1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1998
REGISTRATION NO. 333-
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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METROPOLITAN FINANCIAL CORP. METROPOLITAN CAPITAL TRUST I
(Exact name of Registrant as specified in its charter) (Exact name of Registrant as specified in its trust agreement)
OHIO DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
34-1109469 APPLIED FOR
(I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number)
6120
(Primary Standard Industrial
Classification Code Number)
6001 LANDERHAVEN DRIVE
MAYFIELD HEIGHTS, OHIO 44124
(440) 646-1111
(Address, including zip code, and telephone number, including area code,
of Registrants' principal executive offices)
DAVID G. LODGE
PRESIDENT, ASSISTANT SECRETARY AND ASSISTANT TREASURER
METROPOLITAN FINANCIAL CORP.
6001 LANDERHAVEN DRIVE
MAYFIELD HEIGHTS, OHIO 44124
(440) 646-1111
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
MALVIN E. BANK, ESQ. JOSEPH G. PASSAIC, JR., ESQ.
PAUL N. HARRIS, ESQ. MARY M. SJOQUIST, ESQ.
THOMPSON HINE & FLORY LLP PATTON BOGGS, LLP
3900 KEY CENTER 2550 M STREET, N.W.
127 PUBLIC SQUARE WASHINGTON, D.C. 20037
CLEVELAND, OHIO 44114-1216 (202) 457-6000
(216) 566-5500 (202) 457-6315 (FACSIMILE)
(216) 566-5800 (Facsimile)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
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If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. |_|
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) PRICE (1) REGISTRATION FEE
(2) (3)
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% Trust Preferred Securities of
Metropolitan Capital Trust I $28,750,000 100% $28,750,000 $8,481.25
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% Junior Subordinated
Deferrable Interest Debentures of
Metropolitan Financial Corp. (2) $28,750,000 100% $28,750,000 N/A
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Metropolitan Financial Corp.
Guarantee With Respect to the
Trust Preferred Securities (3) N/A N/A N/A N/A
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Total $28,750,000 (4) 100% $28,750,000 (4) $8,481.25
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(1) Estimated solely for the purpose of calculating the Registration Fee.
(2) No separate consideration will be received for the Junior Subordinated
Deferrable Interest Debentures of Metropolitan Financial Corp. (the
"Junior Subordinated Debentures") distributed upon any liquidation of
Metropolitan Capital Trust I.
(3) No separate consideration will be received for the Metropolitan
Financial Corp. Guarantee.
(4) Such amount represents the liquidation amount of the Metropolitan
Capital Trust I Trust Preferred Securities and the principal amount of
Junior Subordinated Debentures that may be distributed to holders of
such Trust Preferred Securities upon any liquidation of Metropolitan
Capital Trust I.
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 8, 1998
PROSPECTUS
$25,000,000
METROPOLITAN CAPITAL TRUST I
[METROPOLITAN % CUMULATIVE TRUST PREFERRED SECURITIES
LOGO]
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
2,500,000 PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
METROPOLITAN FINANCIAL CORP.
The % Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent beneficial interests in Metropolitan
Capital Trust I, a statutory business trust created under the laws of the State
of Delaware (the "Trust Issuer"). Metropolitan Financial Corp., an Ohio
corporation ("Metropolitan" or the "Corporation"), will be the owner of all of
the beneficial interests represented by common securities of the Trust Issuer
(the "Common Securities" and, collectively with the Preferred Securities, the
"Trust Securities"). Wilmington Trust Company is the Property Trustee of the
Trust Issuer. The Trust Issuer exists for the sole purpose of issuing the Trust
Securities and investing the proceeds from the sale thereof in % Junior
Subordinated Deferrable Interest Debentures (the "Junior Subordinated
Debentures") to be issued by the Corporation. The Junior Subordinated Debentures
will mature on June 30, 2028 (the "Stated Maturity"). The Preferred Securities
will have a preference over the Common Securities under certain circumstances
with respect to cash distributions and amounts payable on liquidation,
redemption or otherwise. See "Description of the Preferred Securities --
Subordination of the Common Securities."
Application has been made to list the Preferred Securities on the Nasdaq
Stock Market's National Market under the symbol "METFCP." See "Risk Factors --
Absence of Prior Public Market for the Preferred Securities; Trading Price and
Tax Considerations."
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SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR THE BANK INSURANCE FUND OF
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) ISSUER(2)(3)
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Per Preferred Security.................................. $10.00 (2) $10.00
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Total(4)................................................ $25,000,000 (2) $25,000,000
=======================================================================================================================
(1) The Trust Issuer and Metropolitan have agreed to indemnify the underwriter,
Ryan, Beck & Co. (the "Underwriter") against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debentures of
Metropolitan, Metropolitan has agreed to pay the Underwriter, as
compensation for its arranging the investment of such proceeds in the Junior
Subordinated Debentures, $ per Preferred Security, or $ in the
aggregate ($ in the aggregate if the over-allotment option is
exercised in full). See "Underwriting."
(3) Before deducting expenses payable by Metropolitan, estimated to be
approximately $280,000.
(4) The Trust Issuer and Metropolitan have granted the Underwriter a 30-day
option to purchase up to 375,000 additional Preferred Securities on the same
terms and conditions set forth above solely to cover over-allotments, if
any. If this option is exercised in full, the total Price to Public and
Proceeds to Issuer will be $28,750,000. See "Underwriting."
The Preferred Securities are offered by the Underwriter subject to receipt
and acceptance by it, prior sale and the Underwriter's right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Preferred Securities will be made in
book-entry form through the book-entry facilities of The Depository Trust
Company on or about , 1998 against payment therefor in immediately
available funds.
[RYAN, BECK LOGO]
The date of this Prospectus is , 1998
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(continued from the previous page)
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depository ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of Preferred
Securities," Preferred Securities in definitive form will not be issued and
owners of beneficial interests in the global securities will not be considered
holders of the Preferred Securities. Settlement for the Preferred Securities
will be made in immediately available funds. The Preferred Securities will trade
in DTC's Same-Day Funds Settlement System, and secondary market trading activity
for the Preferred Securities will therefore settle in immediately available
funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from the date of
original issuance and payable quarterly in arrears on June 30, September 30,
December 31 and March 31 of each year, commencing June 30, 1998, at the annual
rate of % of the Liquidation Amount of $10 per Preferred Security
("Distributions"). Subject to certain exceptions, Metropolitan has the right to
defer payment of interest on the Junior Subordinated Debentures at any time or
from time to time for a period not exceeding 20 consecutive quarters with
respect to each deferral period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all interest then accrued and unpaid (together with interest
thereon at the rate of %, compounded quarterly, to the extent permitted by
applicable law), Metropolitan may elect to begin a new Extension Period subject
to the requirements set forth herein. If interest payments on the Junior
Subordinated Debentures are so deferred, Distributions on the Preferred
Securities will also be deferred, and Metropolitan will not be permitted,
subject to certain exceptions described herein, to declare or pay any cash
distributions with respect to the capital stock of Metropolitan or debt
securities of Metropolitan that rank pari passu with or junior to the Junior
Subordinated Debentures. See "Description of the Junior Subordinated
Debentures--Restrictions on Certain Payments."
During an Extension Period, interest on the Junior Subordinated
Debentures would continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled would accumulate) at the rate
of % per annum, compounded quarterly, and holders of the Preferred Securities
would be required to include interest income in their gross income for United
States federal income tax purposes in advance of receipt of the cash
distributions with respect to such deferred interest payments. Metropolitan
believes that the mere existence of its right to defer interest payments should
not cause the Preferred Securities to be issued with original issue discount for
federal income tax purposes. However, it is possible that the Internal Revenue
Service could take the position that the likelihood of deferral was not a remote
contingency within the meaning of applicable Treasury Regulations. See
"Description of the Junior Subordinated Debentures--Right to Defer Interest
Payment Obligation" and "Certain Federal Income Tax Consequences-Interest Income
and Original Issue Discount."
Metropolitan and the Trust Issuer believe that, taken together, the
obligations of Metropolitan under the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement (each as
defined herein), constitute, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of all of the Trust Issuer's
obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures, the Expense Agreement
and the Guarantee--Full and Unconditional Guarantee." The Guarantee of
Metropolitan (the "Guarantee") guarantees the payment of Distributions and
payments on liquidation or redemption of the Preferred Securities, but only in
each case to the extent of funds held by the Trust Issuer, as described herein.
See "Description of the Guarantee." If Metropolitan does not make interest
payments on the Junior Subordinated Debentures held by the Trust Issuer, the
Trust Issuer will have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the Trust
Issuer does not have sufficient funds to pay such Distributions. In such event,
a holder of the Preferred Securities may institute a legal proceeding directly
against Metropolitan to enforce payment of amounts equal to such Distributions
to such holder. See "Description of the Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of the Preferred
Securities."
The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or their earlier redemption. Subject to regulatory approval, if then
required under applicable capital guidelines or regulatory policies, and to
restrictions contained in the indenture (the "1995 Notes Indenture") for the
Corporation's 9.625% subordinated notes maturing January 1, 2005 (the "1995
Notes"), the Junior Subordinated Debentures are redeemable prior to their Stated
Maturity at the option of the Corporation (i) on or after , 2003, in whole
at any time or in part from time to time, or (ii) at any time, in whole (but not
in part), within ninety days following the occurrence and continuation of a Tax
Event, an Investment Company Event or a Capital Treatment Event (each as defined
herein) at a redemption price (the "Redemption Price") equal to the accrued
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and unpaid interest on the Junior Subordinated Debentures so redeemed to the
date fixed for redemption plus 100% of the principal amount thereof. See
"Description of the Junior Subordinated Debentures--Redemption or Exchange" and
"Description of the 1995 Notes."
The obligations of Metropolitan under the Guarantee and the Junior
Subordinated Debentures will be unsecured and are junior in right of payment to
all indebtedness not specifically subordinated to the Junior Subordinated
Debentures (the "Senior Indebtedness"). At December 31, 1997, Metropolitan had
$20.4 million in outstanding Senior Indebtedness. There are no limits pursuant
to the terms of the Trust Securities or the Junior Subordinated Debentures on
the amount of Senior Indebtedness or indebtedness ranking pari passu with the
Junior Subordinated Debentures which Metropolitan may issue. Metropolitan may
from time to time incur Senior Indebtedness and indebtedness ranking pari passu
with the Junior Subordinated Debentures. The obligations of Metropolitan under
the Guarantee and the Junior Subordinated Debentures are also junior to the
liabilities of the Bank and other subsidiaries of Metropolitan. See "Description
of the Junior Subordinated Debentures--Subordination."
Metropolitan will have the right at any time to dissolve the Trust
Issuer and, after satisfaction of creditors of the Trust Issuer, if any, as
provided by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities and the Common Securities
in exchange therefor upon liquidation of the Trust Issuer. The ability of
Metropolitan to do so may be subject to Metropolitan's prior receipt of
regulatory approval. In the event of the dissolution of the Trust Issuer, after
satisfaction of liabilities to creditors of the Trust Issuer as provided by
applicable law, the holders of the Preferred Securities will be entitled to
receive a Liquidation Amount of $10 per Preferred Security plus accumulated and
unpaid Distributions thereon to the date of payment, which may be in the form of
a distribution of a Like Amount of the Junior Subordinated Debentures, subject
to certain exceptions. See "Description of the Preferred Securities--Liquidation
of the Trust Issuer and Distribution of the Junior Subordinated Debentures to
Holders" and "--Liquidation Distribution upon Dissolution."
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Metropolitan will provide to the holders of the Preferred Securities
annual reports containing financial statements audited by Metropolitan's
independent auditors. Metropolitan will also furnish annual reports on Form 10-K
free of charge to holders of the Preferred Securities who so request in writing
addressed to the Secretary of Metropolitan.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
PREFERRED SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING
TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. ANY OF THE
FOREGOING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME WITHOUT
NOTICE. FOR A DESCRIPTION OF THESE ACTIVITIES, See "UNDERWRITING."
ii
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[Map indicating Metropolitan
Savings Bank's branch offices and
loan production office.]
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SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriter's over-allotment option will not be
exercised.
METROPOLITAN FINANCIAL CORP.
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is
the holding company for Metropolitan Savings Bank of Cleveland (the "Bank"), an
Ohio chartered stock savings association headquartered in Mayfield Heights,
Ohio. Metropolitan had total assets of $925.0 million at December 31, 1997. The
Bank operates 15 full service retail offices serving primarily the eastern
suburbs of Cleveland, Ohio and is the fifth largest savings association
headquartered in Ohio. The Bank's deposits are insured up to applicable limits
by the Federal Deposit Insurance Corporation ("FDIC").
In recent years, Metropolitan has pursued a strategy of maximizing
long term profitability by pursuing balance sheet growth designed to enhance the
franchise value of the Bank, its primary operating subsidiary. Metropolitan
seeks to maintain strong growth through (i) increasing total interest-earning
assets by continuing to focus on multifamily, commercial real estate and
residential loan origination while maintaining a high level of asset quality and
"adequately capitalized" status pursuant to FDIC guidelines, (ii) growing time
and core deposits at a rate that is consistent with the overall level of growth
of interest-earning assets, (iii) increasing non-interest income as a non-credit
based source of income that requires a lower commitment of capital than credit
based products, and (iv) increasing the capital of the Bank through retained
earnings.
As a result of this strategy, Metropolitan's assets have increased
from $300.5 million at December 31, 1992 to $925.0 million at December 31, 1997.
Net income for the Corporation has increased from $3.1 million for the year
ended December 31, 1992 to $5.8 million for the year ended December 31, 1997.
Metropolitan is primarily engaged in originating and purchasing
multifamily and commercial real estate loans in Ohio, Southeastern Michigan,
Central and Northern New Jersey, Northern Kentucky, Western Pennsylvania and
California, and residential real estate loans in Northeastern Ohio. Metropolitan
has expanded its multifamily and commercial real estate lending beyond its
primary lending markets into other areas of the United States in order to
benefit from management's expertise in multifamily and commercial lending.
Management believes that a certain degree of geographic diversity serves to
enhance Metropolitan's asset quality.
At December 31, 1997, Metropolitan's loan portfolio totaled $707.9
million, of which $194.5 million, or 25.4%, was in multifamily loans. Management
intends to continue to focus on originating and purchasing variable rate
multifamily, as well as commercial real estate and residential mortgages in its
primary lending markets. Management believes that multifamily loans offer
attractive risk-adjusted yields and favorable asset/liability management
characteristics. Metropolitan believes that, despite growing competition for
multifamily real estate loans from other lenders, it will continue to benefit
from management's experience and relationships with various sources of
multifamily lending developed over the years.
At December 31, 1997, commercial real estate loans comprised 21.8% of
Metropolitan's total loan portfolio. Over the past three years, this portion of
Metropolitan's portfolio has increased mainly through purchases. A majority of
these loans were part of larger packages of loans that included multifamily
residential loans and exhibited the yield and term characteristics sought by
Metropolitan and met the underwriting criteria established by Metropolitan.
Metropolitan plans to continue to add commercial real estate loans to its
portfolio through these types of purchases and to a lesser extent, through
origination. Due to regulatory limitations, Metropolitan expects that although
the level of commercial real estate loans in its portfolio will continue to
increase, the percentage of its loan portfolio consisting of commercial real
estate loans will remain stable.
Metropolitan originates one- to four-family residential loans in its
primary market of Northeastern Ohio. Metropolitan originates fixed rate
residential loans primarily for sale in the secondary market and originates
adjustable rate residential loans to hold in its portfolio. At December 31,
1997, 19.2% of Metropolitan's total loan portfolio was made up of residential
real estate loans secured by one- to four-family residences. When Metropolitan
sells its fixed rate real estate loans into the secondary market, it retains the
servicing rights on the loans, thereby increasing the amount of non-interest
income to the Corporation.
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In addition to retaining servicing rights on the residential loans
that it sells, Metropolitan increases its loan servicing portfolio through
purchases of servicing rights. At December 31, 1997, Metropolitan's overall
servicing portfolio was $1.6 billion. Of such amount, $1.2 billion represented
loans serviced for others. Loan servicing income, net, which was $1.3 million in
the 12 months ended December 31, 1997, represents a significant source of fee
income to Metropolitan. Management believes that the market value of the
servicing portfolio exceeds the amount reflected on the balance sheet.
Maintaining a high level of asset quality is one of management's top
priorities. Net charge-offs have averaged 0.06% for the five years ended
December 31, 1997, and net charge-offs were $893,000 in the 12 months ended
December 31, 1997. At December 31, 1997, nonperforming loans represented 0.44%
of total loans and nonperforming assets represented 0.56% of total assets.
Metropolitan plans to fund its asset growth primarily through growth
in time and core deposits. Deposits have grown at a compounded annual rate of
22.3% from December 31, 1992 to December 31, 1997, while assets have grown at
the rate of 25.2%. As deposit growth has lagged behind asset growth, Federal
Home Loan Bank ("FHLB") advances and reverse repurchase agreements have been
used by the Bank to fund asset growth. Metropolitan targets growing communities
with demographic and market characteristics which can support new retail sales
office locations and plans to open two de novo offices per year. In addition to
providing a source of core deposit funding, these retail sales offices will
enable the Corporation to continue to increase residential, consumer and
business lending in its primary Ohio markets.
In recent years, Metropolitan has put in place several initiatives
designed to make the Bank a full service bank. Metropolitan has created a trust
department, which manages investment assets for individuals and institutional
clients. In addition, the Bank has expanded its business lending and consumer
loan departments and personnel, including a credit card program. These
initiatives have been undertaken despite the short-term detrimental impact on
earnings as Metropolitan believes that such additional products and services
will enhance its competitive position and profitability in future years.
Although these activities constitute a relatively small part of Metropolitan's
business strategy at the present time, management expects these lines of
business to continue to grow and to become a more significant part of the
business of the Bank in the future.
The Corporation was incorporated in Ohio in 1972. Its corporate
headquarters is located at 6001 Landerhaven Drive, Mayfield Heights, Ohio 44124
and its telephone number is (440) 646-1111.
METROPOLITAN CAPITAL TRUST I
Metropolitan Capital Trust I (the "Trust Issuer") is a statutory
business trust created under Delaware law pursuant to (i) the Trust Agreement
executed by the Corporation, as depositor, Wilmington Trust Company, as Property
Trustee, and the Administrative Trustees named therein, and (ii) the filing of a
certificate of trust with the Delaware Secretary of State on April 7, 1998. The
trust agreement will be amended and restated in its entirety (as so amended, the
"Trust Agreement"). All of the beneficial interests represented by common
securities of the Trust Issuer (the "Common Securities") will be owned by the
Corporation. The Corporation will acquire Common Securities in an aggregate
Liquidation Amount equal to 4% of the total capital of the Trust Issuer. The
Trust Issuer exists for the exclusive purposes of (i) issuing and selling the
Common Securities and the % Cumulative Trust Preferred Securities (the
"Preferred Securities", and collectively with the Common Securities, the "Trust
Securities"), (ii) using the proceeds from the sale of the Trust Securities to
acquire % Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures") issued by the Corporation, and (iii) engaging in only
those other activities necessary, advisable or incidental thereto (such as
registering the transfer of the Trust Securities). Accordingly, the Junior
Subordinated Debentures will be the sole assets of the Trust Issuer, and
payments under the Junior Subordinated Debentures will be the sole revenue of
the Trust Issuer. The principal executive office of the Trust Issuer is 6001
Landerhaven Drive, Mayfield Heights, Ohio 44124 and its telephone number is
(440) 646-1111.
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THE OFFERING
THE TRUST ISSUER......................................... Metropolitan Capital Trust I, a Delaware statutory business trust.
The sole assets of the Trust Issuer will be the Junior Subordinated
Debentures.
SECURITIES OFFERED....................................... 2,500,000 shares of % Cumulative Trust Preferred Securities,
evidencing undivided preferred beneficial interests in the assets of
the Trust Issuer, which will consist only of the Junior Subordinated
Debentures.
OFFERING PRICE........................................... $10 per Preferred Security (Liquidation Amount $10).
DISTRIBUTIONS............................................ Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions at an annual rate of %
of the Liquidation Amount of $10 per Preferred Security,
accumulating from the date of original issuance and payable
quarterly in arrears on June 30, September 30, December 31 and
March 31 of each year, commencing on June 30, 1998
("Distributions"). The distribution rate and the distribution and
other payment dates for the Preferred Securities will correspond to
the interest rate and interest and other payment dates on the Junior
Subordinated Debentures. See "Description of the Preferred
Securities."
JUNIOR SUBORDINATED DEBENTURES........................... The Trust Issuer will invest the proceeds from the issuance of the
Trust Securities in an equivalent amount of the Junior Subordinated
Debentures. The Junior Subordinated Debentures will mature on
June 30, 2028. The Junior Subordinated Debentures will rank
subordinate and junior in right of payment to all indebtedness of
Metropolitan not specifically subordinated to the Junior
Subordinated Debentures (the "Senior Indebtedness"). At
December 31, 1997, Metropolitan had $20.4 million in outstanding
Senior Indebtedness. There is no limitation on the amount of Senior
Indebtedness which Metropolitan may issue. Metropolitan may
from time to time incur indebtedness constituting Senior
Indebtedness. In addition, because Metropolitan is a holding
company, Metropolitan's obligations under the Junior Subordinated
Debentures will effectively be subordinated to all existing and future
liabilities and obligations of its subsidiaries, including the Bank.
See "Risk Factors--Subordination of the Guarantee and the Junior
Subordinated Debentures," "Risk Factors--Source of Payments to
Holders of Preferred Securities" and "Description of the Junior
Subordinated Debentures--Subordination."
GUARANTEE................................................ Payments of Distributions out of funds held by the Trust Issuer, and
payments on liquidation of the Trust Issuer or the redemption of the
Preferred Securities, are guaranteed by Metropolitan to the extent
the Trust Issuer has funds available therefor (the "Guarantee").
Metropolitan and the Trust Issuer believe that, taken together, the
obligations of Metropolitan under the Guarantee, the Trust
Agreement, the Junior Subordinated Debentures, the Indenture and
the Expense Agreement (each as defined herein), constitute, in the
aggregate, a full, irrevocable and unconditional guarantee, on a
subordinated basis, of all of the Trust Issuer's obligations under the
Preferred Securities. See "Description of the Guarantee" and
"Relationship Among the Preferred Securities, the Junior
Subordinated Debentures, the Expense Agreement and the
Guarantee." The obligations of Metropolitan under the Guarantee
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are subordinate and junior in right of payment to all Senior
Indebtedness of Metropolitan. See "Risk Factors--Subordination of
the Guarantee and the Junior Subordinated Debentures" and
"Description of the Guarantee."
RIGHT TO DEFER INTEREST PAYMENTS......................... So long as no event of default under the Indenture has occurred and
is continuing, Metropolitan has the right under the Indenture at any
time during the term of the Junior Subordinated Debentures to defer
the payment of interest at any time or from time to time for a period
not exceeding 20 consecutive quarters with respect to each deferral
period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity (as defined herein)
of the Junior Subordinated Debentures. At the end of such
Extension Period, Metropolitan must pay all interest then accrued
and unpaid (together with interest thereon at the annual rate of %,
compounded quarterly, to the extent permitted by applicable law).
During an Extension Period, interest will continue to accrue and
holders of the Junior Subordinated Debentures (and holders of the
Preferred Securities) will be required to accrue interest income for
United States federal income tax purposes in advance of receipt of
payment of such deferred interest. See "Certain Federal Income Tax
Consequences--Interest Income and Original Issue Discount").
During any such Extension Period, Metropolitan may not (i) declare
or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of
Metropolitan's capital stock (other than (a) the reclassification of
any class of Metropolitan's capital stock into another class of
capital stock, (b) dividends or distributions payable in common
shares of Metropolitan, (c) any declaration of a dividend in
connection with the implementation of a shareholders' rights plan,
or the issuance of shares under any such plan in the future or the
redemption or repurchase of any such rights pursuant thereto, (d)
payments under the Guarantee, and (e) purchases of common shares
related to the issuance of common shares or rights under any of
Metropolitan's benefit plans for its directors, officers or
employees), (ii) make any payment of principal, interest or premium,
if any, on, or repay, repurchase or redeem, any debt securities of
Metropolitan that rank pari passu with or junior in right of payment
to the Junior Subordinated Debentures, or (iii) make any guarantee
payments with respect to any guarantee by Metropolitan of the debt
securities of any subsidiary of Metropolitan if such guarantee ranks
pari passu with or junior in right of payment to the Junior
Subordinated Debentures other than payments pursuant to the
Guarantee. Additionally, during any such Extension Period, the
Corporation shall not redeem, purchase or acquire less than all the
outstanding Junior Subordinated Debentures or any of the Preferred
Securities. Prior to the termination of any such Extension Period,
Metropolitan may further defer the payment of interest on the Junior
Subordinated Debentures, provided that no Extension Period may
exceed 20 consecutive quarters or extend beyond the Stated Maturity
of the Junior Subordinated Debentures. There is no limitation on the
number of times that Metropolitan may elect to begin an Extension
Period. See "Description of the Junior Subordinated Debentures-Right
to Defer Interest Payment Obligation" and "Certain Federal Income
Tax Consequences--Interest Income and Original Issue Discount."
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Metropolitan has no current intention of exercising its right to
defer payments of interest by extending the interest payment period
on the Junior Subordinated Debentures. However, should Metropolitan
elect to exercise such right in the future, the market price of the
Preferred Securities is likely to be adversely affected. As a result
of the existence of Metropolitan's right to defer interest payments,
the market price of the Preferred Securities may be more volatile
than the market prices of other similar securities that do not
provide for such optional deferrals.
REDEMPTION............................................... Subject to regulatory approval, if then required under applicable
capital guidelines or regulatory policies, and to restrictions
contained in the indenture (the "1995 Notes Indenture") for the
Corporation's 9.625% subordinated notes maturing January 1, 2005
(the "1995 Notes"), the Junior Subordinated Debentures are subject
to redemption prior to their Stated Maturity at the option of
Metropolitan (i) on or after , 2003, in whole at any time or in part
from time to time, or (ii) at any time, in whole (but not in part),
within 90 days following the occurrence and continuation of a Tax
Event, an Investment Company Event or a Capital Treatment Event
(each as defined herein) in each case at a redemption price equal to
100% of the principal amount of the Junior Subordinated Debentures
so redeemed, together with any accrued and unpaid interest to the
date fixed for redemption.
If the Junior Subordinated Debentures are redeemed prior to their
Stated Maturity, the Trust Issuer must apply the proceeds of such
redemption to redeem a Like Amount (as defined herein) of the
Preferred Securities and the Common Securities. The Preferred
Securities will be redeemed upon repayment of the Junior
Subordinated Debentures at their Stated Maturity. See "Description
of the Preferred Securities--Redemption" and "Description of the
1995 Notes."
DISTRIBUTION OF THE JUNIOR
SUBORDINATED DEBENTURES UPON
LIQUIDATION OF THE TRUST ISSUER........................ Metropolitan will have the right at any time to dissolve the Trust
Issuer and, after satisfaction of creditors of the Trust Issuer, if any,
as provided by applicable law, cause the Junior Subordinated
Debentures to be distributed to the holders of the Preferred
Securities and the Common Securities in exchange therefor upon
liquidation of the Trust Issuer. The ability of Metropolitan to do so
may be subject to Metropolitan's prior receipt of regulatory
approval. See "Description of the Preferred Securities--Liquidation
Distribution upon Dissolution."
In the event of the dissolution of the Trust Issuer, after
satisfaction of the claims of creditors of the Trust Issuer, if any,
as provided by applicable law, the holders of the Preferred
Securities will be entitled to receive a Liquidation Amount of $10
per Preferred Security plus accumulated and unpaid Distributions
thereon to the date of payment, which may be in the form of a
distribution of a Like Amount of the Junior Subordinated Debentures,
subject to certain exceptions as described herein. See "Description
of the Preferred Securities--Liquidation of the Trust Issuer and
Distribution of the Junior Subordinated Debentures to Holders."
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VOTING RIGHTS............................................ Except in limited circumstances, the holders of the Preferred
Securities will have no voting rights. See "Description of the
Preferred Securities--Voting Rights; Amendment of Trust
Agreement."
USE OF PROCEEDS.......................................... All of the proceeds from the sale of the Preferred Securities will be
used by the Trust Issuer to purchase Junior Subordinated
Debentures. Metropolitan intends that the net proceeds from the
sale of such Junior Subordinated Debentures will be used for
general corporate purposes, including, but not limited to, repayment
of the $4.9 million in principal amount currently outstanding with
respect to the Corporation's 1993 subordinated notes, which bear
interest at the rate of 10% per annum and mature on December 31,
2001 (the "1993 Notes"), acquisitions by either the Corporation or
the Bank (although there presently exist no agreements or
understandings with respect to any such acquisition), capital
contributions to the Bank to support growth and for working capital,
and the possible repurchase of Metropolitan's common shares,
subject to acceptable market conditions.
RISK FACTORS............................................. An investment in the Preferred Securities involves substantial risks
that should be considered by prospective purchasers. In addition,
because holders of the Preferred Securities may receive Junior
Subordinated Debentures on termination of the Trust Issuer, and
because payments on the Junior Subordinated Debentures are the
sole source of funds for Distributions on and redemptions of the
Preferred Securities, prospective purchasers of the Preferred
Securities are also making an investment decision with regard to the
Junior Subordinated Debentures and should carefully review all of
the information regarding the Junior Subordinated Debentures
contained herein. See "Risk Factors" and "Description of the Junior
Subordinated Debentures."
NASDAQ NATIONAL MARKET SYMBOL............................ Application has been made to list the Preferred Securities on The
Nasdaq Stock Market's National Market under the symbol
"METFCP."
ERISA CONSIDERATIONS..................................... For a discussion of certain restrictions on purchases, see "ERISA
Considerations."
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain summary consolidated financial
and other data of the Corporation at or for the dates indicated. This
information does not purport to be complete and should be read in conjunction
with, and is qualified in its entirety by, the more detailed information,
including the Consolidated Financial Statements and notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere herein.
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets....................................... $924,985 $769,076 $590,095 $479,384 $372,390
Loans receivable, net.............................. 693,655 637,493 478,345 424,944 284,288
Loans held for sale................................ 14,230 8,973 1,504 84 10,391
Mortgage-backed securities......................... 143,167 56,672 39,156 16,785 13,412
Securities......................................... 6,446 13,173 22,806 7,641 10,168
Intangible assets.................................. 2,987 3,239 3,188 3,409 3,631
Loan servicing rights.............................. 9,224 8,051 9,130 4,825 2,295
Deposits .......................................... 737,782 622,105 503,742 436,198 332,549
Borrowings......................................... 135,870 101,874 46,874 15,504 15,745
Shareholders' equity............................... 36,661 30,244 25,466 20,280 17,750
SELECTED OPERATIONS DATA:
Total interest income.............................. $ 69,346 $ 54,452 $ 43,435 $ 31,639 $ 24,448
Total interest expense............................. 41,703 33,116 26,816 15,992 11,215
------- ------- ------- ------- -------
Net interest income....................... 27,643 21,336 16,619 15,647 13,233
Provision for loan losses.......................... 2,340 1,636 959 766 740
-------- -------- --------- --------- ---------
Net interest income after provision
for loan losses......................... 25,303 19,700 15,660 14,881 12,493
Loan servicing income, net......................... 1,293 1,204 1,068 642 601
Net gain on sale of loans and securities........... 580 336 833 86 1,712
Other noninterest income........................... 2,268 2,233 2,323 873 1,067
Noninterest expense(1)............................. (20,149) (20,839) (14,187) (11,058) (8,274)
------- ------- ------- ------- ------
Income before income taxes and
cumulative effect of change in
accounting method....................... 9,295 2,634 5,697 5,424 7,599
Income tax expense................................. (3,492) (1,095) (2,155) (1,987) (2,829)
Cumulative effect on prior years of change
in accounting method............................. (300)
------- ------- ------- ------- ------
Net Income......................................... $ 5,803 $ 1,539 $ 3,542 $ 3,437 $ 4,470
======== ======== ======== ======== ========
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AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
PER SHARE DATA:(1)(2)
Basic and diluted net income per share.......... $0.82 $0.24 $0.57 $0.55 $0.72
Book value per share............................ 5.20 4.29 4.08 3.25 2.84
Tangible book value per share................... 4.76 3.84 3.52 2.63 2.16
PERFORMANCE RATIOS:(1)
Return on average assets........................ 0.69% 0.23% 0.65% 0.82% 1.34%
Return on average equity........................ 17.58 5.75 16.19 17.83 29.30
Interest rate spread............................ 3.20 3.07 2.98 3.71 4.05
Net interest margin(3).......................... 3.48 3.34 3.24 3.94 4.26
Average interest-earning assets to average
interest-bearing liabilities ................ 105.30 105.39 105.13 105.53 105.62
Noninterest expense to average assets........... 2.40 3.08 2.61 2.64 2.49
Efficiency ratio(4)............................. 62.75 82.57 68.28 62.95 49.42
ASSET QUALITY RATIOS:(5)
Nonperforming loans to total loans.............. 0.44% 0.80% 0.68% 0.55% 1.08%
Nonperforming assets to total assets............ 0.56 0.70 0.60 0.51 1.08
Allowance for losses on loans to total loans.... 0.79 0.64 0.57 0.45 0.43
Net charge-offs to average loans................ 0.13 0.04 0.02 0.03 0.09
CAPITAL RATIOS:
Shareholders' equity to total assets............ 3.96% 3.93% 4.32% 4.23% 4.77%
Average shareholders' equity to average assets.. 3.94 3.96 4.02 4.60 4.58
Tier 1 capital to total assets(6)............... 5.47 5.58 5.77 5.34 5.81
Tier 1 capital to risk-weighted assets(6)....... 7.75 7.87 8.20 7.60 8.33
OTHER DATA:
Loans serviced for others (000's)............... $1,190,185 $1,102,514 $1,182,216 $739,425 $504,677
Number of full service offices.................. 15 14 13 11 9
Number of loan production offices............... 4 5 5 4 1
<FN>
- -------------------------
(1) Noninterest expense for 1996 includes a $2.9 million pre-tax or $1.9
million net of tax one-time assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"). All per share data and performance
ratios include the effect of this assessment.
(2) Per share data has been calculated to reflect the 3,125,635-for-1
stock split which occurred in October 1996 and 2-for-1 stock split which
occurred in December 1997.
(3) Represents the ratio of net interest income to average interest-earning
assets.
(4) Equals noninterest expense less amortization of intangible assets
divided by net interest income plus noninterest income (excluding gains
or losses on securities transactions).
(5) Ratios are calculated on end of period balances except net charge-offs to
average loans.
(6) Ratios are for Metropolitan Savings Bank of
Cleveland only.
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RISK FACTORS
An investment in the Preferred Securities involves a high degree of
risk. Prospective investors should carefully consider, together with the other
information contained in this Prospectus, the following factors in evaluating
the Corporation, its business and the Trust Issuer before purchasing the
Preferred Securities offered hereby. Prospective investors should note, in
particular, that this Prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that involve substantial risks and uncertainties.
When used in this Prospectus, the terms "anticipates," "plans," "expects,"
believes," and similar expressions as they relate to the Corporation or its
management are intended to identify such forward-looking statements. The
Corporation's actual results, performance or achievements may materially differ
from those expressed or implied in the forward-looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry, changes
in law, governmental policies and regulations, and rapidly changing technology
affecting financial services. The considerations listed below represent certain
important factors the Corporation believes could cause such results to differ.
These considerations are not intended to represent a complete list of the
general or specific risks that may affect the Corporation and the Trust Issuer.
It should be recognized that other risks, including those described above, may
be significant, presently or in the future, and the risks set forth below may
affect the Corporation and the Trust Issuer to a greater extent than indicated.
RISK FACTORS RELATING TO THE CORPORATION
ASSET GROWTH STRATEGY
The Corporation's primary strategy is to maximize long-term
profitability by pursuing balance sheet growth designed to enhance the franchise
value of the Bank. In accordance with this growth strategy, the Corporation's
objective has been to maintain "adequately capitalized" status (as opposed to
"well capitalized" status) under Federal regulatory guidelines. In the event
that the Corporation's operating performance would be adversely affected by
losses on loans or other circumstances, the Bank's capital status could be
reclassified as "undercapitalized". An institution classified as
"undercapitalized" is subject to "prompt corrective action" by its primary
regulator and may be required to comply with certain mandatory or discretionary
supervisory actions. Prompt corrective action includes increased restriction on
dividends and other capital distributions by the Bank to its holding company and
can require the adoption of a written capital restoration plan which must be
submitted to and approved by regulators. Institutions like the Bank which
operate with capital at or close to the required levels may be more likely to be
reclassified to the next lower capital category. See "Regulation and
Supervision--The Bank--Prompt Corrective Action and --Restrictions on Dividends
and Other Capital Distributions."
LEVERAGE; CAPITAL DISTRIBUTION REGULATIONS
As a result of the Corporation's asset growth strategy and its use of
debt to help fund its growth, the Corporation is highly leveraged and its debt
service requirements are substantial. As of December 31, 1997, the Corporation
had indebtedness of $20.4 million and shareholders' equity of $36.7 million.
Virtually all of the proceeds from the Corporation's debt is invested in the
common shares of the Bank accordingly, shareholder's equity of the Bank of $54.2
million is greater than the Corporation's Shareholders' equity of $36.7 million.
The ability of the Corporation to satisfy its obligations is dependent upon
the Bank's ability to generate profits and pay dividends to the Corporation as
well as the Corporation's ability to renew or refinance borrowings or to raise
additional equity capital. Each of these alternatives is dependent upon
financial, business, regulatory and other general factors affecting the
Corporation. There can be no assurance that any such alternatives would be
accomplished on satisfactory terms. See "Capitalization."
The capital distribution regulations of the Office of Thrift
Supervision ("OTS") limit the Bank's ability to pay dividends to the Corporation
based on the Bank's capital level and supervisory condition. Under the
regulations, a savings institution that meets the OTS capital requirements is
generally permitted to make capital distributions during a year up to the
greater of (i) 100% of its net income during that year, plus the amount that
would reduce by one-half its "surplus capital ratio" at the beginning of the
calendar year (the excess capital over its capital requirements), or (ii) 75% of
its net income over the most recent four-quarter period. In addition, an insured
depository institution is prohibited from declaring any dividend, making any
other capital distribution, or paying a management fee to its holding company
if, following the distribution or payment, the institution would be classified
as "undercapitalized" or lower. See "Regulation and Supervision--The
Bank--Prompt Corrective Action." As a practical matter, dividends can not be
paid which would cause the Bank's capital to fall below the regulatory minimums.
As of December 31, 1997, the Bank met the OTS capital requirements and under the
above regulations, the Bank had approximately $2.5 million available for the
payment of dividends in the aggregate to the Corporation. There can be no
assurance that the Bank will continue
9
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to meet its capital requirements or that its net income and surplus capital in
the future will be sufficient to permit the payment of dividends by the Bank to
the Corporation. In the event that the capital of the Bank falls below its
capital requirements or the OTS notifies the Bank that it is in need of more
than normal supervision, the ability of the Bank to pay dividends could be
further restricted. See "Regulation and Supervision--The Bank--Restrictions on
Dividends and Other Capital Distributions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Capital."
COMPOSITION OF LOAN PORTFOLIO
At December 31, 1997, approximately 83.5% of Metropolitan's loans were
secured by real estate. Metropolitan's ability to conduct its mortgage lending
business and the value of Metropolitan's real estate collateral could therefore
be adversely affected by adverse changes in the real estate markets in which
Metropolitan conducts its business. At December 31, 1997, approximately 60.0% of
the principal amount of Metropolitan's real estate loans was secured by
properties located in Ohio. A decline in real estate values in Ohio would
increase the risk that losses would be incurred should borrowers default on
their loans.
At December 31, 1997, approximately 25.4% of the principal amount of
Metropolitan's loans was secured by multifamily properties. Multifamily
properties include residential apartment buildings of five or more units.
Metropolitan focuses on this segment of the market more than many other
financial institutions, and it believes that this emphasis gives Metropolitan
certain competitive advantages. Loans secured by multifamily properties,
however, are generally higher in principal amount and are considered to entail a
higher level of risk of loss than loans secured by oneto four-family residences.
Potential significant sources of losses are the possibilities that the cash
flows from the properties securing the loans may become inadequate to service
the loan payments and the value of the collateral may be insufficient to repay
the loan. See "Business--Lending Activities--Multifamily Residential Lending."
At December 31, 1997, approximately 21.8% of the principal amount of
Metropolitan's loans was secured by commercial real estate. Commercial real
estate loans generally present a higher level of risk than loans secured by
oneto four-family residences due to the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
commercial properties and the increased difficulty of evaluating and monitoring
these types of loans. In addition, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
business activities. See "Business--Lending Activities--Commercial Real Estate
Lending."
