (45,327,774) (41,059,540)
Loans purchased for sale.................... (16,675,331) (16,210,821)
Proceeds from sale of loans................. 43,410,896 59,830,616 50,965,820
Repayments on loans held for sale........... 809,737
Gain on sale of real estate owned........... 113,428 3,307 28,887
FHLB stock dividend......................... (264,100) (216,200) (126,900)
Changes in other assets..................... (2,980,967) (2,603,437) (1,634,617)
Changes in other liabilities................ 1,051,575 6,588,239 1,594,937
------------- ------------- -------------
Net cash provided by (used for)
operating activities................. (3,848,514) 8,203,629 15,552,885
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls and repayments of
securities available for sale.................. 6,051,195 2,000,000 2,000,000
Purchases of securities available for sale....... (13,336,840) (23,464,948)
Proceeds from sale of mutual fund................ 16,690,055 7,000,000
Disbursement of loan proceeds.................... (218,376,200) (117,432,139) (143,508,572)
Purchases of loans............................... (110,565,748) (86,134,911) (71,704,818)
Proceeds from loan and principal repayments...... 140,245,124 96,163,166 73,780,215
Purchase of mortgage-backed securities available
for sale....................................... (13,570,050) (6,078,881)
Proceeds from mortgage-backed security principal
repayments and maturities...................... 7,189,624 3,525,478 706,239
Proceeds from sale of mortgage-backed securities
available for sale............................. 3,636,772 29,142,705 1,245,585
Proceeds from loan sales......................... 12,106,490
Proceeds from sales of real estate owned and
premises and equipment......................... 1,250,813 102,678 1,308,418
Purchase of premises and equipment............... (4,506,250) (4,869,739) (1,135,060)
Purchase of FHLB stock........................... (155,800) (1,041,300) (45,800)
Purchase of mortgage loan servicing rights....... (732,261) (5,329,415) (3,516,570)
Premium paid for credit card relationships....... (306,146)
------------- ------------- -------------
Net cash used for investing activities...... (174,379,222) (100,338,425) (146,949,244)
------------- ------------- -------------
(Continued)
24
26
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts................... $ 118,279,840 $ 67,369,745 $ 103,475,533
Proceeds from borrowings......................... 371,850,000 340,700,000 118,718,388
Repayment of borrowings.......................... (316,850,000) (309,330,000) (118,960,000)
Proceeds from issuance of stock.................. 3,300,000
------------- ------------- -------------
Net cash provided by financing activities... 176,579,840 98,739,745 103,233,921
------------- ------------- -------------
Net change in cash and cash equivalents.......... (1,647,896) 6,604,949 (28,162,438)
Cash and cash equivalents at beginning of year... 18,170,473 11,565,524 39,727,962
------------- ------------- -------------
Cash and cash equivalents at end of year......... $ 16,522,577 $ 18,170,473 $ 11,565,524
============= ============= =============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest............................... 33,546,947 23,979,013 15,156,138
Income taxes........................... 1,587,000 2,749,000 1,751,200
Transfer from loans receivable to other real
estate.................................... 1,325,948 326,709 442,689
Securities classified as available for sale
upon adoption of SFAS No. 115............. 23,584,000
Loans securitized........................... 14,458,129 53,795,086
See accompanying notes to consolidated financial statements.
25
27
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is an
Ohio corporation organized for the operation of a savings and loan holding
company. The accounting policies of the Corporation conform to generally
accepted accounting principles and prevailing practices within the banking and
thrift industry. A summary of the more significant accounting policies follows:
CONSOLIDATION POLICY: The Corporation and its subsidiaries, MetroCapital
Corporation and Metropolitan Savings Bank (the "Bank"), and its wholly-owned
subsidiaries, Kimberly Construction Company Incorporated and Metropolitan
Savings Service Corporation and its wholly-owned subsidiary Metropolitan
Securities Corporation are included in the accompanying consolidated financial
statements. All significant intercompany balances have been eliminated.
INDUSTRY SEGMENT INFORMATION: Metropolitan Financial Corp. is a savings and
loan holding company engaged in the business of originating nonresidential real
estate loans in Ohio, Central and Northern New Jersey, Michigan, Kentucky and
Western Pennsylvania and residential real estate loans in Northeast Ohio. The
majority of the Corporation's income is derived from commercial and retail
lending activities.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS: In preparing
financial statements, management must make estimates and assumptions. These
estimates and assumptions affect the amounts reported for assets, liabilities,
revenues and expenses as well as affecting the disclosures provided. Future
results could differ from current estimates. Areas involving the use of
management's estimates and assumptions primarily include the allowance for
losses on loans, the valuation of loan servicing rights, the value of loans held
for sale, fair value of certain securities, the carrying value and amortization
of intangibles, the determination and carrying value of impaired loans, and the
fair value of financial instruments. Estimates that are more susceptible to
change in the near term include the allowance for losses on loans, the valuation
of servicing rights, the value of loans held for sale and the fair value of
securities.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and
off-balance sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
STATEMENT OF CASH FLOWS: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from depository institutions,
interest bearing deposits, investments purchased with an initial maturity of
three months or less, overnight repurchase agreements and federal funds sold.
Generally, federal funds and overnight repurchase agreements are sold for
one-day periods. The Corporation reports net cash flows for deposit transactions
and deposits made with other financial institutions.
SECURITIES: Effective January 1, 1994, the Corporation adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." This
accounting guidance requires the Corporation to classify debt and marketable
equity securities as held to maturity, trading or available for sale. The
cumulative effect on shareholders' equity at January 1, 1994, of adopting SFAS
No. 115, is included as a separate component of shareholders' equity in the
consolidated statement of financial condition and represents the after tax
effect of adjusting securities available for sale to fair value. Prior to the
adoption of SFAS No. 115, the Corporation classified securities as held for
sale.