ALLOWANCE FOR LOSSES ON LOANS
The Corporation's allowance for losses on loans is maintained at a
level considered adequate by management to cover 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. The amount of future losses is susceptible to
changes in economic, operating and other conditions, including changes in
interest rates, that may be beyond the Corporation's control, and such losses
may exceed the Corporation's current allowance for losses on loans. At December
31, 1997, the Corporation had total non-performing loans of $3.1 million. At the
same date, the Corporation's allowance for losses on loans was $5.6 million, or
0.79% of total loans and 178.60% of total non-performing loans. There can be no
assurance however, that such allowance will be adequate to cover actual losses.
See "Business--Loan Delinquencies and Non-Performing Assets" and "--Allocation
of Allowance for Losses on Loans."
EXPOSURE TO CHANGES IN INTEREST RATES
The consolidated net income of the Corporation depends to a substantial
extent on its net interest income, which reflects the difference between the
interest income the Corporation receives from loans, securities and other
interest-earning assets, and the interest expense it pays to obtain deposits and
other liabilities. During periods of rising interest rates, the Corporation's
net interest income could be adversely affected, because at the present time the
Bank has more short-term interest rate sensitive liabilities than short-term
interest rate sensitive assets. These rates are highly sensitive to many factors
including competition, general economic conditions and the policies of various
governmental and regulatory authorities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Quantitative and
Qualitative Disclosures about Market Risk."
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GOVERNMENT REGULATION
As a savings and loan holding company, the Corporation is subject to
regulation, examination and supervision by the OTS. The Bank is subject to
regulation and examination by the OTS, the FDIC and by agencies of the State of
Ohio. Applicable laws and regulations relate to such matters as capital
standards, mergers, establishment of branch offices, subsidiary investments and
activities and general investment authority.
As a savings and loan association, deposits with the Bank are insured
by the SAIF, which is administered by the FDIC. Deposits with state commercial
banks and national banks are insured by the Bank Insurance Fund ("BIF").
Currently, the Deposit Insurance Funds Act of 1996 (the "Funds Act") the merger
of the BIF and SAIF into a single insurance fund no later than January 1, 1999
if there are no savings associations at that date. In connection with the merger
of the funds, it is possible that SAIF-insured institutions could be forced to
convert their charters into state bank charters or national bank charters. If
such a proposal became law, the Corporation would become a bank holding company
and be subject to regulation by the Federal Reserve Board, which imposes capital
requirements on bank holding companies. The Corporation is not currently subject
to capital requirements. See "Regulation and Supervision-The Bank--Insurance of
Accounts and Regulation by the FDIC."
YEAR 2000
The year 2000 issue refers to computer programs being written using two
digits rather than four to define an applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have a
two-digit field to define the year may recognize a date using "00" as the year
1900 rather than the year 2000. This faulty recognition could result in a system
failure, disruption of operations, or inaccurate information or calculations.
Similar to other companies, Metropolitan faces the challenge of ensuring that
all computer-related functions will work properly in the year 2000 and beyond.
As a result, Metropolitan has addressed this issue by forming a task force to
plan for and implement any changes necessary to ensure year 2000 compliance. The
task force has identified four major areas where it will concentrate its
efforts: (i) the service bureau that services the majority of Metropolitan's
customer accounts; (ii) the various software vendors whose software is used by
Metropolitan; (iii) critical vendors Metropolitan uses that are dependent upon
data processing; and (iv) major loan customers to ensure that their revenues
will continue uninterrupted. A time line has been established and the task force
and its subcommittees will progress through assessment planning, implementation
and testing during 1998. Metropolitan believes the plans currently in place will
be adequate to provide quality service to customers without interruption. In
management's opinion, any related incremental costs will not have a material
impact on the financial condition, operations, or cash flows of the Corporation.
COMPETITION
The Corporation faces strong competition, both in originating real
estate and other loans and attracting deposits. Competition in originating loans
comes primarily from other savings institutions, commercial banks, mortgage
companies, conduit lenders, credit unions, finance companies and insurance
companies. Competition in deposits comes primarily from other savings
institutions, commercial banks, credit unions, mutual funds and brokerage
companies. Some of the Bank's competitors have higher lending limits and
substantially greater financial resources than the Bank.
See "Business--Competition".
CONTROL BY ROBERT M. KAYE
The Corporation is majority-owned by Mr. Robert M. Kaye of Rumson, New
Jersey, who controls 77.5% of the Corporation's common shares. Mr. Kaye is also
Chairman of the Corporation and Chairman of the Bank. Mr. Kaye, as majority
shareholder and Chairman of the Corporation, has the ability to elect or remove
all of the directors of the Corporation and has ultimate control of the
Corporation and the Bank.
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RISK FACTORS RELATING TO THE OFFERING
SUBORDINATION OF THE GUARANTEE AND THE JUNIOR SUBORDINATED DEBENTURES
The obligations of Metropolitan under the Guarantee issued by
Metropolitan for the benefit of the holders of the Preferred Securities and
under the Junior Subordinated Debentures issued to the Trust Issuer will be
unsecured and will rank subordinate and junior in right of payment to all Senior
Indebtedness of Metropolitan. At December 31, 1997, Metropolitan had $20.4
million in outstanding Senior Indebtedness. There is no limitation on the amount
of Senior Indebtedness, or Subordinated Debt (as defined herein) which is pari
passu with the Junior Subordinated Debentures, which Metropolitan may issue.
Because Metropolitan is a holding company, the right of Metropolitan to
participate in any distribution of assets of any subsidiary, including the Bank,
upon such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Preferred Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of that subsidiary
(including depositors in the Bank), except to the extent that Metropolitan may
itself be recognized as a creditor of that subsidiary. If Metropolitan is a
creditor of a subsidiary, the claims of Metropolitan would be subject to any
prior security interest in the assets of the subsidiary and any indebtedness of
the subsidiary senior to that of Metropolitan. Accordingly, the Junior
Subordinated Debentures and the Guarantee will be effectively subordinated to
all existing and future liabilities of Metropolitan's subsidiaries, including
the Bank. At December 31, 1997, the Bank had liabilities of $867.8 million
(including $738.1 million in deposits). Only the capital stock of Metropolitan
is currently junior in right of payment to the Junior Subordinated Debentures to
be issued to the Trust Issuer. Holders of the Junior Subordinated Debentures
will be able to look only to the assets of Metropolitan for payments on the
Junior Subordinated Debentures. None of the Indenture, the Guarantee, the
Expense Agreement or the Trust Agreement places any limitation on the amount of
secured or unsecured debt, including Senior Indebtedness, that may be incurred
by Metropolitan. Metropolitan may from time to time incur indebtedness
constituting Senior Indebtedness. See "Description of the Guarantee--Status of
the Guarantee", "Description of the Junior Subordinated
Debentures--Subordination" and "Description of the 1995 Notes."
SOURCE OF PAYMENTS TO HOLDERS OF PREFERRED SECURITIES
As a savings and loan holding company, Metropolitan conducts its
operations principally through its subsidiaries and, therefore, its principal
source of cash, other than its investing and financing activities, is the
receipt of dividends from the Bank. Since Metropolitan is without significant
assets other than the capital stock of the Bank, the ability of Metropolitan to
pay interest on the principal of the Junior Subordinated Debentures to the Trust
Issuer (and consequently, the Trust Issuer's ability to pay Distributions on the
Preferred Securities and Metropolitan's ability to perform its obligations under
the Guarantee) will be dependent on the ability of the Bank to pay dividends to
Metropolitan in amounts sufficient to service Metropolitan's obligations.
Metropolitan may become obligated to make other payments with respect to
securities issued by Metropolitan in the future which are pari passu or have a
preference over the Junior Subordinated Debentures issued to the Trust Issuer
with respect to the payment of principal, interest or dividends. There is no
restriction on the ability of Metropolitan to issue, or limitations on the
amount of securities which Metropolitan may issue, which are pari passu or have
a preference over the Junior Subordinated Debentures issued to the Trust Issuer,
nor is there any restriction on the ability of the Bank to issue additional
capital stock or incur additional indebtedness.
See "Risk Factors--Risk Factors Relating To The Corporation--Leverage;
Capital Distribution Regulations" and Regulation and Supervision."
RIGHT TO DEFER INTEREST PAYMENT OBLIGATION; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
So long as no event of default under the Indenture has occurred and is
continuing, Metropolitan has the right under the Indenture to defer the payment
of interest on the Junior Subordinated Debentures, at any time or from time to
time, for a period not exceeding 20 consecutive quarters with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities by the Trust
Issuer would also be deferred (and the amount of Distributions to which holders
of the Preferred Securities are entitled would accumulate additional
Distributions thereon at the rate of % per annum, compounded quarterly from the
relevant payment date for such Distributions) during any such Extension Period.
During any such Extension Period, Metropolitan may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of Metropolitan's capital stock (other
than (a) the reclassification of any class of Metropolitan's capital stock into
another class of capital stock, (b) dividends or distributions payable in common
shares of Metropolitan, (c) any declaration of a dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of stock under
any such plan in the future or the redemption or repurchase of any such rights
pursuant thereto, (d) payments
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under the Guarantee, and (e) purchases of common shares related to the issuance
of common shares or rights under any of Metropolitan's benefit plans for its
directors, officers or employees), (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities of
Metropolitan that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures, or (iii) make any guarantee payments with
respect to any guarantee by Metropolitan of the debt securities of any
subsidiary of Metropolitan if such guarantee ranks pari passu with or junior in
right of payment to the Junior Subordinated Debentures other than payments
pursuant to the Guarantee. Additionally, during any such Extension Period,
Metropolitan shall not redeem, purchase or acquire less than all the outstanding
Junior Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, Metropolitan may further defer the
payment of interest, provided that no Extension Period may exceed 20 consecutive
quarters or extend beyond the Stated Maturity of the Junior Subordinated
Debentures. Upon the termination of any Extension Period and the payment of all
interest then accrued and unpaid on the Junior Subordinated Debentures (together
with interest thereon at the annual rate of %, compounded quarterly from the
relevant payment date for such interest, to the extent permitted by applicable
law), Metropolitan may elect to begin a new Extension Period subject to the
above requirements. There is no limitation on the number of times that
Metropolitan may elect to begin an Extension Period so long as no event of
default under the Indenture has occurred and is continuing. See "Description of
the Preferred Securities--Distributions" and "Description of the Junior
Subordinated Debentures--Right to Defer Interest Payment Obligation."
If an Extension Period were to occur, a holder of the Preferred
Securities would continue to accrue income (in the form of original issue
discount) for United States federal income tax purposes in respect of its pro
rata share of the interest accruing on the Junior Subordinated Debentures held
by the Trust Issuer. As a result, a holder of the Preferred Securities would be
required to include such income in gross income for United States federal income
tax purposes in advance of the receipt of cash and would not receive the cash
related to such income from the Trust Issuer if the holder disposed of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount" and "--Sales or Redemption of the Preferred Securities."
Metropolitan has no current intention of exercising its right to defer
payments of interest on the Junior Subordinated Debentures. However, should
Metropolitan elect to exercise such right in the future, the market price of the
Preferred Securities would likely be adversely affected. A holder that disposed
of its Preferred Securities during an Extension Period, therefore, might not
receive the same return on its investment as a holder that continued to hold its
Preferred Securities. In addition, as a result of the existence of
Metropolitan's right to defer interest payments, the market price of the
Preferred Securities may be more volatile than the market prices of other
similar securities that are not subject to such deferrals.
OPTIONAL REDEMPTION AFTER 2003
Metropolitan has the right to redeem the Junior Subordinated Debentures
prior to their stated Maturity on or after , 2003 in whole at one time or in
part from time to time. The exercise of such right may be subject to
Metropolitan having received prior regulatory approval, if then required under
applicable capital guidelines or regulatory policies, and to restrictions set
forth in the 1995 Notes Indenture. See "Description of the Junior Subordinated
Debentures--General" and "Description of the 1995 Notes."
REDEMPTION DUE TO TAX EVENT, INVESTMENT COMPANY EVENT OR CAPITAL TREATMENT EVENT
Metropolitan has the right, but not the obligation, to redeem the
Junior Subordinated Debentures in whole (but not in part) within 90 days
following the occurrence of a Tax Event, an Investment Company Event or a
Capital Treatment Event, as those terms are defined below (whether occurring
before or after , 2003), and, therefore, cause a mandatory redemption of the
Preferred Securities. The exercise of such right may be subject to Metropolitan
having received prior regulatory approval, if then required under applicable
capital guidelines or regulatory policies, and to restrictions set forth in the
in the 1995 Notes Indenture. See "Description of the Junior Subordinated
Debentures-General" and "Description of the 1995 Notes."
A "Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel (as defined below) to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust Issuer is, or will be within 90 days of
the date of such opinion, subject to United States federal income tax with
respect
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to income received or accrued on the Junior Subordinated Debentures, (ii)
interest payable by Metropolitan on the Junior Subordinated Debentures is not,
or within 90 days of the date of such opinion will not be, deductible by
Metropolitan, in whole or in part, for United States federal income tax
purposes, or (iii) the Trust Issuer is, or will be within 90 days of the date of
such opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges. The Trust Issuer or Metropolitan must request and
receive an opinion with regard to such matters within a reasonable period of
time after either becomes aware of the possible occurrence of any of the events
described in clauses (i) through (iii) above.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be considered an "investment company"
that is required to be registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), which change occurs or becomes effective
on or after the date of original issuance of the Preferred Securities.
"Capital Treatment Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that as a result of any amendment to, or change
(including any proposed change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or such proposed change, pronouncement, action or decision
is announced on or after the date of original issuance of the Preferred
Securities, there is more than an insubstantial risk that the Preferred
Securities would not constitute Tier 1 Capital (or the then equivalent thereof)
applied as if Metropolitan (or its successor) were a bank holding company for
purposes of applicable capital adequacy guidelines of the Federal Reserve (or
any successor regulatory authority with jurisdiction over bank holding
companies), or any capital adequacy guidelines as then in effect and applicable
to Metropolitan.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as are being opined upon.
EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES; REDEMPTION
AND TAX CONSEQUENCES
Metropolitan has the right at any time to dissolve the Trust Issuer
and, after the satisfaction of liabilities to creditors of the Trust Issuer as
required by applicable law, cause the Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities in exchange therefor in
liquidation of the Trust Issuer. The exercise of such right may be subject to
Metropolitan having received prior regulatory approval. Metropolitan will have
the right, in certain circumstances, to redeem the Junior Subordinated
Debentures in whole or in part, in lieu of a distribution of the Junior
Subordinated Debentures by the Trust Issuer, in which event the Trust Issuer
will redeem the Preferred Securities on a pro rata basis to the same extent as
the Junior Subordinated Debentures are redeemed by Metropolitan. Any such
distribution or redemption prior to the Stated Maturity will be subject to prior
regulatory approval if then required under applicable capital guidelines or
regulatory policies, and to restrictions set forth in the 1995 Notes Indenture.
See "Description of the Preferred Securities--Liquidation of the Trust Issuer
and Distribution of the Junior Subordinated Debentures to Holders", "Description
of the Junior Subordinated Debentures--Redemption or Exchange" and "Description
of the 1995 Notes."
Under current United States federal income tax law, a distribution of
Junior Subordinated Debentures upon the dissolution of the Trust Issuer would
not be a taxable event to holders of the Preferred Securities. If, however, the
Trust Issuer were characterized as an association taxable as a corporation at
the time of the dissolution of the Trust Issuer, the distribution of the Junior
Subordinated Debentures would constitute a taxable event to holders of Preferred
Securities. Moreover, any redemption of the Preferred Securities for cash would
be a taxable event to such holders. See "Certain Federal Income Tax
Consequences--Distribution of the Junior Subordinated Debentures to Holders of
the Preferred Securities" and "--Sales or Redemption of the Preferred
Securities."
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities upon a dissolution or liquidation of the Trust
Issuer. The Preferred Securities or the Junior Subordinated Debentures may trade
at a discount to the price that the investor paid to purchase the Preferred
Securities offered hereby. Because holders of Preferred Securities may receive
Junior Subordinated Debentures as a result of the liquidation of the Trust, and
because payments on the Junior Subordinated Debentures are the sole source of
funds for Distributions and redemptions of the Preferred Securities, prospective
purchasers of Preferred Securities are also making an investment decision with
regard to the Junior
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Subordinated Debentures and should carefully review all the information
regarding the Junior Subordinated Debentures contained herein.
If the Junior Subordinated Debentures are distributed to the holders of
Preferred Securities upon the liquidation of the Trust Issuer, Metropolitan will
use its best efforts to list the Junior Subordinated Debentures on the Nasdaq
Stock Market's National Market or SmallCap Market or such stock exchanges, if
any, on which the Preferred Securities are then listed.
INVESTMENT NOT INSURED
The Junior Subordinated Debentures do not constitute a deposit with a
depository institution; therefore, the Junior Subordinated Debentures are not
insured by the FDIC or any other governmental entity.
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities the
following payments, to the extent not paid by the Trust Issuer: (i) any
accumulated and unpaid Distributions required to be paid on the Preferred
Securities, to the extent that the Trust Issuer has funds on hand available
therefor at such time, (ii) the redemption price with respect to any Preferred
Securities called for redemption, to the extent that the Trust Issuer has funds
on hand available therefor at such time, and (iii) upon a voluntary or
involuntary dissolution, winding-up or liquidation of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities in exchange therefor), the lesser of (a) the aggregate of the
Liquidation Amount and all accumulated and unpaid Distributions to the date of
payment, to the extent that the Trust Issuer has funds on hand available
therefor at such time, and (b) the amount of assets of the Trust Issuer
remaining available for distribution to holders of the Preferred Securities
after payment of creditors of the Trust Issuer as required by applicable law.
If Metropolitan were to default on its obligation to pay amounts
payable under the Junior Subordinated Debentures, the Trust Issuer would lack
funds for the payment of Distributions or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. The holders of not less than a majority in aggregate Liquidation Amount
of the Preferred Securities have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Guarantee Trustee
(as defined below) in respect of the Guarantee or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Guarantee. Any holder
of the Preferred Securities may institute a legal proceeding directly against
Metropolitan to enforce its rights under the Guarantee without first instituting
a legal proceeding against the Trust Issuer, the Guarantee Trustee or any other
person or entity. If an event of default under the Indenture shall have occurred
and be continuing and such event is attributable to the failure of Metropolitan
to pay interest on or principal of the Junior Subordinated Debentures on the
applicable payment date, a holder of the Preferred Securities may institute a
legal proceeding directly against Metropolitan for enforcement of payment to
such holder of the principal of or interest on such Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Preferred Securities of such holder (a "Direct Action"). The exercise by
Metropolitan of its right, as described herein, to defer the payment of interest
on the Junior Subordinated Debentures does not constitute an event of default
under the Indenture. In connection with any Direct Action, Metropolitan will
have a right of set-off under the Indenture to the extent of any payment made by
Metropolitan to such holder of the Preferred Securities in the Direct Action.
Except as described herein, holders of the Preferred Securities will not be able
to exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. Wilmington Trust Company will act as the
guarantee trustee under the Guarantee (the "Guarantee Trustee") and will hold
the Guarantee for the benefit of the holders of the Preferred Securities.
Wilmington Trust Company will also act as Debenture Trustee for the Junior
Subordinated Debentures, and as Property Trustee under the Trust Agreement. The
Trust Agreement provides that each holder of the Preferred Securities by
acceptance thereof agrees to the provisions of the Guarantee and the Indenture.
See "Description of the Junior Subordinated Debentures--Enforcement of Certain
Rights by Holders of the Preferred Securities," "Description of the Junior
Subordinated Debentures--Debenture Events of Default" and "Description of the
Guarantee."
LIMITED COVENANTS
The covenants in the Indenture and the Trust Agreement are limited. As
a result, neither the Indenture nor the Trust Agreement protects holders of
Junior Subordinated Debentures or Preferred Securities, respectively, in the
event of a material adverse change in Metropolitan's financial condition or
results of operations or limits the ability of Metropolitan or any subsidiary to
incur or assume additional indebtedness or other obligations. Additionally,
neither the Indenture nor the Trust Agreement contains any financial ratios or
specified levels of liquidity to which Metropolitan
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must adhere. Therefore, the provisions of these governing instruments should not
be considered a significant factor in evaluating whether Metropolitan will be
able to or will comply with its obligations under the Junior Subordinated
Debentures or the Guarantee.
LIMITED VOTING RIGHTS
Holders of the Preferred Securities will generally have limited voting
rights relating only to the modification of the Preferred Securities and the
exercise of the Trust Issuer's rights as holder of the Junior Subordinated
Debentures and the Guarantee. Holders of the Preferred Securities will not be
entitled to vote to appoint, remove or replace the Property Trustee or the
Administrative Trustees, as such voting rights are vested exclusively in
Metropolitan, as the holder of the Common Securities (except, with respect to
the Property Trustee, upon the occurrence of certain events described herein).
The Property Trustee, the Administrative Trustees and Metropolitan may amend the
Trust Agreement without the consent of holders of the Preferred Securities to
ensure that the Trust Issuer will be classified for United States federal income
tax purposes as a grantor trust even if such action adversely affects the
interests of such holders. See "Description of the Preferred Securities--Voting
Rights; Amendment of the Trust Agreement" and "--Removal of the Trust Issuer
Trustees."
ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES; TRADING PRICE AND
TAX CONSIDERATIONS
There is no current public market for the Preferred Securities.
Application has been made to list the Preferred Securities on the Nasdaq Stock
Market's National Market. However, three market makers for the Preferred
Securities are required for original listing, and two are required for continued
listing thereafter. Metropolitan has been advised that the Underwriter intends
to make a market in the Preferred Securities. However, the Underwriter is not
obligated to do so and such market making may be discontinued at any time.
Therefore, there is no assurance that an active trading market will develop for
the Preferred Securities or, if such market develops, that it will be maintained
or that the market price will equal or exceed the public offering price set
forth on the cover page of this Prospectus. Accordingly, holders of Preferred
Securities may experience difficulty reselling them or may be unable to sell
them at all. The public offering price for the Preferred Securities has been
determined through negotiations between Metropolitan and the Underwriter. Prices
for the Preferred Securities will be determined in the marketplace and may be
influenced by many factors, including prevailing interest rates, the liquidity
of the market for the Preferred Securities, investor perceptions of Metropolitan
and general industry and economic conditions.
Further, should Metropolitan exercise its option to defer any payment
of interest on the Junior Subordinated Debentures, the Preferred Securities
would be likely to trade at prices that do not fully reflect the value of
accrued but unpaid interest with respect to the underlying Junior Subordinated
Debentures. In the event of such a deferral, a holder of Preferred Securities
that disposed of its Preferred Securities between record dates for payments of
Distributions (and consequently did not receive a Distribution from the Trust
Issuer for the period prior to such disposition) would nevertheless be required
to include accrued but unpaid interest on the Junior Subordinated Debentures
through the date of disposition in income as ordinary income and to add such
amount to the adjusted tax basis of the Preferred Securities disposed of. Upon
disposition of the Preferred Securities, such holder would recognize a capital
loss to the extent the selling price (which might not fully reflect the value of
accrued but unpaid interest) was less than its adjusted tax basis (which would
include all accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes. See "Certain Federal Income Tax Consequences--Sales
or Redemption of the Preferred Securities."
USE OF PROCEEDS
All of the proceeds from the sale of the Preferred Securities will be
invested by the Trust Issuer in Junior Subordinated Debentures. The net proceeds
to the Corporation from the sale of the Junior Subordinated Debentures are
estimated to be approximately $ million ($ million if the
Underwriter's over-allotment option is exercised in full) after deduction of the
underwriting discount and estimated expenses. The Corporation intends to use the
net proceeds from the sale of the Junior Subordinated Debentures for general
corporate purposes, including, but not limited to, repayment of the $4.9 million
in principal amount currently outstanding with respect to the 1993 Notes,
acquisitions by either the Corporation or the Bank (although there presently
exist no agreements or understandings with respect to any such acquisition);
capital contributions to the Bank to support growth and for working capital; and
possible repurchase of the Corporation's common shares, subject to regulatory
requirements and acceptable market conditions.
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MARKET FOR THE PREFERRED SECURITIES
Application has been made to list the Preferred Securities on the
Nasdaq Stock Market's National Market under the symbol "METFCP." Although the
Underwriter has informed the Corporation that it presently intends to make a
market in the Preferred Securities, the Underwriter is not obligated to do so
and any such market making may be discontinued at any time. Accordingly, there
is no assurance that an active and liquid trading market will develop or, if
developed, that such a market will be sustained. The offering price and
distribution rate have been determined by negotiations among representatives of
the Corporation and the Underwriter, and the offering price of the Preferred
Securities may not be indicative of the market price following the offering. See
"Underwriting."
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust Issuer will be treated as a
subsidiary of the Corporation and, accordingly, the Trust Issuer's financial
statements will be included in the consolidated financial statements of the
Corporation. The Preferred Securities will be presented as a separate line item
in the consolidated statements of financial condition of the Corporation under
the caption "Guaranteed Preferred Beneficial Interests in the Corporation's
Junior Subordinated Debentures" and appropriate disclosures about the Preferred
Securities will be included in the notes to the consolidated financial
statements. For financial reporting purposes, the Corporation will record
distributions payable on the Preferred Securities as an interest expense in the
consolidated statements of operations.
In its future financial reports, the Corporation will: (i) present the
Preferred Securities in the Corporation's consolidated statements of financial
condition as a separate line item entitled "Guaranteed Preferred Beneficial
Interests in the Corporation's Junior Subordinated Debentures"; (ii) include in
a footnote to the consolidated financial statements disclosure that the sole
assets of the Trust Issuer are the Junior Subordinated Debentures specifying the
principal amount, interest rate and maturity date of Junior Subordinated
Debentures held, and payments thereon; and (iii) if Staff Accounting Bulletin
No. 53 treatment is sought, include, in an audited footnote to the consolidated
financial statements, disclosure that (a) the Trust Issuer is wholly owned, (b)
the sole assets of the Trust Issuer are its Junior Subordinated Debentures, and
(c) the obligations of the Corporation under the Guarantee, the Trust Agreement,
the Junior Subordinated Debentures, the Indenture and the Expense Agreement,
constitute, in the aggregate, a full, irrevocable and unconditional guarantee,
on a subordinated basis, by the Corporation of all of the Trust Issuer's
obligations under the Preferred Securities.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Corporation's consolidated ratios of
earnings to fixed charges for the periods indicated.
Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
Earnings to Fixed Charges(1):
Including interest on deposits 1.22x 1.08x 1.21x 1.34x 1.67x
Excluding interest on deposits 2.18x 1.50x 2.59x 5.32x 14.70x
<FN>
- -------------------------
(1) For purposes of computing the ratios of earnings to fixed charges,
earnings represent income from continuing operations before income
taxes, extraordinary items and cumulative effect of a change in
accounting principle plus fixed charges. Fixed charges represent total
interest expense, including and excluding interest on deposits, as
applicable, as well as the interest component of rental expense.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Corporation as of December 31, 1997, as adjusted to give effect to the
consummation of the offering of the Preferred Securities. The following data
should be read in conjunction with the Consolidated Financial Statements and
notes thereto of the Corporation included elsewhere in this document.
As
Actual Adjusted
------------ -----------
(In thousands)
Deposits............................................................... $737,782 $737,782
Borrowings:
FHLB advances.......................................................... 41,000 41,000
1993 Subordinated Notes................................................ 4,874 0
1995 Subordinated Notes................................................ 14,000 14,000
Other borrowings...................................................... 75,996 75,996
-------- --------
Total borrowings.................................................... 135,870 130,996
------- -------
Total deposits and borrowings....................................... 873,652 868,778
------- -------
Guaranteed Preferred Beneficial Interests in the Corporation's
Junior Subordinated Debentures(1)...................................... 0 25,000
------------ --------
Shareholders' equity:
Common shares, no par value, 20,000,000 shares authorized, 7,051,270 shares
issued and outstanding.................................................
Additional paid-in capital............................................. 11,101 11,101
Retained earnings...................................................... 24,270 24,270
Unrealized gain on securities available for sale....................... 1,290 1,290
-------- --------
Total shareholders' equity......................................... 36,661 36,661
------- -------
<FN>
- -------------------------
(1) Preferred Securities of the Trust Issuer representing beneficial
interests in $25.0 million aggregate principal amount of the Junior
Subordinated Debentures issued by the Corporation to the Trust Issuer.
The Junior Subordinated Debentures will bear interest at the annual
rate of % of the principal amount thereof, payable quarterly and will
mature on June 30, 2028. The Corporation owns all of the Common
Securities of the Trust Issuer.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain selected consolidated financial
and other data of the Corporation at or for the dates indicated. This
information does not purport to be complete and should be read in conjunction
with, and is qualified in its entirety by, the more detailed information,
including the Consolidated Financial Statements and notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere herein.
As of or for the Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Selected Financial Condition Data:
Total assets........................................... $924,985 $769,076 $590,095 $479,384 $372,390
Loans receivable, net.................................. 693,655 637,493 478,345 424,944 284,288
Loans held for sale.................................... 14,230 8,973 1,504 84 10,391
Mortgage-backed securities............................. 143,167 56,672 39,156 16,785 13,412
Securities............................................. 6,446 13,173 22,806 7,641 10,168
Intangible assets...................................... 2,987 3,239 3,188 3,409 3,631
Loan servicing rights.................................. 9,224 8,051 9,130 4,825 2,295
Deposits .............................................. 737,782 622,105 503,742 436,198 332,549
Borrowings............................................. 135,870 101,874 46,874 15,504 15,745
Shareholders' equity................................... 36,661 30,244 25,466 20,280 17,750
Selected Operations Data:
Total interest income.................................. $ 69,346 $ 54,452 $ 43,435 $ 31,639 $ 24,448
Total interest expense................................. 41,703 33,116 26,816 15,992 11,215
-------- -------- -------- -------- --------
Net interest income........................... 27,643 21,336 16,619 15,647 13,233
Provision for loan losses.............................. 2,340 1,636 959 766 740
--------- --------- ---------- ---------- ----------
Net interest income after provision
for loan losses............................. 25,303 19,700 15,660 14,881 12,493
Loan servicing income, net............................. 1,293 1,204 1,068 642 601
Net gain on sale of loans and securities............... 580 336 833 86 1,712
Other noninterest income............................... 2,268 2,233 2,323 873 1,067
Noninterest expense(1)................................. (20,149) (20,839) (14,187) (11,058) (8,274)
-------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of change in
accounting method........................... 9,295 2,634 5,697 5,424 7,599
Income tax expense..................................... (3,492) (1,095) (2,155) (1,987) (2,829)
Cumulative effect on prior years of change
in accounting method................................. (300)
-------------------------------------------------------------
Net Income............................................. $ 5,803 $ 1,539 $ 3,542 $ 3,437 $ 4,470
======== ======== ======== ======== =========
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AS OF OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
PER SHARE DATA:(1)(2)
Basic and diluted net income per share................. $0.82 $0.24 $0.57 $0.55 $0.72
Book value per share................................... 5.20 4.29 4.08 3.25 2.84
Tangible book value per share.......................... 4.76 3.84 3.52 2.63 2.16
PERFORMANCE RATIOS:(1)
Return on average assets............................... 0.69% 0.23% 0.65% 0.82% 1.34%
Return on average equity............................... 17.58 5.75 16.19 17.83 29.30
Interest rate spread................................... 3.20 3.07 2.98 3.71 4.05
Net interest margin(3)................................. 3.48 3.34 3.24 3.94 4.26
Average interest-earning assets to average
interest-bearing liabilities ....................... 105.30% 105.39% 105.13% 105.53% 105.62%
Noninterest expense to average assets.................. 2.40 3.08 2.61 2.64 2.49
Efficiency ratio(4).................................... 62.75 82.57 68.28 62.95 49.42
ASSET QUALITY RATIOS:(5)
Nonperforming loans to total loans..................... 0.44% 0.80% 0.68% 0.55% 1.08%
Nonperforming assets to total assets................... 0.56 0.70 0.60 0.51 1.08
Allowance for losses on loans to total loans........... 0.79 0.64 0.57 0.45 0.43
Net charge-offs to average loans....................... 0.13 0.04 0.02 0.03 0.09
CAPITAL RATIOS:
Shareholders' equity to total assets................... 3.96% 3.93% 4.32% 4.23% 4.77%
Average shareholders' equity to average assets......... 3.94 3.96 4.02 4.60 4.58
Tier 1 capital to total assets(6)...................... 5.47 5.58 5.77 5.34 5.81
Tier 1 capital to risk-weighted assets(6).............. 7.75 7.87 8.20 7.60 8.33
OTHER DATA:
Loans serviced for others (000's)..................... $1,190,185 $1,102,514 $1,182,216 $739,425 $504,677
Number of full service offices......................... 15 14 13 11 9
Number of loan production offices...................... 4 5 5 4 1
<FN>
- -------------------------
(1) Net interest expense for 1996 includes a $2.9 million pre-tax or $1.9
million net of tax one-time assessment to recapitalize the SAIF. All per
share data and performance ratios include the effect of this assessment.
(2) Per share data has been calculated to reflect the 3,125,635-for-1 stock
split which occurred in October 1996 and 2-for-1 stock split which
occurred in December 1997.
(3) Represents the ratio of net interest income to average interest-earning
assets.
(4) Equals noninterest expense less amortization of intangible assets
divided by net interest income plus noninterest income (excluding gains
or losses on securities transactions).
(5) Ratios are calculated on end of period balances except net charge-offs
to average loans.
(6) Ratios are for Metropolitan Savings Bank of
Cleveland only.
20
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Corporation's financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
Prospectus.
OVERVIEW
The reported results of Metropolitan primarily reflect the operations
of the Bank. Metropolitan's results of operations are dependent on a variety of
factors, including the general interest rate environment, competitive conditions
in the industry, governmental policies and regulations and conditions in the
markets for financial assets. Like most financial institutions, the primary
contributor to Metropolitan's income is net interest income, the difference
between the interest Metropolitan earns on interest-earning assets, such as
loans and securities, and the interest Metropolitan pays on interest-bearing
liabilities, such as deposits and borrowings. Metropolitan's operations are also
affected by noninterest income, such as loan servicing fees, service charges on
deposit accounts, 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, and
other general and administrative expenses.
Average Balances and Yields. The following table presents, for the
periods indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates, and the net interest margin. Net interest margin refers to net interest
income divided by total interest-earning assets and is influenced by the level
and relative mix of interest-earning assets and interest-bearing liabilities.
All average balances are daily average balances. Nonaccruing loans are
considered in average loan balances. The average balance of mortgage-backed
securities and securities are presented at historical cost.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- -------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans receivable $673,809 $ 61,230 9.09% $574,502 $ 50,268 8.75% $458,423 $ 39,963 8.72%
Mortgage-backed securities
available for sale 101,160 6,947 6.87 43,734 2,890 6.61 39,342 2,493 6.34
Other 18,923 1,169 6.18 20,417 1,294 6.34 14,610 979 6.70
---------- ---------- -------------------- --------------------
Total interest-earning
assets 793,892 69,346 8.73 638,653 54,452 8.53 512,375 43,435 8.48
--------- --------- --------
Nonearning assets 44,727 37,021 31,881
---------- ---------- ----------
Total assets $838,619 $675,674 $544,256
======== ======== ========
INTEREST-BEARING
LIABILITIES:
Deposits $636,777 34,120 5.36 $532,100 28,132 5.29 $439,286 23,522 5.35
Borrowings 117,150 7,583 6.47 73,899 4,984 6.74 48,066 3,294 6.85
--------- ---------- -------------------- ---------- ---------
Total interest-bearing
liabilities 753,927 41,703 5.53 605,999 33,116 5.46 487,352 26,816 5.50
--------- ------ --------- ------ -------- ------
Noninterest-bearing
liabilities 51,674 42,924 35,032
Shareholders' equity 33,018 26,751 21,872
---------- ---------- ----------
Total liabilities and
shareholders' equity $838,619 $675,674 $544,256
======== ======== ========
Net interest income and
interest rate spread $ 27,643 3.20% $ 21,336 3.07% $ 16,619 2.98%
======== ====== ======== ====== ======== ======
Net interest margin 3.48% 3.34% 3.24%
Average interest-earning
assets to average
interest-bearing
liabilities 105.30% 105.39% 105.13%
21
28
Rate and Volume Variances. Net interest income is affected by changes
in the level of interest-earning assets and interest-bearing liabilities and
changes in yields earned on assets and rates paid on liabilities. The following
table sets forth, for the periods indicated, a summary of the changes in
interest earned and interest paid resulting from changes in average asset and
liability balances and changes in average rates. Changes attributable to the
combined impact of volume and rate have been allocated proportionately to change
due to volume and change due to rate.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
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 $10,962 $ 8,962 $2,000 $10,305 $10,157 $ 148
Mortgage-backed securities 4,057 3,940 117 397 287 110
Other (125) (93) (32) 315 365 (50)
------- ------- ------ ------- ------- -----
Total interest income 14,894 $12,809 $2,085 11,017 $10,809 $ 208
------- ======= ====== ------- ======= =====
Interest Expense on:
Deposits 5,988 $ 5,603 $ 385 4,610 $ 4,903 $(293)
Borrowings 2,599 2,792 (193) 1,690 1,741 (51)
-------- ------- ------ ------- ------- -----
Total interest expense 8,587 $ 8,395 $ 192 6,300 $ 6,644 $(344)
-------- ======= ====== ------- ======= =====
Increase in net interest income $ 6,307 $ 4,717
======== =======
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Income. Net income for 1997 was $5.8 million, or $0.82 per common
share, an increase of $4.3 million from 1996. Net income for 1996 was $1.5
million, or $0.24 per common share. The increase was primarily a result of the
increase in net interest income and the $1.9 million after tax SAIF assessment
in 1996 which was not repeated in 1997. Excluding the one-time SAIF assessment,
net income for 1996 was $3.5 million, or $0.54 per common share.
Interest Income. Total interest income increased 27.4% to $69.3 million
for 1997 as compared to $54.5 million for 1996. The increase was due to a 24.3%
increase in average interest-earning assets between the years and a 187.2%
increase in prepayment penalties to $1.1 million in 1997 from $0.4 million in
1996. Average earning assets increased as a result of Metropolitan's strategy of
increasing assets as long as assets with acceptable portfolio characteristics
are available. Prepayment penalties on multifamily and commercial real estate
loans increased when payoffs increased in response to declining interest rates
during the second half of 1997. The weighted average yield on interest-earning
assets increased to 8.73% during 1997 as compared to 8.53% during 1996. The
increase in prepayment penalties accounted for 9 basis points of the 20 basis
point increase. The remainder was primarily due to the increase in the weighted
average rate on loans receivable which went up due to increases in consumer and
business loans relative to real estate loans.
Interest Expense. Total interest expense increased 25.9% to $41.7
million for 1997 as compared to $33.1 million for 1996. Interest expense
increased primarily because the average balance of interest-bearing liabilities
increased 24.4%. The average balance of interest-bearing liabilities grew at
this rate in order to fund the growth of interest-earning assets discussed
above. Metropolitan's cost of funds increased to 5.53% in 1997 as compared to
5.46% in 1996 because the rates on new borrowings and new deposits were higher
than the weighted average rate of interest-bearing liabilities for 1996.
Net Interest Margin. Metropolitan's net interest margin rose 14 basis
points to 3.48% for 1997 compared to 3.34% for 1996. While overall interest
rates on loans and deposits declined during 1997, Metropolitan experienced
increases in yields on interest-earning assets due to prepayment penalties and
changes in asset mix and experienced increased liability costs due to an effort
to lengthen liability maturities to reduce the risk of declining net interest
income from rising rates. The increased yields in 1997 more than offset the
increased cost of liabilities.
Provision for Loan Losses. The provision for loan losses increased
43.1% to $2.3 million in 1997 as compared to $1.6 million in 1996. 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 9.5% to $707.9 million at December 31, 1997 from $646.5
million at the same date a year earlier. The allowance for losses on loans at
December 31, 1997 was $5.6 million, or 0.79% of total loans, as compared to $4.2
million, or 0.64% of total loans, at the same date in 1996. Management's
estimate of the adequacy of the allowance for losses on loans is based upon an
analysis of factors such as historical loan loss experience, the status of
impaired loans, economic conditions affecting real estate markets, and
regulatory considerations.
22
29
Noninterest Income. Total noninterest income increased 9.8% to $4.1
million in 1997 as compared to $3.8 million in 1996. Net loan servicing income
increased 7.4% to $1.3 million in 1997 as compared to $1.2 million in 1996. The
increase in net loan servicing fees was a result of Metropolitan's strategy of
increasing non-credit based fee income. The portfolio of loans serviced for
others increased to $1.2 billion at December 31, 1997 compared to $1.1 billion
at the same date a year earlier as a result of securitization of $93.0 million
of multifamily loans with the Federal National Mortgage Association ("FNMA")
during the third quarter of 1997. Purchases of loan servicing rights and
origination of loan servicing on one- to four-family mortgages during 1997
approximately offset payoffs and amortization of existing loans serviced.
Metropolitan remains committed to this line of business and will only acquire
the rights to service portfolios where the loan characteristics and pricing are
consistent with management's long-term profitability objectives.
Service charges on deposit accounts increased 26.7% to $716,000 in 1997
as compared to $565,000 in 1996. The primary reason for the increase was the
overall growth in deposit accounts and greater fee income derived from various
accounts due to increased business levels.
Gain on sale of loans was $488,000 in 1997 as compared to $203,000 in
1996. 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. As such,
the primary reason for the increase in these gains was the sale of residential
fixed rate loans into a favorable market during the year. The proceeds of loans
sold were $65.5 million during 1997 as compared to $55.5 million in 1996.
Gain on sale of securities was $92,000 in 1997 as compared to $134,000
in 1996. During 1997, Metropolitan sold securities with a principal balance
outstanding of $16.6 million including FNMA preferred stock, a FNMA note, and
U.S. Treasury Notes. In 1996, $3.6 million of mortgage-backed securities were
sold at a gain of $134,000. Metropolitan does not actively purchase
mortgage-backed securities for resale; however, the existing portfolio of
mortgage-backed securities is monitored for opportunities to improve the yield,
manage interest rate risk, and increase profits, and as a result, certain
mortgage-backed securities have been sold.
Loan option income was $320,000 in 1997 as compared to $696,000 in
1996. 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 1997, Metropolitan purchased $10.6 million of loans and sold
nonrefundable options to purchase those same loans at a specified price within a
specified time period, as compared to $16.7 million of loans purchased for
options in 1996.
Other income increased 26.7% to $1.2 million in 1997 as compared to
$1.0 million in 1996. This increase was primarily due to increased fee income
earned on investment services, rental income at retail sales office locations,
and fee income from credit cards.
Noninterest Expense. Total noninterest expense decreased 3.3% to $20.1
million in 1997 as compared to $20.8 million in 1996. Noninterest expense in
1996 included a $2.9 million one-time assessment to recapitalize the SAIF.
Increases in other expense categories in 1997 as compared to 1996 related
primarily to growth in assets, the increase in retail sales offices and
personnel.
Personnel related expenses increased $2.0 million in 1997, or 23.1%,
from 1996. The increase was the result of increased staffing due to the growth
of the Bank, the payment of incentives for loan and deposit production, the
addition to staff for loan production, and the effects of merit increases. To
the extent that the number of retail sales offices continues to grow and loan
production increases, management anticipates increases in personnel costs will
continue in the near future.
Occupancy and equipment expense increased 23.5% to $3.0 million in 1997
as compared to $2.5 million in 1996. These increases were generally the result
of additional full service retail offices, remodeling of certain other retail
sales offices, and expanded space at the corporate headquarters. At the present
time, two new retail sales offices are planned for 1998 and additional sites are
under consideration for 1999.
Federal deposit insurance expense decreased $3.6 million to $0.6
million for 1997 as compared to $4.2 million for 1996 primarily as a result of
the one-time assessment to recapitalize the SAIF in 1996. The one-time SAIF
assessment was $2.9 million and represented 65.7 basis points of deposits held
as of March 31, 1995. The remaining decrease was attributable to a decline in
insurance premiums paid made possible by the previously mentioned SAIF
recapitalization.
Data processing expense decreased 26.3% to $441,000 in 1997 from
$599,000 in 1996. The primary reason for the decrease was a discount on
processing fees from the Bank's primary data services provider in mid-1997. This
discount on fees will extend until mid-1998 when fees will be returned to their
normal range prior to the discount.
Other operating expenses increased $0.4 million to $3.9 million for
1997 as compared to $3.5 million for 1996. The increase was primarily due to
increased credit card servicing costs as a result of the increased size of the
credit card portfolio, increased depreciation on newly acquired computer
technology, and increased legal fees related to delinquent loans.
23
30
Provision for Income Taxes. The provision for income taxes increased to
$3.5 million in 1997 as compared to $1.1 million in 1996 due to the increase in
income before taxes. The effective tax rate was 37.6% for 1997 and 41.6% for
1996. The effective tax rate in 1997 was significantly lower because expenses
which are not deductible for tax purposes, such as amortization of intangibles,
were less significant in relationship to pre-tax income compared to 1996 as a
result of the unfavorable effect the one-time assessment to recapitalize the
SAIF had on pre-tax income in 1996. This more than offset the fact that
Metropolitan incurred significant state income tax and was subject to a higher
federal tax rate in 1997.
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 taxable year. While this change, effective for the tax
year 1996, will affect the timing of payments, it will not affect the
comparability of results among years.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income. Net income for 1996 was $3.5 million, or $0.54 per common
share, excluding the one-time assessment mandated by legislation to recapitalize
the SAIF. Net income including the SAIF assessment was $1.5 million, or $0.24
per common share as compared to $3.5 million, or $0.57 per common share for
1995. The decrease was primarily a result of the $1.9 million after tax, or
$0.30 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 $263.4 million
and purchased $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.
Net Interest Margin. 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 rate 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 compared to 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.
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 34.0% to $650.9 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
factors such as historical loan loss experience, the status of impaired loans,
economic conditions affecting real estate markets, and regulatory
considerations.
Noninterest Income. Total non-interest income decreased 10.7% to $3.8
million in 1996 as compared to $4.2 million in 1995. 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 due to 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 opposed to 1995.
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 $203,000 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 $55.5 million during 1996 as compared to $59.8
million in 1995. The volume
24
31
of loans sold was greater in 1995 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 $134,000 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 were sold at a gain of
$389,000. The decline in net gains was a result of the reduced volume of sales
which was consistent with availability. Metropolitan does not actively purchase
mortgage-backed securities for resale; however, the existing portfolio of
mortgage-backed securities is monitored for opportunities to improve the yield,
manage interest rate risk and increase profits, and as a result 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 were 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 $16.2 million of loans purchased for
options in 1995.
Loan credit discount income decreased to $0 in 1996 from $640,000 in
1995. Since 1993, Metropolitan has purchased multifamily and commercial real
estate loans, often at a discount due to Metropolitan's assessment of credit
risk and the value of the underlying collateral. These collateral discounts are
not recognized in income over the life of the loan. When the loans paid off,
Metropolitan received the full contractual principal due, and any discount
related to management's initial estimate of deficiency in collateral values was
recognized as noninterest income. Metropolitan had no loan credit discount
income in 1996 and does not expect this source of noninterest income to be
recurring.
Other income increased 41.6% to $1.0 million in 1996 as compared to
$0.7 million in 1995. This increase was primarily due to an increase in
automated teller machine ("ATM") fees due to increases in transactions fees and
the number of ATM transactions, an increase in credit 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.
Noninterest Expense. Total non-interest expense increased 46.9% to
$20.8 million in 1996 as compared to $14.2 million in 1995. Personnel related
expenses increased $1.9 million, or 27.1% in 1996 as compared to 1995. The
increase was attributable to 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. The SAIF assessment was $2.9
million and represented 65.7 basis points of deposits held as of March 31, 1995.
The remaining increase was attributable to an increase in insurance premiums
paid and was 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 represented a 42.4% increase 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 41.6% 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.
ASSET QUALITY
Nonperforming 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 nonperforming when
payments are 90 days or more past due or when the loan review analysis indicates
that repossession of the collateral may be necessary to satisfy the loan. In
addition, 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 nonperforming, 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.
25
32
The table below sets forth the amounts and categories of Metropolitan's
nonperforming assets as of the dates indicated. At December 31, 1997, all loans
classified by management as impaired were also classified as nonperforming.
Year Ended December 31,
-----------------------------------------
1997 1996 1995
-------- -------- ------
(DOLLARS IN THOUSANDS)
Nonaccrual loans $2,763 $4,923 $3,103
Loans past due greater than 90 days,
still accruing 384 271 204
-------- -------- --------
Total nonperforming loans 3,147 5,194 3,307
Real estate owned 2,037 177 258
------- -------- --------
Total nonperforming assets $5,184 $5,371 $3,565
====== ====== ======
Nonperforming loans to total loans 0.44% 0.80% 0.69%
Nonperforming assets to total assets 0.56% 0.70% 0.60%
Real estate owned increased $1.9 million to $2.0 million at December
31, 1997 from a year earlier while total nonperforming assets declined $0.2
million over the same period. This reflects the progression of nonperforming
loans at December 31, 1996 to real estate owned during 1997. Two properties
accounted for the majority of this increase, a strip shopping center in the
Philadelphia, Pennsylvania area valued at $1.0 million and a commercial
condominium warehouse near Chicago, Illinois valued at $0.5 million.
Metropolitan is actively marketing both properties through local real estate
agents and no losses are expected.
In addition to the nonperforming assets included in the table above,
Metropolitan identifies potential problem loans which are still performing but
have a weakness which causes Metropolitan to classify those loans as substandard
for regulatory purposes. There was $4.9 million of loans in this category at
December 31, 1997. The largest loan in that category was a $4.0 million
participation in a $9.0 million loan secured by a water park in Southern
California. The loan was 30 days past due at December 31, 1997 and the borrower
is in the process of refinancing the loan and obtaining more working capital. If
the borrower does not refinance this property with another lender, then the
borrower's ability to repay the loan will be contingent on the operating success
of the park during 1998, its first full year of operation.
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 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,
----------------------------------------
1997 1996 1995
-------- -------- ------
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING OF PERIOD $4,175 $2,765 $1,911
Charge-offs:
One- to four-family 32 22 23
Multifamily 494 119 --
Commercial real estate -- -- 27
Construction and land -- -- --
Consumer 363 95 56
Business 10 -- --
----- ----- ------
Total charge-offs 899 236 106
----- ----- ------
Recoveries:
One- to four-family -- -- 1
Multifamily -- -- --
Commercial real estate -- -- --
Construction and land -- -- --
Consumer 6 11 --
Business -- -- --
----- ----- ------
Total recoveries 6 11 1
----- ----- ------
Net charge-offs 893 225 105
Provision for loan losses 2,340 1,635 959
----- ----- ------
BALANCE AT END OF PERIOD $5,622 $4,175 $2,765
====== ====== ======
Net charge-offs to average loans 0.13% 0.04% 0.02%
Provision for loan losses to average loans 0.35% 0.28% 0.21%
Allowance for losses on loans to total
non-performing loans at end of period 178.60% 77.73% 83.61%
Allowance for losses on loans to total loans
at end of period 0.79% 0.64% 0.57%
26
33
The allowance for losses on loans as a percentage of total loans was
0.79% at December 31, 1997 as compared to 0.64% at December 31, 1996 and 0.57%
at December 31, 1995. In each period, the provision for loan losses and
allowance for losses on loans were based on an analysis of individual loans,
prior and current loss experience, overall growth in the portfolio and current
economic conditions. Charge-offs increased during 1997 to $0.9 million compared
to $0.2 million in 1996 and $0.1 million in 1995. This increase was the result
of overall growth in the loan portfolio, an expansion of consumer loan activity
into higher risk loans and the fact that multifamily loans carry larger average
balances than single-family loans so that a small number of multifamily loans
charged off can result in a significant write-off in dollars. Based on this
activity, Metropolitan increased the provision for losses on loans which
resulted in an increase in the allowance for losses on loans of $1.4 million in
both 1997 and 1996.
COMPARISON OF DECEMBER 31, 1997 AND DECEMBER 31, 1996 FINANCIAL CONDITION
Total assets amounted to $925.0 million at December 31, 1997, as
compared to $769.1 million at December 31, 1996, an increase of $155.9 million,
or 20.3%. The increase in assets was funded primarily with deposit growth of
$115.7 million, an increase in FHLB of Cincinnati advances and other borrowings
of $34.0 million, and an increase in shareholders' equity of $6.4 million.
Securities decreased by $6.8 million, or 51.1%, to $6.4 million.
Securities available for sale are maintained by Metropolitan to meet the
liquidity maintenance requirement of the 1995 Notes and as a way to enhance
earnings by improving the return on idle cash, or taking advantage of changes in
the level of interest rates to generate gains or maintain profitable yields. See
"Liquidity and Capital Resources." During 1997, the Bank sold U.S. Treasury
notes, FNMA preferred stock, and a FNMA note. Some of these proceeds were
reinvested in mortgage-backed securities at a higher yield.
Mortgage-backed securities increased $86.5 million to $143.2 million at
December 31, 1997. The increase was primarily due to the securitization of $93.0
million of multifamily loans with FNMA in the third quarter, the purchase of
$10.4 million of Federal Home Loan Mortgage Corporation ("FHLMC") securities,
and the securitization of $5.4 million of originated one- to four-family
mortgage loans, also with FHLMC.
Loans held for sale increased $5.3 million to $14.2 million at December
31, 1997, primarily as a result of the increased balance of commercial real
estate loans for which Metropolitan had pending sales. From time to time,
Metropolitan sells multifamily or commercial real estate loans in order to
reduce interest rate risk, maintain an appropriate balance of the different
types of loans in the loan portfolio or to free up capital for other types of
growth. When sales are planned, the loans involved are reclassified to held for
sale. These pending sales were completed in January, 1998 for a gain.
Loans receivable increased $56.2 million, or 8.8% to $693.7 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 following increases by loan category were
experienced: one- to four-family loans--$31.9 million; commercial real estate
loans-- $30.9 million; consumer loans--$14.4 million; construction and land
loans (net of loans in process)--$29.6 million; and business loans-- $34.0
million. Multifamily loans decreased $82.1 million as a result of the
multifamily loan securitization of $93.0 million discussed above.
Premises and equipment increased $2.6 million, or 22.9%, to $13.9
million. This increase was primarily the result of a retail sales office opening
in 1997 and the purchase of computer hardware and software used in the retail
sales office network.
Deposits totaled $737.8 million at December 31, 1997, an increase of
$115.7 million, or 18.6%, over the balance at December 31, 1996. The increase
resulted from management's marketing efforts, growth at new retail sales office,
and paying competitive rates to increase certificate of deposit balances.
Borrowings increased $34.0 million to $135.9 million at December 31,
1997, as compared to $101.9 million at December 31, 1996. Based on the lower
cost of wholesale funds as compared to comparable maturity retail deposits and
the increased availability of collateral after the multifamily loan
securitization, management chose to fund a portion of the loan growth discussed
above with wholesale funds. Reverse repurchase agreements were the predominant
source of the increased borrowings.
Shareholders' equity increased $6.4 million, or 21.2%, to $36.7
million, due largely to the retention of net income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to Metropolitan's ability to
generate adequate amounts of cash to meet its needs, for funding loan
originations, loan purchases, deposit withdrawals, maturities of borrowings and
operating expenses. Metropolitan's primary sources of internally generated funds
are principal repayments and payoffs of loans, cash flows from operations and
proceeds from sales of assets. External sources of funds include increases in
deposits, borrowings and the public sale or private placement of debt or equity
issues by the Corporation.
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In addition to debt or equity issues, the Corporation's primary source
of funds is dividends from the Bank, which are subject to restrictions imposed
by federal bank regulatory agencies. At December 31, 1997 the Corporation had
liquid assets of $2.1 million and had $2.5 million available to borrow on a line
of credit of $4.0 million with the Huntington National Bank (the "Huntington
Loan Agreement"). Funds could also be used to fund additional capital
contributions to the Bank, other operating expenses, purchase investment
securities or the acquisition of other assets. Currently the Corporation's
primary use of funds is for interest payments on its existing debt. The
covenants associated with the 1995 Subordinated Notes require the Corporation to
maintain liquid assets sufficient to pay six months interest, or approximately
$675,000.
Sources of funds for the Bank such as loan repayments and deposits
flows are greatly influenced by prevailing interest rates, economic conditions
and competition. Other sources of funds such as borrowings and maturities of
securities are more reliable or predictable. The Bank currently has a $50
million Cash Management Line of Credit with the FHLB which is available to meet
liquidity needs. There was no outstanding balance on that line as of December
31, 1997. Metropolitan regularly reviews cash flow needed to fund its operations
and believes that the aforementioned resources are adequate for its foreseeable
requirements.
At December 31, 1997, $86.9 million, or 18.2%, of Metropolitan's
certificates of deposits were in the form of accounts 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 any 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, 1997, approximately $57.7 million of certificates of
deposits, or 12.1% of Metropolitan's accounts, were held by these individuals
and entities. If Metropolitan were unable to replace these deposits upon
maturity, there could be an adverse effect on Metropolitan's liquidity.
Metropolitan monitors maturities to attempt to minimize any potential adverse
effect on liquidity.
Historically, the Bank has been subject to a regulatory liquidity
requirement. In November 1997 liquidity regulations were significantly changed.
These new regulations require that the Bank maintain liquid assets equal to at
least 4% of the liquidity base on a monthly basis. Liquid assets generally
include all unpledged cash in banks, investment securities maturing within five
years and securities issued by the Government National Mortgage Association
("GNMA"), FNMA, or FHLMC regardless of maturity. The liquidity base includes
amounts due banks and deposits and borrowings maturing in less than one year.
The Bank's liquidity ratio for December 1997 was 14.6%. This ratio is
substantially above the minimum because the new regulations are less restrictive
than the old regulations and because Metropolitan added significantly to its
portfolio of mortgage-backed securities with the $93.0 million multifamily loan
securitization during the third quarter of 1997.
Capital. Total shareholders' equity of the Corporation at December 31,
1997 was $36.7 million, an increase of $6.4 million or 21.2% from equity of
$30.2 million at December 31, 1996. The increase was due to net income of $5.8
million and an increase in unrealized gains on securities available for sale,
net of tax, of $0.6 million. No dividends were paid in 1997, 1996 or 1995. Terms
of the 1993 Notes prohibit the payment of dividends until those notes are paid
off. The terms of the 1995 Subordinated Notes prohibit the payment of dividends
unless total equity divided by total assets is greater than 7%. The Corporation
raised $3.3 million in additional capital in 1996 through an initial public
offering of common shares. Sources of future capital for the Corporation could
include, but would not be limited to, earnings of the Corporation or additional
offerings of equity securities.
The OTS imposes capital requirements on savings associations. Savings
associations are required to meet three minimum capital standards: (i) a
leverage requirement, (ii) a tangible capital requirement, and (iii) a
risk-based capital requirement. Such standards must be no less stringent than
those applicable to national banks. In addition, the OTS is authorized to impose
capital requirements in excess of these standards on individual associations on
a case-by-case basis.
The 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, except a limited amount of qualifying
purchased mortgage servicing rights ("PMSR") 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 PMSRs.
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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, FNMA or 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, 1997 were in
excess of the capital requirements specified by OTS regulations as shown by the
following table:
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------------- ---------------------- ---------------------
(DOLLARS IN THOUSANDS)
Capital amount:
Actual $49,901 5.43% $50,215 5.47% $54,343 8.39%
Required 13,777 1.50 36,738 4.00 51,836 8.00
------- ------- -------- ------- ------- -------
Excess $36,124 3.93% $13,477 1.47% $ 2,507 0.39%
======= ======= ======= ======= ======= =======
The Bank's primary sources of capital are the earnings of the Bank and
additional capital investments from the Corporation. The Corporation follows the
strategy of contributing additional capital to the Bank as growth occurs to
maintain risk based capital at "well capitalized" or "adequately capitalized"
levels as defined by OTS regulations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Metropolitan, like other financial institutions, is subject to direct
and indirect market risk. Direct market risk exists from changes in interest
rates. To the extent that interest-bearing assets and interest-bearing
liabilities mature at different intervals, changes in market interest rates can
result in increases or decreases in net interest income. This is also known as
interest rate risk. Indirect market risk exists to the extent that Metropolitan
has a concentration of loans secured by similar assets and the market for those
assets deteriorates. Metropolitan manages that risk of decline in the value of a
class of collateral by maintaining diversity by type of collateral, geographic
area, industry for corporate borrowers, and by size of loan. In addition,
Metropolitan always gives consideration to the credit worthiness of the borrower
in addition to depending on the value of the collateral when underwriting loans.
Direct exposure to interest rate risk is more significant than indirect market
risk and Metropolitan has created a system for monitoring this risk which
includes periodic quantitative analysis.
The Bank's Asset and Liability Committee, which includes
representatives of senior management, monitors the level and relative mix of its
interest-earning assets and interest-bearing liabilities. The Bank, like many
financial institutions, currently has exposure to declines in net interest
income from rising interest rates. The steps being taken by the Bank to reduce
interest rate risk from rising interest rates include: (i) focusing 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.
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Presented below, as of December 31, 1997 and 1996, is an analysis of
the Bank'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, 1997 DECEMBER 31, 1996
----------------- -----------------
CHANGES IN BOARD LIMIT PERCENTAGE PERCENTAGE
INTEREST RATE PERCENTAGE CHANGE CHANGE CHANGE CHANGE
(BASIS POINTS) CHANGE IN NPV IN NPV IN NPV IN NPV
-------------- ------------- ----------------------- -------------- --------- ---------
(DOLLARS IN THOUSANDS)
+400 (65)% $(27,474) (36)% $(26,596) (44)%
+300 (45) (20,131) (27) (19,790) (33)
+200 (25) (12,743) (17) (12,853) (21)
+100 (15) (5,829) (8) (6,302) (10)
-100 (15) 5,631 7 6,294 10
-200 (25) 13,381 18 14,644 24
-300 (45) 25,415 33 26,402 44
-400 (65) 40,157 53 40,742 68
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 maturity. In addition, the fixed rate
assets in the loan portfolio will only reprice as the loans are repaid and new
loans at market 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, 1997 and 1996, the Bank was within the Board-established limits
for various changes in interest rates, and the Bank's sensitivity to rising
interest rates has decreased from 1996 to 1997. The modest improvement in
interest rate sensitivity, from 1996 to 1997, was a result of: (i) slightly
lower overall interest rates; (ii) a shortening of the average term of fixed
rate assets; and (iii) a lengthening of the average term of time deposits and
borrowings.
The principal strategy used by Metropolitan to mitigate the risk of
decline in net interest income from increases in interest rates has been to
build a portfolio of adjustable rate interest-earning assets. At December 31,
1997, 63.4% 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, 1997, Metropolitan had only 7.7% of its total loans comprised of
fixed rate residential one- to four-family loans. Within the remaining fixed
rate portfolio, Metropolitan has focused on short-term loan types. Fixed rate
multifamily and commercial real estate loans comprised 14.7% of total loans at
December 31, 1997, and had a weighted average contractual term to maturity of
approximately five years. Fixed rate consumer loans, with a weighted average
contractual term of maturity of approximately eight years, comprised 8.0% of
total loans at December 31, 1997. Consumers often, for various reasons, repay
loans before their contractual maturity, thereby 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. Finally, the NPV approach is a measure of how long
term value changes with changes in interest rates and assumes no responses by
management to changes in rates. Changes in interest rates may affect near-term
net interest income to a greater or lesser extent than those changes affect NPV.
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.
YEAR 2000
The year 2000 issue refers to computer programs being written using two
digits rather than four to define an applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have a
two-digit field to define the year may recognize a date using "00" as the year
1900 rather than the year 2000. This faulty recognition could result in a system
failure, disruption of operations, or inaccurate information or calculations.
Similar to other companies, Metropolitan faces the challenge of ensuring that
all computer-related functions will work properly in the year 2000 and beyond.
As a result, Metropolitan has addressed this issue by forming a task force to
plan for and implement any changes necessary to ensure year 2000 compliance. The
task force has identified four major areas where it will concentrate its
efforts: (i) the service bureau that services the majority of Metropolitan's
customer accounts; (ii) the various software vendors whose software is used by
Metropolitan; (iii) critical vendors Metropolitan uses that are dependent upon
data
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processing; and (iv) major loan customers to ensure that their revenues will
continue uninterrupted. A time line has been established and the task force and
its subcommittees will progress through assessment planning, implementation and
testing during 1998. Metropolitan believes the plans currently in place will be
adequate to provide quality service to customers without interruption. In
management's opinion, any related incremental costs will not have a material
impact on the financial condition, operations, or cash flows of the Corporation.
RECENT ACCOUNTING DEVELOPMENTS
In December 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 127, Deferral of
the Effective Date of Certain Provisions of SFAS No. 125. This statement defers
provisions of SFAS No. 125 related repurchase agreements, securities lending and
other similar transactions for one year. Metropolitan adopted these provisions
prospectively as of January 1, 1998. The adoption of this statement will not
have a material impact on the financial position or results of operations of the
Bank or the Corporation.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting certain changes in
equity that are not included in net income but are a component of comprehensive
income. The change in unrealized gains or losses on securities available for
sale is an example of a component of comprehensive income that would be relevant
to Metropolitan. This statement will be effective for Metropolitan beginning
with interim financial statements in 1998. This statement will result in
additional disclosures but will have no impact on the financial position or
results of operations of the Corporation.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. This statement requires disclosure of
financial and descriptive information about operating segments of a business in
annual and interim financial reports to shareholders. This statement will be
effective for the 1998 annual report but will not be required or included in
1998 interim financial reports. This statement may require additional
disclosures but will not have any impact on the financial position or results of
operations of the Bank or the Corporation.
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 rates on its financial performance.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "expects,"
"believes," and similar expressions as they relate to Metropolitan or its
management are intended to identify such forward looking statements.
Metropolitan's actual results, performance or achievements may materially differ
from those expressed or implied in the forward looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry, changes
in law, governmental policies and regulations, and rapidly changing technology
affecting financial services.
BUSINESS
GENERAL
Metropolitan is a savings and loan holding company incorporated in 1972
that is engaged in the principal business of originating and purchasing mortgage
and other loans through its wholly-owned subsidiary, the Bank. Funds for lending
and other investment activities are obtained primarily from savings deposits,
wholesale borrowings, principal repayments on loans and the sale of loans. The
activities of the Corporation are limited and impact the results of operations
primarily through interest expense on a consolidated basis. Unless
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otherwise noted, all of the activities discussed below are of the Bank.
Metropolitan's corporate headquarters is located at 6001 Landerhaven Drive,
Mayfield Heights, Ohio 44124.
The Corporation's current majority shareholder is Robert M. Kaye of
Rumson, New Jersey. Mr. Kaye acquired the Corporation in 1987 and remained sole
shareholder until the IPO of the Corporation's common shares in October, 1996.
As a result of the IPO, Mr. Kaye currently owns 77.5% of the Corporation's
outstanding common shares and has the ability to control the outcome of various
matters submitted to the shareholders for approval, the ability to elect or
remove all the directors of the Corporation and has ultimate control of the
Corporation and the Bank. In addition, Mr. Kaye is Chairman of the Board and
Chief Executive Officer of the Corporation and the Bank.
The Bank is a state chartered stock savings association established in
1958. At December 31, 1997, the Bank operated fifteen full service retail
offices throughout Eastern Cuyahoga, Summit, Lake and Geauga Counties. As of
December 31, 1997, the Bank also maintained four residential and
multifamily/commercial real estate loan production offices. In addition to its
principal business of originating and purchasing mortgage and other loans, the
Bank services a significant portfolio of mortgage loans for various investors.
At December 31, 1997, Metropolitan had total assets of $925.0 million,
total deposits of $737.8 million and shareholders' equity of $36.7 million. The
deposits of the Bank are insured by the FDIC up to applicable limits.
In addition to the Bank, Metropolitan has four other subsidiaries, each
of which are either directly or indirectly wholly-owned by Metropolitan:
MetroCapital Corporation; Kimberly Construction Company, Incorporated ("Kimberly
Construction"); Metropolitan Savings Service Corporation; and Metropolitan
Securities Corporation. Each of these subsidiaries, with the exception of
Kimberly Construction, is inactive. Currently, Kimberly Construction's sole
business function is to serve as a principal party to various construction
contracts entered into in connection with the construction of Bank premises.
LENDING ACTIVITIES
General. Metropolitan primarily originates and purchases mortgage loans
secured by multifamily residential and commercial real estate. Metropolitan also
originates one- to four-family residential and construction loans, and to a
lesser extent, consumer and business loans. In order to minimize interest rate
risk, the majority of the residential real estate loans retained by Metropolitan
in its portfolio are adjustable rate mortgages ("ARMs").
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Loan Portfolio Composition. The following information presents the
composition of Metropolitan's loan portfolio, including loans held for sale, in
dollar amounts and in percentages (before deductions for loans in process,
deferred fees and discounts and allowance for losses on loans) as of the dates
indicated.
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
REAL ESTATE LOANS:
One- to four-family $146,685 19.2% $114,758 16.8% $ 76,259 15.0% $112,840 25.2% $ 39,510 12.7%
Multifamily 194,450 25.4 276,544 40.3 231,459 45.8 187,928 41.9 166,221 53.2
Commercial 166,593 21.8 135,635 19.8 109,403 21.5 83,354 18.6 54,819 17.5
Construction and land 116,829 15.3 71,697 10.5 48,210 9.5 38,270 8.5 30,894 9.9
Held for sale 14,230 1.8 8,973 1.3 1,504 0.2 84 0.0 10,391 3.3
--------- ------- ---------- ------- --------- ------ ----------- ------ -------- ------
Total real estate
loans 638,787 83.5 607,607 88.7 466,835 92.0 422,476 94.2 301,835 96.6
CONSUMER LOANS 68,590 9.0 54,180 7.9 32,214 6.3 25,946 5.8 10,687 3.4
BUSINESS AND OTHER
LOANS 57,496 7.5 23,508 3.4 8,703 1.7 171 0.0 50 0.0
--------- ------- --------- ------- --------- ------ ---------- ------ ------- ------
Total loans 764,873 100.0% 685,295 100.0% 507,752 100.0% 448,593 100.0% 312,572 100.0%
===== ===== ===== ===== =====
LESS:
Loans in process 46,833 31,758 23,373 19,338 14,656
Deferred fees,
premiums and
discounts, net 4,533 2,896 1,764 2,317 1,998
Allowance for losses
on loans 5,622 4,175 2,765 1,911 1,239
--------- --------- --------- --------- ---------
TOTAL LOANS
RECEIVABLE, NET $707,885 $646,466 $479,850 $425,027 $294,679
======= ======= ========= ========= =========
Metropolitan had commitments to originate or purchase fixed and
variable rate loans of $22.3 million and $49.4 million, respectively, at
December 31, 1997. In addition, Metropolitan had firm commitments to sell fixed
rate loans of $2.2 million at December 31, 1997.
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The following table shows the composition of Metropolitan's loan
portfolio, including loans held for sale, in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowance for losses on loans) by fixed and adjustable rates as of the dates
indicated.
DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
------ ------ ------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
FIXED RATE LOANS:
Real estate:
One- to four-family $ 59,058 7.7% $ 41,436 6.1% $ 35,042 6.9%
Multifamily 60,136 7.9 88,529 12.9 71,909 14.2
Commercial 52,390 6.9 34,726 5.1 17,615 3.5
Construction and land 20,854 2.7 392 0.0 39 0.0
Held for sale 6,294 0.8 2,531 0.4 1,504 0.3
--------- --- --------- ---- --------- -----
Total fixed rate real estate
loans 198,732 26.0 167,614 24.5 126,109 24.9
Consumer 61,307 8.0 46,725 6.8 32,214 6.3
Business and other 19,575 2.6 5,650 0.8 2,744 0.5
-------- ---- --------- ----- --------- ----
Total fixed rate loans 279,614 36.6% 219,989 32.1% 161,067 31.7%
------- ==== --------- ===== ------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 87,627 11.5% 73,322 10.7% 41,217 8.1%
Multifamily 134,314 17.6 188,015 27.5 159,550 31.4
Commercial 114,203 14.9 100,909 14.7 91,788 18.1
Construction and land 95,975 12.5 71,305 10.4 48,171 9.5
Held for sale 7,936 1.0 6,442 0.9
--------- ---- --------- ---- ------- -----
Total adjustable rate real
estate loans 440,055 57.5 439,993 64.2 340,726 67.1
Consumer 7,283 0.9 7,455 1.1
Business and other 37,921 5.0 17,858 2.6 5,959 1.2
-------- ----- ------- ----- ------- -----
Total adjustable rate loans 485,259 63.4% 465,306 67.9% 346,685 68.3%
------- ==== -------- ==== ------- ====
LESS:
Loans in process 46,833 31,758 23,373
Deferred fees, premiums
and discounts, net 4,533 2,896 1,764
Allowance for losses
on loans 5,622 4,175 2,765
--------- --------- ---------
TOTAL LOANS
RECEIVABLE, NET $707,885 $646,466 $479,850
======= ======= =======
DECEMBER 31,
------------------------------------------------
1994 1993
------ -----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
FIXED RATE LOANS:
Real estate:
One- to four-family $ 46,418 10.4% $ 20,448 6.5%
Multifamily 19,852 4.4 5,281 1.7
Commercial 7,948 1.8 8,325 2.7
Construction and land
Held for sale 84 0.0 10,391 3.3
-------- ---- -------- ----
Total fixed rate real estate
loans 74,302 16.6 44,445 14.2
Consumer 25,946 5.8 10,687 3.4
Business and other 20 0.0
-------- ----- -------- -----
Total fixed rate loans 100,268 22.4% 55,132 17.6%
-------- ===== -------- =====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 66,422 14.8% 19,062 6.1%
Multifamily 168,076 37.5 160,940 51.5
Commercial 75,406 16.8 46,494 14.9
Construction and land 38,270 8.5 30,894 9.9
Held for sale
Total adjustable rate real
estate loans 348,174 77.6 257,390 82.4
Consumer
Business and other 151 0.0 50 0.0
Total adjustable rate loans 348,325 77.6% 257,440 82.4%
------- ==== ------- =====
LESS:
Loans in process 19,338 14,656
Deferred fees, premiums
and discounts, net 2,317 1,998
Allowance for losses
on loans 1,911 1,239
--------- ---------
TOTAL LOANS RECEIVABLE,
RECEIVABLE, NET $425,027 $294,679
======= =======
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41
The following table illustrates the contractual maturity of
Metropolitan's loan portfolio, including loans held for sale at December 31,
1997. Loans which have adjustable or renegotiable interest rates are shown as
maturing in the period during which the contract is due. The schedule does not
reflect the effects of possible prepayments, enforcement of due-on-sale clauses,
or the effect of the amortization of premium, discounts, or deferred loan fees.
AFTER ONE YEAR
DUE IN OVER YEAR OR LESS DUE THROUGH FIVE YEARS DUE AFTER FIVE YEARS TOTAL
---------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ------ ------ ------ ------ ------ ------ -----
REAL ESTATE: (Dollars in thousands)
One- to Four-family $ 248 7.94% $ 3,658 8.13% $147,332 7.41% $151,238 7.43%
Multifamily 23,410 8.97 49,291 8.85 121,749 8.36 194,450 8.56
Commercial 20,277 9.14 78,125 9.27 77,868 8.92 176,270 9.10
Construction and land 84,002 9.60 24,861 9.56 7,966 9.47 116,829 9.58
CONSUMER 8,560 13.76 20,568 9.77 39,462 11.09 68,590 11.03
BUSINESS 20,822 9.39 14,839 9.30 21,835 8.62 57,496 9.08
-------- -------- -------- --------
Total $157,319 9.64% $191,342 9.23% $416,212 8.42% $764,873 8.88%
======= ======= ======= =======
- -------------------------
(1) Includes demand loans, loans having no stated maturity and overdraft
loans of $0.6 million.
The total amount of loans due after December 31, 1998 which have
predetermined interest rates is $228.1 million, while the total amount of loans
due after such date which have floating or adjustable rates is $379.5 million.
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42
LOAN ORIGINATIONS AND PURCHASES
Metropolitan's strategy in recent years has been to increase
interest-earning assets, primarily by increasing the total loan portfolio, as
long as quality assets with the necessary portfolio characteristics were
available. This was accomplished by increasing origination capacity and
emphasizing purchases. The following table sets forth loan origination,
purchase, sale and repayment activities of Metropolitan for the periods
indicated.
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----- ----------- --------
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to Four-Family $ 28,017 $ 56,519 $ 22,503
Multifamily 12,600 20,669 24,542
Commercial 29,304 14,667 5,919
Construction and Land 77,062 60,566 41,559
Consumer 12,719 10,062
Business 27,058 18,536 6,814
-------- ------- -------
Total Adjustable Rate 186,760 181,019 101,337
------- ------- -------
FIXED RATE:
Real Estate:
one- to Four-Family 53,712 44,795 24,230
Multifamily 9,490 15,759 13,957
Commercial 1,300 4,400
Construction and Land 25,333 328 37
Consumer 17,598 17,242 15,048
Business 15,003 4,249 2,915
-------- --------- ---------
Total Fixed Rate 22,436 82,373 60,587
-------- -------- --------
Total Loans Originated 309,196 263,392 161,924
------- ------- -------
PURCHASES BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to Four-Family 90 1,835
Multifamily 19,433 45,184 3,694
Commercial 22,541 16,905 13,939
Construction and Land 347
Consumer 5,432
Business
-------- -------- --------
Total Adjustable Rate 42,411 69,356 17,633
------ ------ -------
FIXED RATE:
Real Estate:
One- to Four-Family 1,125 19,381
Multifamily 23,195 22,971 50,420
Commercial 46,729 21,296 15,879
Construction and Land 1,975
Consumer 16,900 12,224 387
-------- -------- --------
Business
Total Fixed Rate 88,799 57,616 86,067
-------- -------- --------
Total Loans Purchased 131,210 126,972 103,700
------- ------- -------
SALES:
Real Estate:
One- to Four-Family (34,887) (36,392) (35,770)
Multifamily (9,678) (11,539) (27,094)
Commercial (20,782) (7,808) (1,835)
Construction and land (600)
-------- -------- --------
Total loan sales (65,947) (55,739) (64,699)
--------- --------- ---------
Loans Securitized (98,325) (14,458) (53,795)
Principal Repayments (196,556) (142,624) (87,972)
-------- -------- ---------
Total reductions (360,828) (212,821) (206,466)
-------- -------- --------
Increase (decrease) in other items, net (18,159) (10,927) (4,336)
--------- --------- ----------
NET INCREASE $ 61,419 $166,616 $ 54,822
=========== ========= ===========
36
43
Multifamily Residential Lending. Metropolitan places a major portfolio
lending effort on multifamily residential real estate loans. Multifamily loans
are originated by Metropolitan from referrals by present customers of the Bank
and mortgage and real estate brokers. Through its existing referral network and
advertising efforts, Metropolitan has become known for multifamily lending in
its primary multifamily lending markets of Ohio, Kentucky, Michigan,
Pennsylvania, and New Jersey. Although Metropolitan operates full service retail
sales offices solely in Northeast Ohio, it has loan origination offices in
Southern Ohio, Western Pennsylvania, and Southeastern Michigan.
At December 31, 1997, Metropolitan's multifamily loans totaled $194.5
million, with an average loan size of approximately $543,000. Of this amount,
$89.7 million or 46.1% were originated by Metropolitan. Currently, Metropolitan
emphasizes the origination of ARMs with principal amounts of $2.0 to $6.0
million and balloon maturities of 10 years. The loans are adjustable on a one-,
threeor five-year schedule with amortization periods of 25 or 30 years. Rate
adjustments are based on the appropriate term U.S. Treasury securities plus a
margin. The loans are subject to a maximum individual aggregate interest rate
adjustment as well as a maximum aggregate adjustment over the life of the loan
(generally 6%). Due to increasing demand for fixed rate loans, Metropolitan has
allocated some funds for fixed rate programs, typically those with 7 to 10-year
maturities. The maximum loan to value ratio of Metropolitan's multifamily
residential loans is 75%.
Metropolitan recognizes that multifamily residential property loans
generally involve a higher degree of risk than the financing of one- to
four-family residential real estate because they typically involve larger loan
balances to single borrowers or groups of related borrowers. The payment
experience on these loans is typically dependent upon the successful operation
of the related real estate project and is subject to certain risks including
excessive vacancy rates or inadequate rental income levels. In order to manage
and reduce these risks, Metropolitan uses strict underwriting standards in its
multifamily residential lending process.
The loans originated in this area are typically secured by apartments
with generally under 75 residential units. The underwriting process includes a
site evaluation which considers such factors as location, access by roadways,
condition of the apartments and amenities. In addition, a Metropolitan employee
visits each location before a loan approval is made. The underwriting process
also involves an evaluation of the borrower, whether the borrower is an
individual or a group of individuals acting as a separate entity. The financial
statements of each of the individual borrowers are reviewed and personal
guarantees in an amount equal to the original principal amount of the loan are
generally obtained. The financial statements of individual guarantors are
reviewed by staff independent of the lending department. Another important
aspect of Metropolitan's underwriting of its multifamily residential loans is
the debt service coverage test of the property. Debt service coverage
requirements are determined based upon the individual characteristics of each
loan, and typically range from a ratio of 1.15:1 to 1.30:1. In order to factor
in the adjustable rate of the multifamily loans, the debt service coverage is
calculated based on the maximum interest rate of the loan.
At December 31, 1997, $104.8 million or 53.9% of Metropolitan's
multifamily residential loan portfolio was purchased. Prior to purchasing these
loans, Metropolitan utilizes a similar underwriting process with substantially
the same standards as for its originated loans. In some cases, when Metropolitan
considers the purchase of a portfolio with a considerable number of moderate
balance loans, an independent contract inspector may be utilized for property
inspections. Real estate located in Ohio secures 52.8% of Metropolitan's
multifamily residential loan portfolio. Underlying real estate for the remaining
loans is primarily located in California, Michigan, Pennsylvania and New Jersey.