26
28
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
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 a sale.
Securities available for sale are carried at fair value with unrealized gains
and losses included as a separate component of shareholders' equity, net of tax.
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 re-evaluates 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 loans held for sale, the Bank enters into a
sales agreement concurrent with loan origination. As such, these loans are
recorded at cost, which approximates market. At December 31, 1996 and 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: Because some loans may not be repaid in
full, an allowance for losses on loans is maintained. 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.
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 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 its review for impairment.
SFAS No. 118 was adopted January 1, 1995. Under this standard a creditor is
allowed to use existing methods for income recognition on an impaired loan. All
impaired loans for purposes of SFAS No. 114 are placed on non-accrual status.
REAL ESTATE OWNED: Real estate owned is comprised of properties acquired
through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.
These properties are recorded at fair value, less estimated selling costs. Any
reduction from carrying value of the related loan to fair value at the time of
acquisition is accounted for as a loan loss. Any subsequent reduction in fair
value is reflected in a valuation
27
29
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
allowance account through a charge to income. Expenses to carry other real
estate are charged to operations as incurred.
PREMISES AND EQUIPMENT: Premises and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets for
financial reporting purposes. For tax purposes, depreciation on certain assets
is computed using accelerated methods. Maintenance and repairs are charged to
expense as incurred and improvements are capitalized.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED: The cost in excess of
fair value of the net assets acquired resulting from the acquisition of the Bank
is being amortized to expense on a straight-line basis over a period of 25 years
beginning in July 1987. This amount is a reduction from shareholders' equity in
calculating tangible capital for regulatory purposes.
LOAN SERVICING RIGHTS: The cost of loan servicing rights acquired is
amortized in proportion to, and over the period of, estimated net servicing
revenues. The cost of loan servicing rights purchased and the amortization
thereon is periodically evaluated in relation to estimated future net servicing
revenues. The Bank evaluates the carrying value of the servicing portfolio by
estimating the future net servicing income of the portfolio based on
management's best estimate of remaining loan lives.
Effective January 1, 1995, the Corporation adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights." SFAS No. 122 requires lenders who
sell or securitize originated loans and retain the servicing rights to recognize
as separate assets the rights to service mortgage loans for others. SFAS No. 122
also requires that capitalized mortgage servicing rights be assessed for
impairment based on the fair value of those rights. For purposes of measuring
impairment, management stratifies loans by loan type, interest rate and
investor.
INTEREST INCOME ON LOANS: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. Management reviews loans delinquent
90 days or more to determine if interest accrual should be discontinued based on
the estimated fair market value of the collateral. Under SFAS No. 114, as
amended by SFAS No. 118, the carrying values of impaired loans are periodically
adjusted to reflect cash payments, revised estimates of future cash flows and
increases in the present value of expected cash flows due to the passage of
time. Cash payments representing interest income are reported as such and other
cash payments are reported as reductions in carrying value. Increases or
decreases in carrying value due to changes in estimates of future payments or
the passage of time are reported as reductions or increases in the provision for
loan losses.
LOAN FEES AND COSTS: Origination and commitment fees received for loans,
net of direct origination costs, are deferred and amortized to interest income
over the contractual life of the loan using the level yield method. The net
amount deferred is reported in the consolidated statements of financial
condition as a reduction of loans.
LOAN OPTION INCOME: The Bank purchases real estate loans for sale and
simultaneously writes an option giving the holder the option to purchase those
loans at a specified price within a specified time period. At the time the
transaction is complete the Bank recognizes a non-refundable fee in income.
INCOME TAXES: The Corporation and its subsidiaries are included in the
consolidated federal income tax return of the Corporation. Income taxes are
provided on a consolidated basis and allocated to each entity based on its
proportionate share of consolidated income. Deferred income taxes are provided
on items of income or expense that are recognized for financial reporting
purposes in periods different than when such items are recognized for income tax
purposes.
28
30
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
CONCENTRATION OF CREDIT RISK: The Bank originates and purchases commercial
real estate loans, residential real estate loans, consumer loans and business
loans. At December 31, 1996, real estate loans secured by multifamily apartments
approximated 41% of the Bank's total loan portfolio. The remainder of the
portfolio was comprised of one- to four-family residential loans (17%),
commercial real estate (21%), residential construction and land acquisition and
development loans (10%), consumer loans (8%) and business loans (3%).
Additionally, approximately 62% of the Bank's total real estate loans are
secured by real estate in the State of Ohio, approximately 8% in the State of
California, approximately 7% in the State of Michigan, and approximately 6% in
the State of Pennsylvania. At December 31, 1995, real estate loans secured by
residential apartments approximated 46% of the Bank's total loan portfolio. The
remainder of the portfolio was comprised of one- to four-family residential
loans (15%), commercial real estate (21%), residential construction and land
acquisition and development loans (10%), consumer loans (6%), and business loans
(2%). Additionally, at December 31, 1995, approximately 63% of the Bank's total
real estate loans were secured by real estate in the State of Ohio,
approximately 12% in the State of Michigan, and approximately 8% in each of the
States of New Jersey and California.
TRUST DEPARTMENT ASSETS AND INCOME: Property held by the Bank in a
fiduciary or other capacity for its trust customers is not included in the
accompanying consolidated financial statements since such items are not assets
of the Bank.
EARNINGS PER SHARE: In connection with the initial public offering of stock
completed in October, 1996, the Board of Directors approved a 3,125,635-for-one
stock split, effected in the form of a stock dividend during October 1996. All
per share information has been retroactively adjusted to reflect the effect of
the stock dividend.
FINANCIAL STATEMENT PRESENTATION: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1996
presentation.
NOTE 2 -- SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale at December 31, 1996 and 1995 are as
follows:
1996
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
U.S. Treasury securities.......... $ 6,093,443 $ 40,176 $ (69,244) $ 6,064,375
Mutual funds...................... 2,009,083 2,009,083
FNMA preferred stock.............. 5,000,000 100,000 5,100,000
----------- ---------- ----------- -----------
Total investment securities..... 13,102,526 140,176 (69,244) 13,173,458
Mortgage-backed securities........ 55,719,015 954,642 (1,363) 56,672,294
----------- ---------- ----------- -----------
Totals.......................... $68,821,541 $1,094,818 $ (70,607) $69,845,752
=========== ========== =========== ===========
29
31
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
1995
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
U.S. Treasury securities.......... $12,195,274 $ 277,102 $ (29,896) $12,442,480
Mutual funds...................... 10,363,698 10,363,698
----------- ---------- ----------- -----------
Total investment securities..... 22,558,972 277,102 (29,896) 22,806,178
Mortgage-backed securities........ 38,286,116 869,384 39,155,500
----------- ---------- ----------- -----------
Totals.......................... $60,845,088 $1,146,486 $ (29,896) $61,961,678
=========== ========== =========== ===========
The amortized cost and fair value of debt securities available for sale at
December 31, 1996, by contractual maturity are shown below. Actual maturities
could differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
AMORTIZED FAIR
COST VALUE
----------- -----------
Due after one year through five years...................... $ 6,093,443 $ 6,064,375
Mortgage-backed securities................................. 55,719,015 56,672,294
----------- -----------
Total debt securities available for sale................. $61,812,458 $62,736,669
=========== ===========
Proceeds from the sale of mortgage-backed securities available for sale
were $3,636,772 in 1996, $29,142,705 in 1995 and $1,245,585 in 1994. Gross gains
realized on those sales were $133,706 in 1996, $475,587 in 1995 and $37,593 in
1994. Gross losses of $87,006 and $3,389 were realized realized in 1995 and
1994, respectively. Proceeds from the sale of mutual funds were $16,690,055 in
1996 and $7,000,000 in 1995. No gain or loss was realized in 1996 or 1995.
Certain securities with a carrying value of $24,714,428 and a market value
of $25,114,156 at December 31, 1996, were pledged to secure reverse repurchase
agreements.
On November 17, 1995, the Corporation transferred securities with an
amortized cost of $51,345,071 previously classified as held to maturity to
available for sale. The unrealized gain on the securities transferred totaled
$771,664. On November 17, 1995, the Corporation's equity increased $509,298 as a
result of the transfer.
30
32
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 3 -- LOANS RECEIVABLE
The composition of the loan portfolio at December 31, 1996 and 1995 is as
follows:
1996
--------------------------------------------
ORIGINATED PURCHASED TOTAL
------------ ------------ ------------
Real estate loans
Construction loans
Residential single family............. $ 47,999,248 $ 47,999,248
Commercial............................ 9,825,000 9,825,000
Land.................................. 13,735,638 13,735,638
Loans in process...................... (31,758,069) (31,758,069)
------------ ------------ ------------
Construction loans, net............. 39,801,817 39,801,817
Permanent loans
Residential single family............. 91,358,204 $ 23,399,646 114,757,850
Multifamily........................... 165,202,852 111,341,902 276,544,754
Commercial............................ 43,006,141 92,629,301 135,635,442
Other................................. 137,538 137,538
------------ ------------ ------------
Total real estate loans............. 339,506,552 227,370,849 566,877,401
Consumer loans............................. 38,601,020 15,577,578 54,178,598
Business loans and other loans............. 23,507,560 23,507,560
------------ ------------ ------------
Total loans.............................. $401,615,132 $242,948,427 644,563,559
============ ============
Discount on loans, net..................... (559,593)
Deferred loan fees, net.................... (2,336,016)
Allowance for losses on loans.............. (4,175,015)
------------
$637,492,935
============
31
33
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
1995
--------------------------------------------
ORIGINATED PURCHASED TOTAL
------------ ------------ ------------
Real estate loans
Construction loans
Residential single family............. $ 37,118,087 $ 37,118,087
Commercial............................ 440,000 440,000
Land.................................. 10,613,217 10,613,217
Loans in process...................... (23,373,232) (23,373,232)
------------ ------------
Construction loans, net............. 24,798,072 24,798,072
Permanent loans
Residential single family............. 47,821,816 $ 28,437,082 76,258,898
Multi family.......................... 118,441,339 113,017,691 231,459,030
Commercial............................ 24,303,645 85,098,474 109,402,119
Other................................. 36,415 2,394 38,809
------------ ------------ ------------
Total real estate loans............. 215,401,287 226,555,641 441,956,928
Consumer loans............................. 27,243,050 4,970,535 32,213,585
Business loans and other loans............. 8,703,794 8,703,794
------------ ------------ ------------
Total loans.............................. $251,348,131 $231,526,176 482,874,307
============ ============
Discount on loans, net..................... (543,770)
Deferred loan fees, net.................... (1,220,475)
Allowance for losses on loans.............. (2,764,664)
------------
$478,345,398
============
Loans with adjustable rates, included above, totaled $465,306,000 and
$346,685,000 at December 31, 1996 and 1995, respectively.
During 1995, the Bank received payoffs on loans originally purchased at
discounts. The purchase discounts recorded were attributable to collectibility
concerns and at payoff, the unamortized discounts totaling $640,262 were
recorded as income.