Commercial Real Estate Lending. Although Metropolitan has always held
an investment in loans secured by commercial real estate, this portion of the
portfolio has increased, mainly through purchases, in the last three years. At
December 31, 1997, Metropolitan's loans secured by commercial real estate
totaled $166.6 million or 21.8% of Metropolitan's total portfolio, with an
average loan size of $677,000. Of this amount, $51.6 million or 31.0% was
originated by Metropolitan and $115.0 million or 69.0% represented loans
purchased from a variety of sources, predominantly other financial institutions.
The $115.0 million of purchased commercial real estate loans were acquired by
Metropolitan since 1992.
Loans secured by commercial real estate are purchased by Metropolitan
generally when they are in the primary lending markets being targeted by
Metropolitan, are generally secured by retail strip shopping centers or office
buildings, and meet Metropolitan's yield and term requirements. In 1997,
Metropolitan began to introduce more geographic diversity into the portfolio
based on its desire to acquire seasoned loans. Management believes a certain
amount of geographic diversity is important to maintaining good asset quality.
Metropolitan recognizes that commercial real estate loans generally
involve a higher degree of risk than the financing of oneto four-family
residential real estate because these loans typically involve larger loan
balances to single borrowers or groups of related borrowers. The payment
experience on these loans is typically dependent upon the successful operation
of the related real estate project and is subject to certain risks including
excessive vacancy brought on by tenant turnover and inadequate rental income
levels. In addition, the profitability of the business operating in the property
may affect the borrower's ability to make timely payments. In order to manage
and reduce these risks, Metropolitan focuses its lending on existing properties
with a record of satisfactory performance and targets retail strip centers and
office buildings with multiple tenants.
Metropolitan originates commercial real estate loans secured by strip
shopping centers and small office buildings to a much lesser extent than it
purchases commercial real estate loans. Through customer referrals and real
estate brokers, Metropolitan lends on commercial real estate in Ohio,
Pennsylvania, Northern Kentucky, and Southeastern Michigan. These loans are ten
year balloon loans
37
44
adjustable on a one-, three- or five-year schedule with amortization of 25 years
at a margin over the appropriate term U.S. Treasury securities. The maximum loan
to value ratio is 75%.
The following table presents information as to the locations and types
of properties securing Metropolitan's multifamily and commercial real estate
portfolio as of December 31, 1997:
Number
of Loans Percent Principal Percent
-------- ------- --------- -------
(Dollars in thousands)
Ohio:
Apartments 157 26.0% $102,668 28.4%
Office buildings 43 7.1 20,042 5.6
Retail centers 24 4.0 18,950 5.2
Other 32 5.3 9,994 2.8
--- ---- ------- ----
Total 256 42.4 151,654 42.0
--- ---- ------- ----
California:
Apartments 76 12.6 41,616 11.6
Office buildings 9 1.5 6,635 1.8
Retail centers 17 2.8 11,141 3.1
Other 10 1.6 5,874 1.6
--- ---- ------- ----
Total 112 18.5 65,266 18.1
--- ---- ------- ----
Pennsylvania:
Apartments 32 5.3 4,683 1.3
Office buildings 1 0.2 82
Retail centers 5 0.8 10,531 2.9
Other 5 0.8 1,540 0.4
--- ---- ------- ----
Total 43 7.1 16,836 4.6
--- ---- ------- ----
Michigan:
Apartments 3 0.5 6,227 1.7
Office buildings 6 1.0 6,844 1.9
Retail centers 7 1.2 9,291 2.6
Other 2 0.3 6,913 1.9
--- ---- ------- ----
Total 18 3.0 29,275 8.1
--- ---- ------- ----
Other states(1):
Apartments 90 14.9 39,256 10.9
Office buildings 25 4.1 22,988 6.4
Retail centers 23 3.8 20,292 5.6
Other 37 6.2 15,476 4.3
--- ---- ------- ----
Total 175 29.0 98,012 27.2
--- ---- ------- ----
604 100.0% $361,043 100.0%
=== ===== ======== =====
<FN>
- -------------------------
(1)Properties securing loans in other states are located in 26 other
states, none of which exceed 5.0% of the outstanding principal balance
of the total multifamily and commercial real estate portfolio.
The following table presents aggregate information as to the type of
security as of December 31, 1997:
AVERAGE
NUMBER BALANCE
OF LOANS PER LOAN PRINCIPAL PERCENT
-------- -------- --------- -------
(Dollars in thousands)
Apartments 358 $543 $194,450 53.9%
Office buildings 84 674 56,591 15.7
Retail centers 76 924 70,205 19.4
Other 86 463 39,797 11.0
---- -------- -------
Total 604 $598 $361,043 100.0%
==== ======== =====
38
45
One- to Four-family Residential Lending. In 1997, approximately 41.6%
of Metropolitan's one- to four-family residential loans were originated through
its full service retail sales offices. The remainder were originated by
commissioned loan officers. Metropolitan has focused its one- to four-family
residential lending efforts primarily on the origination of loans secured by
first mortgages on owner-occupied residences. As of December 31, 1997,
Metropolitan's one- to four-family residential mortgages totaled $146.7 million
or 19.2% of Metropolitan's loan portfolio.
Metropolitan emphasizes the origination of conventional ARM loans for
retention in Metropolitan's portfolio and fixed rate loans suitable for sale in
the secondary market. In addition, Metropolitan offers fixed rate end loan
financing to borrowers building homes with Metropolitan's approved construction
loan builders. Metropolitan retains only a limited dollar amount of this fixed
rate end loan financing in its portfolio. The amount being originated and
subsequently retained is monitored very closely. Substantially all of
Metropolitan's one- to four-family residential mortgage loans originated for
retention in Metropolitan's portfolio are secured by property located in its
Northeast Ohio market area. At December 31, 1997, Metropolitan's fixed rate
residential mortgage loan portfolio totaled $59.1 million, or 7.7% of
Metropolitan's total loan portfolio.
Metropolitan is presently originating three types of ARM products for
retention in its portfolio. The first product is a one-year adjustable ARM, the
interest rate being subject to change annually. The adjustments are based upon
the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year, and are generally limited to a 2% maximum annual interest
rate adjustment, as well as a maximum lifetime adjustment of 6%. The second
product, known as a five/one ARM, has the same index and caps as the one year
ARM; the five/one ARM, however, retains its initial interest rate for the first
five years of the loan and then begins to adjust annually in the sixth year. The
third product, the three-year ARM, allows for interest rate adjustments every
three years. The adjustments are based upon the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of three years, and are
generally limited to a 2% maximum interest rate adjustment per change, as well
as a maximum lifetime adjustment of 6%.
Metropolitan's originated ARMs do not permit negative amortization of
principal and most of them are convertible into fixed rate mortgages. If
converted, they are typically sold in the secondary market. ARMs are originated
with terms to maturity of up to 30 years, and borrowers are qualified based upon
secondary market requirements.
At December 31, 1997, $19.5 million, or 13.3% of Metropolitan's one- to
four-family residential loan portfolio was purchased. Prior to purchasing these
loans, Metropolitan utilizes an underwriting process with substantially the same
standards as for its originated loans.
Construction Lending and Land Development. Metropolitan originates
construction loans on single family homes to local builders in Metropolitan's
primary lending market and to individual borrowers on owner-occupied properties.
Metropolitan also makes loans to builders for the purchase of fully-improved
single family lots and to developers for the purpose of developing land into
single family lots. Metropolitan's market area for construction lending is in
Northeastern Ohio, primarily in the counties of Cuyahoga, Lake, Geauga, Summit,
Medina, Portage, and Lorain. Metropolitan has one commissioned construction loan
originator in the high volume Columbus, Ohio construction market to originate
single family construction loans and improved lot loans.
The following table presents the number, amount, and type of properties
securing Metropolitan's construction and land development loans at December 31,
1997:
NUMBER OF LOANS PRINCIPAL BALANCE
--------------- -----------------
(Dollars in thousands)
RESIDENTIAL CONSTRUCTION LOANS:
Owner-occupied 33 $ 12,003
Builder presold 43 6,502
Builder spec/model 128 25,736
Allocated construction loans 28 24,579
Lot loans 46 5,284
Development loans 23 16,168
--- --------
Total residential construction loans 301 90,272
NONRESIDENTIAL CONSTRUCTION LOANS:
Multifamily 1 5,000
Commercial 2 10,200
--- --------
Total nonresidential construction loans 3 15,200
LAND LOANS 14 11,357
--- --------
Total 318 $116,829
=== ========
Metropolitan's risk of loss on a construction loan is largely dependent
upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost of the project. The application
process includes a submission of the cost, specifications and plans.
Metropolitan also reviews the borrower's financial position and requires a
personal guarantee on all builder loans. All loans are based upon the appraised
value of the underlying collateral, as completed. Appraisals are completed by
qualified independent fee appraisers who have been approved by Metropolitan's
Board of Directors.
Each type of loan has a maximum loan to value ratio which is
established by the contract price, cost estimate or appraised value, whichever
is less. The maximum loan to value ratio for each type of construction loan is
as follows: owner-occupied homes - 80%; builder presold homes - 80%; builder
models or speculative homes - 75%; lot loans - 75%; development loans - 70%
(development of single-family home lots for resale to builders) and 75%
(development of land for cluster or condominium projects which will be part of
an allocated construction loan).
All of Metropolitan's construction loans that are made to builders are
made for relatively short terms (6 to 24 months) and are made with an adjustable
rate of interest. Owner-occupied loans are generally fixed rate. These loans
increase the yield on, and the proportion of interest rate sensitive loans in,
Metropolitan's portfolio.
Allocated construction loans or lines of credit are used to build
single family homes only and cannot be used for any other purpose. All lines of
credit are secured by the homes that are built with the draws under such credit
agreements. Most of the homes built with the line of credit funds are presold
homes, and the number of spec and model homes allowed to be built is limited by
the financial strength of the builder. Lines of credit can only be utilized
where a builder owns a specific number of lots in a development. Draws are based
upon the percentage of completion, and at all times, funds remain to complete
the home. Disbursements are only made after receipt of a property inspection and
a mechanic's lien update from the title company.
39
46
Metropolitan also originates construction loans on multifamily and
commercial real estate projects where Metropolitan intends to provide the
financing once construction is complete. These loans are underwritten in a
manner similar to originated and purchased multifamily residential and
commercial real estate loans described above. The two commercial real estate
construction loans are rehabilitation projects with existing tenants ensuring
satisfactory cash flow.
Consumer Lending. The underwriting standards employed by Metropolitan
for consumer loans include a determination of the applicant's payment history on
other debts and an assessment of the applicant's ability to meet existing
obligations and payments on the proposed loan. Although creditworthiness of the
applicant is a primary consideration, the underwriting process also includes a
comparison of the value of the security, if any, in relation to the proposed
loan amount.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or are secured by
rapidly depreciable assets, such as automobiles. At December 31, 1997, $58.2
million or 84.9% of Metropolitan's $68.6 million consumer loan portfolio was
secured. However, even in the case of secured loans, repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance due to the higher likelihood of damage, loss or
depreciation. In addition, consumer loan collections are dependent upon the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans in the event of default.
In order to supplement the growth in the consumer loan portfolio,
Metropolitan has been purchasing loans through correspondent lenders and bulk
portfolios offered for sale. At December 31, 1997, $22.8 million, or 33.3% of
the outstanding balance of consumer loans was purchased. These loans are
generally secured by second mortgages on one- to four-family homes, automobiles,
or manufactured housing. In 1997, Metropolitan acquired two packages of subprime
loans totaling $6.3 million (loans where the borrower's credit rating is below
an A grade). These loans require more intensive collection techniques; however,
the yield is significantly higher to cover these incremental costs.
At December 31, 1997, Metropolitan's credit card portfolio had an
outstanding balance of $7.3 million with $22.7 million in unused credit lines.
Of the outstanding balance, $2.6 million related to cards originated by
Metropolitan and $4.7 million related to credit card relationships purchased by
Metropolitan.
Business Lending. Metropolitan began offering business loans in 1994.
At December 31, 1997, Metropolitan had $57.5 million of business loans
outstanding, or 7.5% of Metropolitan's total loan portfolio, against available
lines on existing business loans totaling $73.0 million. Metropolitan's business
lending activities encompass loans with a variety of purposes and security,
including loans to finance accounts receivable, inventory and equipment.
Generally, Metropolitan's business lending has been limited to borrowers
headquartered, or doing business in, Metropolitan's retail market area. These
loans are generally adjustable interest rates at some margin over the prime
interest rate and some may be guaranteed by the Small Business Administration.
40
47
The following table sets forth information regarding the number and
amount of Metropolitan's business loans as of December 31, 1997:
NUMBER TOTAL LOAN OUTSTANDING
OF LOANS COMMITMENT PRINCIPAL BALANCE
-------- ---------- -----------------
(Dollars in thousands)
LOANS SECURED BY:
Accounts receivable, inventory and equipment 194 $39,025 $28,705
Second lien on real estate 36 6,977 5,805
First lien on real estate 35 23,064 19,915
Specific equipment and machinery 25 1,843 1,843
Titled vehicles 31 705 705
Stocks and bonds 5 227 77
Certificates of deposit 3 196 110
UNSECURED LOANS 18 1,011 336
--- ------- -------
Total 347 $73,048 $57,496
=== ======= =======
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, business loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of business loans may be substantially dependent upon the success of
the business itself. Furthermore, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
SECONDARY MARKET ACTIVITIES
In addition to originating loans for its own portfolio, Metropolitan
participates in secondary mortgage market activities by selling whole loans, as
well as creating mortgage-backed securities, with the FNMA and the FHLMC.
Secondary market sales allow Metropolitan to make loans during periods when
deposit flows decline, or are not otherwise available, and at times when
customers prefer loans with long-term fixed interest rates which Metropolitan
does not choose to originate for its own portfolio. Metropolitan's primary focus
in its mortgage banking operations is on the sale of fixed rate one- to
four-family residential mortgage loans.
The secondary market for mortgage loans is comprised of institutional
investors who purchase loans meeting certain underwriting specifications with
respect to loan-to-value ratios, maturities and yields. Subject to market
conditions, Metropolitan tailors certain real estate loan programs to meet the
specifications of FHLMC and FNMA, two of the largest institutional investors.
Metropolitan may retain a portion of the loan origination fee paid by the
borrower and receive annual servicing fees as compensation for retaining
responsibility for and performing the servicing of all loans sold to
institutional investors. See "--Loan Servicing Activities." The sale of
substantially all loans to FHLMC and FNMA is nonrecourse to Metropolitan.
The terms and conditions under which such sales are made depend upon,
among other things, the specific requirements of each institutional investor,
the type of loan, the interest rate environment and Metropolitan's relationship
with the institutional investor. In the case of one- to four-family residential
loans, Metropolitan periodically obtains formal commitments primarily with FHLMC
and FNMA. Pursuant to these commitments, FHLMC or FNMA is obligated to purchase
a specific dollar amount of whole loans over a specified period of time. The
terms of the commitments range from ten to sixty days. The pricing will vary,
depending upon the length of each commitment. Loans are classified as held for
sale while Metropolitan is negotiating the sale of specific loans which meet
selected criteria to a specific investor.
During the third quarter of 1997, Metropolitan completed the
securitization of $93.0 million of multifamily loans with FNMA under a newly
developed program which uses insurance to provide the credit enhancement
necessary to achieve a AAA rating. The loans are serviced as mortgage-backed
securities for FNMA. Up to this point, Metropolitan has retained ownership of
the securities in that portfolio. In addition to resulting in a decrease in
loans receivable and a related increase in mortgage-backed securities, the
securitization has had several other benefits to Metropolitan, including the
following: i) improvement in the credit risk profile of the Bank's balance sheet
by converting whole loans into mortgage-backed securities guaranteed by FNMA;
ii) reduction of the required level of risk-based capital; and iii) addition of
high quality collateral which can be pledged for borrowings in the secondary
market to fund future loan growth.
Metropolitan also sells whole loans or participations in multifamily
and commercial real estate loans to private investors and retains the right to
service the loans. The majority of Metropolitan's sales of multifamily and
commercial real estate loans are made pursuant to individually negotiated whole
loan or participation sales agreements for individual loans or for a package of
such loans. During 1997, Metropolitan sold $9.9 million of multifamily and
commercial real estate participations. The Bank may seek out a participant when
a loan would otherwise exceed the loan-to-one borrower limit. Other loans have
been sold to manage geographic concentration or interest rate risk. In addition,
Metropolitan sells multifamily and commercial real estate loans that were
purchased under a loan option program.
See "--Loan Option Income."
41
48
Loan Servicing Activities
At December 31, 1997, Metropolitan's overall servicing portfolio was
$1.6 billion. Of that amount, loans serviced for others totaled $1.2 billion.
The following table summarizes the portfolio by investor and source:
Originated Purchased Portfolio
Servicing Servicing Servicing Total
--------- --------- --------- -----
(Dollars in thousands)
One- to Four-family:
Metropolitan portfolio $138,099 $ 138,099
FHLMC $178,751 $469,465 648,216
FNMA 55,974 321,013 376,987
Private investors 10,050 10,050
-------- -------- -------- ----------
Total One- to Four-family 234,725 800,528 138,099 1,173,352
-------- -------- -------- ----------
Multifamily and Commercial:
Metropolitan portfolio 303,961 303,961
FHLMC 4,925 3,676 8,601
FNMA 107,057 23,340 130,397
Private investors 13,339 2,705 16,044
-------- -------- -------- ----------
Total Multifamily and Commercial 125,321 29,721 303,961 459,003
-------- -------- -------- ----------
Total $360,046 $830,249 $442,060 $1,632,355
======== ======== ======== ==========
Metropolitan generally services the loans that it originates. When
Metropolitan sells loans to an investor, such as FHLMC or FNMA, it generally
retains the servicing rights for the loans. Servicing fee income is generated
from the loans sold to investors. In order to further increase Metropolitan's
servicing fee income, the Bank has aggressively pursued purchases of servicing
portfolios from other originating institutions. These purchased servicing
portfolios are primarily FHLMC and FNMA single family loans that are
geographically located within the eastern half of the nation. At December 31,
1997, Metropolitan's purchased servicing portfolio was $830.2 million and the
related balance of purchased mortgage servicing rights was $7.7 million.
Approximately 72.9% of the overall servicing portfolio (by dollar
volume) is comprised of loans sold to investors, primarily FHLMC and FNMA.
Metropolitan receives fee income for servicing these sold loans at various
percentages based upon unpaid principal balances of the loans serviced.
Servicing fees are collected and retained by Metropolitan out of monthly
mortgage payments.
Loan servicing functions include collecting and remitting loan
payments, accounting for principal and interest, holding escrow (impound) funds
for payment of taxes and insurance, making rate and payment changes to
contractually adjustable loans, managing loans in payment default, processing
foreclosure and other litigation activities to recover mortgage debts,
conducting property inspections and risk assessment for investment loans and
general administration of loans for the investors to whom they are sold, and for
Metropolitan as mortgagee.
LOAN OPTION INCOME
During 1995, Metropolitan developed a program to purchase loans and
sell loan options in order to take advantage of its underwriting capabilities,
increase net interest income and increase non-interest income. In these
transactions, Metropolitan purchases loans and sells nonrefundable options to a
third party to purchase these same loans at a specified price within a specified
time period. The Bank, prior to purchasing the loans that will be subject to the
options, utilizes an underwriting process with substantially the same standards
as in its origination process. In the event the option is not exercised,
Metropolitan would sell the underlying loans or transfer them to the Bank's
portfolio at its fair value at the date of the transfer. A nonrefundable option
fee is negotiated based on a percentage of the principal amount of the loans
involved. The third party acquiring the option is a loan broker who markets the
loans to potential buyers who may be willing to pay a higher price for the
loans. To date, Metropolitan has entered into these option transactions with one
loan broker. At December 31, 1997, there were no loans held for sale in
connection with outstanding options and $320,000 has been recognized in income
in connection with these loan options during the year then ended.
BRIDGE LOAN ACTIVITY
During 1997, Metropolitan developed a program to underwrite and fund
bridge loans to take advantage of its underwriting capabilities and increase net
interest income. For these loans, Metropolitan assesses debt service capacity
and underlying collateral value as it would for multifamily or other commercial
real estate loans. Bridge loans have a shorter term to maturity (generally 6 to
24 months) than the typical ten year portfolio loans. Metropolitan collects a
fee at origination which is deferred and recognized in interest income over the
term of the loan. As a result of the comparatively short term to maturity of
these loans, the borrowers must refinance the underlying properties sooner than
is the case with longer term, permanent loans, which adds a potential element of
risk. In all cases, these loans are adequately secured by real property. During
1997, Metropolitan originated seven of these loans totalling $15.9 million and
recognized origination fees of $515,000 in net interest income.
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LOAN DELINQUENCIES AND NONPERFORMING ASSETS
When a borrower fails to make a required payment on a loan,
Metropolitan attempts to cause the delinquency to be cured by contacting the
borrower. In the case of real estate loans, a late notice is sent 15 days after
the due date. If the delinquency is not cured by the 30th day, contact with the
borrower is made by phone. Additional written and verbal contacts are made with
the borrower between 30 and 90 days after the due date. If the delinquency
continues for a period of 90 days, Metropolitan usually institutes appropriate
action to foreclose on the property. If foreclosed, the property is sold at
public auction and may be purchased by Metropolitan. Delinquent consumer loans
are handled in a generally similar manner, except that initial contacts are made
when the payment is 10 days past due and appropriate action may be taken to
collect any loan payment that is delinquent for more than 30 days.
Metropolitan's procedures for collection efforts, repossession and sale of
consumer collateral are subject to various requirements under state and federal
consumer protection laws.
The following table sets forth information concerning delinquent loans
at December 31, 1997, in dollar amounts and as a percentage of each category of
Metropolitan's loan portfolio. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
Loans Delinquent For:
60-89 Days 90 Days and Over
---------------------------------- --------------------------------------
Percent of Loan Percent of Loan
Number Amount Category Number Amount Category
------ ------ -------- ------ ------ --------
Real Estate
One-to Four-Family 6 $ 460 0.31% 5 $ 792 0.53%
Multifamily - - - - - -
Commercial - - - 3 198 0.11
Construction and Land - - - - - -
Consumer 83 821 1.20 324 1,946 2.84
Business 1 239 0.42 6 211 0.37
-- ------ ---- ---- ------ ----
Total 90 $1,520 0.20% $338 $3,147 0.41%
== ====== ==== ==== ====== ====
Total Delinquent Loans
-------------------------------------
Percent of Loan
Number Amount Category
------ ------ --------
Real Estate
One-to Four-Family 11 $ 1,252 0.84%
Multifamily - - -
Commercial 3 198 0.11
Construction and Land - - -
Consumer 407 2,767 4.04
Business 7 450 0.79
--- ------ ----
Total 428 $4,667 0.61%
=== ====== ====
Nonperforming assets include all nonaccrual loans, loans past due
greater than 90 days still accruing and real estate owned. Interest is not
accrued on loans contractually past due 90 days or more as to interest or
principal payments and as to which payment of principal and interest in full is
not expected unless in the judgment of management the loan is well secured, and
no loss in principal or interest is expected.
When a loan reaches nonaccrual status, interest accruals are
discontinued and prior accruals are reversed. The classification of a loan on
nonaccrual status does not necessarily indicate that the principal is
uncollectible in whole or in part. A determination as to collectibility is made
by the management of Metropolitan on a case-by-case basis. Metropolitan
considers both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect nonaccrual loans. The
final determination as to these steps is made on a case-by-case basis.
Alternatives that are considered are commencing foreclosure, collecting on
guarantees, restructuring the loan or instituting collection lawsuits.
43
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The following table summarizes non-performing assets by category as of
the dates indicated.
At December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccruing loans
One- to four-family $ 792 $ 950 $ 293 $ 337 $ 475
Multifamily 871 2,138 1,585 549
Commercial real estate 198 2,032 391 150 691
Construction and land development 15 15 1,051
Consumer 1,562 802 266 153 53
Business 211 268
------ ------ ------- ------- ------
Total nonaccruing loans 2,763 4,923 3,103 2,240 2,819
Loans past due greater than 90
days still accruing 384 271 204 128 277
------ ------ ------- ------- ------
Total nonperforming loans 3,147 5,194 3,307 2,368 3,096
Real estate owned 2,037 177 258 53 941
------ ------ ------- ------- ------
Total nonperforming assets $5,184 $5,371 $ 3,565 $ 2,421 $4,037
====== ====== ======= ======= ======
Nonperforming loans to total loans 0.44% 0.80% 0.69% 0.55% 1.08%
Nonperforming assets to total
assets 0.56% 0.70% 0.60% 0.51% 1.08%
For the years ended December 31, 1997 and 1996, gross interest income
which would have been recorded had the nonaccruing loans been current in
accordance with their original terms amounted to $151,000 and $439,000,
respectively. The amounts that were included in interest income on such loans
were $132,000 and $85,000 for the years ended 1997 and 1996, respectively.
Nonperforming assets were $5.2 million at December 31, 1997, a
decrease of $0.2 million from $5.4 million at December 31, 1996. During the same
period, total net loans receivable increased $61.4 million to $707.9 million at
December 31, 1997. Also during 1997, nonaccrual loans decreased $2.2 million to
$2.8 million, while at the same time, real estate owned increased $1.9 million
to $2.0 million. This reflects the progression of nonperforming loans at
December 31, 1996 to real estate owned during 1997. Two properties accounted for
the majority of this increase, a strip shopping center in the Philadelphia,
Pennsylvania area valued at $1.0 million and a commercial condominium warehouse
near Chicago, Illinois valued at $0.5 million. Metropolitan is actively
marketing both properties through local real estate agents and no losses are
expected. At December 31, 1997, all loans classified by management as impaired
were included in nonperforming loans.
Nonperforming consumer loans increased to $1.6 million in 1997 due in
part to the acquisition of subprime consumer loans. These loans are secured by
manufactured housing or are unsecured. The yield on this portfolio is
substantially higher to compensate for the increased costs of collection and the
cost to carry nonperforming loans. Management expects a higher level of
nonperforming consumer loans to continue due to this portfolio.
At December 31, 1997, Metropolitan had potential problem loans
totaling $4.9 million which were classified by management as substandard and
were not included in the table above. Although these loans were current or not
seriously delinquent, there is some unfavorable development involving each loan
which, if not corrected, could result in the loan changing to nonaccrual status
and/or a loss being incurred. Metropolitan is in contact with these borrowers
and monitors their status closely. The largest loan in that category was a $4.0
million participation in a $9.0 million loan secured by a water park in Southern
California. The loan was 30 days past due at December 31, 1997 and the borrower
is in the process of refinancing the loan and obtaining additional working
capital. If the borrower does not refinance this property with another lender,
then the borrower's ability to repay the loan will be contingent on the
operating success of the park during 1998, its first full year of operation.
ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS
Because some loans may not be repaid in full, an allowance for losses
on loans is maintained. 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.
The following table sets forth an allocation of the allowance for
losses on loans among categories as of the dates indicated based on Management's
estimate of possible losses that are currently anticipated based largely on past
loss experience. Since the factors influencing such estimates are subject to
change over time, management believes that any allocation of the allowance for
losses on loans into specific categories lends an appearance of precision which
does not exist. In practice, the allowance is utilized as a single unallocated
44
51
allowance available for all loans. The allowance can also be reallocated among
different loan categories if actual losses differ from expected losses and based
upon changes in management's expectation of future losses. The following
allocation table should not be interpreted as an indication of the actual
amounts or the relative proportion of future charges to the allowance.
1997 1996 1995 1994
------------------------ ----------------------- --------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
One- to four-family $ 237 19.8% $ 228 17.1% $ 172 15.2% $ 189 25.2%
Multifamily 482 25.4 1,020 40.8 887 45.8 733 41.9
Commercial real estate 1,400 23.0 937 20.3 676 21.5 358 18.6
Construction and land 353 15.3 193 10.5 167 9.5 99 8.5
Consumer 2,132 9.0 1,182 7.9 512 6.3 340 5.8
Business 456 7.5 197 3.4 74 1.7 1
Unallocated 562 418 277 191
------ ----- ------ ----- ------ ----- ------ -----
Total $5,622 100.0% $4,175 100.0% $2,765 100.0% $1,911 100.0%
====== ===== ====== ===== ====== ===== ====== =====
1993
---------------------
PERCENT OF
LOANS IN
EACH
CATEGORY TO
AMOUNT TOTAL LOANS
------ -----------
One- to four-family $ 93 16.0%
Multifamily 494 53.2
Commercial real estate 314 17.5
Construction and land 90 9.9
Consumer 124 3.4
Business
Unallocated 124
------ -----
Total $1,239 100.0%
====== =====
With the uncertainties that could adversely impact the overall quality of
Metropolitan's loan portfolio, management of Metropolitan considers an adequate
allowance for losses on loans essential. The unallocated allowance is considered
adequate to cover losses from the existing loans that have not demonstrated
problems such as late payments, financial difficulty of the borrower or
deterioration of collateral values. The risks associated with off-balance sheet
commitments are insignificant in the opinion of management of Metropolitan and
therefore, no allowance for such commitments is provided.
45
52
The following table provides an analysis of Metropolitan's allowance for
losses on loans for the periods indicated. In each period, the provision for
loan losses was based on an analysis of individual credits, prior and current
loss experience, overall growth in the portfolio and current economic
conditions.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
BALANCE AT BEGINNING OF PERIOD $4,175 $2,765 $1,911 $1,239 $ 725
Charge-offs:
One- to four-family 32 22 23 23 50
Multifamily 494 119 64 100
Commercial real estate 27 74
Construction and land
Consumer 363 95 56 14 5
Business 10
------ ------ ------ ------ ------
Total charge-offs 899 236 106 101 229
------ ------ ------ ------ ------
Recoveries:
One- to four-family 1 1 3
Multifamily 6
Commercial real estate
Construction and land
Consumer 6 11
Business
------ ------ ------ ------ ------
Total recoveries 6 11 1 7 3
------ ------ ------ ------ ------
Net charge-offs 893 225 105 94 226
Provision for loan losses 2,340 1,635 959 766 740
------ ------ ------ ------ ------
BALANCE AT END OF PERIOD $5,622 $4,175 $2,765 $1,911 $1,239
====== ====== ====== ====== ======
Net charge-offs to average
loans 0.13% 0.04% 0.02% 0.03% 0.09%
Provision for loan losses to
average loans 0.35% 0.28% 0.21% 0.21% 0.29%
Allowance for losses on loans
to total non-performing loans
at end of period 178.60% 77.73% 83.61% 80.70% 40.02%
Allowance for losses on loans
to total loans at end of period 0.79% 0.64% 0.57% 0.45% 0.43%
46
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Investment Portfolio
Metropolitan maintains its investment portfolio in accordance with
policies adopted by the Board of Directors that consider the regulatory
requirements and restrictions which dictate the type of securities that can be
held. As a member of the FHLB System, the Bank is required to hold a minimum
amount of FHLB stock based upon asset size and mix. As the Bank grows,
management anticipates this investment will increase.
The following table summarizes the amounts and the distribution of
Metropolitan's securities held as of the dates indicated:
At December 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Securities:
Mutual funds $ 1,706 $ 2,009 $10,364
Tax-exempt bond 4,740
U.S. Treasury securities 6,065 12,442
FNMA preferred stock 5,100
FHLB stock 5,350 3,989 3,569
-------- -------- --------
Total $11,796 $17,163 $26,375
======== ======== ========
Other interest-earning assets:
Interest-bearing deposits with banks $1,961 $2,745 $4,788
Term repurchase agreements 6,397 6,000
-------- -------- --------
Total $ 8,358 $ 8,745 $ 4,788
======== ======== ========
The following table sets forth the contractual maturities and
approximate weighted average yields of Metropolitan's securities at December 31,
1997.
Due in
---------------------------------------------
One year or less More than ten years Total
---------------- -------------------- ------
(Dollars in thousands)
Mutual Funds $1,706 $1,706
Tax-exempt bond $4,740 4,740
FHLB stock 5,350 5,350
------ ------ -------
Total $7,056 $4,740 $11,796
====== ====== =======
Weighted average yield 6.86% 7.75% 7.22%
MORTGAGE-BACKED SECURITIES PORTFOLIO
The following table sets forth Metropolitan's mortgage-backed
securities portfolio at the dates indicated. All mortgage-backed securities are
classified as available for sale.
At December 31,
---------------------------------------------------
1997 1996 1995
(Dollars in thousands)
FNMA pass-through certificates $97,146 $19,775 $22,549
GNMA pass-through certificates 8,037 9,700 11,348
FHLMC participation certificates 37,714 26,713 4,715
-------- ------- -------
Other 270 484 544
======== ======= =======
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The following table sets forth the contractual maturities and
approximate weighted average yields of Metropolitan's mortgage-backed securities
at December 31, 1997.
DUE IN
-------------------------------------------------------
ONE YEAR TO
FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS TOTAL
------------ -------------------- --------------- -------
(Dollars in Thousands)
FNMA pass-through certificates $ 9,880 $78,420 $ 8,846 $ 97,146
GNMA pass-through certificates 108 7 7,922 8,037
FHLMC participation certificates 19,274 18,440 37,714
Other 270 270
------- ------- ------- --------
Total available for sale $29,262 $78,427 $35,478 $143,167
======= ======= ======= ========
Weighted average yield 7.00% 7.30% 7.09% 7.18%
SOURCES OF FUNDS
The Bank's primary sources of funds are deposits, amortization and
repayment of loan principal, borrowings, sales of mortgage loans, sales or
maturities of mortgage-backed securities, securities, and short-term
investments. Deposits are the principal source of Metropolitan's funds for
lending and investment purposes. The following paragraphs provide a brief
description of the types of accounts offered by Metropolitan:
Passbook and Statement Savings Accounts. Savings may be invested in and
withdrawn from regular passbook, tiered passbook and statement savings accounts
without restriction. Interest on tiered passbook accounts is compounded monthly
and credited monthly. Interest on regular passbook and statement savings
accounts is compounded quarterly and credited quarterly.
Checking Accounts. Metropolitan offers two interest-bearing checking
and one noninterest-bearing checking account for consumers. The noninterest
checking requires no minimum balance and has no monthly service fees. The rate
paid on the interest checking account is dependent upon the balance in the
account. Monthly service charges can be waived on personal interest-bearing
checking accounts by maintaining either a $1,000 minimum balance or greater than
$5,000 minimum balance in another deposit account or establishing a direct
deposit relationship. All accounts have no minimum maturity or penalty for early
withdrawal and no restrictions on the size and frequency of the withdrawals or
additional deposits. Metropolitan regularly reviews the interest rate paid on
the interest-bearing checking accounts and adjusts the rate based on cash flow
projections and market interest rates.
In connection with loan servicing activities, Metropolitan maintains
custodial checking accounts for principal and interest payments collected for
investors monthly and for tax and insurance escrow balances. This remains a
recurring but relatively short-term source of funds for the Bank given the level
of loans serviced for others.
Metropolitan offers a commercial checking account that is noninterest
bearing and is assessed monthly service charges based upon transaction activity
levels.
Certificates of Deposit. Metropolitan offers fixed rate, fixed term
certificates of deposit. Terms are from seven days to five years, and there are
no regulatory rate ceilings. Certificates of deposit require a penalty for
withdrawal prior to maturity dates. These accounts generally bear the highest
interest rates of any deposit product offered by Metropolitan. Interest rates
offered on certificates of deposit are regularly reviewed and adjusted based on
cash flow projections and market interest rates.
Metropolitan has from time to time accepted certificates of deposit from
out-of-state 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, 1997,
approximately $57.7 million of certificates of deposits, or 12.1% of
Metropolitan's certificate of deposit accounts, were held by these individuals
and entities.
Individual Retirement Accounts ("IRA"). Metropolitan offers IRAs.
Funds may be invested in a passbook account or any certificate of deposit
offered by Metropolitan.
48
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The following table sets forth information regarding trends in
Metropolitan's average deposits for the periods indicated.
DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Average Percent of Rate Average Percent of Rate Average Percent of Rate
Amount Total Paid Amount Total Paid Amount Total Paid
------ ----- ---- ------ ----- ---- ------ ----- ----
Noninterest-bearing demand
deposits(1) $ 38,837 5.8% $ 31,248 5.5% $ 24,636 5.3%
Interest bearing deposits:
Demand deposits 39,965 5.9 2.66% 36,273 6.4 2.64% 37,695 8.1 2.57%
Savings deposits 170,362 25.2 4.56% 169,866 30.2 4.79% 118,475 25.5 4.76%
Time deposits 426,450 63.1 5.93% 325,960 57.9 5.83% 283,186 61.1 5.98%
-------- ------ ----- ------- ----- ----- -------- ----- -----
Total interest-bearing
deposits 636,777 94.2 5.36% 532,099 94.5 4.97% 439,356 94.7 5.07%
-------- ------ ------- ----- -------- -----
Total average deposits $675,614 100.0% $563,347 100.0% $463,992 100.0%
======== ====== ======== ===== ======== =====
- -------------------------
(1) Includes principal and interest custodial accounts and taxes and insurance
custodial accounts for loans serviced for FHLMC, FNMA and private investors.
Deposits increased 18.6% to $737.8 million at December 31, 1997 consistent with
the overall growth of the Bank. The growth was primarily in time deposits which
increased 27.3% to $478.0 million. During the same period, the Bank experienced
overall growth in other types of savings accounts.
The following table shows rate and maturity information for Metropolitan's
certificates of deposit as of December 31, 1997.
2.00-4.99% 5.00-6.99% 7.00-8.99% TOTAL PERCENT OF TOTAL
---------- ---------- ---------- ----- ----------------
(Dollars in thousands)
CERTIFICATE ACCOUNTS MATURING IN QUARTER ENDING:
March 31, 1998 $ 4,910 $105,548 $ 1,650 $112,108 23.5%
June 30, 1998 138 100,797 335 101,270 21.2
September 30, 1998 11 52,568 52,579 11.0
December 31, 1998 17 49,763 50 49,830 10.4
March 31, 1999 54 65,906 478 66,438 13.9
June 30, 1999 21 35,829 71 35,921 7.5
September 30, 1999 4,679 4,679 1.0
December 31, 1999 23,678 1,552 25,230 5.3
March 31, 2000 1,999 4,996 6,995 1.5
June 30, 2000 4,512 27 4,539 0.9
September 30, 2000 803 7,916 8,719 1.8
December 31, 2000 2,312 1,121 3,433 0.7
Thereafter 5,402 882 6,284 1.3
-------- -------- -------- -------- -----
Total $ 5,151 $453,796 $ 19,078 $478,025 100.0%
======== ======== ======== ======== =====
Percent of total 1.1% 94.9% 4.0% 100.0%
The following table sets forth the remaining maturity for time
deposits of $100,000 or more at the date indicated.
DECEMBER 31, 1997
----------------------
(Dollars in thousands)
Three months or less $18,142
Over three through six months 16,197
Over six through twelve months 18,210
Over twelve months 34,335
-------
Total $86,884
=======
In addition to deposits, Metropolitan relies on borrowed funds. The
following describes Metropolitan's current borrowings:
Note Offerings. In 1993 and early 1994, Metropolitan issued the 1993
Notes. The interest rate on the 1993 Notes is 10%, which is paid quarterly and
principal will be repaid when the 1993 Notes mature on December 31, 2001.
Metropolitan may redeem the 1993 Notes, in whole or in part, at any time by
paying the outstanding principal amount plus accrued interest and a prepayment
premium. The prepayment premium was 10% of the principal amount prepaid if such
prepayment was made during the first year following the issuance
49
56
of the 1993 Notes and the prepayment premium reduces 1% for each year the 1993
subordinated notes are outstanding. If the 1993 Notes are prepaid more than
seven years after issuance, the prepayment premium is 3%. The 1993 Notes may
also be repurchased in privately negotiated transactions. The 1993 Notes are
unsecured.
In December 1995, Metropolitan issued the 1995 Notes. The interest
rate on the notes is 9.625%, which is paid monthly and principal will be repaid
when the notes mature on January 1, 2005. The 1995 Notes are not redeemable, in
whole or in part, by Metropolitan prior to December 1, 1998. After December 1,
1998, the 1995 Notes may be redeemed by Metropolitan at a declining premium
which begins at 3% of the prepaid principal amount. After December 1, 2000, the
1995 Notes may be prepaid at par plus accrued interest. The 1995 Notes may also
be repurchased in privately negotiated or open market transactions. The 1995
Notes are also unsecured.
Line of Credit. In October 1996, the Corporation amended the
Huntington Loan Agreement. The Huntington Loan Agreement is a revolving line of
credit for the first 24 month period and then it converts to a 36 month term
note. The maximum permitted borrowing amount is $4.0 million. The terms of the
Huntington Loan Agreement require interest only payments for 24 months, then
quarterly principal payments based on a 60-month amortization with a balloon
payment due in May 2001. The interest rate during the first 24 months is tied to
LIBOR or Huntington National Bank prime at Metropolitan's option. After
conversion to a term loan in May 1998, the interest rate is prime. As collateral
for the Huntington Loan Agreement, Mr. Kaye, Chairman and Chief Executive
Officer of Metropolitan, has agreed to pledge a portion of his shares of Common
Stock of Metropolitan with a market value at least equal in value to 200% of any
outstanding balance. At December 31, 1997, the outstanding balance under the
Huntington Loan Agreement was $1.5 million.