Activity in the allowance for losses on loans is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Balance at beginning of year............. $2,764,664 $1,910,714 $1,239,147
Provision for loan losses................ 1,635,541 958,573 765,664
Net charge-offs.......................... (225,190) (104,623) (94,097)
---------- ---------- ----------
$4,175,015 $2,764,664 $1,910,714
========== ========== ==========
Effective January 1, 1995, the Bank adopted the provisions of SFAS Nos.
114, "Accounting by Creditors for Impairment of a Loan" and 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No.
114 specifies that allowances for losses on impaired loans be determined using
the present value of estimated future cash flows of the loan, discounted using
the loan's effective interest rate. Management analyzes loans on an individual
basis and considers a loan to be impaired when it is probable that all principal
and interest amounts will not be collected according to the loan contract. Loans
which are past due two payments or less and that management feels are probable
of being paid current within 90 days are not
32
34
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
considered to be impaired loans. SFAS No. 118 allows a creditor to use existing
methods for income recognition on an impaired loan.
Information regarding impaired loans are as follows:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
Balance of impaired loans............................ $3,495,006 $3,569,074
Less portion for which no allowance for losses on
loans is allocated................................. 2,773,777 3,569,074
---------- ----------
Portion of impaired loan balance for which an
allowance for losses on loans is allocated......... $ 721,229 $ 0
========== ==========
Portion of allowance for losses on loans allocated to
the impaired loan balance.......................... $ 241,269 $ 0
========== ==========
Information regarding impaired loans is as follows for the year ended
December 31:
1996 1995
---------- ----------
Average investment in impaired loans during the
year............................................... $4,220,286 $2,144,138
========== ==========
Interest income recognized during impairment......... $ 48,146 $ 35,884
========== ==========
Interest income recognized on cash basis during the
year............................................... $ 48,146 $ 35,884
========== ==========
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with Metropolitan's and the Bank's directors,
officers, shareholders and associates on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the time for
comparable transactions with other persons, and that do not involve more than
the normal risk of collectibility or present other unfavorable terms. Loans to
related parties totaled $1,372,000 at December 31, 1996.
NOTE 4 -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
1996 1995
---------- ----------
Loans receivable..................................... $4,194,756 $3,210,849
Mortgage-backed securities........................... 385,240 204,658
Other................................................ 210,665 292,235
---------- ----------
$4,790,661 $3,707,742
========== ==========
33
35
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 5 -- PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
Land............................................... $ 2,969,274 $ 2,223,354
Office buildings................................... 3,684,536 1,617,812
Leasehold improvements............................. 2,329,573 2,239,329
Furniture, fixtures and equipment.................. 4,899,961 3,684,568
Construction in progress........................... 678,209 351,979
----------- -----------
Total............................................ 14,561,553 10,117,042
Accumulated depreciation........................... 3,229,314 2,617,103
----------- -----------
$11,332,239 $ 7,499,939
=========== ===========
Depreciation expense was $683,718, $519,533, and $369,946 for the years
ended December 31, 1996, 1995 and 1994, respectively.
NOTE 6 -- REAL ESTATE OWNED
Activity in the allowance for loss on real estate owned is as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
Balance at beginning of year....................... $ 15,000 $ 0
Provision for loss................................. 42,000 15,000
----------- -----------
$ 57,000 $ 15,000
=========== ===========
NOTE 7 -- 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 are summarized as follows:
DECEMBER 31,
--------------------------------
1996 1995
-------------- --------------
Mortgage loans underlying pass-through
securities
FNMA........................................ $ 134,568,302 $ 112,657,048
Mortgage loan portfolios serviced for
FHLMC....................................... 713,289,564 781,402,395
FNMA........................................ 219,294,951 224,544,952
Other....................................... 35,361,907 63,611,413
-------------- --------------
$1,102,514,724 $1,182,215,808
============== ==============
Custodial balances maintained in connection with the foregoing loan
servicing were approximately $12,895,000, $14,198,000 and $5,600,000 at December
31, 1996, 1995 and 1994, respectively.
34
36
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
Following is an analysis of the changes in loan servicing rights acquired
for the year ended December 31:
1996 1995
-------------- --------------
Balance at beginning of year.................. $ 8,587,831 $ 4,824,586
Additions..................................... 732,261 5,329,415
Amortization.................................. (2,033,689) (1,566,170)
-------------- --------------
Balance at end of year........................ $ 7,286,403 $ 8,587,831
============== ==============
Following is an analysis of the changes in loan servicing rights originated
for the year ended December 31:
1996 1995
-------------- --------------
Balance at beginning of year.................. $ 541,727 $ 0
Additions..................................... 333,507 558,940
Amortization.................................. (110,800) (17,213)
-------------- --------------
Balance at end of year........................ $ 764,434 $ 541,727
============== ==============
NOTE 8 -- DEPOSITS
Deposits consist of the following:
DECEMBER 31,
--------------------------------------------------
1996 1995
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
Noninterest-bearing checking accounts........... $ 30,850,882 5% $ 27,036,735 5%
Interest-bearing checking accounts -- 2.00% to
3.20%......................................... 39,363,322 6 36,097,363 7
Passbook savings and statement savings -- 2.75%
to 5.46%...................................... 176,430,162 29 140,573,065 28
Certificates of deposit......................... 375,460,151 60 300,035,257 60
------------ --- ------------ ---
$622,104,517 100% $503,742,420 100%
============ === ============ ===
At December 31, 1996, scheduled maturities of certificates of deposit are
as follows:
YEAR WEIGHTED AVERAGE
ENDED AMOUNT INTEREST RATE
------ ------------ ----------------
1997........................................... $285,171,989 5.68%
1998........................................... 63,849,303 6.04%
1999........................................... 6,685,905 6.51%
2000........................................... 15,349,546 7.27%
2001........................................... 4,024,603 5.91%
Thereafter..................................... 378,805 6.35%
------------
$375,460,151 5.82%
============
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $58,516,000 and $41,930,000 at December 31, 1996
and 1995, respectively.
Related party deposits totaled $2,164,000 at December 31, 1996.
35
37
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 -- OTHER BORROWINGS
Other borrowings consisted of the following:
DECEMBER 31,
---------------------------
1996 1995
------------ -----------
Federal Home Loan Bank advances (5.5% and 5.7% at December 31,
1996 and 1995, respectively).................................... $ 59,500,000 $28,000,000
Reverse repurchase agreements (5.6% at December 31, 1996)......... 23,500,000
Subordinated debt maturing December 31, 2001 (10% fixed rate)..... 4,873,673 4,873,673
Subordinated debt maturing January 1, 2005 (9.625% fixed rate).... 14,000,000 14,000,000
------------ -----------
$101,873,673 $46,873,673
============ ===========
Federal Home Loan Bank advances are collateralized by FHLB stock, first
mortgage loans, and mortgage-backed securities with an aggregate carrying value
of $89,250,000 and $42,000,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996, scheduled payments on Federal Home Loan Bank advances
and reverse repurchase agreements are as follows:
YEAR WEIGHTED AVERAGE
ENDED AMOUNT INTEREST RATE
------ ----------- ----------------
1997............................................ $65,000,000 5.52%
1998............................................ 15,000,000 5.40%
2001............................................ 3,000,000 6.15%
------------
$83,000,000 5.52%
============
In 1993 and early 1994, the Corporation issued subordinated notes totaling
$4,873,673. Interest on the notes is paid quarterly and principal will be repaid
when the notes mature December 31, 2001. Total issuance costs of approximately
$185,000 were incurred and will be amortized on a straight line basis over the
life of the notes. The notes are unsecured.
On February 22, 1995, the Corporation entered into an agreement for a
$5,000,000 variable rate 18-month revolving credit converting to a 30-month
variable rate term note. The terms of the loan required interest only payments
for eighteen months, then quarterly principal payments based on an 84-month
amortization with a balloon payment at maturity. The loan, which was guaranteed
by the Corporation's sole shareholder at the time, Robert M. Kaye, and
collateralized by stock of the Corporation and the Bank, was paid in full during
1995. In May, 1996, the Corporation renegotiated certain terms of this
agreement. The maximum borrowing was decreased to $4,000,000, the revolving term
was extended to May, 1998, at which time any then outstanding balance converts
to a term loan with quarterly principal payments based on a 60-month
amortization with a balloon payment due at maturity in May, 2001. As collateral
for the loan, the largest shareholder, Robert Kaye, has agreed to pledge a
portion of his common shares in an amount at least equal to 200% of any
outstanding balance. At December 31, 1996, there were no borrowings outstanding
under this agreement.
In December 1995, the Corporation issued subordinated notes totaling
$14,000,000. Interest on the notes is paid quarterly and principal will be
repaid when the notes mature January 1, 2005. Total issuance costs of
approximately $1,170,000 will be amortized on a straight line basis over the
life of the notes. The notes are unsecured.
36
38
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
The following tables set forth certain information about other borrowings
during the periods indicated.
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
MAXIMUM MONTH-END BALANCES:
FHLB advances...................................... $75,150,000 $51,000,000
Term loan.......................................... 3,280,000
Qualifying subordinated debt....................... 1,200,000
1993 subordinated notes............................ 4,873,673 4,873,673
1995 subordinated notes............................ 14,000,000 14,000,000
Line of credit..................................... 5,000,000
Reverse repos...................................... 23,500,000 9,000,000
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
AVERAGE BALANCES:
FHLB advances...................................... $50,545,916 $28,466,663
Term loan.......................................... 485,260
Qualifying subordinated debt....................... 923,077
1993 subordinated notes............................ 4,873,673 4,873,673
1995 subordinated notes............................ 14,000,000 690,411
Line of credit..................................... 3,833,644
Reverse repos...................................... 4,479,839 7,590,659
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances...................................... 5.43% 6.18%
Term loan.......................................... 8.79
Qualifying subordinated debt....................... 11.78
1993 subordinated notes............................ 10.47 10.47
1995 subordinated notes............................ 10.48 10.48
Line of credit..................................... 8.67
Reverse repos...................................... 5.61
NOTE 10 -- LEASE COMMITMENTS
The Bank leases certain of its branches under lease agreements whose lease
terms are renewable periodically. Rent expense for the years ended December 31,
1996, 1995 and 1994 was $874,164, $839,849 and $539,636, respectively.