FHLB Advances. The FHLB makes funds available for housing finance to
eligible financial institutions like Metropolitan. The FHLB generally limits
advances to 25% of assets with a total borrowing limit of 40% of assets from all
borrowing sources. Advances are collateralized by any combination of the
following assets and collateralization rates: one- to four-family first mortgage
loans, not past due greater than 90 days, pledged on a blanket basis at 150% of
the advance amount, specifically identified mortgage loans at 125% of the
advance amount and various types of investment and mortgage-backed securities at
rates ranging from 101-110% of the advance amount. FHLB stock owned by the Bank
is pledged as additional collateral but is not available as primary collateral.
The aggregate balance of assets pledged as collateral for FHLB advances at
December 31, 1997 was $147.0 million.
Reverse Repurchase Agreements. From time to time the Bank borrows
funds by using its investment or mortgage-backed securities to issue reverse
repurchase agreements. This type of borrowing provides an alternative source of
funds to FHLB borrowings and at times, more favorable rates. The aggregate
balance of mortgage-backed securities pledged as collateral for reverse
repurchase agreements at December 31, 1997 was $77.8 million.
The following table sets forth the maximum month-end balance of
borrowings during the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
----------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
MAXIMUM MONTH-END BALANCE:
FHLB advances $73,700 $75,150 $51,000
Term Loan 3,240
Qualifying Subordinated Debt 1,200
1993 subordinated notes 4,874 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 4,000 5,000
Reverse repurchase agreements 74,496 23,500 9,000
50
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The following table sets forth the average balance during the periods
indicated, end of period balances at the date indicated, and interest rates
during the period then ended.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
----------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
AVERAGE BALANCE:
FHLB advances $59,325 $50,546 $28,467
Term Loan 485
Qualifying Subordinated Debt 923
1993 subordinated notes 4,874 4,874 4,874
1995 subordinated notes 14,000 14,000 690
Line of credit 114 3,834
Reverse repurchase agreements 38,843 4,480 7,591
ENDING BALANCE:
FHLB advances $41,000 $59,500 $28,000
Term loan
Qualifying subordinated debt
1993 subordinated notes 4,874 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 1,500
Reverse repurchase agreements 74,496 23,500
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances 5.65% 5.43% 6.18%
Term Loan 8.79
Qualifying Subordinated Debt 11.78
1993 subordinated notes 10.47 10.47 10.47
1995 subordinated notes 10.48 10.48 10.48
Line of credit 8.98 8.67
Reverse repurchase agreements 5.73 5.61 6.10
COMPETITION
Metropolitan faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other savings institutions, commercial banks,
mortgage companies, credit unions, finance companies and insurance companies.
The Bank competes for loans principally on the basis of the interest rates and
loan fees it charges, the type of loans it originates and the quality of
services it provides to borrowers. Some of the Bank's competitors, however, have
higher lending limits and substantially greater financial resources than the
Bank.
The Bank attracts its deposits through its retail sales offices,
primarily from the communities in which those retail sales offices are located;
therefore, competition for those deposits is principally from other savings
institutions, commercial banks, credit unions, mutual funds and brokerage
companies located in the same communities. The Bank competes for these deposits
by offering a variety of deposit accounts at competitive rates, convenient
business hours, and convenient branch locations.
EMPLOYEES
At December 31, 1997, Metropolitan had a total of 281 employees,
including part-time employees. The Corporation's employees are not represented
by any collective bargaining group. Management considers its employee relations
to be excellent.
REGULATION AND SUPERVISION
INTRODUCTION
Metropolitan is registered as a savings and loan holding company within
the meaning of the Home Owners' Loan Act (the "HOLA"). As a savings and loan
holding company, Metropolitan is subject to the regulations, examination,
supervision, and reporting requirements of the OTS. The Bank, an Ohio-chartered
savings and loan association, is a member of the FHLB System, and its deposits
are insured by the FDIC through the SAIF. The Bank is subject to examination and
regulation by the OTS, the FDIC and the Ohio
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Superintendent of Savings and Loan Associations and to regulations regarding
such matters as capital standards, mergers, establishment of branch offices,
subsidiary investments and activities, and general investment authority. Such
examination and regulation is intended primarily for the protection of
depositors.
The descriptions of the statutes and regulation which are applicable to
Metropolitan and the Bank and the effects thereof which are set forth below and
elsewhere in this document do not purport to be a complete description of such
statutes and regulations and their effects on Metropolitan or the Bank or to
identify every statute and regulation that may apply to Metropolitan or the
Bank.
METROPOLITAN
As a savings and loan holding company, Metropolitan is subject to
certain restrictions with respect to its activities and investments. Among other
things, Metropolitan is generally prohibited, either directly or indirectly,
from acquiring control of any other savings association or savings and loan
holding company, without prior approval of the OTS, and from acquiring more than
5% of the voting stock of any savings association or savings and loan holding
company which is not a subsidiary of Metropolitan.
Similarly, OTS approval must be obtained prior to any person's
acquiring control of the Bank or Metropolitan. Control is conclusively presumed
to exist if, among other things, a person acquires more than 25% of any class of
voting stock of the institution or holding company or controls in any manner the
election of a majority of the directors of the institution or the holding
company. Control is rebuttably presumed to exist if, among other things, a
person acquires more than 10% of any class of voting stock (or 25% of any class
of stock) and is subject to any certain specified "control factors."
THE BANK
General. The OTS also has enforcement authority over all savings
associations. This enforcement authority includes the ability to impose
penalties for and to seek correction of violations of laws and regulations and
unsafe or unsound practices by assessing civil money penalties, issuing cease
and desist or removal and prohibition orders against an institution, its
directors, officers or employees and other persons, or initiating injunctive
actions.
As a lender and a financial institution, the Bank is subject to various
regulations promulgated by the Federal Reserve Board including, without
limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves),
Regulation E (Electronic Fund Transfers), Regulation F (Interbank Liabilities),
Regulation Z (Truth in Lending), Regulation CC (Availability of Funds), and
Regulation DD (Truth in Savings). As lenders of loans secured by real property,
and as owners of real property, financial institutions, including the Bank, are
subject to compliance with various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of the property.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.
Under the FDIC risk-based deposit insurance assessment system, all
insured depository institutions are placed into one of nine categories and
assessed insurance premiums based upon their level of capital and supervisory
evaluation. Under the system, institutions classified as well-capitalized and
requiring little supervision would pay the lowest premium while institutions
that are classified as undercapitalized and considered of substantial
supervisory concern would pay the highest premium. Risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment period.
With respect to the SAIF, the FDIC is authorized to increase assessment
rates, on a semi-annual basis, if it determines that the reserve ratio of the
SAIF will be less than the designated reserve ratio of 1.25% of SAIF-insured
deposits. In setting these increased assessments, the FDIC must seek to restore
the reserve ratio to that designated reserve level, or such higher reserve ratio
as established by the FDIC. In addition, the FDIC may impose special assessments
on SAIF members to repay amounts borrowed from the United States Treasury or for
any other reason deemed necessary by the FDIC.
Similarly, with respect to deposits which are insured by the BIF, the
FDIC is authorized to adjust the insurance premium rates in order to maintain
the reserve ratio of the BIF at 1.25% of BIF-insured deposits. In setting the
BIF assessment rates, the FDIC must maintain the reserve ratio at that
designated reserve level, or such higher reserve ratio as established by the
FDIC. BIF and SAIF assessment rates, however, have not remained comparable.
During fiscal 1996, BIF members generally paid lower premiums than SAIF
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insured institutions, placing SAIF-insured institutions whose deposits are
exclusively or primarily SAIF-insured at a competitive disadvantage.
As a result of this disparity in insurance premium rates, on September
30, 1996 the President signed into law the Omnibus Bill which included
provisions designed to recapitalize the SAIF and to mitigate the BIF/SAIF
premium disparity. The Omnibus Bill required the FDIC to impose a special
assessment on SAIF-insured deposits held by institutions as of March 31, 1995 in
order that the SAIF achieve the designated reserve ratio. Accordingly, the FDIC
assessed and the Bank paid a $2.9 million special assessment from working
capital of the Bank.
Now that the SAIF has reached it required reserve ratio following the
one-time assessment, the FDIC has reduced the annual assessment rates for
SAIF-insured institutions. Effective January 1, 1997, the SAIF assessment rates
are identical to those for BIF-insured institutions.
The Omnibus Bill also requires the repayment of Financing Corporation
("FICO") bonds to be shared by both SAIF- and BIF-insured institutions. Prior to
the enactment of this legislation, only a portion of the SAIF assessment was
used to repay the $780 million in annual FICO interest payments. However, as of
January 1, 1997, BIF institutions are required to pay a portion of the FICO
interest payments, as well. For the first three years, the BIF assessment rates
for FICO payments are 20% of those for SAIF institutions. Thus, SAIF
institutions, such as the Bank, will continue to be subject to a greater burden
than BIF institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are 6.44 basis points on SAIF
deposits and 1.29 basis points on BIF deposits. However, after January 1, 2000,
assessments on BIF-insured institutions will be made on the same basis as
SAIF-insured institutions. It is estimated that the payments of such assessments
will be 2.43 basis points on deposits. It is important to note that these
assessments are only for FICO interest payments and that further premiums could
be assessed in order to maintain the BIF and SAIF funds at the required 1.25%
reserve ratio.
In addition, the Omnibus Bill requires the merger of the BIF and SAIF
into a single insurance fund no later than January 1, 1999 if there are no
savings associations at that date. In connection with the merger of the BIF and
the SAIF, SAIF-insured institutions could be forced to convert to state bank
charters or national bank charters. If such a proposal became law, the
Corporation would become a bank holding company and be subject to regulation by
the Federal Reserve Board, which imposes capital requirements on bank holding
companies. The Corporation is not currently subject to capital requirements.
Regulatory Capital Requirements. The capital regulations of the OTS
issued thereunder (the "Capital Regulations") establish a "leverage limit," a
"tangible capital requirement" and a "risk-based capital requirement." In
addition, the OTS may establish, on a case by case basis, individual minimum
capital requirements for a savings association which vary from the requirements
that would otherwise apply under the Capital Regulations. The OTS has not
established such individual minimum capital requirements for the Bank.
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 leverage limit currently requires a savings association to maintain
"core capital" of not less than 3% of adjusted total assets. The OTS has taken
the position, however, that the prompt corrective action regulatory scheme
(See"-Prompt Corrective Action") has effectively raised the leverage ratio
requirement for all but the most highly-rated institutions to 4% since an
institution is "undercapitalized" for such purpose if, among other things, its
leverage ratio is less than 4% (3% for MACRO 1 rated institutions).
The tangible capital requirement requires a savings association to
maintain "tangible capital" in an amount not less than 1.5% of adjusted total
assets.
The risk-based capital requirement generally provides that a savings
association must maintain total capital in an amount at least equal to 8.0% of
its risk-weighted assets. The risk-based capital regulations are similar to
those applicable to national banks. The regulations assign each asset and
certain off-balance sheet assets held by a savings association to one of four
risk-weighting categories, based upon the degree of credit risk associated with
the particular type of asset.
Savings associations are required to incorporate interest rate risk in
their capital calculations for determining compliance with capital requirements.
Interest rate risk is measured by the decline in "net portfolio value" that
would result from a hypothetical 200 basis point increase or decrease in market
interest rates, whichever is lower, divided by the estimated economic value of
assets. An institution whose measured interest rate exposure exceeds 2% must
deduct an amount equal to one-half of the difference between its measured
interest
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rate risk and 2%, multiplied by the estimated economic value of its total
assets, from total capital in determining whether it meets its riskbased capital
requirement.
Banking regulators continue to indicate their desire to raise capital
requirements applicable to financial institutions beyond their current levels.
No prediction can be made as to whether and when higher capital requirements
would be imposed and, if so, to what levels and on what schedule.
Each bank regulatory agency and the OTS review each of their capital
standards every two years to determine whether those standards require
sufficient capital to facilitate prompt corrective action to prevent or minimize
loss to the deposit insurance funds. Each bank regulatory agency and the OTS
revise each of their risk-based capital standards to ensure that those standards
take adequate account of interest rate risk, concentration of credit risk and
the risk of non-traditional activities.
At December 31, 1997, the Bank complied with each of the tangible
capital, the core capital and the risk-based capital requirements. The following
table presents the Bank's regulatory capital position at December 31, 1997.
PERCENT OF
AMOUNT REGULATORY ASSETS(1)
------ --------------------
(Dollars in thousands)
Tangible capital $49,901 5.43%
Tangible capital requirement 13,777 1.50
------- ----
Excess $36,124 3.93%
======= ====
Core capital $50,215 5.47%
Core capital requirement(2) 36,738 4.00
------- ----
Excess $13,477 1.47%
======= ====
Risk-based capital $54,343 8.39%
Risk-based capital requirement 51,836 8.00
------- ----
Excess $ 2,507 0.39%
======= ====
<FN>
- -------------------------
(1) Represents the percentage of adjusted total assets for tangible and core
capital purposes and the percentage of risk-weighted assets for
risk-based capital purposes.
(2) The "prompt corrective action" regulatory scheme (See "-Prompt
Corrective Action") has effectively raised the leverage requirement to
4% for all but the most highly-rated institutions since an institution
is considered "undercapitalized" for such purposes if, among other
things, it has a leverage ratio of under 4% (3% for MACRO 1 rated
institutions).
Prompt Corrective Action. Banks and savings associations are
classified into one of five categories based upon capital adequacy, ranging from
"well-capitalized" to "critically undercapitalized" and require (subject to
certain exceptions) the appropriate federal banking agency to take prompt
corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
The federal banking agencies have issued a joint rule for this purpose
under which, in general, an institution is: "well capitalized" if it has total
risk-based capital of 10% or greater, Tier 1 risk-based capital of 6% or
greater, leverage ratio of 5% or greater, and is not subject to an order or
other supervisory directive to meet and maintain a specific capital level for
any capital measure; "adequately capitalized" if it has total risk-based capital
of 8% or greater, Tier 1 risk-based capital of 4% or greater, and leverage ratio
of 4% or greater (3% or greater if rated Composite 1 under the MACRO rating
system); "undercapitalized" if it has total risk-based capital of less than 8%,
Tier 1 risk-based capital of less than 4%, or a leverage ratio of less than 4%
(3% if rated Composite 1 under the MACRO rating system); "significantly
undercapitalized" if it has total risk-based capital of less than 6%, Tier 1
risk-based capital of less than 3%, or a leverage ratio of less than 3%; and
"critically undercapitalized" if it has a ratio of tangible equity to total
assets equal to or less than 2%. Based on these requirements, the Bank is an
"adequately capitalized" institution.
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-thansatisfactory rating for any of the
categories of asset quality, management, earnings or liquidity in its most
recent examination. As a result of such reclassification 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.
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Restrictions on Dividends and Other Capital Distributions. Savings
association subsidiaries of holding companies generally are required to provide
their OTS Regional Director not less than thirty days' advance notice of any
proposed declaration of a dividend on the association's stock. Any dividend
declared within the notice period, or without giving the prescribed notice, is
invalid.
OTS regulations impose limitations upon certain "capital
distributions" by savings associations, including cash dividends, payments to
repurchase or otherwise acquire an association's shares, payments to
shareholders of another institution in a cash-out merger and other distributions
charged against capital. The regulation establishes a three-tiered system of
regulation, with the greatest flexibility being afforded to well-capitalized
associations. The OTS retains discretion to treat a Tier 1 Institution as a Tier
2 or Tier 3 Institution if the OTS determines that the institution is in need of
more than normal supervision and has provided the institution with notice to
that effect.
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the higher
of: (i) 100% of its net income to date during the calendar year plus the amount
that would reduce the association's "surplus capital ratio" (the excess over its
fully phased-in capital requirement) to one-half of its surplus capital ratio at
the beginning of the calendar year or (ii) 75% of its net income over the most
recent four-quarter period. Any additional capital distributions would require
prior regulatory non-objection. A Tier 2 Institution may, after prior notice but
without the approval of the OTS, make capital distributions in accordance with
the following schedule: if the association's capital satisfies the risk-based
capital standard applicable to the association as of January 1, 1993, the
association may make distributions up to 75% of its net income over the most
recent four-quarter period, and, if the association's capital satisfies the
risk-based capital standard applicable as of January 1, 1991, it may make
distributions up to 50% of its net income over the most recent four-quarter
period. A Tier 3 Institution is not authorized under the regulation to make any
capital distributions unless it receives prior written approval from the OTS or
in accordance with the express terms of an approved capital plan.
The OTS retains the authority to prohibit any capital distribution
otherwise authorized under the regulation if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulation also
states that the capital distribution limitations apply to direct and indirect
distributions to affiliates, including those occurring in connection with
corporate reorganizations.
Under the "prompt corrective action" provisions ( See "--Prompt
Corrective Action"), an FDIC-insured institution may not make a "capital
distribution" (which includes, among other things, cash dividends and stock
purchases) if, after making the distribution, the institution would be
"undercapitalized" for such purposes.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. In their current form, the proposed
regulations would not apply to the Bank as it is owned by a holding company.
Under the proposal, a savings association may make a capital distribution
without notice to the OTS provided that it has a MACRO 1 or 2 rating, is not in
troubled condition, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. A savings
association will be considered in troubled condition if it has a MACRO rating of
4 or 5, is subject to an enforcement action relating to its safety and soundness
or financial viability, or has been informed in writing by the OTS that it is in
troubled condition. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
Liquidity. Federal regulations currently require savings associations
to maintain, for each calendar month, an average daily balance of liquid assets
(including cash, certain time deposits, bankers' acceptances, and specified
United States Government, state or federal agency obligations) equal to at least
4% of the ending or average daily balance of deposit accounts with maturities
less than a year plus short-term borrowings during the preceding calendar month.
This liquidity requirement may be changed from time to time by the OTS to an
amount within a range of 4% to 10% of such accounts and borrowings depending
upon economic conditions and the deposit flows of savings associations. Monetary
penalties may be imposed for failure to meet liquidity ratio requirements. At
December 31, 1997, the liquidity ratio of the Bank was 14.6%, which exceeded the
applicable requirement.
Qualified Thrift Lender Test. Pursuant to the Qualified Thrift Lender
("QTL") test, a savings institution must invest at least 65% of its portfolio
assets in "qualified thrift investments" on a monthly average basis on a rolling
12-month "look-back" basis. Portfolio assets are an institution's total assets
less goodwill and other intangible assets, the institution's business property,
and a limited amount of the institution's liquid assets.
A savings association's failure to remain a QTL may result in: (i)
limitations on new investments and activities; (ii) imposition of branching
restrictions; (iii) loss of FHLB borrowing privileges; and (iv) limitations on
the payment of dividends. If a savings institution that is a subsidiary of a
savings and loan holding company fails to regain QTL status within one year of
its loss of such status, the holding
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company must register as and will be deemed to be a bank holding company subject
to, among other things, the business activity restrictions and capital
regulations of the Bank Holding Company Act.
The Bank's qualified thrift investments were in excess of 69.2% of its
portfolio assets as of December 31, 1997.
Ohio Regulation. As a savings and loan association organized under the
laws of the State of Ohio, the Bank is subject to regulation by the Ohio
Division of Financial Institutions (the "Division"). Regulation by the Division
affects the Bank's internal organization as well as its savings, mortgage
lending, and other investment activities. Periodic examinations by the Division
are usually conducted on a joint basis with the OTS. Ohio law requires that the
Bank maintain federal deposit insurance as a condition of doing business.
Under Ohio law and regulations, an Ohio association may invest in
loans and interests in loans, secured or unsecured, of any type or amount for
any purpose, subject to certain requirements including but not limited to: loans
secured by liens on income-producing real estate may not exceed 20% of an
association's assets; all loans for educational purposes may not exceed 5% of an
association's assets; consumer loans, commercial paper and corporate debt
securities may not exceed 20% of an association's assets; and loans for
commercial, corporate, business or agricultural purposes may not exceed 10% of
an association's assets (subject to certain exceptions). In addition, no
association may make loans for the acquisition and development of undeveloped or
partially developed land for primarily residential use to one borrower in excess
of 2% of assets of the association. The total investment in commercial paper or
corporate debt of any issuer cannot exceed 1% of an association's assets, with
certain exceptions.
Ohio law authorizes Ohio-chartered associations to, among other
things: (i) invest up to 15% of assets in the capital stock, obligations and
other securities of service corporations organized under the laws of Ohio, and
an additional 20% of net worth may be invested in loans to majority owned
service corporations; (ii) invest up to 10% of assets in corporate equity
securities, bonds, debentures, notes, or other evidence of indebtedness; (iii)
exceed limits otherwise applicable to certain types of investments (other than
investments in service corporations) by between 3% and 10% of assets, depending
upon the level of the institution's permanent stock, general reserves, surplus
and undivided profits; and (iv) invest up to 15% of assets in any loans or
investments not otherwise specifically authorized or prohibited, subject to
authorization by the institution's board of directors.
An Ohio association may invest in such real property or interests
therein as its board of directors deems necessary or convenient for the conduct
of the business of the association, but the amount so invested may not exceed
the net worth of the association at the time the investment is made.
Additionally, an association may invest an amount equal to 10% of its assets in
any other real estate. This limitation does not apply, however, to real estate
acquired by foreclosure, conveyance in lieu of foreclosure or other legal
proceedings in relation to loan security interests.
Notwithstanding the above powers authorized under Ohio law and
regulation, a state-chartered savings association, such as the Bank, is subject
to certain limitations on its permitted activities and investments under federal
law which may restrict the ability of an Ohio-chartered association to engage in
activities and make investments otherwise authorized under Ohio law.
Ohio has adopted a statutory limitation on the acquisition of control
of an Ohio savings and loan association which requires the written approval of
the Division prior to the acquisition by any person or entity of a controlling
interest in an Ohio association. Control exists, for purposes of Ohio law, when
any person or entity, either directly or indirectly, or acting in concert with
one or more other persons or entities, owns, controls, holds with power to vote,
or holds proxies representing, 15% or more of the voting shares or rights of an
association, or controls in any manner the election or appointment of a majority
of the directors.
Under certain circumstances, interstate mergers and acquisitions
involving associations incorporated under Ohio law are permitted by Ohio law. A
savings and loan association or savings and loan holding company with its
principal place of business in another state may acquire a savings and loan
association or savings and loans holding company incorporated under Ohio law if
laws of such other state permit an Ohio savings and loan association or an Ohio
holding company reciprocal rights.
Ohio law requires prior written approval of the Ohio Superintendent of
a merger of an Ohio association with another savings and loan association or a
holding company affiliate.
Federal and State Taxation
The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Corporation or the Bank.
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
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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 debt 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 be required to compute their deduction based
on specific charge offs during the taxable year or, if the savings association
or its control group had assets of not more than $500 million, based on actual
loss experience over a period of years. 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. A savings association (or
its controlled group) with assets of not more than $500 million are required to
recapture their bad debt tax reserve to the extent it exceeds the greater of (i)
the applicable bad debt tax reserve as of the close of the last taxable year
beginning before January 1, 1988, or (ii) what the savings association's
applicable bad debt tax reserve would have been at the close of its last taxable
year beginning before January 1, 1996 under the experience method. The recapture
may be suspended for up to two years if, during those years, the savings
association satisfies a residential loan requirement.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt reserve
deductions ratable over a multi-year period. Among other things, the qualifying
thrift definitional tests required the Bank to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations of
the United States or any agency or instrumentality thereof, certain obligations
of a state or political subdivision thereof, loan secured by interests in
improved residential real property or by savings accounts, student loans and
property used by the Bank in the conduct of its banking business. Under current
law, a savings association will not be required to recapture its pre-1988 bad
debt reserves if it ceases to meet the qualifying thrift definitional tests.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to an alternative minimum
tax. An alternative minimum tax is imposed at a tax rate of 20% on alternative
minimum taxable income ("AMTI"), which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. Adjustments and preferences include depreciation deductions
in excess of those allowable for alternative minimum tax purposes, tax-exempt
interest on most private activity bonds issued after August 7, 1986 (reduced by
any related interest expense disallowed for regular tax purposes), and, for 1990
and succeeding years, 75% of the excess of adjusted current earnings ("ACE")
over AMTI. ACE equals pre-adjustment AMTI (i) increased or decreased by certain
ACE adjustments, which include tax-exempt interest on municipal bonds,
depreciation deductions in excess of those allowable for ACE purposes and, in
certain cases, the dividend received deduction, and (ii) determined without
regard to the ACE adjustment and the alternative tax net operating loss. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax, and alternative tax net operating losses can offset no more
than 90% of AMTI. The payment of alternative minimum tax will give rise to a
minimum tax credit which will be available with an indefinite carry forward
period to reduce federal income taxes in future years (but not below the level
of alternative minimum tax arising in each of the carry forward years). For
taxable years beginning after 1986 and before 1996, corporations, including
savings associations such as the Bank, are also subject to an environmental tax
equal to 0.12% of the excess of AMTI for the taxable year (determined without
regard to alternative tax net operating losses and the deduction for the
environmental tax) over $2 million.
Metropolitan, the Bank and other includable subsidiaries file
consolidated federal income tax returns on a December 31 calendar year basis
using the accrual method of accounting. Metropolitan, the Bank and other
includable subsidiaries have been audited by the Internal Revenue Service
through December 31, 1994.
The Bank is subject to the Ohio corporate franchise tax. As a
financial institution, the Bank computes its franchise tax based on its net
worth. Under this method, the Bank will compute its Ohio corporate franchise tax
by multiplying its net worth (as determined under generally accepted accounting
principles) as specifically adjusted pursuant to Ohio law, by the applicable tax
rate, which is currently 1.5% and will drop to 1.4% for 1999 and 1.3% for 2000
and thereafter. As an Ohio-chartered savings and loan association, the Bank also
receives a credit against the franchise tax for a portion of the state
supervisory fees paid by it.
The Corporation is subject to an Ohio corporation franchise tax
payable in an amount equal to the greater of a specified percentage of net
income (currently 5.1% of the first $50,000 and 8.9% of the remainder (8.5% for
1999 and thereafter), with an additional add-on tax not to exceed $5,000) or a
specified percentage of net worth (currently approximately 0.6% (0.4% for 1999
and thereafter with a $150,000 cap), plus an add-on tax not to exceed $5,000).
In calculating net income for this purpose, dividends from wholly-owned
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subsidiaries, such as the Bank, would be excluded. In addition, in calculating
net worth, the Corporation's investment in the Bank would be excluded for this
purpose. Beginning with the 1999 tax year, the Corporation may be exempt from
the franchise tax as computed on the net worth basis as a qualified holding
company.
MANAGEMENT
The following table sets forth the names of and certain information,
including any positions held with the Bank, with respect to the director
nominees for election at the Corporation's 1998 Annual Meeting and the
directors.
FOR TERM
DIRECTOR TO POSITIONS CURRENTLY HELD WITH
NOMINEES FOR DIRECTOR AGE SINCE EXPIRE METROPOLITAN AND THE BANK
- --------------------- --- -------- -------- --------------------------------
Ralph D. Ketchum 71 1991 2001 Director of Metropolitan and the
Bank
James A. Karman 60 1992 2001 Director of Metropolitan and the
Bank
Robert R. Broadbent 76 1992 2001 Director of Metropolitan and the
Bank
Marjorie M. Carlson 57 1994 2001 Director of Metropolitan and the
Bank
DIRECTOR TERM POSITIONS CURRENTLY HELD WITH
CONTINUING DIRECTORS AGE SINCE EXPIRING METROPOLITAN AND THE BANK
- --------------------- --- -------- -------- --------------------------------
Robert M. Kaye 61 1987 1999 Chairman of Metropolitan and
Chairman of the Bank
David G. Lodge 58 1991 1999 President, Assistant Secretary,
Assistant Treasurer and Director of
Metropolitan and President and
Director of the Bank
Malvin E. Bank 67 1991 1999 Secretary, Assistant Treasurer and
Director of Metropolitan and
Secretary and Director of the Bank
David P. Miller 65 1992 1999 Treasurer, Assistant Secretary and
Director of Metropolitan and
Director of the Bank
Lois K. Goodman 64 1994 2000 Director of Metropolitan and the
Bank
Marguerite B. Humphrey 56 1994 2000 Director of Metropolitan and the
Bank
Alfonse M. Mattia 56 1996 2000 Director of Metropolitan and the
Bank
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During the past five years, the business experience of each of the
director nominees, directors and executive officers has been as follows:
NOMINEES
Mr. Ketchum has served as a Director of Metropolitan and the Bank
since 1991. Since 1987, Mr. Ketchum has been President of RDK Capital Inc., a
general partner in a partnership formed for the purposes of acquiring and
managing companies serving the aircraft industry. Prior thereto, he was a Senior
Vice President and Group Executive for the General Electric Company, Lighting
Group. Mr. Ketchum is also a member of the Board of Directors of Oglebay Norton
Company, Thomas Industries, Pacific Scientific and Lithium Technologies Corp.
Mr. Karman has served as a Director of Metropolitan and the Bank since
1992. Mr. Karman has been affiliated with RPM, Inc. since 1963, and in 1978 he
became President of RPM, Inc., a manufacturer of protective coatings, sealants
and specialty chemicals. Mr. Karman serves as a member of the Board of Directors
of RPM, Inc., McDonald & Company Investments, Inc., A. Schulman, Inc. and Shiloh
Industries, Inc. Mr. Karman also serves as a member of the Board of Trustees of
the Musical Arts Association, the Boys & Girls Club of Cleveland, Hiram College
and Boys Hope, and is a member of the Corporate Council, Cleveland Museum of
Art.
Mr. Broadbent has served as a Director of Metropolitan and the Bank
since 1992. From 1984 to 1989, Mr. Broadbent served as Chairman and Chief
Executive Officer of The Higbee Company, a Cleveland-based clothing and
housewares retailer. Mr. Broadbent served as the Chairman of the Rock and Roll
Hall of Fame Museum, Inc. until May 1994 and is now on the advisory board. Mr.
Broadbent also serves as a Director of PICO Holding, Inc., as well as a Trustee
of the Murphy Foundation.
Ms. Carlson has served as a Director of Metropolitan and the Bank
since 1994. She also is the Director of Development for the Cleveland
Foundation. Ms. Carlson is a member of the Board of Trustees of the College of
Wooster, the Musical Arts Association, the Playhouse Square Foundation, and is a
Director of the National Committee on Planned Giving.
CONTINUING DIRECTORS
Mr. Kaye has served as Chairman and Chief Executive Officer of
Metropolitan and the Bank since 1987. He has also served as President of Planned
Residential Communities, Inc. since 1960. Planned Residential Communities, Inc.
is actively engaged in every aspect of multifamily housing from new construction
and rehabilitation to acquisition and management. Mr. Kaye serves as a member of
the Board of Directors of Community Bank of New Jersey. He has also been a
member of the Corporate Council of the Cleveland Museum of Art since its
inception in 1993 and has been a member of the Board of Trustees of the College
of New Jersey since 1980 and of The Peddie School since 1988.
Mr. Lodge joined Metropolitan in December 1988 as Executive Vice
President. He has served as President of Metropolitan and the Bank since August
1991. Mr. Lodge has also served as Director of Metropolitan and the Bank since
1991 and as Assistant Secretary and Assistant Treasurer of Metropolitan since
1992. Mr. Lodge has served as a Director of University Circle Incorporated and
Vocational Guidance Services since 1994 and became a member of the Board of
Trustees of The Cleveland Playhouse in June 1995.
Mr. Bank has served as a Director and as Secretary of Metropolitan and
the Bank since 1991. Mr. Bank also serves as Assistant Treasurer of
Metropolitan. Mr. Bank is a senior partner with the Cleveland law firm of
Thompson Hine & Flory LLP. Mr. Bank also serves as a Director of Oglebay Norton
Company. Mr. Bank also serves as a Trustee of Case Western Reserve University,
Chagrin River Land Conservancy, Cleveland Center for Research in Child
Development and numerous foundations.
Mr. Miller has served as a Director of Metropolitan and the Bank since
1992. Mr. Miller also serves as Treasurer and Assistant Secretary of
Metropolitan. Since 1986, Mr. Miller has been the Chairman and Chief Executive
Officer of Columbia National Group, Inc., a Cleveland-based scrap and waste
materials wholesaler and steel manufacturer. He is currently commissioner of the
Ohio Lottery.
Ms. Goodman has served as a Director of Metropolitan and the Bank
since 1994. Since 1990, she has been President of the Work & Family Consulting
Group, Inc., a consulting service for employers on managing working families.
Ms. Goodman is also a member of the Board of Trustees for the Cleveland Opera,
the Jewish Community Federation, Starting Point and Eldred Theater.
Ms. Humphrey has served as a Director of Metropolitan and the Bank
since 1994. Ms. Humphrey developed and implemented workshops for trustee
education for the Cultural Arts Trustee Forum at the Cleveland Mandel Center
from 1992 to 1995. She is a trustee for the American Symphony Orchestra League,
the Cleveland Institute of Music, the Musical Arts Association, Rainbow Babies
and Children's Hospital and the Cleveland Zoological Society.
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Mr. Mattia has served as a consultant to the Bank since 1987 and as a
Director of Metropolitan and the Bank since 1996. Mr. Mattia is a CPA and a
founding partner of Amper, Politziner & Mattia, a New Jersey-based accounting
and consulting firm. Mr. Mattia serves on the Assurance Services Executive
Committee of the AICPA and is co-Chairman of the Rutgers University Family
Business Forum.
EXECUTIVE OFFICER WHO IS NOT A DIRECTOR
Patrick W. Bevack, 51, has been Executive Vice President of the Bank
since May 1992. Mr. Bevack became Treasurer and Assistant Secretary of the Bank
in 1993. Prior to joining Metropolitan, Mr. Bevack was Executive Vice President
of TransOhio Savings Bank.
DIRECTOR COMPENSATION
For their services as directors, each member of the Board of Directors
of the Bank who is not an employee of Metropolitan or the Bank receives a
monthly consulting fee of $1,000. The Chairman of the Board of the Bank and all
other members of the Board of the Bank, who are not employees of Metropolitan or
the Bank, receive a $500 attendance fee for each meeting of the Board attended.
Members of the Board of Directors of Metropolitan receive no fees for their
services as such.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Organization Committee of Metropolitan's Board of
Directors consists of Messrs. Ketchum (Chair), Kaye, Bank, and Karman.
Mr. Kaye, the Chairman of the Board, is the sole shareholder of
Planned Residential Communities, Inc. which receives a $96,000 annual fee for
employee benefit related services and multifamily property consulting services
provided to Metropolitan.
The law firm of Thompson Hine & Flory LLP, of which Malvin E. Bank is
a partner, provided legal services to Metropolitan in 1997 and during the
current fiscal year.
Several of the directors and executive officers of Metropolitan
purchased subordinated notes from Metropolitan during the Corporation's private
offering of the 1993 Notes. These purchases were made on the same terms and at
the same prices offered to unaffiliated investors. Mr. Kaye holds $515,000
principal amount of 1993 Notes and Mr. Ketchum holds $200,000 principal amount
of 1993 Notes.
CERTAIN TRANSACTIONS
The accounting firm of Amper, Politziner & Mattia, of which Alfonse M.
Mattia is a partner, provided tax services to Metropolitan in 1997 and during
the current fiscal year.
As noted above, several of the directors and executive officers of
Metropolitan purchased 1993 Notes from Metropolitan during the private offering
of the 1993 Notes. These purchases were made on the same terms and at the same
prices offered to unaffiliated investors. Mr. Miller holds $200,000 principal
amount of 1993 Notes. In addition, the Metropolitan Savings Bank of Cleveland
401(k) Plan and the Planned Residential Communities Management Co. Inc. and
Affiliates 401(k) Plan jointly own $400,000 principal amount of 1993 Notes. The
Amper, Politziner & Mattia Profit Sharing Trust, of which Alfonse M. Mattia is a
trustee, holds $200,000 principal amount of 1993 Notes.
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 collectability or present other
unfavorable terms.
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SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 2, 1998, information
concerning Common Shares beneficially owned by current directors of and nominees
for director of Metropolitan, executive officers included in the Summary
Compensation Table, and all directors, nominees for director and executive
officers of Metropolitan and the Bank as a group. Except as otherwise noted,
each beneficial owner listed has sole investment and voting power with respect
to the Common Shares indicated.
AMOUNT AND NATURE OF
NAME OF INDIVIDUAL OR PERSONS IN GROUP BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
---------------------------------------- -------------------------- -----------------------
Robert M. Kaye 5,467,270 (2) 77.5%
David G. Lodge 22,700 (3) *
Malvin E. Bank 15,000 *
David P. Miller 30,000 *
Ralph D. Ketchum 27,000 (4) *
James A. Karman 5,000 *
Robert R. Broadbent 30,000 (5) *
Marjorie M. Carlson 15,000 *
Lois K. Goodman 15,000 (6) *
Marguerite B. Humphrey 10,000 *
Alfonse M. Mattia 60,000 (7) *
Patrick W. Bevack 8,000 *
All directors and executive officers as a group
(12 persons) 5,704,970 80.9%
<FN>
- -------------------------
(1) The Common Shares indicated reflect the Corporation's completion, on
December 10, 1997, of a two-for-one split in the form of a stock
dividend to shareholders of record as of November 24, 1997.
(2) Total includes 6,000 Common Shares held by Mr. Kaye as trustee.
(3) Total includes 2,100 Common Shares held by Mr. Lodge as custodian for
his children and 1,600 Common Shares held by Mr.
Lodge's spouse, as to which Mr. Lodge disclaims beneficial ownership.
(4) Total includes 7,000 Common Shares held by Mr. Ketchum's spouse, as to
which Mr. Ketchum disclaims beneficial ownership.
(5) Total includes 5,500 Common Shares held by the Broadbent Family
Foundation, of which Mr. Broadbent is Chair.
(6) Total includes 8,000 Common Shares held by Ms. Goodman's spouse, as to
which Ms. Goodman disclaims beneficial ownership.
(7) Total includes 31,400 Common Shares held by Mr. Mattia as trustee, and
1,000 Common Shares held by Mr. Mattia's spouse, as to which Mr. Mattia
disclaims beneficial ownership.
* Represents less than 1% of Metropolitan's outstanding Common Shares.
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SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Except as set forth below, no person is known to Metropolitan at March
2, 1998 to own beneficially within the meaning of the regulations of the
Securities and Exchange Commission, more than 5% of Metropolitan's outstanding
Common Shares.
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
------------------- --------------------------- ----------------
Robert M. Kaye 5,467,270 77.5%
6001 Landerhaven Drive
Mayfield Heights, Ohio 44124
<FN>
- -------------------------
(1) The Common Shares indicated reflect the Corporation's completion, on
December 10, 1997, of a two-for-one split in the form of a stock
dividend to shareholders of record as of November 24, 1997.
CHANGE IN CONTROL
As collateral for the Huntington Loan Agreement, Mr. Kaye pledged a
portion of his Common Shares with a fair market value at least equal in value to
200% of any outstanding balance. At March 3, 1998, the outstanding balance under
the Huntington Loan Agreement was $1.5 million.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION TABLE
The following table sets forth certain information with respect to
compensation provided by Metropolitan and its subsidiaries during the years
ended December 31, 1997, 1996 and 1995, to its chief executive officer and
Metropolitan's other executive officers whose annual salary and bonus exceed
$100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND FISCAL YEAR ENDED ALL OTHER
PRINCIPAL POSITION DECEMBER 31 SALARY BONUS COMPENSATION (1)
------------------ ----------- ------ ----- ----------------
Robert M. Kaye, 1997 $351,000 $ 75,000(2) $4,750
Chairman of the Board and 1996 295,000 65,000(2) 4,750
Chief Executive Officer 1995 255,000 --- 4,620
David G. Lodge, 1997 242,654 75,000(2) 4,750
President, Assistant Treasurer and 1996 205,000 65,000 4,750
Assistant Secretary 1995 175,000 50,000 4,571
Patrick W. Bevack, 1997 142,942 ---- 4,750
Executive Vice President of the 1996 135,000 7,500 4,750
Bank 1995 125,000 7,000 4,275
<FN>
- -------------------------
(1) Represents the Bank's contribution to the Metropolitan Savings Bank of
Cleveland 401(k) Plan.
(2) Paid January of the following year.
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OPTION GRANTS
The following table provides information regarding grants of Options
made during the year ended December 31, 1997, to each of the executive officers
named in the Summary Compensation Table. All of the grants were made subject to
shareholder approval of the Metropolitan Financial Corp. 1997 Stock Option Plan.
All share and base price figures reflect the Corporation's completion, on
December 10, 1997, of a two-for-one stock split.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS TEN YEAR OPTION TERM
--------------------------------------------------------------- -----------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS IN FISCAL ($/SHARE) DATE 5% 10%
---- GRANTED (#) YEAR --------- ---- -- ---
----------- ----
Robert M. Kaye 300,000 (1) 75.0% $10.1250 11/28/2007 $4,947,765 $7,878,510
30,000 (2) 7.5 11.1375 10/28/2007 544,254 866,634
David G. Lodge 20,000 (1) 5.0 10.1250 11/28/2007 329,851 525,234
30,000 (2) 7.5 10.1250 10/28/2007 494,777 787,851
Patrick W. Bevack 2,000 (1) 0.5 10.1250 10/28/2007 32,985 52,523
- -----------------------
<FN>
(1) These options vest 50% on the third anniversary, 25% on the fourth
anniversary and 25% on the fifth anniversary from the date of grant.
(2) These options granted in three groups of 10,000, each vesting 50%, 25%
and 25% beginning on October 28, 2000, October 2001 and October 2002,
respectively.
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DESCRIPTION OF THE PREFERRED SECURITIES
GENERAL
The following is a summary of certain terms and provisions of the
Preferred Securities. The Trust Indenture Agreement will be qualified under the
Trust Indenture Act. This summary of certain terms and provisions of the
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Trust Agreement and the Trust
Indenture Act. Wherever particular defined terms of the Trust Agreement are
referred to, but not defined herein, such defined terms are incorporated herein
by reference. The form of the Trust Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. Unless
otherwise expressly stated or the context otherwise requires, all references to
the "Corporation" appearing under this caption "Description of the Preferred
Securities" and under the caption "Description of the Junior Subordinated
Debentures" shall mean Metropolitan Financial Corp. excluding its consolidated
subsidiaries.
DISTRIBUTIONS
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Trust Issuer. Distributions on such Preferred
Securities will be payable at the annual rate of % of the stated Liquidation
Amount of $10, payable quarterly in arrears on June 30, September 30, December
31 and March 31 of each year, to the holders of the Preferred Securities on the
relevant record dates. The record date will be the 15th day of the preceding
month in which the relevant Distribution payment date occurs. Distributions will
accumulate from the date of the initial issuance of the Preferred Securities and
are cumulative. The first Distribution payment date for the Preferred Securities
will be June 30, 1998. The amount of Distributions payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months. In the
event that any date on which Distributions are payable on the Preferred
Securities is not a Business Day, then payment of the Distributions payable on
such date will be made on the next succeeding day that is a Business Day (and
without any additional Distributions or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment shall be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment was
originally payable (each date on which Distributions are payable in accordance
with the foregoing, a "Distribution Date"). A "Business Day" shall mean any day
other than a Saturday or a Sunday, or a day on which banking institutions in the
City of New York are authorized or required by law or executive order to remain
closed or a day on which the principal corporate trust office of the Property
Trustee or the Debenture Trustee is closed for business.
So long as no event of default under the Indenture has occurred and is
continuing, the Corporation has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. As a consequence of any
such deferral of interest, quarterly Distributions on the Preferred Securities
by the Trust Issuer will also be deferred during any such Extension Period.
Distributions to which holders of the Preferred Securities are entitled will
accumulate additional Distributions thereon at the rate per annum of % thereof,
compounded quarterly from the relevant payment date for such Distributions. The
term "Distributions" as used herein, shall include any such additional
Distributions. During any such Extension Period, the Corporation may not (i)
declare or pay any dividends or distributions on, or redeem, purchase, acquire
or make a liquidation payment with respect to, any of the Corporation's capital
stock (other than (a) the reclassification of any class of the Corporation's
capital stock into another class of capital stock, (b) dividends or
distributions payable in common shares of the Corporation, (c) any declaration
of a dividend in connection with the implementation of a shareholders' rights
plan, or the issuance of shares under any such plan in the future or the
redemption or repurchase of any such rights pursuant thereto, (d) payments under
the Guarantee, and (e) purchases of common shares related to the issuance of
common shares or rights under any of the Corporation's benefit plans for its
directors, officers or employees), (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities of the
Corporation that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Corporation of the debt securities of any subsidiary of
the Corporation if such guarantee ranks pari passu with or junior in right of
payment to the Junior Subordinated Debentures other than payments pursuant to
the Guarantee. Additionally, during any such Extension Period, the Corporation
shall not redeem, purchase or acquire less than all the outstanding Junior
Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Corporation may further defer the
payment of interest on the Junior Subordinated Debentures, provided that no
Extension Period may exceed 20 consecutive quarters or extend beyond the Stated
Maturity of the Junior Subordinated Debentures. Upon the termination of any such
Extension Period and the payment of all interest then accrued and unpaid
(together with interest thereon at the rate of %, compounded quarterly, to
the extent permitted by applicable law), the Corporation may elect to begin a
new Extension Period. There is no limitation on the number of times that the
Corporation may elect to begin an Extension Period. See "Description of the
Junior Subordinated Debentures--Right to Defer Interest Payment Obligation" and
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount."
The revenue of the Trust Issuer available for distribution to holders
of its Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Trust Issuer will invest the proceeds from
the issuance and sale of its Trust Securities. See "Description of the Junior
Subordinated Debentures." If the Corporation does not make interest payments on
the Junior Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Preferred Securities. The payment of
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Distributions (if and to the extent the Trust Issuer has funds legally available
for the payment of such Distributions and cash sufficient to make such payments)
is guaranteed by the Corporation on a limited basis as set forth herein under
"Description of the Guarantee."
The Corporation has no current intention of exercising its right to
defer payments of interest on the Junior Subordinated Debentures.
SUBORDINATION OF THE COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amount of the Preferred Securities and the Common Securities;
provided, however, that if on any Distribution Date or Redemption Date an event
of default under the Indenture shall have occurred and be continuing, no payment
of any Distribution on, or Redemption Price of, any of the Common Securities,
and no other payment on account of the redemption, liquidation or other
acquisition of such Common Securities, shall be made unless payment in full in
cash of all accumulated and unpaid Distributions on all of the outstanding
Preferred Securities for all Distribution periods terminating on or prior
thereto, or, in the case of payment of the Redemption Price, the full amount of
such Redemption Price on all of the outstanding Preferred Securities then called
for redemption shall have been made or provided for, and all funds available to
the Property Trustee shall first be applied to the payment in full in cash of
all Distributions on, or Redemption Price of, the Preferred Securities then due
and payable.
In the case of any event of default under the Trust Agreement resulting
from an event of default under the Indenture, the Corporation as holder of the
Common Securities will be deemed to have waived any right to act with respect to
any such event of default under the Trust Agreement until the effect of all such
events of default with respect to the Preferred Securities shall have been
cured, waived or otherwise eliminated. Until all such events of default under
the Trust Agreement shall have been so cured, waived or otherwise eliminated,
the Property Trustee shall act solely on behalf of the holders of the Preferred
Securities and not on behalf of the Corporation as holder of the Common
Securities, and only the holders of the Preferred Securities will have the right
to direct the Property Trustee to act on their behalf.
REDEMPTION
The Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at their Stated
Maturity or earlier redemption as provided in the Indenture. The proceeds from
such repayment or redemption shall be applied by the Property Trustee to redeem
a Like Amount (as defined below) of the Preferred Securities upon not less than
30 nor more than 60 days' notice prior to the date fixed for repayment or
redemption, at a redemption price equal to the aggregate Liquidation Amount of
such Preferred Securities plus accumulated and unpaid Distributions thereon (the
"Redemption Price") to the date of redemption (the "Redemption Date"). For a
description of the Stated Maturity and redemption provisions of the Junior
Subordinated Debentures, see "Description of the Junior Subordinated
Debentures--General" and "--Redemption or Exchange."
The Corporation has the option to redeem the Junior Subordinated
Debentures prior to maturity on or after , 2003, in whole at any
time or in part from time to time, and thereby cause a mandatory redemption of a
Like Amount of the Preferred Securities. Any time that a Tax Event, an
Investment Company Event or a Capital Treatment Event (each as defined below)
shall occur and be continuing, the Corporation has the right to redeem the
Junior Subordinated Debentures in whole (but not in part) and thereby cause a
mandatory redemption of the Preferred Securities in whole (but not in part). Any
such redemption prior to the Stated Maturity will be subject to prior regulatory
approval, if then required under applicable capital guidelines or regulatory
policies, and to restrictions set forth in the 1995 Notes Indenture. See
"Description of the Junior Subordinated Debentures--Redemption or Exchange" and
"Description of the 1995 Notes."
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the applicable proceeds from the contemporaneous
redemption of a Like Amount of the Junior Subordinated Debentures. Redemptions
of the Preferred Securities shall be made and the Redemption Price shall be paid
on each Redemption Date only to the extent that the Trust Issuer has funds on
hand available for the payment of such Redemption Price. See "Description of the
Preferred Securities--Subordination of the Common Securities."
If the Trust Issuer gives a notice of redemption in respect of the
Preferred Securities, then, by 10:00 a.m., New York City time, on the Redemption
Date, to the extent funds are available, the Property Trustee will deposit
irrevocably with DTC funds sufficient to pay the applicable Redemption Price and
will give DTC irrevocable instructions and authority to pay the Redemption Price
to the holders thereof upon surrender of their certificates evidencing such
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for the Preferred Securities called for redemption
shall be payable to the holders of the Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption shall
have been given and funds deposited
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as required, then, upon the date of such deposit, all rights of the holders of
such Preferred Securities so called for redemption will cease, except the right
of the holders of such Preferred Securities to receive the Redemption Price, but
without interest on such Redemption Price, and such Preferred Securities will
cease to be outstanding.
In the event that any date fixed for redemption of the Preferred
Securities is not a Business Day, then payment of the Redemption Price payable
on such date will be made on the next succeeding day which is a Business Day
(and without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will be
made on the immediately preceding Business Day. In the event that payment of the
Redemption Price in respect of the Preferred Securities called for redemption is
improperly withheld or refused and not paid either by the Trust Issuer or by the
Corporation pursuant to the Guarantee as described under "Description of the
Guarantee," Distributions on such Preferred Securities will continue to accrue
at the then applicable rate, from the Redemption Date originally established by
the Trust Issuer for such Preferred Securities to the date such Redemption Price
is actually paid, in which case the actual payment date will be the date fixed
for redemption for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Corporation or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by private
agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of the Junior Subordinated Debentures to holders of the Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for the Preferred Securities on the relevant record date, which
date shall be one business day prior to the relevant Redemption Date, however,
in the event the Preferred Securities do not remain in book entry form, the
relevant record date shall be the date at least 15 days prior to the Redemption
Date or liquidation date, as applicable.
If less than all of the Preferred Securities and Common Securities
issued by the Trust Issuer are to be redeemed on a Redemption Date, then the
aggregate Liquidation Amount of the Preferred Securities and Common Securities
to be redeemed shall be allocated pro rata to the Preferred Securities and the
Common Securities based upon the relative Liquidation Amounts of such classes.
The particular Preferred Securities to be redeemed shall be selected not more
than 60 days prior to the Redemption Date by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, or, if
the Preferred Securities are then held in the form of a global preferred
security, in accordance with DTC's customary procedures. The Property Trustee
shall promptly notify the trust registrar in writing of the Preferred Securities
selected for redemption and, in the case of any Preferred Securities selected
for partial redemption, the Liquidation Amount thereof to be redeemed. For all
purposes of the Trust Agreement, unless the context otherwise requires, all
provisions relating to the redemption of the Preferred Securities shall relate,
in the case of the Preferred Securities redeemed or to be redeemed only in part,
to the portion of the aggregate Liquidation Amount of the Preferred Securities
which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 but not more than
60 days before the Redemption Date to each holder of the Preferred Securities to
be redeemed at its registered address. Unless the Corporation defaults in
payment of the Redemption Price on the Junior Subordinated Debentures, on and
after the Redemption Date interest will cease to accrue on the Junior
Subordinated Debentures or portions thereof called for redemption.
LIQUIDATION OF THE TRUST ISSUER AND DISTRIBUTION OF THE JUNIOR SUBORDINATED
DEBENTURES TO HOLDERS
The Corporation has the right at any time to dissolve the Trust Issuer
and, after satisfaction of the liabilities of creditors of the Trust Issuer as
provided by applicable law, cause Junior Subordinated Debentures to be
distributed to the holders of the Preferred Securities and Common Securities in
exchange therefor upon liquidation of the Trust Issuer.
After the liquidation date fixed for any distribution of the Junior
Subordinated Debentures for Preferred Securities (i) such Preferred Securities
will no longer be deemed to be outstanding, and (ii) DTC or its nominee, as the
registered holder of Preferred Securities, will receive a registered global
certificate or certificates representing the Junior Subordinated Debentures to
be delivered upon such distribution with respect to Preferred Securities held by
DTC or its nominee, (iii) any certificates representing the Preferred Securities
not held by DTC or its nominee will be deemed to represent Junior Subordinated
Debentures having a principal amount equal to the stated Liquidation Amount of
such Preferred Securities, and bearing accrued and unpaid interest in an amount
equal to the accumulated and unpaid Distributions on such series of the
Preferred Securities until such certificates are presented to the Administrative
Trustees or their agent for transfer or reissuance.
Under current United States federal income tax law and interpretations,
a distribution of the Junior Subordinated Debentures should not be a taxable
event to holders of the Preferred Securities. Should there be a change in law, a
change in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences--Distribution of the Junior
Subordinated Debentures to Holders of the Preferred Securities."
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LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Trust Agreement, the Trust Issuer shall automatically
dissolve upon expiration of its term and shall dissolve on the first to occur of
(i) certain events of bankruptcy, dissolution or liquidation of the Corporation,
subject in certain instances to any such event remaining in effect for a period
of 90 consecutive days; (ii) the distribution of a Like Amount of the Junior
Subordinated Debentures to the holders of its Preferred Securities, if the
Corporation, as depositor, has given written direction to the Property Trustee
to dissolve the Trust Issuer (which direction is optional and wholly within the
discretion of the Corporation, as depositor); (iii) redemption of all of the
Preferred Securities as described under "Description of the Preferred
Securities-Redemption;" and (iv) the entry of an order for the dissolution of
the Trust Issuer by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or (iv)
of the preceding paragraph, the Trust Issuer shall be liquidated by the Trust
Issuer Trustees as expeditiously as the Trust Issuer Trustees determine to be
possible by distributing, after satisfaction of liabilities to creditors of the
Trust Issuer, if any, as provided by applicable law, to the holders of the
Preferred Securities a Like Amount of the Junior Subordinated Debentures, unless
such distribution is determined by the Property Trustee not to be practical, in
which event such holders will be entitled to receive out of the assets of the
Trust Issuer available for distribution to holders, after satisfaction of
liabilities to creditors of the Trust Issuer, if any, as provided by applicable
law, an amount equal to, in the case of holders of the Preferred Securities, the
aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust Issuer has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust Issuer on Preferred Securities shall be paid on a pro rata basis. The
Corporation, as the holder of the Common Securities, will be entitled to receive
distributions upon any such liquidation pro rata with the holders of the
Preferred Securities, except that if an event of default under the Indenture has
occurred and is continuing, the Preferred Securities shall have a priority over
the Common Securities with respect to any such distributions.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under
the Trust Agreement (an "Event of Default") with respect to the Trust Securities
issued thereunder (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) the occurrence of an event of default under the Indenture
(see "Description of the Junior Subordinated Debentures--Debenture
Events of Default"); or
(ii) default in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period
of 30 days; or
(iii) default in the payment of any Redemption Price when it
becomes due and payable; or
(iv) default in the performance, or breach, in any material
respect, of any covenant or warranty of the Trust Issuer Trustees in
the Trust Agreement (other than a covenant or warranty a default in the
performance of which or the breach of which is dealt with in clause
(ii) or (iii) above), and continuation of such default or breach for a
period of 60 days after there has been given, by registered or
certified mail, to the defaulting Trust Issuer Trustee or Trustees by
the holders of at least 25% in aggregate Liquidation Amount of the
outstanding Preferred Securities, a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or
insolvency with respect to the Property Trustee and the failure by the
Corporation to appoint a successor Property Trustee within 60 days
thereof.
Within 90 days after the occurrence of any Event of Default actually
known to the Property Trustee, the Property Trustee shall transmit notice of
such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Corporation, as depositor, unless such Event of
Default shall have been cured or waived. The Corporation, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If an event of default under the Indenture has occurred and is
continuing, the Preferred Securities shall have a preference over the Common
Securities as described above. See "Description of the Preferred
Securities--Subordination of the Common Securities" and "--Liquidation
Distribution Upon Dissolution". The existence of an event of default does not
entitle the holders of the Preferred Securities to accelerate the payment
thereof.
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REMOVAL OF THE TRUST ISSUER TRUSTEES
Unless an event of default under the Indenture shall have occurred and
be continuing, any Trust Issuer Trustee may be removed at any time by the holder
of the Common Securities. If an event of default under the Indenture has
occurred and is continuing, the Property Trustee may be removed at such time by
the holders of a majority in Liquidation Amount of the outstanding Preferred
Securities. In no event will the holders of the Preferred Securities have the
right to vote to appoint, remove or replace the Administrative Trustees, which
voting rights are vested exclusively in the Corporation as the holder of the
Common Securities. No resignation or removal of any Trust Issuer Trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at
any time or times, for the purpose of meeting the legal requirements of the
Trust Indenture Act, if applicable, or of any jurisdiction in which any part of
the Trust Property (as defined in the Trust Agreement) may at the time be
located, the Corporation, as the holder of the Common Securities, shall have
power to appoint one or more persons either to act as a co-trustee, jointly with
the Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such property, in either case with such powers as may be
provided in the instrument of appointment, and to vest in such person or persons
in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Trust Agreement. In the event an
event of default under the Indenture has occurred and is continuing, the
Property Trustee alone shall have power to make such appointment.
MERGER OR CONSOLIDATION OF THE TRUST ISSUER TRUSTEES
Any entity into which the Property Trustee or any Administrative
Trustee that is not a natural person may be merged or converted or with which it
may be consolidated, or any entity resulting from any merger, conversion or
consolidation to which such Trustee shall be a party or any entity succeeding to
all or substantially all the corporate trust business of such Trustee, shall be
the successor of such Trustee under the Trust Agreement, provided such entity
shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST ISSUER
The Trust Issuer may not merge with or into, consolidate, amalgamate,
be replaced by, convey, transfer or lease its properties and assets
substantially as an entirety to any entity or other Person, except as described
below or as otherwise described in the Trust Agreement. The Trust Issuer may, at
the request of the Corporation, with the consent of the Administrative Trustees
and without the consent of the holders of the Preferred Securities or the
Property Trustee, merge with or into, consolidate, amalgamate, be replaced by,
convey, transfer or lease its properties and assets substantially as an entirety
to, a trust organized as such under the laws of any State: provided, that (i)
such successor entity either (a) expressly assumes all of the obligations of the
Trust Issuer with respect to the Preferred Securities or (b) substitutes for the
Preferred Securities other securities having substantially the same terms as the
Preferred Securities (the "Successor Securities") so long as the Successor
Securities rank the same as the Preferred Securities in priority with respect to
Distributions and payments upon liquidation, redemption and otherwise, (ii) the
Corporation expressly appoints a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Junior
Subordinated Debentures, (iii) the Successor Securities are registered or
listed, or any Successor Securities will be registered or listed upon
notification of issuance, on any national securities exchange or other
organization on which the Preferred Securities are then registered or listed
(including, if applicable, the Nasdaq Stock Market's National Market), if any,
(iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose substantially identical to that of the Trust Issuer, (vii) prior to such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
the Corporation has received an opinion from independent counsel to the Trust
Issuer experienced in such matters to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Preferred Securities (including any Successor Securities) in any material
respect and (b) following such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, neither the Trust Issuer nor such successor
entity will be required to register as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act") and
(viii) the Corporation or any permitted successor or assignee owns all of the
common securities or its equivalent of such successor entity and guarantees the
obligations of such successor entity under the Successor Securities at least to
the extent provided by the Guarantee. Notwithstanding the foregoing, the Trust
Issuer shall not, except with the consent of holders of 100% in Liquidation
Amount of the Preferred Securities, consolidate, amalgamate, merge with or into
or be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust Issuer or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes.
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VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the Preferred Securities will have no voting
rights.
The Trust Agreement may be amended from time to time by the
Corporation, the Property Trustee and the Administrative Trustees, without the
consent of the holders of the Preferred Securities, (i) with respect to
acceptance of appointment of a successor trustee, (ii) to cure any ambiguity,
correct or supplement any provisions in the Trust Agreement that may be
inconsistent with any other provision or to make any other provisions with
respect to matters or questions arising under the Trust Agreement, which shall
not be inconsistent with the other provisions of the Trust Agreement or (iii) to
modify, eliminate or add to any provisions of the Trust Agreement to such extent
as shall be necessary to ensure that the Trust Issuer will be classified for
United States federal income tax purposes as a grantor trust at all times that
the Preferred Securities are outstanding or to ensure that the Trust Issuer will
not be required to register as an "investment company" under the Investment
Company Act; provided, however, that in the case of clause (ii), such action
shall not adversely affect in any material respect the interests of any holder
of the Preferred Securities, and any such amendments of the Trust Agreement
shall become effective when notice thereof is given to the holders of the
Preferred Securities. The Trust Agreement may be amended by the Trust Issuer
Trustees and the Corporation with (i) the consent of holders representing not
less than a majority (based upon Liquidation Amounts) of the outstanding
Preferred Securities and (ii) receipt by the Trust Issuer Trustees of an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Trust Issuer Trustees in accordance with such amendment will not
affect the Trust Issuer's status as a grantor trust for United States federal
income tax purposes or the Trust Issuer's exemption from status as an
"investment company" under the Investment Company Act, provided that without the
consent of each holder of the Preferred Securities, the Trust Agreement may not
be amended to (a) change the amount or timing of any Distribution on the
Preferred Securities or otherwise adversely affect the amount of any
Distribution required to be made in respect of the Preferred Securities as of a
specified date or (b) restrict the right of a holder of the Preferred Securities
to institute suit for the enforcement of any such payment on or after such date.
So long as the Junior Subordinated Debentures are held by the Property
Trustee, the Trust Issuer Trustees shall not (i) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee or executing any trust or power conferred on the Property Trustee with
respect to the Junior Subordinated Debentures, (ii) waive any past default that
is waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or termination
of the Indenture or the Junior Subordinated Debentures, where such consent shall
be required, without, in each case, obtaining the prior approval of the holders
of a majority in aggregate Liquidation Amount of all outstanding Preferred
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of the Junior Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of each holder of the Preferred Securities. The Trust Issuer
Trustees shall not revoke any action previously authorized or approved by a vote
of the holders of the Preferred Securities except by subsequent vote of the
holders of the Preferred Securities. The Property Trustee shall notify each
holder of the Preferred Securities of any notice of default with respect to the
Junior Subordinated Debentures. In addition to obtaining the foregoing approvals
of the holders of the Preferred Securities, prior to taking any of the foregoing
actions, the Trust Issuer Trustees shall obtain an opinion of counsel
experienced in such matters to the effect that the Trust Issuer will not be
classified as an association taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of the Preferred Securities may be
given at a meeting of holders of the Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a notice
of any meeting at which holders of the Preferred Securities are entitled to
vote, or of any matter upon which action by written consent of such holders is
to be taken, to be given to each holder of record of the Preferred Securities in
the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Preferred Securities will be
required for the Trust Issuer to redeem and cancel the Preferred Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Corporation, the Trust Issuer
Trustees or any affiliate of the Corporation or the Trust Issuer Trustees shall,
for purposes of such vote or consent, be treated as if they were not
outstanding.
LIQUIDATION VALUE
The amount payable on the Preferred Securities in the event of any
liquidation of the Trust Issuer is $10 per Preferred Security plus accumulated
and unpaid Distributions, which may be in the form of a distribution of such
amount in Junior Subordinated Debentures, subject to certain exceptions. See
"Description of the Preferred Securities--Liquidation Distribution Upon
Dissolution."
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EXPENSES AND TAXES
In the Indenture, the Corporation, as borrower, has agreed to pay all
debts and other obligations (other than with respect to the Preferred
Securities) and all costs and expenses of the Trust Issuer (including costs and
expenses relating to the organization of the Trust Issuer, the fees and expenses
of the Trust Issuer Trustee and the costs and expenses relating to the operation
of the Trust Issuer) and to pay any and all taxes and all costs and expenses
with respect thereto (other than United States withholding taxes) to which the
Trust Issuer might become subject. The foregoing obligations of the Corporation
under the Indenture are for the benefit of, and shall be enforceable by, any
person to whom any such debts, obligations, costs, expenses and taxes are owed
(a "Creditor") whether or not such Creditor has received notice thereof. Any
such Creditor may enforce such obligations of the Corporation directly against
the Corporation, and the Corporation has irrevocably waived any right or remedy
to require that any such Creditor take any action against the Trust Issuer or
any other person before proceeding against the Corporation. The Corporation has
also agreed in the Indenture to execute such additional agreements as may be
necessary or desirable to give full effect to the foregoing.
BOOK ENTRY, DELIVERY AND FORM
The Preferred Securities will be issued in the form of one or more
fully registered global securities which will be deposited with, or on behalf
of, DTC and registered in the name of DTC's nominee. Unless and until it is
exchangeable in whole or in part for the Preferred Securities in definitive
form, a global security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of such depository or a nominee of such
successor.
Ownership of beneficial interests in a global security will be limited
to persons that have accounts with DTC or its nominee ("Participants") or
persons that may hold interests through Participants. The Corporation expects
that, upon the issuance of a global security, DTC will credit, on its book-entry
registration and transfer system, the Participants' accounts with their
respective principal amounts of the Preferred Securities represented by such
global security. Ownership of beneficial interests in such global security will
be shown on, and the transfer of such ownership interests will be effected only
through, records maintained by DTC (with respect to interests of Participants)
and on the records of Participants (with respect to interests of Persons held
through Participants). Beneficial owners will not receive written confirmation
from DTC of their purchase, but are expected to receive written confirmations
from the Participants through which the beneficial owner entered into the
transaction. Transfers of ownership interests will be accomplished by entries on
the books of Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a global security will not be entitled to receive
physical delivery of the Preferred Securities in certificated form and will not
be considered the owners or holders thereof under the Indenture. Accordingly,
each person owning a beneficial interest in such a global security must rely on
the procedures of DTC and, if such person is not a Participant, on the
procedures of the Participant through which such person owns its interest, to
exercise any rights of a holder of Preferred Securities under the Indenture. The
Corporation understands that, under DTC's existing practices, in the event that
the Corporation requests any action of holders, or an owner of a beneficial
interest in such a global security desires to take any action which a holder is
entitled to take under the Indenture, DTC would authorize the Participants
holding the relevant beneficial interests to take such action, and such
Participants would authorize beneficial owners owning through such Participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them. Redemption notices will also be sent to DTC. If less
than all of the Preferred Securities are being redeemed, the Corporation
understands that it is DTC's existing practice to determine by lot the amount of
the interest of each Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Corporation, the Trust Issuer Trustees, the Administrators, any
Paying Agent (as defined herein) or any other agent of the Corporation or the
Trust Issuer Trustees will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in the global security for such Preferred Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests. Disbursements of Distributions to Participants shall be the
responsibility of DTC. DTC's practice is to credit Participants' accounts on a
payable date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payment on the payable
date. Payments by Participants to beneficial owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such Participant and not of DTC, the Corporation,
the Trust Issuer Trustees, the Paying Agent or any other agent of the
Corporation, subject to any statutory or regulatory requirements as may be in
effect from time to time.
DTC may discontinue providing its services as securities depository
with respect to the Preferred Securities at any time by giving reasonable notice
to the Corporation or the Trust Issuer Trustees. If DTC notifies the Corporation
or the Trust Issuer Trustees that it is unwilling to continue as such, or if it
is unable to continue or ceases to be a clearing agency registered under the
Exchange Act and a
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successor depository is not appointed by the Corporation within 90 days after
receiving such notice or becoming aware that DTC is no longer so registered, the
Corporation will issue the Preferred Securities in definitive form upon
registration of transfer of, or in exchange for, such global security. In
addition, the Corporation may, at any time and in its sole discretion, determine
not to have the Preferred Securities represented by one or more global
securities and, in such event, will issue Preferred Securities in definitive
form in exchange for all of the global securities representing such Preferred
Securities.
DTC has advised the Corporation and the Trust Issuer as follows: DTC is
a limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Certain of such Participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
Participant, either directly or indirectly.
The information in this section concerning DTC and book-entry systems
has been obtained from sources that the Corporation and the Trust Issuer believe
to be reliable, but neither the Corporation nor the Trust Issuer take
responsibility for the accuracy thereof.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Preferred Securities will be made by the Underwriter
in immediately available funds.
Secondary trading in preferred securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the Preferred Securities are not held by DTC, such payments will be
made by check mailed to the address of the holder entitled thereto, as such
address appears on the securities register for the Trust Securities. The paying
agent (the "Paying Agent") will initially be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrators. The Paying Agent will be permitted to resign as Paying Agent
upon 30 days' written notice to the Property Trustee and the Administrators. If
the Property Trustee is no longer the Paying Agent, the Property Trustee will
appoint a successor (which must be a bank or trust company reasonably acceptable
to the Administrators) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent
for the Preferred Securities. Registration of transfers of Preferred Securities
will be effected without charge by or on behalf of the Trust Issuer, except for
the payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. In the event of any redemption, the
Trust Issuer will not be required to (i) issue, register the transfer of, or
exchange any Preferred Securities during a period beginning at the opening of
business 15 days before the date of mailing of a notice of redemption of any
Preferred Securities called for redemption and ending at the close of business
on the day of such mailing or (ii) register the transfer of or exchange any
Preferred Securities so selected for redemption, in whole or in part, except the
unredeemed portion of any such Preferred Securities being redeemed in part.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee will take such
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action as it deems advisable and in the best interests of the holders of the
Preferred Securities and will have no liability except for its own negligence or
willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust Issuer in such a way that the Trust Issuer
will not be deemed to be an "investment company" required to be registered under
the Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of the Corporation for
United States federal income tax purposes. In this connection, the Corporation
and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of the Trust Issuer
or the Trust Agreement, that the Corporation and the Administrative Trustees
determine in their discretion to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar
rights.
The Trust Agreement and the Preferred Securities will be governed by,
and construed in accordance with, the laws of the State of Delaware.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under an Indenture
(the "Indenture") between the Corporation and Wilmington Trust Company, as
trustee (the "Debenture Trustee"). The Indenture will be qualified as an
Indenture under the Trust Indenture Act. This summary of certain terms and
provisions of the Junior Subordinated Debentures and the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Indenture, and to the Trust Indenture Act. Wherever particular
defined terms of the Indenture are referred to, but not defined herein, such
defined terms are incorporated herein by reference. The form of the Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
GENERAL
Concurrently with the issuance of the Preferred Securities, the Trust
Issuer will invest the proceeds thereof, together with the consideration paid by
the Corporation for the Common Securities, in the Junior Subordinated
Debentures. The Junior Subordinated Debentures will bear interest at the annual
rate of %, payable quarterly in arrears on June 30, September 30, December
31 and March 31 of each year (each, an "Interest Payment Date"), commencing June
30, 1998, to the person in whose name each Junior Subordinated Debenture is
registered, subject to certain exceptions, at the close of business on the
Business Day next preceding such Interest Payment Date. It is anticipated that,
until the liquidation, if any, of the Trust Issuer, the Junior Subordinated
Debentures will be held in the name of the Property Trustee in trust for the
benefit of the holders of the Preferred Securities. The amount of interest
payable for any period will be computed on the basis of a 360-day year of twelve
30-day months. In the event that any date on which interest is payable on the
Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment shall be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment was
originally payable. Accrued interest that is not paid on the applicable Interest
Payment Date will bear additional interest on the amount thereof (to the extent
permitted by applicable law) at the rate per annum of % thereof, compounded
quarterly from the relevant Interest Payment Date. The term "interest" as used
herein shall include quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional
Interest (as defined below), as applicable.
The Junior Subordinated Debentures will mature on June 30, 2028 (the
"Stated Maturity").
The Junior Subordinated Debentures will be unsecured and will rank
junior and be subordinate in right of payment to all Senior Indebtedness of the
Corporation. Because the Corporation is a holding company, the right of the
Corporation to participate in any distribution of assets of any subsidiary,
including the Bank, upon such subsidiary's liquidation or reorganization or
otherwise, is subject to the prior claims of creditors of that subsidiary,
except to the extent that the Corporation may itself be recognized as a creditor
of that subsidiary. Accordingly, the Junior Subordinated Debentures will be
effectively subordinated to all existing and future liabilities of the
Corporation's subsidiaries, and holders of the Junior Subordinated Debentures
should look only to the assets of the Corporation for payments on the Junior
Subordinated Debentures. The Indenture does not limit the incurrence or issuance
of other secured or unsecured debt of the Corporation, including Senior
Indebtedness, whether under the Indenture or any existing or other indenture
that the Corporation may enter into in the future or otherwise.
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RIGHT TO DEFER INTEREST PAYMENT OBLIGATION
So long as no event of default under the Indenture has occurred and is
continuing, the Corporation has the right under the Indenture at any time or
from time to time during the term of the Junior Subordinated Debentures to defer
the payment of interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters with respect to each Extension Period,
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. At the end of each Extension Period, the
Corporation must pay all interest then accrued and unpaid on the Junior
Subordinated Debentures (together with interest on such unpaid interest at the
annual rate of %, compounded quarterly from the relevant Interest Payment
Date, to the extent permitted by applicable law, referred to herein as
"Compounded Interest"). During an Extension Period, interest would continue to
accrue and holders of the Junior Subordinated Debentures would be required to
accrue interest income for United States federal income tax purposes. See
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock
(other than (a) the reclassification of any class of the Corporation's capital
stock into another class of capital stock, (b) dividends or distributions in
common shares of the Corporation, (c) any declaration of a dividend in
connection with the implementation of a shareholders' rights plan, or the
issuance of shares under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (d) payments under the
Guarantee, and (e) purchases of common shares related to the issuance of common
shares or rights under any of the Corporation's benefit plans for its directors,
officers or employees) or (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of the
Corporation that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Corporation of the debt securities of any subsidiary of
the Corporation if such guarantee ranks pari passu with or junior in right of
payment to the Junior Subordinated Debentures other than payments pursuant to
the Guarantee. Additionally, during any such Extension Period, the Corporation
shall not redeem, purchase or acquire less than all the outstanding Junior
Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Corporation may further defer the
payment of interest on the Junior Subordinated Debentures, provided that no
Extension Period may exceed 20 consecutive quarters or extend beyond the Stated
Maturity of the Junior Subordinated Debentures. Upon the termination of any such
Extension Period and the payment of all interest then accrued and unpaid
(together with interest thereon at the rate of %, compounded quarterly, to
the extent permitted by applicable law), the Corporation may elect to begin a
new Extension Period subject to the above requirements. No interest shall be due
and payable during an Extension Period, except at the end thereof. The
Corporation must give the Property Trustee, the Administrative Trustees and the
Debenture Trustee notice of its election of such Extension Period at least one
Business Day prior to the earlier of (i) the date interest on the Junior
Subordinated Debentures would have been payable except for the election to begin
such Extension Period or (ii) the date the Administrative Trustees are required
to give notice of the record date, or the date such Distributions are payable,
to the Nasdaq Stock Market's National Market or other applicable self-regulatory
organization or to holders of the Preferred Securities as of the record date or
the date such Distributions are payable, but in any event not less than one
Business Day prior to such record date. The Debenture Trustee shall give notice
of the Corporation's election to begin a new Extension Period to the holders of
the Preferred Securities. There is no limitation on the number of times that the
Corporation may elect to begin an Extension Period.
ADDITIONAL INTEREST
If the Trust Issuer or the Property Trustee is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Corporation will pay such additional amounts (the "Additional Sums")
on the Junior Subordinated Debentures as shall be required so that the
Distributions payable by the Trust Issuer shall not be reduced as a result of
any such additional taxes, duties or other governmental charges.
REDEMPTION OR EXCHANGE
The Corporation will have the right to redeem the Junior Subordinated
Debentures prior to maturity (i) on or after , 2003, in whole at any time or in
part from time to time, or (ii) at any time in whole (but not in part), within
90 days following the occurrence and continuation of a Tax Event, an Investment
Company Event or a Capital Treatment Event, in each case at a redemption price
equal to the accrued and unpaid interest on the Junior Subordinated Debentures
so redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. Any such redemption prior to the Stated Maturity will be subject to
prior regulatory approval, if then required under applicable capital guidelines
or regulatory policies, and to restrictions set forth in the 1995 Notes
Indenture. See "Description of the 1995 Notes."
The Junior Subordinated Debentures will not be subject to any sinking
fund.
Notice of any redemption will be mailed at least 30 but not more than
60 days before the redemption date to each Holder of the Junior Subordinated
Debentures to be redeemed at its registered address. Unless the Corporation
defaults in payment of the redemption
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price, on and after the redemption date interest ceases to accrue on the Junior
Subordinated Debentures or portions thereof called for redemption.
"Investment Company Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority, the Trust Issuer is or will be considered an "investment company"
that is required to be registered under the Investment Company Act, which change
becomes effective on or after the date of original issuance of the Preferred
Securities.
"Capital Treatment Event" means the receipt by the Trust Issuer of an
Opinion of Counsel to the effect that as a result of any amendment to, or change
(including any proposed change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or such proposed change, pronouncement, action or decision
is announced on or after the date of original issuance of the Preferred
Securities, there is more than an insubstantial risk that the Preferred
Securities would not constitute Tier 1 Capital (or the then equivalent thereof)
applied as if the Corporation (or its successor) were a bank holding company for
purposes of the capital adequacy guidelines of the Federal Reserve (or any
successor regulatory authority with jurisdiction over bank holding companies),
or any capital adequacy guidelines as then in effect and applicable to the
Corporation. There are currently no capital adequacy guidelines applicable to
savings and loan holding companies such as the Corporation.
"Tax Event" means the receipt by the Trust Issuer of an Opinion of
Counsel to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which pronouncement or
decision is announced on or after the date of issuance of the Preferred
Securities under the Trust Agreement, there is more than an insubstantial risk
that (i) the Trust Issuer is, or will be within 90 days of the date of such
opinion, subject to United Stated federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Corporation on the Junior Subordinated Debentures is not, or within 90
days of the date of such opinion will not be, deductible by the Corporation, in
whole or in part, for United States federal income tax purposes or (iii) the
Trust Issuer is, or will be within 90 days of the date of such opinion, subject
to more than a de minimis amount of other taxes, duties or other governmental
charges.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in such matters as being opined upon, that is delivered to
the Trust Issuer Trustees.
"Additional Interest" means the additional amounts as may be necessary
in order that the amount of Distributions then due and payable by the Trust
Issuer on the outstanding Preferred Securities and Common Securities shall not
be reduced as a result of any additional taxes, duties and other governmental
charges to which the Trust Issuer has become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of the Preferred
Securities, Preferred Securities having a Liquidation Amount equal to that
portion of the principal amount of the Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities pro rata based upon the
relative Liquidation Amounts of such Common Securities and Preferred Securities
and the proceeds of which will be used to pay the Redemption Price of such
Common Securities and Preferred Securities and (ii) with respect to a
distribution of the Junior Subordinated Debentures to holders of the Preferred
Securities in exchange therefor in connection with a dissolution or liquidation
of the Trust Issuer, Junior Subordinated Debentures having a principal amount
equal to the Liquidation Amount of the Preferred Securities of the holder to
whom such Junior Subordinated Debentures would be distributed.
AUTHENTICATION
A Junior Subordinated Debenture shall not be valid until authenticated
manually by an authorized signatory of the Debenture Trustee, or by an
Authenticating Agent. Such signature shall be conclusive evidence that the
Junior Subordinated Debenture so authenticated has been duly authenticated and
delivered under the Indenture and that the holder is entitled to the benefits of
the Indenture. Each Junior Subordinated Indenture shall be dated the date of its
authentication by the Debenture Trustee.
REGISTRATION, DENOMINATION AND TRANSFER
The Junior Subordinated Debentures will initially be registered in the
name of Cede & Co., as nominee of DTC, on behalf of the Trust Issuer. If the
Junior Subordinated Debentures are distributed to holders of Preferred
Securities, it is anticipated that the depository arrangements for the Junior
Subordinated Debentures will be substantially identical to those in effect for
the Preferred Securities. See "Description of Preferred Securities -- Book
Entry, Delivery and Form."
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Although DTC has agreed to the procedures described above, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depository and a successor depository is not appointed by
the Corporation within 90 days of receipt of notice from DTC to such effect, the
Corporation will cause the Junior Subordinated Debentures to be issued in
certificated form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede & Co., the nominee for DTC, as the registered
holder of the Junior Subordinated Debentures, as described under "Description of
Preferred Securities -- Book Entry, Delivery and Form." If Junior Subordinated
Debentures are issued in certificated form, principal and interest will be
payable, the transfer of the Junior Subordinated Debentures will be registrable,
and Junior Subordinated Debentures will be exchangeable for Junior Subordinated
Debentures of other authorized denominations of a like aggregate principal
amount, at the corporate trust office of the Debenture Trustee in Wilmington,
Delaware or at the offices of any Paying Agent or transfer agent appointed by
the Corporation, provided that payment of interest may be made at the option of
the Corporation by check mailed to the address of the persons entitled thereto.