37
39
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
The future minimum annual rental commitments as of December 31, 1996 for
all noncancelable leases are as follows:
1997............................................................. $ 944,456
1998............................................................. 918,797
1999............................................................. 848,846
2000............................................................. 840,573
2001............................................................. 186,302
Thereafter....................................................... 477,085
----------
$4,216,059
==========
NOTE 11 -- INCOME TAXES
The provision for income taxes consists of the following components:
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Current expense.......................... $1,278,303 $2,164,026 $2,108,143
Deferred benefit......................... (183,303) (9,326) (121,000)
---------- ---------- ----------
$1,095,000 $2,154,700 $1,987,143
========== ========== ==========
Deferred income taxes are provided for temporary differences. The
components of the Corporation's net deferred tax asset (liability) consist of
the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Deferred tax assets
Deferred loan fees............................. $ 196,538 $ 283,118 $ 186,971
Loan servicing rights.......................... 377,977 159,129 6,801
Bad debt deduction............................. 99,990
Other.......................................... 17,530 2,576 4,181
---------- ---------- ----------
692,035 444,823 197,953
---------- ---------- ----------
Deferred tax liabilities
Debt issuance costs............................ (359,542) (373,738)
Bad debt deduction............................. (54,465) (116,557)
Employment contract............................ (104,768) (102,605) (108,823)
Depreciation expense........................... (59,370) (25,666) (25,960)
Stock dividends on FHLB stock.................. (163,526) (67,699)
Other.......................................... (876) (135,289)
---------- ---------- ----------
(688,082) (624,173) (386,629)
---------- ---------- ----------
Net deferred tax asset (liability).......... $ 3,953 $ (179,350) $ (188,676)
========== ========== ==========
38
40
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
A reconciliation from income taxes at the statutory rate to the effective
provision for income taxes is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Statutory rate................................... 34% 34% 34%
Income taxes at statutory rate................... $ 895,527 $1,937,020 $1,844,137
Officer's life premium........................... 30,441 55,185 27,833
Amortization of purchased intangibles............ 97,962 134,414 135,028
Tax exempt income................................ (43,248)
Business expense limitation...................... 67,368
Other............................................ 3,702 28,081 23,393
---------- ---------- ----------
Provision for income taxes..................... $1,095,000 $2,154,700 $1,987,143
========== ========== ==========
Taxes attributable to security's gains totaled $45,460, $121,548 and
$10,699 for the years ended December 31, 1996, 1995 and 1994, respectively.
Savings associations such as the Bank are generally taxed in the same
manner as other corporations. For taxable years beginning prior to January 1,
1996, savings associations such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their supervision and
business operations ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying real property loans,"
which are generally loans secured by certain interests in real property, may
have been computed using an amount based on the Bank's actual loss experience,
or a percentage equal to 8% of the Bank's taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the
reserve for nonqualifying loans (the "percentage of taxable income method"). The
Bank's deduction with respect to nonqualifying loans was computed under the
experience method, which essentially allows a deduction based on the Bank's
actual loss experience over a period of several years. Each year the Bank
selected the most favorable way to calculate the deduction attributable to an
addition to the tax bad debt reserve.
Legislation enacted during 1996 repealed the existing reserve method of
accounting for bad reserves for tax years beginning after December 31, 1995. As
a result, savings associations will no longer be able to calculate their
deduction for bad debts using the percentage of taxable income method. Instead,
savings associations will generally be required to compute their deduction based
on specific charge offs during the taxable year. This legislation also requires
a savings association (or its controlled group) with assets of more than $500
million to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves for qualifying real property loans and
nonqualifying loans, thereby generating additional tax liability. At December
31, 1995, the Bank's post-1987 reserves totaled approximately $3.9 million. The
recapture may be suspended for up to two years if, during those years, the
savings association satisfies a residential loan requirement.
NOTE 12 -- SALARY DEFERRAL -- 401(K) PLAN
The Corporation maintains a 401(k) plan covering substantially all
employees who have attained the age of 21 and have completed one year of service
with the Corporation. This is a salary deferral plan, which calls for matching
contributions by the Corporation based on a percentage (50%) of each
participant's voluntary contribution (limited to a maximum of eight percent (8%)
of a covered employee's annual compensation). In addition to the Corporation's
required matching contribution, a contribution to the plan may be made at the
39
41
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
discretion of the Board of Directors. Employee voluntary contributions are
vested at all times, whereas employer contributions vest 20% per year through
year five at which time employer contributions are fully vested. The
Corporation's matching contributions were $126,599, $96,902 and $81,214 for the
years ended December 31, 1996, 1995 and 1994, respectively. No discretionary
contributions have been made by the Corporation for the periods presented.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
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 instruments
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 those
instruments. The Bank follows the same credit policy to make such commitments as
is followed for those loans recorded in the financial statements.
As of December 31, 1996, the Bank had fixed and variable rate commitments
to originate and/or purchase loans (at market rates) of approximately
$23,164,000 and $47,543,000, respectively. In addition, the Bank has firm
commitments to sell loans totaling $2,120,000 and optional commitments to sell
loans totaling $6,410,000 at December 31, 1996. Metropolitan's commitments to
originate and purchase loans are for loans at rates ranging from 7% to 16% and
commitment periods up to one year.
During 1996 and 1995, the Corporation purchased approximately $16,675,000
and $16,400,000 of mortgage loans and sold non-refundable options to a third
party to purchase these same loans at a later date. The Corporation recognized a
gain of $695,798 and $559,256 on the sale of these options during the years
ended December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995,
loans with a carrying value of $6,409,841 and $458,146, respectively, were held
for sale in connection with outstanding purchase options.
RESERVE REQUIREMENTS: The Bank is required to maintain $2,736,000 of cash
on hand or on deposit with the Federal Reserve to meet regulatory reserve
requirements at December 31, 1996. These funds do not earn interest.
NOTE 14 -- RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Prior to 1996, the Bank was permitted, under the Internal Revenue Code, to
determine taxable income after deducting a provision for bad debts in excess of
such provision recorded in the financial statements. Accordingly, retained
earnings at December 31, 1996 and 1995, includes approximately $2,883,000 for
which no provision for federal income taxes has been made. If this portion of
retained earnings is used in the future for any purpose other than to absorb bad
debts, it will be added to future taxable income.