However, at the option of the Corporation, a holder of $1 million or more in
aggregate principal amount of Junior Subordinated Debentures may receive
payments of interest (other than interest payable at the Stated Maturity) by
wire transfer of immediately available funds upon written request to the
Debenture Trustee not later than 15 calendar days prior to the date on which the
interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as
provided above, and may be presented for registration of transfer (with the form
of transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Indenture or at the office of any transfer agent designated by the Corporation
for such purpose without service charge and upon payment of any taxes and other
governmental charges as described in the Indenture. The Corporation will appoint
the Debenture Trustee as securities registrar under the Indenture. The
Corporation may at any time designate additional transfer agents with respect to
the Junior Subordinated Debentures.
In the event of any redemption, neither the Corporation nor the
Debenture Trustee shall be required to (i) issue, register the transfer of or
exchange Junior Subordinated Debentures during a period beginning at the opening
of business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Corporation in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Corporation, be repaid
to the Corporation and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Corporation for
payment thereof.
RESTRICTIONS ON CERTAIN PAYMENTS
The Corporation will also covenant, as to the Junior Subordinated
Debentures, that, during any Extension Period, it will not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock
(other than (a) the reclassification of any class of the Corporation's capital
stock into another class of capital stock, (b) dividends or distributions
payable in common shares of the Corporation, (c) any declaration of a dividend
in connection with the implementation of a shareholders' rights plan, or the
issuance of shares under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (d) payments under the
Guarantee, and (e) purchases of common shares related to the issuance of common
shares or rights under any of the Corporation's benefit plans for its directors,
officers or employees), (ii) make any payment of principal, interest or premium,
if any, on or repay, repurchase or redeem any debt securities of the Corporation
that rank pari passu with or junior in right of payment to the Junior
Subordinated Debentures, or (iii) make any guarantee payments with respect to
any guarantee by the Corporation of the debt securities of any subsidiary of the
Corporation if such guarantee ranks pari passu with or junior in right of
payment to the Junior Subordinated Debentures other than payments pursuant to
the Guarantee. Additionally, the Corporation shall not redeem, purchase or
acquire less than all the outstanding Junior Subordinated Debentures or any of
the Preferred Securities if at such time (a) there shall have occurred an event
of default under the Indenture, (b) the Corporation shall be in default with
respect to its obligations under the Guarantee relating to such Preferred
Securities or (c) the Corporation shall have given notice of its selection of an
Extension Period as provided in the Indenture with respect to the Junior
Subordinated Debentures and shall not have rescinded such notice, or such
Extension Period, or any extension thereof, shall be continuing.
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MODIFICATION OF INDENTURE
From time to time the Corporation and the Debenture Trustee may,
without the consent of the holders of the Junior Subordinated Debentures, amend,
waive or supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, provided that any such
action does not materially adversely affect the interest of the holders of the
Junior Subordinated Debentures or the ability to qualify, or maintain the
qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Corporation and the Debenture Trustee, with
the consent of the holders of not less than a majority in principal amount of
the Junior Subordinated Debentures affected, to modify the Indenture in a manner
affecting the rights of the holders of the Junior Subordinated Debentures,
provided that no such modification may, without the consent of the holder of
each outstanding Junior Subordinated Debenture so affected, (i) extend the
Stated Maturity of the Junior Subordinated Debentures, reduce the principal
amount thereof or reduce the rate or extend the time of payment of interest
thereon or (ii) reduce the percentage of principal amount of the Junior
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default":
(i) failure for 30 days to pay interest (including Additional
Interest or Compounded Interest, if any) on the Junior Subordinated
Debentures when due (subject to the deferral of certain due dates in
the case of an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due, whether at maturity, upon declaration of
acceleration of maturity or otherwise; or
(iii) failure to observe or perform certain other covenants
contained in the Indenture for 90 days after written notice to the
Corporation from the Debenture Trustee or the holders of at least 25%
in aggregate outstanding principal amount of the outstanding Junior
Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or
reorganization of the Corporation, subject in certain instances to any
such event remaining in effect for a period of 60 consecutive days.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee. The Debenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon a Debenture Event of Default. The
holders of a majority in aggregate outstanding principal amount of the Junior
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Junior Subordinated Debenture. The Corporation is
required to file annually with the Debenture Trustee a certificate as to whether
or not the Corporation is in compliance with all the conditions and covenants
applicable to it under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Corporation to pay interest or
principal on the Junior Subordinated Debentures on the date such interest or
principal is otherwise payable, a holder of the Preferred Securities may
institute a Direct Action. The Corporation may not amend the Indenture to remove
the foregoing right to bring a Direct Action without the prior written consent
of the holders of all of the Preferred Securities. If the right to bring a
Direct Action is removed, the Trust Issuer may become subject to the reporting
obligations under the Exchange Act. The Corporation shall have the right under
the Indenture to set-off any payment made to such holder of the Preferred
Securities by the Corporation in connection with a Direct Action.
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The holders of the Preferred Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures. See "Description
of the Preferred Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Corporation shall not consolidate with
or merge into any other entity or convey, transfer or lease its properties and
assets substantially as an entirety to any entity, and no entity shall
consolidate with or merge into the Corporation or convey, transfer or lease its
properties and assets substantially as an entirety to the Corporation, unless:
(i) in the event the Corporation consolidates with or merges into another entity
or conveys or transfers its properties and assets substantially as an entirety
to any entity, the successor entity is organized under the laws of the United
States or any state or the District of Columbia, and such successor entity
expressly assumes the Corporation's obligations on the Junior Subordinated
Debentures issued under the Indenture; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; and (iii) certain other conditions as prescribed by
the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged or
other change in control transaction involving the Corporation that may adversely
affect holders of the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all of the Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and the Corporation deposits or causes
to be deposited with the Debenture Trustee funds, in trust, for the purpose and
in an amount in the currency or currencies in which the Junior Subordinated
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Debenture
Trustee for cancellation, for the principal and interest to the date of the
deposit or to the Stated Maturity, as the case may be, then the Indenture will
cease to be of further effect (except as to the Corporation's obligations to pay
all other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Corporation
will be deemed to have satisfied and discharged the Indenture.
SUBORDINATION
In the Indenture, the Corporation has covenanted and agreed that the
Junior Subordinated Debentures issued thereunder will be subordinate and junior
in right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon the
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, the holders of Senior Indebtedness
will first be entitled to receive payment in full of principal of (and premium,
if any) and interest, if any, on such Senior Indebtedness before the holders of
the Junior Subordinated Debentures, or the Property Trustee on behalf of the
holders, will be entitled to receive or retain any payment in respect of the
principal of or interest, if any, on the Junior Subordinated Debentures.
In the event of the acceleration of the maturity of any of the Junior
Subordinated Debentures, the holders of all Senior Indebtedness outstanding at
the time of such acceleration will first be entitled to receive payment in full
of all amounts due thereon (including any amounts due upon acceleration) before
the holders of the Junior Subordinated Debentures will be entitled to receive or
retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of
the Junior Subordinated Debentures may be made if there shall have occurred and
be continuing a default in any payment with respect to Senior Indebtedness or an
event of default with respect to any Senior Indebtedness resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
"Debt" means with respect to any Person, whether recourse is to all or
a portion of the assets of such Person and whether or not contingent: (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; (vi) all
indebtedness of such Person whether incurred on or prior to the date of the
Indenture or thereafter incurred, for claims in respect of derivative products,
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps
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and similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another Person and all dividends of another Person
the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise.
"Senior Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Corporation whether
or not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior Debt shall not be deemed to include:
(i) any Debt of the Corporation which when incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Corporation, (ii) any Debt of the
Corporation to any of its subsidiaries, and (iii) any Debt to any employee of
the Corporation.
"Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Corporation whether
or not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other Debt of the Corporation (other than the Junior Subordinated
Debentures), except that Subordinated Debt shall not include debentures sold by
the Corporation to the Trust.
The Indenture places no limitation on the amount of Senior
Indebtedness, that may be incurred by the Corporation. The Corporation may from
time to time incur indebtedness constituting Senior Indebtedness.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed
by and construed in accordance with the laws of the State of Delaware, without
regard to conflicts of laws principles thereof.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of the Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
As described under "Description of the Preferred
Securities--Liquidation of the Trust Issuer and Distribution of the Junior
Subordinated Debentures to Holders," under certain circumstances involving the
termination of the Trust Issuer, Junior Subordinated Debentures may be
distributed to the holders of the Preferred Securities in exchange therefor upon
liquidation of the Trust Issuer, after satisfaction of liabilities to creditors
of the Trust Issuer as provided by applicable law. Any such distribution will be
subject to receipt of prior regulatory approval if then required. If the Junior
Subordinated Debentures are distributed to the holders of Preferred Securities
upon the liquidation of the Trust Issuer, the Corporation will use its best
efforts to list the Junior Subordinated Debentures on the Nasdaq Stock Market's
National Market or such stock exchanges, if any, on which the Preferred
Securities are then listed. There can be no assurance as to the market price of
any Junior Subordinated Debentures that may be distributed to the holders of the
Preferred Securities.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the offices of the Debenture Trustee in the city of
Wilmington, Delaware or at the offices of such Paying Agent or Paying Agents as
the Corporation may designate from time to time, except that at the option of
the Corporation payment of any interest may be made (i) by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Securities Register or (ii) by transfer to an account maintained by the Person
entitled thereto as specified in the Securities Register, provided that proper
transfer instructions have been received by the Regular Record Date. Payment of
any interest on the Junior Subordinated Debentures will be made to the Person in
whose name the Junior Subordinated Debenture is registered at the close of
business on the Regular Record Date for such interest, except in the case of
Defaulted Interest. The Corporation may at any time designate additional Paying
Agents or rescind the designation of any Paying Agent; however, the Corporation
will at all times be required to maintain a Paying Agent in each Place of
Payment for the Junior Subordinated Debentures.
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Any monies deposited with the Debenture Trustee or any Paying Agent, or
then held by the Corporation in trust, for the payment of the principal of or
interest on the Junior Subordinated Debentures and remaining unclaimed for two
years after such principal or interest has become due and payable shall be
repaid to the Corporation upon written request of the Corporation on May 31 of
each year or (if then held in trust by the Corporation) will be discharged from
such trust and the holders of the Junior Subordinated Debentures shall
thereafter look, as general unsecured creditors, only to the Corporation for
payment thereof.
REGISTRAR AND TRANSFER AGENT
The Debenture Trustee will act as the registrar and the transfer agent
for the Junior Subordinated Debentures. Junior Subordinated Debentures may be
presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed) at the
office of the registrar. The Corporation may at any time rescind the designation
of any such transfer agent or approve a change in the location through which any
such transfer agent acts; provided that the Corporation maintains a transfer
agent in the place of payment. The Corporation may at any time designate
additional transfer agents with respect to the Junior Subordinated Debentures.
In the event of any redemption, neither the Corporation nor the Debenture
Trustee will be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Junior
Subordinated Debentures and ending at the close of business on the day of
mailing of the relevant notice of redemption, or (ii) transfer or exchange any
Junior Subordinated Debentures so selected for redemption, except, in the case
of any Junior Subordinated Debentures being redeemed in part, any portion
thereof not to be redeemed.
DESCRIPTION OF THE GUARANTEE
A Guarantee will be executed and delivered by the Corporation
concurrently with the issuance of the Preferred Securities, and held by the
Guarantee Trustee for the benefit of the holders from time to time of such
Preferred Securities (the "Guarantee"). The Guarantee will be qualified under
the Trust Indenture Act. This summary of certain provisions of the Guarantee
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all of the provisions of the Guarantee and the Trust Indenture
Act. Wherever particular defined terms of the Guarantee are referred to, but not
defined herein, such defined terms are incorporated herein by reference. The
form of the Guarantee has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
GENERAL
The Corporation will irrevocably agree to pay in full, on a
subordinated basis, to the extent set forth herein, the Guarantee Payments (as
defined below) to the holders of the Preferred Securities, as and when due,
regardless of any defense, right of set-off or counterclaim that the Trust
Issuer may have or assert other than the defense of payment. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Trust Issuer (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accrued and unpaid Distributions required to be paid on the
Preferred Securities, to the extent that the Trust Issuer has funds on hand
available therefor at such time, (ii) the Redemption Price with respect to any
Preferred Securities called for redemption, to the extent that the Trust Issuer
has funds on hand available therefor at such time, or (iii) upon a voluntary or
involuntary dissolution, winding-up or termination of the Trust Issuer (unless
the Junior Subordinated Debentures are distributed to holders of the Preferred
Securities), the lesser of (a) the Liquidation Distribution, to the extent that
the Trust Issuer has funds available therefor at such time, and (b) the amount
of assets of the Trust Issuer remaining available for distribution to holders of
the Preferred Securities after satisfaction of liabilities to creditors of the
Trust Issuer as required by applicable law. The Corporation's obligation to make
a Guarantee Payment may be satisfied by direct payment of the required amounts
by the Corporation to the holders of the Preferred Securities or by causing the
Trust Issuer to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee, on a subordinated
basis, of the Trust Issuer's obligations under the Preferred Securities, but
will apply only to the extent that the Trust Issuer has funds sufficient to make
such payments, and is not a guarantee of collection.
If the Corporation does not make interest payments on the Junior
Subordinated Debentures held by the Trust Issuer, the Trust Issuer will not be
able to pay Distributions on the Preferred Securities and will not have funds
legally available therefor. The Guarantee will rank subordinate and junior in
right of payment to all Senior Indebtedness of the Corporation. See "Description
of the Guarantee-Status of the Guarantee." Because the Corporation is a holding
company, the right of the Corporation to participate in any distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that subsidiary, except
to the extent the Corporation may itself be recognized as a creditor of that
subsidiary. Accordingly, the Corporation's obligations under the Guarantee will
be effectively subordinated to all existing and future liabilities of the
Corporation's subsidiaries, and claimants should look only to the assets of the
Corporation for payments thereunder. The Guarantee does not limit the incurrence
or issuance of other secured or unsecured debt of the Corporation, including
Senior Indebtedness, whether under the Indenture, any other indenture that the
Corporation may enter into in the future, or otherwise. The Corporation may from
time to time to incur indebtedness constituting Senior Indebtedness.
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The Corporation and the Trust Issuer believe that, taken together, the
obligations of the Corporation under the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures, the Indenture and the Expense Agreement,
constitute, in the aggregate, a full, irrevocable and unconditional guarantee,
on a subordinated basis, of all of the Trust Issuer's obligations under the
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the Trust
Issuer's obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures, the Expense Agreement
and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the
Corporation and will rank subordinate and junior in right of payment to all
Senior Indebtedness of the Corporation in the same manner as the Junior
Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Corporation to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Preferred
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Trust Issuer or upon
distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Preferred Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of not less than a majority of the aggregate Liquidation Amount
of such outstanding Preferred Securities. The manner of obtaining any such
approval will be as set forth under "Description of the Preferred
Securities--Voting Rights; Amendment of the Trust Agreement." All guarantees and
agreements contained in the Guarantee shall bind the successors, assigns,
receivers, trustees and representatives of the Corporation and shall inure to
the benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of
the Corporation to perform any of its payments or other obligations thereunder.
The holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of such Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
The Corporation, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Corporation is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Corporation in the performance of the Guarantee, undertakes
to perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of the Preferred Securities unless it is offered
reasonable indemnity by such holder against the costs, expenses and liabilities
that might be incurred thereby. The Guarantee Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Guarantee Trustee reasonably believes repayment
or adequate indemnity is not reasonably assured to it.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon
(a) full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of the Trust Issuer, or (c)
distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities in exchange therefor. The Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Preferred Securities must restore payment of any sums paid under the
Preferred Securities or the Guarantee.
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GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the
laws of the State of Delaware, without regard to conflicts of laws principles
thereof.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by the Corporation under
the Trust Agreement (the "Expense Agreement"), the Corporation will irrevocably
and unconditionally guarantee to each person or entity to whom the Trust Issuer
becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust Issuer, other than obligations of the Trust Issuer to
pay to the holders of the Preferred Securities the amounts due such holders
pursuant to the terms of the Preferred Securities. Third party creditors of the
Trust Issuer may proceed directly against the Corporation under the Expense
Agreement, regardless of whether such creditors had notice of the Expense
Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES,
THE EXPENSE AGREEMENT AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Trust Issuer has funds available for the payment
of such Distributions) are irrevocably guaranteed by the Corporation as and to
the extent set forth under "Description of the Guarantee." The Corporation and
the Trust Issuer believe that, taken together, the obligations of the
Corporation under the Guarantee, the Trust Agreement, the Junior Subordinated
Debentures, the Indenture and the Expense Agreement, constitute, in the
aggregate, a full, irrevocable and unconditional guarantee, on a subordinated
basis, of all of the Trust Issuer's obligations under the Preferred Securities.
No single document standing alone or operating in conjunction with fewer than
all of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Trust Issuer's obligations under
the Preferred Securities. If and to the extent that the Corporation does not
make payments on the Junior Subordinated Debentures, the Trust Issuer will not
pay Distributions or other amounts due on its Preferred Securities. The
Guarantee does not cover payment of Distributions when the Trust Issuer does not
have sufficient funds to pay such Distributions. In such event, the remedy of a
holder of the Preferred Securities is to institute a Direct Action against the
Corporation for enforcement of payment of such Distributions to such holder. The
obligations of the Corporation under the Guarantee are subordinate and junior in
right of payment to all Senior Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because: (i) the aggregate principal amount of the Junior Subordinated
Debentures will be equal to the sum of the aggregate stated Liquidation Amount
of the Preferred Securities and Common Securities, (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the distribution rate and Distribution and other payment dates for the
Preferred Securities, (iii) the Corporation shall pay for all and any costs,
expenses and liabilities of the Trust Issuer except the Trust Issuer's
obligations to holders of its Preferred Securities, and (iv) the Trust Agreement
further provides that the Trust Issuer will not engage in any activity that is
not consistent with the limited purposes of the Trust Issuer.
Notwithstanding anything to the contrary contained in the Indenture,
the Corporation has the right to set-off any payment it is otherwise required to
make thereunder if, and to the extent, the Corporation has theretofore made, or
is concurrently making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES
A holder of a Preferred Security may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust Issuer or any other person or entity.
A default or event of default under any Senior Indebtedness of the
Corporation would not constitute a default or event of default under the
Indenture. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness of the Corporation, the subordination provisions of the
Indenture provide that no payments may be made in respect of the Junior
Subordinated Debentures until such Senior Indebtedness has been paid in full or
any payment default thereunder has been cured or waived. Failure to make
required payments on the Junior Subordinated Debentures would constitute an
event of default under the Indenture.
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LIMITED PURPOSE OF THE TRUST ISSUER
The Preferred Securities evidence preferred undivided beneficial
interests in the Trust Issuer, and the Trust Issuer exists for the sole purpose
of issuing its Preferred Securities and Common Securities and investing the
proceeds thereof in Junior Subordinated Debentures. A principal difference
between the rights of a holder of a Preferred Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture is
entitled to receive from the Corporation the principal amount of and interest
accrued on Junior Subordinated Debentures held, while a holder of the Preferred
Securities is entitled to receive Distributions from the Trust Issuer (or from
the Corporation under the Guarantee) if, and to the extent, the Trust Issuer has
funds available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or
liquidation of the Trust Issuer involving the liquidation of the Junior
Subordinated Debentures, after satisfaction of liabilities to creditors of the
Trust Issuer, if any, as provided by applicable law, the holders of the
Preferred Securities will be entitled to receive, out of assets held by the
Trust Issuer, the Liquidation Distribution in cash. See "Description of the
Preferred Securities-Liquidation Distribution Upon Dissolution." Upon any
voluntary or involuntary liquidation or bankruptcy of the Corporation, the
Property Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the Corporation, subordinated in right of payment to
all Senior Indebtedness as set forth in the Indenture, but entitled to receive
payment in full of principal and interest, before any shareholders of the
Corporation receive payments or distributions. Since the Corporation is the
guarantor under the Guarantee and has agreed to pay for all costs, expenses and
liabilities of the Trust Issuer (other than the Trust Issuer's obligations to
the holders of its Preferred Securities), the positions of a holder of such
Preferred Securities and a holder of the Junior Subordinated Debentures relative
to other creditors and to shareholders of the Corporation in the event of
liquidation or bankruptcy of the Corporation are expected to be substantially
the same.
DESCRIPTION OF THE 1995 NOTES
In December 1995, $14.0 million of the 1995 Notes were issued in a
public offering pursuant to the 1995 Notes Indenture. The 1995 Notes will mature
on January 1, 2005. Interest on the 1995 Notes accrues at the rate of 9 5/8% per
annum and is payable monthly. The 1995 Notes are not redeemable, in whole or in
part, by the Corporation prior to December 1, 1998. After December 1, 1998, the
1995 Notes may be redeemed by the Corporation according to the following
schedule:
IF REDEEMED DURING THE REDEMPTION
12 MONTHS BEGINNING PRICE
--------------------- ------
December 1, 1998...................................... 103%
December 1, 1999...................................... 101 1/2%
December 1, 2000 and thereafter....................... 100%
The 1995 Notes may also be repurchased in privately negotiated or open
market transactions.
The terms of the 1995 Notes are governed by the 1995 Notes Indenture.
The 1995 Notes Indenture limits the amount of Funded Indebtedness of the
Corporation and all of its subsidiaries to 80% of Consolidated Net Worth.
"Funded Indebtedness" and "Consolidated Net Worth" are defined in the 1995 Notes
Indenture. As of December 31, 1997, the amount of Funded Indebtedness the
Corporation could incur under the 1995 Notes Indenture was $29.3 million. The
1995 Notes Indenture permits the incurrence of junior indebtedness, which is
defined as the principal amount of, and interest on, any Funded Indebtedness
whether now outstanding or hereafter created, incurred, assumed or guaranteed,
provided that in the instrument creating or evidencing such Funded Indebtedness
or pursuant to which such Funded Indebtedness is outstanding it is provided that
(1) such indebtedness is junior in right of payment to the 1995 Notes, (2) no
payments with respect to such indebtedness may be made at any time that an Event
of Default (as defined in the 1995 Notes Indenture) shall have occurred and be
continuing and (3) no payments other than the payment of interest may be made
with respect to such indebtedness at any time the 1995 Notes are Outstanding (as
defined in the 1995 Notes Indenture). In addition, the 1995 Notes Indenture
prohibits the Corporation from paying dividends on its equity securities (except
in the form of those securities) unless the Corporation's ratio of tangible
equity to total assets is in excess of 7.0%. For purposes of the 1995 Notes
Indenture, "tangible equity" is Consolidated Net Worth (as defined in the 1995
Notes Indenture) less goodwill.
The terms of the 1995 Notes Indenture further state that in the event
of a Fundamental Structural Change or a Significant Subsidiary Disposition (both
as defined in the 1995 Notes Indenture), each holder of the 1995 Notes will have
the right to have the Corporation purchase the holder's 1995 Notes at the
outstanding principal amount plus accrued interest. The right of the holders is
not
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exercisable if within 40 days after the occurrence of such event the 1995 Notes
have received a specified rating from a nationally recognized statistical rating
organization. This offering does not constitute a Fundamental Structural Change
for purposes of the 1995 Notes Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal
income tax consequences of the purchase, ownership and disposition of the
Preferred Securities. This summary addresses only the tax consequences to a
person that acquires Preferred Securities on their original issue at the stated
offering price and does not address the tax consequences to persons that may be
subject to special treatment under United States federal income tax law, such as
banks, insurance companies, thrift institutions, regulated investment companies,
real estate investment trusts, employee benefit plans, tax-exempt organizations,
dealers in securities or currencies, persons that will hold Preferred Securities
as part of a position in a "straddle" or as part of a "hedging", "conversion" or
other integrated investment transaction for federal income tax purposes, persons
whose functional currency is not the United States dollar or persons that do not
hold Preferred Securities as capital assets.
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Thompson Hine & Flory LLP ("Thompson Hine"), special
tax counsel to the Corporation and the Trust Issuer. This summary is based upon
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service rulings and pronouncements and judicial
decisions now in effect, all of which are subject to change at any time. Such
changes may be applied retroactively in a manner that could cause the tax
consequences to vary substantially from the consequences described below,
possibly adversely affecting a beneficial owner of the Preferred Securities. The
authorities on which this summary is based are subject to various
interpretations, and it is therefore possible that the United States federal
income tax treatment of the purchase, ownership and disposition of the Preferred
Securities may differ from the treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE UNITED STATES
FEDERAL TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
PREFERRED SECURITIES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX
LAWS.
CLASSIFICATION OF THE TRUST ISSUER AND THE JUNIOR SUBORDINATED DEBENTURES
In the opinion of Thompson Hine, for United States federal income tax
purposes under current law, (i) the Trust Issuer will not be classified as an
association taxable as a corporation, and (ii) the Junior Subordinated
Debentures will be classified as indebtedness. As a result, each beneficial
owner of Preferred Securities (a "Securityholder") will be required to include
in its gross income its pro rata share of the interest (or accrued original
issue discount) in addition to any interest and other income (if any) with
respect to the Junior Subordinated Debentures. See "--Interest Income and
Original Issue Discount." No amount included in income with respect to the
Preferred Securities will be eligible for the dividends-received deduction. This
opinion is based in part upon certain factual assumptions and upon certain
representations made by the Corporation, which representations Thompson Hine has
relied upon and assumed to be true, correct and complete. If such
representations are inaccurate, this opinion could be adversely affected.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations, currently Section 1.1275-2(h)
(the "Regulations"), if the terms and conditions of a debt instrument make the
likelihood that stated interest will not be timely paid a "remote" contingency,
such contingency will be ignored in determining whether the debt instrument is
issued with original issue discount ("OID"). The Corporation believes that the
likelihood of its exercising its option to defer payments of interest on the
Junior Subordinated Debentures is remote, since exercising that option would
prevent it from declaring dividends on any class of its shares. Based on the
foregoing, the Corporation intends to take the position that the Junior
Subordinated Debentures were not issued with OID and, accordingly, a
Securityholder purchasing the Preferred Securities at the stated price should be
required to include in gross income only such Securityholder's pro rata share of
stated interest on the Junior Subordinated Debentures in accordance with such
Securityholder's method of tax accounting.
The Regulations have not yet been addressed in any rulings or other
published interpretations by the Internal Revenue Service (the "IRS"). However,
it is possible the IRS could take the position that the likelihood of deferral
was not a remote contingency within the meaning of the Regulations.
Under the Regulations, if the Corporation were to exercise its option
to defer payments of interest after treating the Junior Subordinated Debentures
as issued without OID, the Junior Subordinated Debentures would be treated as
re-issued with OID at that time, and all stated interest (and de minimis OID, if
any) on the Junior Subordinated Debentures would thereafter be treated as OID as
long as the Junior Subordinated Debentures remained outstanding. In such event,
all of a Securityholder's interest income with respect to the
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Junior Subordinated Debentures would be accounted for as OID on an economic
accrual basis regardless of such Securityholder's method of tax accounting, and
actual distributions of stated interest related thereto would not be includable
in gross income. Consequently, a Securityholder would be required to include OID
in gross income even though the Corporation would not make and the
Securityholder would not receive any actual cash payments during an Extension
Period.
A Securityholder that disposed of Preferred Securities prior to the
record date for the payment of Distributions following an Extension Period would
include OID in gross income but would not receive any cash related thereto from
the Trust Issuer. Any amount of OID included in a Securityholder's gross income
(whether or not during an Extension Period) would increase such Securityholder's
tax basis in its Preferred Securities, and the amount of Distributions not
includable in gross income would reduce such Securityholder's tax basis in its
Preferred Securities.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF THE PREFERRED
SECURITIES
Under current United States federal income tax law and provided that
the Trust Issuer is not treated as an association taxable as a corporation, a
distribution by the Trust Issuer of the Junior Subordinated Debentures as
described under the caption "Description of the Preferred Securities-Liquidation
of the Trust Issuer and Distribution of the Junior Subordinated Debentures to
Holders" will be nontaxable to the Securityholders and will result in a
Securityholder receiving its pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Trust Issuer, with a holding
period and aggregate tax basis equal to the holding period and aggregate tax
basis such Securityholder had in its Preferred Securities before such
distribution. A Securityholder will account for interest in respect of the
Junior Subordinated Debentures received from the Trust Issuer in the manner
described above under "Certain Federal Income Tax Consequences--Interest Income
and Original Issue Discount," including any accrual of OID (if any) attributed
to the Junior Subordinated Debentures upon the distribution.
SALES OR REDEMPTION OF THE PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on the sale of
Preferred Securities (including a redemption for cash or other consideration) in
an amount equal to the difference between the amount realized on the sale (or
redemption) and the Securityholder's adjusted tax basis in the Preferred
Securities sold or so redeemed. Gain or loss recognized by a Securityholder on
Preferred Securities held for more than one year will generally be taxable as
long-term capital gain or loss. Pursuant to the Taxpayer Relief Act of 1997,
Preferred Securities constituting a capital asset which are acquired by an
individual after July 28, 1997, and held for more than 18 months are accorded a
maximum United States federal capital gains tax rate of 20% (or a rate of 10%,
if the individual taxpayer is in the 15% tax bracket). Effective in 2001, the
20% rate drops to 18% (and the 10% rate drops to 8%) for capital assets acquired
after the year 2000 and held more than five years; however, the requirement that
the capital asset be acquired after the year 2000 does not apply to the 8% rate.
Preferred Securities held by an individual for more than one year, but not more
than 18 months, are accorded a United States federal capital gains tax rate of
28%.
If the Corporation were to exercise its option to defer payments of
interest on the Junior Subordinated Debentures, the Preferred Securities might
trade at a price that did not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debentures. A
Securityholder that disposed of its Preferred Securities between record dates
for payments of Distributions (and consequently did not receive a Distribution
from the Trust Issuer for the period prior to such disposition) would
nevertheless be required to include in income as ordinary income accrued but
unpaid interest on the Junior Subordinated Debentures through the date of
disposition and to add such amount to its adjusted tax basis in its Preferred
Securities disposed of. Such Securityholder would recognize a capital loss on
the disposition of its Preferred Securities to the extent the selling price
(which might not fully reflect the value of accrued but unpaid interest) was
less than the Securityholder's adjusted tax basis in the Preferred Securities
(which would include accrued but unpaid interest). Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership or a non-resident fiduciary of a foreign estate or trust.
Under current United States federal income tax law: (i) payments by the
Trust Issuer or any of its paying agents to any Securityholder who or which is a
United States Alien Holder will not be subject to United States federal
withholding tax provided that (a) the Securityholder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of shares of the Corporation entitled to vote, (b) the Securityholder is not a
controlled foreign corporation that is related to the Corporation through share
ownership and (c) either (A) the Securityholder certifies to the Trust Issuer or
its agent, under penalties of perjury, that it is not a United States holder and
provides its name and address or (B) a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution") certifies to the
Trust Issuer or its agent,
84
91
under penalties of perjury, that such statement has been received from the
Securityholder by it or by a Financial Institution holding such security for the
Securityholder and furnishes the Trust Issuer or its agent with a copy thereof,
and (ii) a United States Alien Holder of a Preferred Security generally will not
be subject to United States federal withholding tax on any gain realized upon
the sale or other disposition of a Preferred Security.
In October 1997, final Treasury Regulations (the "Withholding Tax
Regulations") were issued that provide alternative methods for satisfying the
certification requirements described in clause (i)(c) above. The Withholding Tax
Regulations also require, in the case of Preferred Securities held by a foreign
partnership, that the certification described in clause (i)(c) above be provided
by the partners rather than by the foreign partnership. A look-through rule
would apply in the case of tiered partnerships. In IRS Notice 98-16, issued
March 27, 1998, the IRS announced that it would extend the effective date of the
Withholding Tax Regulations to payments of interest after December 31, 1999.
Prospective investors are urged to consult their tax advisors with respect to
the effect of the Withholding Tax Regulations. The Trust Issuer will issue a
Form 1042 or 1042-S, where appropriate.
INFORMATION REPORTING TO SECURITYHOLDERS
Generally, income on the Preferred Securities will be reported to
Securityholders on Forms 1099-INT, which will be mailed to Securityholders by
January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the Securityholder
complies with certain certification requirements. Any withheld amounts will be
allowed as a credit against the Securityholder's United States federal income
tax, provided the required information is provided to the Internal Revenue
Service on a timely basis.
ERISA CONSIDERATIONS
The Corporation and certain affiliates of the Corporation may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or a "disqualified person"
within the meaning of Section 4975 of the Code with respect to many employee
benefit plans ("Plans") that are subject to ERISA. The purchase of the Preferred
Securities by a Plan that is subject to the fiduciary responsibility provisions
of ERISA or the prohibited transaction provisions of Section 4975(e)(1) of the
Code and with respect to which the Corporation, or any affiliate of the
Corporation, is a service provider (or otherwise is a party in interest or a
disqualified person) may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless the Preferred Securities are acquired
pursuant to and in accordance with an applicable exemption. Any pension or other
employee benefit plan proposing to acquire any Preferred Securities should
consult with its counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated , 1998, among the Corporation, the
Trust Issuer and Ryan, Beck & Co., Inc. (the "Underwriter"), the Trust Issuer
has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Trust Issuer, $25,000,000 aggregate Liquidation Amount of
Preferred Securities at the public offering price subject to the underwriting
commissions set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and that the Underwriter
will purchase all of the Preferred Securities offered hereby if any of such
Preferred Securities are purchased.
The Corporation has been advised by the Underwriter that the
Underwriter proposes to offer the Preferred Securities to the public and other
dealers at the public offering price set forth on the cover page of this
Prospectus and will share with certain dealers from its commission a concession
not in excess of $ per Preferred Security. The Underwriter may allow, and such
dealers may reallow, a concession not in excess of $ per Preferred Security to
certain other dealers. After the public offering, the offering price and other
selling terms may be changed by the Underwriter.
The Corporation has granted to the Underwriter an option, exercisable
not later than 30 days after the date of this Prospectus, to purchase up to an
additional $3,750,000 aggregate Liquidation Amount of the Preferred Securities
at the public offering price plus accrued Distributions, if any, from
, 1998. To the extent that the Underwriter exercises such option,
the Corporation will be obligated, pursuant to the option, to sell such
Preferred Securities to the Underwriter. The Underwriter may exercise such
option only to cover over-allotments made in connection with the sale of the
Preferred Securities offered hereby. If purchased, the Underwriter will offer
such additional Preferred Securities on the same terms as those on which the
$25,000,000 aggregate Liquidation Amount of the Preferred Securities are being
offered.
85
92
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Corporation, the Underwriting Agreement provides that the Corporation will
pay as compensation for the Underwriter's arranging the investment therein of
such proceeds an amount of $ per Preferred Security (or $ ($
if the over-allotment option is exercised in full) in the aggregate). The
Corporation has also agreed to reimburse the Underwriter for its reasonable
out-of-pocket expenses, including legal fees (not to exceed $50,000 (excluding
"Blue Sky" work) without the prior written consent of the Corporation) and
expenses relating to the offering of the Preferred Securities.
In connection with the offering of the Preferred Securities, the
Underwriter and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriter
creates a short position for its own account by selling more Preferred
Securities than it is committed to purchase from the Trust Issuer. In such a
case, to cover all or part of the short position, the Underwriter may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriter also may engage in stabilizing transactions in which
it bids for, and purchases, shares of the Preferred Securities at a level above
that which might otherwise prevail in the open market for the purpose of
preventing or retarding a decline in the market price of the Preferred
Securities. The Underwriter also may reclaim any selling concessions allowed to
an Underwriter or dealer if the Underwriter repurchases shares distributed by
the Underwriter or dealer. Any of the foregoing transactions may result in the
maintenance of a price for the Preferred Securities at a level above that which
might otherwise prevail in the open market. Neither the Corporation nor the
Underwriter makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Preferred Securities. The Underwriter is not required to engage in
any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
Because the National Association of Securities Dealers, Inc. ("NASD")
is expected to view the Preferred Securities as interests in a direct
participation program, the offering of the Preferred Securities is being made in
compliance with the applicable provisions of Rule 2810 of the NASD's Conduct
Rules.
The Preferred Securities are a new issue of securities with no
established trading market. The Corporation and the Trust Issuer have been
advised by the Underwriter that it intends to make a market in the Preferred
Securities. However, the Underwriter is not obligated to do so and such market
making may be interrupted or discontinued at any time without notice at the sole
discretion of the Underwriter. Application has been made to list the Preferred
Securities on the Nasdaq National Market. However, three market makers for the
Preferred Securities are required for original listing, and two are required for
continued listing thereafter. The presence of a second or a third market maker
cannot be assured. Accordingly, no assurance can be given as to the development
or liquidity of any market for the Preferred Securities.
The Corporation and the Trust Issuer have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the
Preferred Securities, the enforceability of the Trust Agreement and the creation
of the Trust Issuer will be passed upon by Richards, Layton & Finger, special
Delaware counsel to the Corporation and the Trust Issuer. The validity of the
Guarantee and the Junior Subordinated Debentures will be passed upon for the
Corporation by Thompson Hine. Certain legal matters will be passed upon for the
Underwriter by Patton Boggs, LLP. Certain matters relating to the United States
federal income tax considerations will be passed upon for the Corporation by
Thompson Hine.
Malvin E. Bank, a partner of Thompson Hine, is Secretary, Assistant
Treasurer and a Director of the Corporation and a Director of the Bank. Mr. Bank
owns 15,000 of the Corporation's Common Shares. Other partners of Thompson Hine
own a total of 600 of the Corporation's Common Shares.
EXPERTS
The consolidated financial statements of Metropolitan as of December
31, 1997 and 1996, and for each of the three years in the period ended December
31, 1997, included in this Prospectus and Registration Statement have been
included herein and in the Registration Statement in reliance upon the report of
Crowe Chizek and Company LLP, as set forth in its report thereon, appearing
elsewhere herein. The financial statements audited by Crowe Chizek and Company
LLP have been included in reliance upon such report given upon their authority
as an expert in accounting and auditing.
86
93
AVAILABLE INFORMATION
The Corporation is subject to the informational requirements of the
Exchange Act, and in accordance therewith, files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material
may also be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov.
The Corporation and the Trust Issuer have filed with the Commission a
Registration Statement on Form S-1 (together with all amendments thereto, the
"Registration Statement"), of which this Prospectus is a part, under the
Securities Act, with respect to the Preferred Securities, the Junior
Subordinated Debentures and the Guarantee. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Corporation, the Trust
Issuer, the Preferred Securities, the Junior Subordinated Debentures and the
Guarantee, reference is made to the Registration Statement, including the
exhibits thereto. This Prospectus contains a description of the material terms
and features of all material contracts, reports or exhibits to the Registration
Statement required to be disclosed; however, the statements contained in this
Prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement are, of necessity, brief descriptions
thereof and are not necessarily complete, and, in each instance, reference is
made to the copy of such document so filed for a more complete description of
the matter involved. Each such statement is qualified in its entirety by such
reference. The Registration Statement may be inspected without charge at the
principal office of the Commission in Washington, D.C., and copies of all or
part of it may be obtained from the Commission upon payment of the prescribed
fees.
No separate financial statements of the Trust Issuer have been included
herein. The Corporation does not consider that such financial statements would
be material to holders of Preferred Securities because (i) all of the voting
securities of the Trust Issuer will be owned by the Corporation, a reporting
company under the Exchange Act, (ii) the Trust Issuer has no independent
operations but exists for the sole purpose of issuing securities representing
undivided beneficial interests in the assets of the Trust Issuer and investing
the proceeds thereof in Junior Subordinated Debentures issued by the
Corporation, and (iii) the Corporation and the Trust Issuer believe that, taken
together, the obligations of the Corporation under the Guarantee, the Trust
Agreement, the Junior Subordinated Debentures, the Indenture and the Expense
Agreement, constitute, in the aggregate, a full, irrevocable and unconditional
guarantee, on a subordinated basis, of all of the Trust Issuer's obligations
under the Preferred Securities. See "Description of the Junior Subordinated
Debentures" and "Description of the Guarantee."
The Trust Issuer is not currently subject to the information reporting
requirements of the Exchange Act and the Corporation does not expect that the
Trust Issuer will file reports, proxy statements and other information under the
Exchange Act with the Commission.