The Bank is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings and other factors, and
the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval
40
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METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and plans for
capital restoration are required. The minimum requirements are:
CAPITAL TO RISK-
WEIGHTED ASSETS
---------------- TIER 1 CAPITAL TO
TOTAL TIER 1 ADJUSTED TOTAL ASSETS
----- ------ ---------------------
Well capitalized........................... 10% 6% 5%
Adequately capitalized..................... 8% 4% 4%
Undercapitalized........................... 6% 3% 3%
At year end, the Bank's actual capital levels (in thousands) and minimum
required levels were:
MINIMUM REQUIRED
TO BE WELL
CAPITALIZED UNDER
MINIMUM REQUIRED PROMPT CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES REGULATIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
1996
Total capital (to risk weighted
assets)...................... $45,761 8.46% $43,274 8.0% $54,093 10.0%
Tier 1 (core) capital (to risk
weighted assets)............. $42,592 7.87% $21,637 4.0% $32,456 6.0%
Tier 1 (core) capital (to
adjusted total assets)....... $42,592 5.58% $30,545 4.0% $38,181 5.0%
Tangible capital (to adjusted
total assets)................ $42,342 5.54% $11,454 1.5% N/A
1995
Total capital (to risk weighted
assets)...................... $35,530 8.64% $32,892 8.0% $41,115 10.0%
Tier 1 (core) capital (to risk
weighted assets)............. $33,057 8.04% $16,446 4.0% $24,669 6.0%
Tier 1 (core) capital (to
adjusted total assets)....... $33,057 5.66% $23,361 4.0% $29,201 5.0%
Tangible capital (to adjusted
total assets)................ $32,705 5.61% $ 8,747 1.5% N/A
The Bank at year-end 1996 was categorized as adequately capitalized.
A savings association which fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
OTS requiring the following: an increase in capital; reduction of rates paid on
savings accounts; cessation of or limitations on deposit-taking and lending;
limitations on operational expenditures; an increase in liquidity; and such
other actions deemed necessary or appropriate by the OTS. In addition, a
conservator or receiver may be appointed under certain circumstances.
The appropriate federal banking agency has the authority to reclassify a
well-capitalized institution as adequately capitalized, and to treat an
adequately capitalized or undercapitalized institution as if it were in the next
lower capital category, if it is determined, after notice and an opportunity for
a hearing, to be in an unsafe or unsound condition or to have received and not
corrected a less-than-satisfactory rating for any of the categories of asset
quality, management, earnings or liquidity in its most recent examination. As a
result of
41
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METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
such classification or determination, the appropriate federal banking agency may
require an adequately capitalized or under-capitalized institution to comply
with certain mandatory and discretionary supervisory actions. A significantly
undercapitalized savings association may not be reclassified, however, as
critically undercapitalized.
NOTE 15 -- RELATED PARTY TRANSACTIONS
In the years ended December 31, 1996, 1995 and 1994 the Corporation
expensed $96,000 per year for management fees relating to services provided by
an affiliate.
Certain directors and executive offices of the Corporation and its
subsidiaries hold an interest in the subordinated debt maturing December 31,
2001. The aggregate interest in the subordinated debt held by related parties
totaled $1,065,284 at December 31, 1996 and 1995. In addition, the Corporation's
401(k) salary deferral plan held a $400,000 interest in the subordinated debt at
December 31, 1996 and 1995.
NOTE 16 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Corporation disclose the estimated fair values of its
financial instruments. The following table shows those values and the related
carrying values. Items which are not financial instruments are not included.
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
Cash and equivalents............. $ 16,522,577 $ 16,522,577 $ 18,170,473 $ 18,170,473
Securities....................... 13,173,458 13,173,458 22,806,178 22,806,178
Mortgage-backed securities....... 56,672,294 56,672,294 39,155,500 39,155,500
Loans, net....................... 646,465,881 658,869,077 479,849,746 483,330,240
Federal Home Loan Bank stock..... 3,988,600 3,988,600 3,568,700 3,568,700
Loan servicing rights............ 8,050,837 8,830,101 9,129,558 9,294,631
Accrued interest receivable...... 4,790,661 4,790,661 3,707,742 3,707,742
Demand and savings deposits...... (246,644,366) (246,644,366) (203,707,163) (203,707,163)
Time deposits.................... (375,460,151) (376,934,368) (300,035,257) (302,230,363)
Other borrowings................. (101,873,673) (99,724,946) (46,873,673) (46,983,664)
Official check float account..... (3,882,671) (3,882,671) (2,778,632) (2,778,632)
Accrued interest payable......... (4,120,163) (4,120,163) (4,551,061) (4,551,061)
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that were the Corporation to
have disposed of such items at December 31, 1996, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1996 should not necessarily be considered to apply at subsequent dates.
For purposes of the above disclosures of estimated fair value, the
following assumptions were used. The estimated fair value for cash and
equivalents, the official check float account, accrued interest receivable and
accrued interest payable is considered to approximate cost due to the short term
nature of these instruments. The estimated fair value for securities and
mortgage-backed securities is based on quoted market values for the individual
securities or for equivalent securities. Loans were segregated into three main
groups: those with adjustable rates, those with fixed rates which are held for
sale and those with fixed rates held for investment. For the loans held for
sale, the carrying value was considered a reasonable estimate of fair value. The
fixed and
42
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METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
adjustable rate loans held for investment were further divided between those
secured by one- to four-family real estate and those secured by multifamily and
commercial real estate. For these loans, estimated fair value was determined
using a discounted cash flow analysis. The estimated fair value of Federal Home
Loan Bank stock is considered to approximate cost since it may be redeemed at
par under certain circumstances. Loan servicing rights includes loan servicing
rights acquired and loan servicing rights originated after the adoption of SFAS
No. 122. The estimated fair value of the servicing rights is based on a
discounted cash flow analysis. The estimated fair value of demand and savings
deposits, which have no stated maturity, is equal to the amount payable. The
estimated fair value for certificates of deposit, Federal Home Loan Bank
advances and the subordinated debt is based on estimates of the rate the
Corporation would pay on such deposits, advances and debt, applied for the time
period until maturity using a discounted cash flow analysis. The estimated fair
value of commitments is not material.
Other assets and liabilities of the Corporation that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill and similar items.
43
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METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 17 -- CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Metropolitan Financial Corp.
(parent company only). In this information, the parent's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of the
subsidiaries since acquisition. This information should be read in conjunction
with the consolidated financial statements.
PARENT COMPANY ONLY
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
ASSETS
Cash....................................................... $ 180,112 $ 4,790,234
Securities available for sale.............................. 2,009,083 1,102,243
Loans receivable, net...................................... 50,000 50,000
Investment in Metropolitan Savings Bank.................... 46,387,728 37,549,253
Cost in excess of fair value of net assets acquired........ 54,090 57,580
Prepaid expenses and other assets.......................... 1,194,532 1,253,500
----------- -----------
$49,875,545 $44,802,810
=========== ===========
LIABILITIES
Other borrowings........................................... $18,873,673 $18,873,673
Other liabilities.......................................... 757,503 462,722
----------- -----------
19,631,176 19,336,395
----------- -----------
SHAREHOLDERS' EQUITY
Common stock............................................... 100
Additional paid-in capital................................. 11,101,383 7,801,283
Retained earnings.......................................... 18,466,986 16,928,083
Unrealized gain on securities available for sale, net of
tax...................................................... 676,000 736,949
----------- -----------
30,244,369 25,466,415
----------- -----------
$49,875,545 $44,802,810
=========== ===========
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METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
PARENT COMPANY ONLY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Interest on loans and securities................. $ 97,909 $ 7,211 $ 4,191
Interest on other borrowings..................... 1,982,259 958,804 745,810
---------- ---------- ----------
Net interest expense............................. (1,884,350) (951,593) (741,619)
Non-interest income
Equity in net income of Metropolitan Savings
Bank........................................ 2,995,199 4,408,900 4,070,421
Other operating income......................... 3,723 47,859 18,226
---------- ---------- ----------
2,998,922 4,456,759 4,088,647
---------- ---------- ----------
Non-interest expense
Amortization of intangibles.................... 3,490 3,490 3,490
State franchise taxes.......................... 24,672 4,833 1,794
Other operating expenses....................... 249,507 315,424 186,955
---------- ---------- ----------
277,669 323,747 192,239
---------- ---------- ----------
Income before income taxes....................... 836,903 3,181,419 3,154,789
Federal income tax benefit.................. (702,000) (361,000) (282,000)
---------- ---------- ----------
Net income....................................... $1,538,903 $3,542,419 $3,436,789
========== ========== ==========
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METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................... $ 1,538,903 $ 3,542,419 $ 3,436,789
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in net income of Metropolitan
Savings Bank........................... (2,995,199) (4,408,900) (4,070,421)
Dividends received from Metropolitan
Savings Bank........................... 1,400,000 850,000 375,000
Amortization............................. 3,490 3,490 3,490
Change in other assets and liabilities... 349,524 (908,474) (154,990)
----------- ----------- -----------
Net cash from operating
activities........................ 296,718 (921,465) (410,132)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities........ 7,428,600
Purchase of securities available for
sale................................... (8,335,440) (1,102,243)
Capital contributions to subsidiary
bank................................... (7,300,000) (4,520,000)
----------- ----------- -----------
Net cash from investing
activities........................ (8,206,840) (5,622,243)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings................. 19,000,000 1,368,388
Repayment of borrowings.................. (8,280,000) (360,000)
Proceeds from issuance of stock.......... 3,300,000
----------- ----------- -----------
Net cash from financing activities....... 3,300,000 10,720,000 1,008,388
----------- ----------- -----------
Net change in cash and cash
equivalents......................... (4,610,122) 4,176,292 598,256
Cash and cash equivalents at beginning of
year........................................ 4,790,234 613,942 15,686
----------- ----------- -----------
Cash and cash equivalents at end of year...... $ 180,112 $ 4,790,234 $ 613,942
=========== =========== ===========
NOTE 18 -- FEDERAL DEPOSIT INSURANCE PREMIUMS
On September 30, 1996, the President signed into law the Omnibus Bill which
required the Federal Deposit Insurance Corporation to impose a special
assessment on Savings Association Insurance Fund ("SAIF") insured deposits in
order to recapitalize the SAIF and provide an opportunity to mitigate the
premium disparity between SAIF and Bank Insurance Fund ("BIF") insured deposits.
The assessment of 65.7 basis points on deposits as of March 31, 1995 resulted in
the Bank paying $2,927,800.
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METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 19 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
Interest income.................. $12,184 $12,804 $ 14,008 $15,456
Net interest income.............. 4,551 4,988 5,389 6,408
Provision for loan losses........ 307 379 650 300
Net income (loss)................ 716 865 (1,129) 1,087
Earnings (loss) per share........ $ .22 $ .27 $ (.35) $ .34
1995
Interest income.................. $ 9,810 $10,557 $ 11,404 $11,356
Net interest income.............. 4,052 3,928 4,186 4,145
Provision for loan losses........ 240 239 240 240
Net income....................... 632 1,047 716 1,147
Earnings per share............... $ .20 $ .33 $ .23 $ .37
47