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94
METROPOLITAN FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.................................................................................F-2
Consolidated Financial Statements
Consolidated Statements of Financial Condition
as of December 31, 1997 and 1996......................................................................F-3
Consolidated Statements of Operations for the Years
ended December 31, 1997, 1996 and 1995...............................................................F-4
Consolidated Statements of Shareholders' Equity for the Years
ended December 31, 1997, 1996 and 1995................................................................F-5
Consolidated Statements of Cash Flows for the Years
ended December 31, 1997, 1996 and 1995................................................................F-6
Notes to Consolidated Financial Statements.....................................................................F-8
F-1
95
REPORT OF INDEPENDENT AUDITORS
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, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
CROWE, CHIZEK AND COMPANY LLP
Cleveland, Ohio
February 20, 1998
F-2
96
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
ASSETS
Cash and due from banks (Note 12) $ 14,152,785 $ 7,777,868
Interest-bearing deposits in other banks 1,961,183 2,744,709
Securities purchased under resale agreements 6,396,720 6,000,000
------------ ------------
Cash and cash equivalents 22,510,688 16,522,577
Securities available for sale (Note 2) 1,705,879 13,173,458
Securities held to maturity (Note 2) 4,740,000
Mortgage-backed securities available for sale (Notes 2 and 8) 143,166,654 56,672,294
Loans held for sale 14,230,130 8,972,946
Loans receivable, net (Notes 3 and 8) 693,654,608 637,492,935
Federal Home Loan Bank stock, at cost (Note 8) 5,349,700 3,988,600
Accrued interest receivable 5,752,161 4,790,661
Premises and equipment, net (Note 4) 13,927,911 11,332,239
Real estate owned, net (Note 5) 2,037,465 177,300
Intangible assets 2,986,539 3,238,839
Loan servicing rights (Note 6) 9,223,974 8,050,837
Prepaid expenses and other assets 5,698,912 4,663,157
------------ ------------
Total assets $924,984,621 $769,075,843
============ ============
LIABILITIES
Noninterest-bearing deposits (Notes 6 and 7) $ 46,234,027 $ 30,850,882
Interest-bearing deposits (Note 7) 691,547,834 591,253,635
Borrowings (Note 8) 135,869,673 101,873,673
Accrued interest payable 3,272,815 4,120,163
Other liabilities 11,399,016 10,733,121
------------ ------------
Total liabilities 888,323,365 738,831,474
------------ ------------
Commitments (Notes 4 and 12)
SHAREHOLDERS' EQUITY (Note 13)
Common stock, no par value, 20,000,000 shares
authorized, 7,051,270 shares issued and
outstanding
Additional paid-in capital 11,101,383 11,101,383
Retained earnings 24,269,873 18,466,986
Unrealized gain on securities available for
sale, net of tax 1,290,000 676,000
------------ ------------
Total shareholders' equity 36,661,256 30,244,369
------------ ------------
Total liabilities and shareholders' equity $924,984,621 $769,075,843
============ ============
See accompanying notes to consolidated financial statements.
F-3
97
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
INTEREST INCOME
Interest and fees on loans $61,230,083 $50,267,618 $39,963,189
Interest on mortgage-backed securities 6,946,824 2,890,437 2,492,744
Interest and dividends on other
investments 1,169,208 1,293,828 979,566
----------- ----------- -----------
Total interest income 69,346,115 54,451,883 43,435,499
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 34,120,452 28,131,837 23,521,751
Interest on borrowings 7,582,855 4,984,212 3,294,520
----------- ----------- -----------
Total interest expense 41,703,307 33,116,049 26,816,271
----------- ----------- -----------
NET INTEREST INCOME 27,642,808 21,335,834 16,619,228
Provision for loan losses (Note 3) 2,340,000 1,635,541 958,573
----------- ----------- -----------
Net interest income after provision
for loan losses 25,302,808 19,700,293 15,660,655
----------- ----------- -----------
NONINTEREST INCOME
Loan servicing income, net 1,292,719 1,203,779 1,067,767
Service charges on deposit accounts 715,657 564,654 426,175
Net gain on sale of loans 488,104 202,621 444,313
Net gain on sale of securities 92,338 133,706 388,581
Loan option income 320,464 695,798 559,256
Loan credit discount income 640,262
Other operating income 1,231,524 972,057 697,361
----------- ----------- -----------
Total noninterest income 4,140,806 3,772,615 4,223,715
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and related personnel costs 10,671,192 8,669,705 6,819,383
Occupancy and equipment expense 3,044,220 2,464,926 2,134,862
Federal deposit insurance premiums
(Note 17) 595,268 4,211,869 1,132,125
Marketing expense 685,954 694,898 542,838
State franchise taxes 542,577 461,127 306,518
Data processing expense 441,335 599,150 586,260
Amortization of intangibles 262,659 255,720 220,115
Other operating expenses 3,905,522 3,481,610 2,445,150
----------- ----------- -----------
Total noninterest expense 20,148,727 20,839,005 14,187,251
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 9,294,887 2,633,903 5,697,119
Provision for income taxes (Note 9) 3,492,000 1,095,000 2,154,700
----------- ----------- -----------
NET INCOME $ 5,802,887 $ 1,538,903 $ 3,542,419
=========== =========== ===========
Basic earnings per share (Note 1) $ 0.82 $ 0.24 $ 0.57
=========== =========== ===========
Diluted earnings per share (Note 1) $ 0.82 $ 0.24 $ 0.57
=========== =========== ===========
Weighted average shares for basic
earnings per share 7,051,270 6,384,604 6,251,270
Effect of dilutive stock options 11,726 0 0
----------- ----------- -----------
Weighted average shares for diluted
earnings per share 7,062,996 6,384,604 6,251,270
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
98
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
UNREALIZED
GAIN/(LOSS)
ADDITIONAL ON SECURITIES TOTAL
COMMON PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
STOCK CAPITAL EARNINGS FOR SALE EQUITY
---------- ------------ ----------- ----------- --------------
Balance, January 1, 1995 $ 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
Net income 5,802,887 5,802,887
Change in unrealized gain/(loss) on
securities available for sale,
net of tax 614,000 614,000
---------- ------------ ----------- ----------- --------------
Balance, December 31, 1997 $ 0 $ 11,101,383 $24,269,873 $ 1,290,000 $ 36,661,256
========== ============ =========== =========== ==============
See accompanying notes to consolidated financial statements.
F-5
99
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,802,887 $ 1,538,903 $ 3,542,419
Adjustments to reconcile net income to net cash provided
by operating activities
Net amortization and depreciation 4,533,303 3,022,358 2,036,614
Net gain on sale of securities (92,338) (133,706) (388,581)
Provision for loan and REO losses 2,340,000 1,677,541 973,573
Deferred tax provision (1,131,325) (183,303) (9,326)
Loans originated for sale (36,731,553) (35,235,545) (45,327,774)
Loans purchased for sale (10,654,255) (16,675,331) (16,210,821)
Proceeds from sale of loans 51,402,212 43,410,896 59,830,616
Repayments on loans held for sale 39,180 809,737
Net loss on sale of premises,
equipment and real estate owned 104,608 113,428 3,307
FHLB stock dividend (348,800) (264,100) (216,200)
Changes in other assets (865,930) (2,980,967) (2,618,437)
Changes in other liabilities (561,078) 1,051,576 6,588,239
------------- ------------- -------------
Net cash provided by (used in)
operating activities 13,836,911 (3,848,513) 8,203,629
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (288,659,170) (218,376,200) (117,432,139)
Purchases of:
Loans (103,062,046) (110,565,748) (86,134,911)
Mortgage-backed securities (6,364,379) (13,570,050)
Securities available for sale (5,101,096) (13,336,840) (23,464,948)
Securities held to maturity (4,740,000)
Mortgage loan servicing rights (2,055,908) (732,262) (5,329,415)
FHLB stock (1,012,300) (155,800) (1,041,300)
Premises and equipment (3,713,528) (4,506,250) (4,869,739)
Proceeds from maturities and repayments of:
Loans 208,024,684 140,245,124 96,163,166
Mortgage-backed securities 18,111,121 7,189,624 3,525,478
Securities available for sale 6,051,195 2,000,000
Proceeds from sale of:
Loans 14,088,337 12,106,490
Mortgage-backed securities 3,636,772 29,142,705
Securities available for sale 16,582,643 16,690,055 7,000,000
Premises, equipment and real estate owned 551,043 1,250,813 102,678
Additional investment in real estate owned (88,481)
Premium paid for credit card relationships (10,359) (306,146)
------------- ------------- -------------
Net cash used for investing
activities (157,449,439) (174,379,223) (100,338,425)
------------- ------------- -------------
(continued)
F-6
100
(METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts $ 115,604,639 $ 118,279,840 $ 67,369,745
Proceeds from borrowings 115,219,000 101,500,000 60,000,000
Repayment of borrowings (76,223,000) (53,000,000) (22,480,000)
Net activity on lines of credit (5,000,000) 6,500,000 (6,150,000)
Proceeds from issuance of stock 3,300,000
------------- ------------- -------------
Net cash provided by
financing activities 149,600,639 176,579,840 98,739,745
------------- ------------- -------------
Net change in cash and cash
equivalents 5,988,111 (1,647,896) 6,604,949
Cash and cash equivalents at
beginning of year 16,522,577 18,170,473 11,565,524
------------- ------------- -------------
Cash and cash equivalents at end
of year $ 22,510,688 $ 16,522,577 $ 18,170,473
============= ============= =============
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 42,550,655 $ 33,546,947 $ 23,979,013
Income taxes 4,871,000 1,587,000 2,749,000
Transfer from loans receivable
to other real estate 2,282,807 1,325,948 326,709
Transfer from loans receivable
to loans held for sale 9,678,044
Loans securitized 98,324,696 14,458,129 53,795,086
See accompanying notes to consolidated financial statements.
F-7
101
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is
an Ohio corporation organized for operation as 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 of Cleveland (the
"Bank"), and its wholly-owned subsidiaries, Kimberly Construction Company,
Incorporated, and Metropolitan Savings Service Corporation and its wholly-owned
subsidiary Metropolitan Securities Corporation 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 and purchasing
multifamily and nonresidential real estate loans primarily in Ohio, New Jersey,
Michigan, California, Kentucky and Pennsylvania and one-to-four family
residential real estate loans primarily 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 in Note 15. 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 do 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: The Corporation classifies debt and mortgage-backed
securities as held to maturity or available for sale. The Corporation classifies
marketable equity securities as available for sale.
Securities classified as held to maturity are those that management has
the positive intent and ability to hold to maturity. Securities held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts.
Securities classified as available for sale are those that management
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: All loans are held for investment unless specifically designated
as held for sale. When the Bank originates or purchases loans, it makes a
determination whether or not to classify loans as held for sale. The Bank
re-evaluates its intention to hold or sell loans at each balance sheet date
based on the current environment and, if appropriate, reclassifies loans as held
for sale. Sales of loans are dependent upon various factors including interest
rate movements, deposit flows, the availability and attractiveness of other
sources of funds, loan demand by borrowers, and liquidity and capital
requirements.
Loans held for investment are stated at the principal amount
outstanding adjusted for amortization of premiums and accretion of discounts
using the interest method. At December 31, 1997 and 1996, management had the
intent and the Bank had the ability to hold all loans being held for investment
for the foreseeable future.
Loans held for sale are recorded at the lower of cost or market. When
the Bank purchases real estate loans and simultaneously writes an option giving
the holder the right to purchase those loans, those loans are designated as held
for sale. Gains and losses on the sale of loans are determined by the identified
loan method and are reflected in operations at the time of the settlement of the
sale.
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.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by allocating a
portion of the allowance for losses on loans to such loans. If these allocations
require an increase in the allowance for losses on loans, such increase is
reported as a provision for loan
F-8
102
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
losses. Management excludes all consumer loans and residential single family
loans with balances less than $200,000 from its review for impairment. All
impaired loans are placed on nonaccrual 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 allowance account through a
charge to income. Expenses to carry real estate owned 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.
Long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If
impaired, the assets are recorded at fair value based on discounted cash flows.
INTANGIBLE ASSETS: Intangible assets resulting from the acquisition of
the Bank are 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 the Bank's
shareholders' equity in calculating tangible capital for regulatory purposes.
LOAN SERVICING RIGHTS: Effective January 1, 1995, the Corporation
adopted Statement of Financial Accounting Standards (SFAS) No. 122 "Accounting
for Mortgage Servicing Rights." This statement requires lenders who sell or
securitize originated loans and retain servicing rights to recognize as separate
assets the rights to service mortgage loans for others. Effective January 1,
1997, SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" superseded SFAS No. 122 and was adopted by
the Corporation. SFAS No. 125 provided new guidance on the determination of the
value of mortgage servicing rights and when to recognize the sale of loans
without changing the concept of assigning value to mortgage servicing rights
when a loan is sold or securitized and the servicing is retained. Both
statements were adopted prospectively.
Purchased mortgage servicing rights are initially valued at cost. When
loans are sold or securitized and servicing rights are retained, those rights
are valued by allocating the book value of the loans between the loans or
securities and the servicing rights based on the relative fair value of each.
Servicing rights that have been capitalized are amortized in proportion to and
over the period of estimated servicing income. Servicing rights are assessed for
impairment periodically by estimating the future net servicing income of the
portfolio based on management's estimate of remaining loan lives. 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. 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.
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 those items are recognized for income
tax purposes. A valuation allowance, if needed, reduces deferred tax assets to
the amount expected to be realized.
STOCK OPTIONS: As of January 1, 1996, Metropolitan adopted SFAS No.
123, "Accounting for Stock-based Compensation," which encourages a fair-value
based accounting method for stock based compensation arrangements. Metropolitan
has elected to disclose pro forma net income and earnings per share amounts as
permitted by this statement. For the periods presented, no expense has been
recognized as the market price of the common shares exceeds the price on the
grant date.
TRUST DEPARTMENT ASSETS AND INCOME: Property held by the Corporation 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 Corporation.
EARNINGS PER SHARE: The accounting standard for computing earnings per
share was revised for 1997, and all earnings per share data previously reported
have been restated to follow the new standard.
Basic and diluted earnings per share are computed based on weighted
average shares outstanding during the period. Basic earnings per share has been
computed by dividing net income by the weighted average shares outstanding.
Diluted earnings per share has been computed by dividing net income by the
diluted weighted average shares outstanding. Diluted weighted average shares
were calculated assuming the exercise of stock options less the treasury shares
assumed to be purchased from the proceeds using the average market price of the
Corporation's stock. All per share information has been retroactively adjusted
to reflect the effect of the stock dividends and stock splits.
F-9
103
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
FINANCIAL STATEMENT PRESENTATION: Certain previously reported
consolidated financial statement amounts have been reclassified to conform to
the 1997 presentation.
NOTE 2--SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values
of investment securities at December 31, 1997 and 1996 are as follows:
1997
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- -------- ------------
AVAILABLE FOR SALE
Mutual funds $ 1,705,879 $ 1,705,879
Mortgage-backed securities 141,148,819 $2,077,015 $(59,180) 143,166,654
------------ ---------- -------- ------------
142,854,698 2,077,015 (59,180) 144,872,533
HELD TO MATURITY
Tax-exempt municipal bond 4,740,000 4,740,000
------------ ---------- -------- ------------
$147,594,698 $2,077,015 $(59,180) $149,612,533
============ ========== ======== ============
1996
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- -------- ------------
AVAILABLE FOR SALE
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
----------- ----------- -------- -----------
$68,821,541 $1,094,818 $(70,607) $69,845,752
=========== ========== ======== ===========
The amortized cost and fair value of debt securities at December 31,
1997, by contractual maturity are shown below. Expected maturities will 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
--------------- -------------
Securities held to maturity due after ten years $ 4,740,000 $ 4,740,000
Mortgage-backed securities available for sale 141,148,819 143,166,654
--------------- -------------
Total debt securities $ 145,888,819 $ 147,906,654
=============== =============
Proceeds from the sale of mortgage-backed securities available for sale
were $3,636,772 in 1996 and $29,142,705 in 1995. Proceeds from the sale of
securities available for sale were $16,582,643 in 1997, $16,690,055 in 1996, and
$7,000,000 in 1995. Gross gains realized on those sales were $102,955 in 1997,
$133,706 in 1996 and $475,587 in 1995. Gross losses of $10,617 and $87,006 were
realized in 1997 and 1995, respectively.
Certain securities with a carrying value of $76,606,671 and a market
value of $77,760,890 at December 31, 1997, were pledged to secure reverse
repurchase agreements. Other securities with carrying values of $107,047 and
$2,196,169 and market values of $114,166 and $2,214,834 were pledged to the
State of Ohio to enable Metropolitan to engage in trust activities and the
Federal Reserve Bank to enable Metropolitan to receive treasury, tax and loan
payments, respectively.
F-10
104
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 3--LOANS RECEIVABLE
The composition of the loan portfolio at December 31, 1997 and 1996 is
as follows:
1997
-------------------------------------------------------
ORIGINATED PURCHASED TOTAL
--------------- ------------- -------------
Real estate loans
Construction loans
Residential single family $ 67,985,876 $ 67,985,876
Commercial 19,200,000 19,200,000
Land 29,076,961 29,076,961
Loans in process (46,833,171) (46,833,171)
--------------- -------------
Construction loans, net 69,429,666 69,429,666
Permanent loans
Residential single family 127,227,343 $ 19,458,082 146,685,425
Multifamily 89,689,810 104,759,993 194,449,803
Commercial 51,605,536 114,987,215 166,592,751
Other 565,795 565,795
--------------- ------------- -------------
Total real estate loans 338,518,150 239,205,290 577,723,440
Consumer loans 45,758,041 22,832,076 68,590,117
Business loans and other loans 57,496,142 57,496,142
--------------- ------------- -------------
Total loans $ 441,772,333 $ 262,037,366 703,809,699
=============== ============= -------------
Discount on loans, net (425,466)
Deferred loan fees, net (4,107,746)
Allowance for losses on loans (5,621,879)
------------
$693,654,608
============
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
============
Loans with adjustable rates, included above, totaled $485,259,000 and
$465,306,000 at December 31, 1997 and 1996, respectively.
F-11
105
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
Metropolitan's real estate loans are secured by property in the
following states:
1997 1996
---- ----
Ohio 60% 62%
California 11 8
Michigan 5 7
Pennsylvania 5 6
Other 19 17
---- ----
100% 100%
=== ===
Activity in the allowance for losses on loans is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------ -------------- --------
Balance at beginning of year $4,175,015 $2,764,664 $1,910,714
Provision for loan losses 2,340,000 1,635,541 958,573
Net charge-offs (893,136) (225,190) (104,623)
---------- ---------- ----------
Balance at end of year $5,621,879 $4,175,015 $2,764,664
========== ========== ==========
Management analyzes loans on an individual basis and considers a loan
to be impaired when it is probable that all principal and interest amounts will
not be collected according to the loan contract based on current information and
events. Loans which are past due two payments or less and that management feels
are probable of being paid current within 90 days are not considered to be
impaired loans.
Information regarding impaired loans is as follows at December 31:
1997 1996
---------- ----------
Balance of impaired loans $ 516,498 $3,495,006
Less portion for which no allowance for losses on
loans is allocated 516,498 2,773,777
---------- ----------
Portion of impaired loan balance for which an allowance
for losses on loans is allocated $ 0 $ 721,229
========== ==========
Portion of allowance for losses on loans allocated to
the impaired loan balance $ 0 $ 241,269
========== ==========
Information regarding impaired loans is as follows for the year ended
December 31:
1997 1996
---------- ----------
Average investment in impaired loans during the year $ 944,283 $4,220,286
========== ==========
Interest income recognized during impairment $ 16,691 $ 48,146
========== ==========
Interest income recognized on cash basis during the year $ 16,691 $ 48,146
========== ==========
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, significant 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 such related parties totaled $1,296,000 and
$1,372,000 at December 31, 1997 and 1996, respectively.
F-12
106
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 4--PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
DECEMBER 31,
---------------------------------
1997 1996
------------- -------------
Land $ 2,752,946 $ 2,969,274
Office buildings 5,334,323 3,684,536
Leasehold improvements 2,783,785 2,329,573
Furniture, fixtures and equipment 6,389,966 4,899,961
Construction in progress 458,515 678,209
------------- -------------
Total 17,719,535 14,561,553
Accumulated depreciation 3,791,624 3,229,314
------------- -------------
$13,927,911 $11,332,239
=========== ===========
Depreciation expense was $978,193, $683,718, and $519,533 for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Bank leases certain of its branches and corporate headquarters
space under lease agreements whose lease terms are renewable periodically. Rent
expense for the years ended December 31, 1997, 1996 and 1995 was $923,395,
$874,164, and $839,849, respectively.
The future minimum annual rental commitments as of December 31, 1997
for all noncancellable leases are as follows:
1998 $ 960,133
1999 917,775
2000 914,973
2001 172,702
2002 118,424
Thereafter 344,161
------------
$3,428,168
============
NOTE 5--REAL ESTATE OWNED
Activity in the allowance for loss on real estate owned is as follows:
YEAR ENDED
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------ ---------- -------
Balance at beginning of year $ 57,000 $15,000 $ 0
Provision for loss 0 42,000 15,000
Charge-offs (57,000) 0 0
-------- ------- --------
Balance at end of year $ 0 $57,000 $ 15,000
======== ======= ========
F-13
107
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 6--LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans are summarized as follows:
DECEMBER 31,
-------------------------------
1997 1996
-------------- --------------
Mortgage loan portfolios serviced for
FHLMC $ 656,816,894 $ 713,289,564
FNMA 507,345,160 353,863,253
Other 26,023,287 35,361,907
-------------- --------------
$1,190,185,341 $1,102,514,724
============== ==============
Custodial balances maintained in noninterest-bearing deposit accounts
with the Bank in connection with the foregoing loan servicing were approximately
$18,894,000 and $12,895,000 at December 31, 1997 and 1996, respectively.
Following is an analysis of the changes in loan servicing rights
acquired for the year ended December 31:
1997 1996
-------------- --------
Balance at beginning of year $ 7,286,403 $ 8,587,831
Additions 2,055,908 732,262
Amortization (1,682,793) (2,033,690)
------------- ------------
Balance at end of year $ 7,659,518 $ 7,286,403
============== =============
Following is an analysis of the changes in loan servicing rights
originated for the year ended December 31:
1997 1996
-------------- ---------
Balance at beginning of year $ 764,434 $ 541,727
Additions 1,157,451 333,507
Amortization (357,429) (110,800)
----------- ---------
Balance at end of year $1,564,456 $ 764,434
========== ==========
The Corporation did not have a valuation allowance associated with loan
servicing rights at any time during the years ended December 31, 1997, 1996, and
1995.
NOTE 7--DEPOSITS
Deposits consist of the following:
DECEMBER 31,
----------------------------------------------------------------
1997 1996
------------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
Noninterest-bearing deposits $ 46,234,027 6% $ 30,850,882 5%
============= =============
Interest-bearing checking
accounts--2.08% to 3.20% $ 43,080,404 6 $ 39,363,322 6
Passbook savings and
statement savings--
2.72% to 5.46% 170,442,615 23 176,430,162 29
Certificates of deposit 478,024,815 65 375,460,151 60
------------- ---- ------------- ----
Total interest-bearing
deposits $691,547,834 94 $591,253,635 95
============ ---- ============ ----
$737,781,861 100% $622,104,517 100%
============ === ============ ===
F-14
108
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
At December 31, 1997, scheduled maturities of certificates of deposit
are as follows:
WEIGHTED
AVERAGE
YEAR INTEREST
ENDED AMOUNT RATE
----- ------ ----
1998 $334,571,633 5.82%
1999 115,282,966 6.16%
2000 22,906,179 6.93%
2001 3,185,158 5.91%
2002 1,783,722 6.05%
Thereafter 295,157 6.95%
------------
$478,024,815 5.96%
============
The aggregate amount of certificates of deposit with balances of
$100,000 or more was approximately $86,884,000 and $58,516,000 at December 31,
1997 and 1996, respectively. The Bank also accepts out-of-state time deposits
from individuals and entities, predominantly credit unions. At December 31,
1997, approximately $57.7 million of time deposits, or 12.1% of Metropolitan's
time deposits, were held by these entities. At December 31, 1996, approximately
$61.5 million of time deposits, or 9.9% of Metropolitan's time deposits, were
held by these entities.
Related party deposits totaled $1,116,000 and $2,164,000 at December
31, 1997 and 1996, respectively.
NOTE 8--BORROWINGS
Borrowings consisted of the following:
DECEMBER 31,
1997 1996
-------------------- -------------
Federal Home Loan Bank advances
(5.7% and 5.5% at December 31, 1997
and 1996, respectively) $ 41,000,000 $ 59,500,000
Reverse repurchase agreements
(5.7% and 5.6% at December 31, 1997
and 1996, respectively) 74,496,000 23,500,000
Commercial bank line of credit (8.5%
at December 31, 1997--variable rate) 1,500,000
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
------------ ------------
$135,869,673 $101,873,673
============ ============
At December 31, 1997, scheduled payments on borrowings are as follows:
WEIGHTED
AVERAGE
YEAR INTEREST
ENDED AMOUNT RATE
----- ------ ----
1998 $ 42,417,556 5.64%
1999 23,367,566 5.70%
2000 402,764 9.25%
2001 8,431,787 8.85%
2002 47,250,000 5.77%
Thereafter 14,000,000 10.48%
------------
$135,869,673 6.40%
============
F-15
109
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
Federal Home Loan Bank advances are collateralized by FHLB stock and
one-to-four family first mortgage loans with an aggregate carrying value of
approximately $147,000,000 and $89,250,000 at December 31, 1997 and 1996,
respectively. In addition, Metropolitan also has a $50,000,000 cash management
line with the Federal Home Loan Bank which at December 31, 1997 was unused.
The Corporation has a commercial line of credit agreement with the
Huntington National Bank. The maximum borrowing under the line is $4,000,000.
The line has a revolving term until 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, 1997, the outstanding balance
under this agreement was $1,500,000.
In 1993 and early 1994, the Corporation issued subordinated notes
("1993 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 are being
amortized on a straight line basis over the life of the notes. The notes are
unsecured. The notes may be redeemed prior to maturity by paying a prepayment
premium. The prepayment premium is 6% through October 25, 1998 and decreases by
1% during each year following that date.
During 1995, the Corporation issued subordinated notes ("1995
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 are being amortized on a
straight line basis over the life of the notes. The notes are unsecured. The
notes may not be redeemed prior to December 1, 1998. From that date through
November 30, 1999, the notes may be redeemed by paying a 3.0% premium. From
December 1, 1999 through November 30, 2000, the notes may be redeemed by paying
a 1.5% premium. Thereafter, the notes may be redeemed at par.
The following tables set forth certain information about borrowings
during the periods indicated.
YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1996
------------------ --------------------
MAXIMUM MONTH-END BALANCES:
FHLB advances $73,700,000 $71,150,000
1993 subordinated notes 4,873,673 4,873,673
1995 subordinated notes 14,000,000 14,000,000
Commercial bank line of credit 4,000,000
Reverse repurchase agreements 74,496,000 23,500,000
YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1996
------------------ --------------------
AVERAGE BALANCE:
FHLB advances $59,324,587 $50,545,916
1993 subordinated notes 4,873,673 4,873,673
1995 subordinated notes 14,000,000 14,000,000
Commercial bank line of credit 113,699
Reverse repurchase agreements 38,843,324 4,479,839
YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1996
------------------ --------------------
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances 5.65% 5.43%
1993 subordinated notes 10.47 10.47
1995 subordinated notes 10.48 10.48
Commercial bank line of credit 8.98
Reverse repurchase agreements 5.73 5.61
F-16
110
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 9--INCOME TAXES
The provision for income taxes consists of the following components:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
Current tax provision:
Federal expense $4,478,325 $1,278,303 $2,164,026
State expense 145,000
---------- ---------- ----------
Total current expense 4,623,325 1,278,303 2,164,026
Deferred federal benefit (1,131,325) (183,303) (9,326)
---------- ---------- ----------
$3,492,000 $1,095,000 $2,154,700
========== ========== ==========
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
---------------------------------------
1997 1996
------------ -------------
Deferred tax assets
Deferred loan fees $ 124,872 $ 196,538
Loan servicing rights 426,811 377,977
Bad debt deduction 1,051,179 99,990
Other 19,859 17,530
------------ -------------
1,622,721 692,035
------------ -------------
Deferred tax liabilities
Debt issuance costs (359,542)
Employment contract (100,891) (104,768)
Depreciation expense (95,103) (59,370)
Stock dividends on FHLB stock (290,287) (163,526)
Other (1,162) (876)
------------ -------------
(487,443) (688,082)
------------ -------------
Net deferred tax asset $ 1,135,278 $ 3,953
============ =============
A reconciliation from income taxes at the statutory rate to the
effective provision for income taxes is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
----------- ------------ ------------
Statutory rate 35% 34% 34%
Income taxes at statutory rate $3,253,210 $ 895,527 $1,937,020
Officer's life premium 9,610 30,441 55,185
Amortization of purchased
intangibles 92,051 97,962 134,414
Tax exempt income (64,286)
Current state expense 94,250
Utilization of capital
loss carryforward (35,000)
Business expense limitation 62,684 67,368 41,753
Other 79,481 3,702 (13,672)
---------- ---------- ----------
Provision for income taxes $3,492,000 $1,095,000 $2,154,700
========== ========== ==========
Taxes attributable to security's gains and (losses) totaled $(2,682),
$45,460 and $121,548 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Prior to January 1, 1996, the Bank was able to use the
percentage-of-taxable income method of computing its tax bad debt deduction if
it was more favorable than the specific charge-off method. During 1996,
legislation was passed which removed the option of using the percentage of
taxable income method of computing the tax bad debt deduction. The change was
retroactive to 1988 with the additional tax due over a six year period beginning
in 1996, 1997, or 1998 based on the current level of loan activity. The changes
to the tax liability related to 1995 and prior years did not result in any
additional tax expense in 1996 because deferred taxes had been provided on the
benefit of the percentage of taxable income method of computing the bad debt
deduction in each of those years.
F-17
111
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 10--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
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 $166,895, $126,599 and $96,902 for the
years ended December 31, 1997, 1996 and 1995, respectively. No discretionary
contributions have been made by the Corporation for the periods presented.
NOTE 11--STOCK OPTION PLAN
On October 28, 1997, the Board of Directors of Metropolitan adopted,
subject to the approval of Metropolitan's shareholders, the Metropolitan
Financial Corp. 1997 Stock Option Plan for key employees and officers of the
Corporation. The Plan is intended to encourage their continued employment with
Metropolitan and to provide them with additional incentives to promote the
development and long-term financial success of Metropolitan.
Subject to adjustment under certain circumstances, the maximum number
of Common Shares that may be issued under the plan is 650,000, which reflects an
adjustment for the 2-for-1 stock split completed in December, 1997. The Plan
provides for the grant of options, which may qualify as either incentive stock
options or nonqualified options. Grants of options will be made by the
Compensation and Organization Committee of the Board of Directors.
The exercise price of an option, whether an incentive stock option or a
nonqualified option, will not be less than the fair market value of the Common
Shares on the date of grant. On October 28, 1997, the Compensation and
Organization Committee of the Board of Directors approved grants of 80,000
incentive stock options and 320,000 nonqualified options.
An option may be exercised in one or more installments at the time or
times provided in the option instrument. Generally, options granted to employees
will become exercisable with respect to one-half of the Common Shares covered by
the option on the third anniversary, and one-fourth of the Common Shares covered
by the option on the fourth and fifth anniversaries of the date of grant.
Options granted under the Plan will expire no later than ten years after grant
in the case of an incentive stock option and ten years and one month after grant
in the case of a nonqualified option.
A summary of option activity is presented below:
STOCK OPTION ACTIVITY:
1997
---------------------------------------------------------------
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
----------------------- --------------------
SHARES OPTION PRICE SHARES OPTION PRICE
------ ------------ ------ ------------
Outstanding at beginning
of year 0 0
Granted 80,000 $ 10.13 320,000 $10.13-$11.14
Exercised 0 0
Forfeited 0 0
------ ------- -------------
Outstanding at end of year 80,000 $ 10.13 320,000 $10.13-$11.14
====== =======
Closing stock price
on date of grant $ 10.13 $ 10.13
Assumptions used:
Expected option life 10 years 5 years
Risk-free interest rate 5.97% 5.75%
Expected stock price
volatility 33.00% 33.00%
Expected dividends 0 0
Estimated fair value of options granted:
Granted at $10.13 $ 4.55 $ 2.53
Granted at $11.14 $ 1.77
F-18
112
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
PRO FORMA DISCLOSURES:
For purposes of providing the required disclosures under SFAS No. 123,
"Accounting for Stock Based Compensation," the Black Scholes option pricing
model was used to estimate the value of these options. The Black Scholes model
was developed to estimate the fair value of equity options. Had compensation
costs been determined in accordance with SFAS No. 123, net income and earnings
per share would be affected as summarized in the schedule below (In thousands,
except per share data):
Net income--as reported $5,803
Net income--pro forma 5,614
Basic and diluted earnings
per share--as reported $ 0.82
Basic and diluted earnings
per share--pro forma 0.79
NOTE 12--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, 1997, the Bank had fixed and variable rate
commitments to originate and/or purchase loans (at market rates) of
approximately $22,343,000 and $49,443,000, respectively. In addition, the Bank
had firm commitments to sell fixed rate loans totaling $2,210,000 at December
31, 1997. Metropolitan's commitments to originate and purchase loans are for
loans at rates ranging from 6.5% to 16% and commitment periods up to one year.
During 1997 and 1996, the Corporation purchased approximately
$12,816,000 and $16,675,000 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 $320,464, $695,798, and $559,256 on the sale of these
options during the years ended December 31, 1997, 1996, and 1995, respectively.
At December 31, 1997, all options had been exercised and there were no loans
held for sale in connection with outstanding purchase options. At December 31,
1996, loans with a carrying value of $6,409,841 were held for sale in connection
with outstanding purchase options.
RESERVE REQUIREMENTS. The Bank is required to maintain $2,955,000 of
cash on hand or on deposit with the Federal Reserve to meet regulatory reserve
requirements at December 31, 1997. These funds do not earn interest.
LIQUIDITY REQUIREMENT. The Corporation is required to maintain cash or
short-term investments equal to six months interest on the 1995 subordinated
notes or approximately $675,000 as a condition of the indenture agreement
related to the 1995 subordinated notes.
NOTE 13--RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
In connection with the initial public offering of stock completed in
October, 1996, the Board of Directors approved a 3,125,635-for-1 stock split,
effected in the form of a stock dividend during October 1996. In addition, the
Board of Directors approved a 2-for-1 stock split in the fourth quarter, 1997,
increasing the number of shares outstanding to 7,051,270.
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, 1997 and 1996, 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 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:
F-19
113
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
CAPITAL TO RISK- TIER 1
WEIGHTED ASSETS CAPITAL
---------------------- TO ADJUSTED
TOTAL TIER 1 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
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
----------------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
1997
Total capital
(to risk weighted assets) $54,343 8.39% $51,836 8.0% $64,796 10.0%
Tier 1 (core) capital
(to risk weighted assets) $50,215 7.75% $25,918 4.0% $38,877 6.0%
Tier 1 (core) capital
(to adjusted total assets) $50,215 5.47% $36,738 4.0% $45,923 5.0%
Tangible capital
(to adjusted total assets) $49,901 5.43% $13,777 1.5% N/A
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
The Bank at year-end 1997 was categorized as adequately capitalized. At
December 31, 1997, the most restrictive regulatory constraint on the payment of
dividends from the Bank to the holding company and the retention of the
adequately capitalized status was the total capital (to risk weighted capital)
ratio. Management is not aware of any event or circumstances after December 31,
1997 that would change the capital category.
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
Office of Thrift Supervision ("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 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.
The terms of the 1993 subordinated notes prohibit the Corporation from
paying any cash dividends on common stock until those notes are paid off. The
terms of the 1995 subordinated notes and related indenture agreement along with
the Huntington National Bank line of credit prohibit the Corporation from paying
cash dividends unless the Corporation's ratio of tangible equity to total assets
exceeds 7.0%.
F-20
114
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 14--RELATED PARTY TRANSACTIONS
In the years ended December 31, 1997, 1996 and 1995 the Corporation
expensed $96,000 per year for management fees relating to services provided by
an affiliate.
Certain directors and executive officers of the Corporation and its
subsidiaries hold an interest in the 1993 subordinated notes. The aggregate
interest in the subordinated debt held by related parties totaled $1,265,284 at
December 31, 1997 and 1996. In addition, the Corporation's 401(k) salary
deferral plan held a $400,000 interest in the subordinated debt at December 31,
1997 and 1996.
NOTE 15--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, 1997 DECEMBER 31, 1996
---------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
Cash and equivalents $ 22,510,688 $ 22,510,688 $ 16,522,577 $ 16,522,577
Securities 6,445,879 6,445,879 13,173,458 13,173,458
Mortgage-backed securities 143,166,654 143,166,654 56,672,294 56,672,294
Loans, net 707,884,738 732,123,284 646,465,881 658,869,077
Federal Home Loan Bank stock 5,349,700 5,349,700 3,988,600 3,988,600
Loan servicing rights 9,223,974 11,707,000 8,050,837 8,830,101
Accrued interest receivable 5,752,161 5,752,161 4,790,661 4,790,661
Demand and savings deposits (260,223,821) (260,223,821) (246,644,366) (246,644,366)
Time deposits (478,024,815) (478,415,186) (375,460,151) (376,934,368)
Borrowings (135,869,673) (135,692,553) (101,873,673) (99,724,946)
Accrued interest payable (3,272,815) (3,272,815) (4,120,163) (4,120,163)
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, 1997, the estimated fair values
would necessarily have been realized at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1997 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, 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 fair value was
estimated based on quoted market price. The fixed and 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.
The carrying amount of 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 an independent
appraisal in 1997 and a discounted cash flow analysis in 1996. 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 materially different
than the nominal value.
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 trained work force, customer goodwill and
similar items.
NOTE 16--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.
F-21
115
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
PARENT COMPANY ONLY
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
ASSETS
Cash and due from banks $ 349,563 $ 180,112
Securities available for sale 1,705,879 2,009,083
Loans receivable 50,000 50,000
Investment in Metropolitan Savings Bank 54,234,523 46,383,503
Intangible assets 50,601 54,090
Prepaid expenses and other assets 1,198,148 1,198,757
----------- -----------
Total assets $57,588,714 $49,875,545
=========== ===========
LIABILITIES
Borrowings $20,373,673 $18,873,673
Other liabilities 553,785 757,503
----------- -----------
Total liabilities 20,927,458 19,631,176
=========== ===========
SHAREHOLDERS' EQUITY
Common stock
Additional paid-in capital 11,101,383 11,101,383
Retained earnings 24,269,873 18,466,986
Unrealized gain on securities
available for sale, net of tax 1,290,000 676,000
----------- -----------
Total shareholders' equity 36,661,256 30,244,369
----------- -----------
Total liabilities and
shareholders' equity $57,588,714 $49,875,545
=========== ===========
PARENT COMPANY ONLY
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Interest on loans and securities $ 107,505 $ 97,909 $ 7,211
Interest on borrowings 1,997,341 1,982,259 958,804
----------- ----------- -----------
Net interest expense (1,889,836) (1,884,350) (951,593)
Noninterest income
Dividends from Metropolitan
Savings Bank 1,500,000 1,400,000 850,000
Other operating income 3,647 1,541 89,845
----------- ----------- -----------
Total noninterest income 1,503,647 1,401,541 939,845
----------- ----------- -----------
Noninterest expense
Amortization of intangibles 3,490 3,490 3,490
State franchise taxes 21,111 24,672 4,833
Other operating expenses 246,244 249,507 315,424
----------- ----------- -----------
Total noninterest expense 270,845 277,669 323,747
----------- ----------- -----------
Income before income taxes (657,034) (760,478) (335,495)
Federal income tax benefit (723,000) (702,000) (361,000)
----------- ----------- -----------
Net income before equity in
undistributed net income of
Metropolitan Savings Bank 65,966 (58,478) 25,505
Equity in undistributed net income
of Metropolitan Savings Bank 5,736,921 1,597,381 3,516,914
----------- ----------- -----------
Net income $ 5,802,887 $ 1,538,903 $ 3,542,419
=========== =========== ===========
(continued)
F-22
116
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,802,887 $ 1,538,903 $ 3,542,419
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed net
income of Metropolitan Savings Bank (5,736,921) (1,597,381) (3,516,914)
Amortization 3,490 3,490 3,490
Change in other assets and liabilities (203,209) 351,706 (950,460)
------------ ------------ ------------
Net cash from operating activities (133,753) 296,718 (921,465)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities 400,000 7,428,600
Purchase of securities available
for sale (96,796) (8,335,440) (1,102,243)
Capital contributions to Metropolitan
Savings Bank (1,500,000) (7,300,000) (4,520,000)
------------ ------------ ------------
Net cash from investing activities (1,196,796) (8,206,840) (5,622,243)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 19,000,000
Repayment of borrowings (8,280,000)
Net activity on lines of credit 1,500,000
Proceeds from issuance of stock 3,300,000
------------ ------------ ------------
Net cash from financing activities 1,500,000 3,300,000 10,720,000
------------ ------------ ------------
Net change in cash and cash
equivalents 169,451 (4,610,122) 4,176,292
Cash and cash equivalents at
beginning of year 180,112 4,790,234 613,942
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 349,563 $ 180,112 $ 4,790,234
============ ============ ============
NOTE 17--FEDERAL DEPOSIT INSURANCE PREMIUMS
On September 30, 1996, legislation was enacted 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 insured deposits. The assessment of 65.7 basis
points on deposits as of March 31, 1995 resulted in the Bank paying $2,927,800,
which was expensed September 30, 1996.
F-23
117
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR THE THREE MONTHS ENDED:
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Interest income $ 16,123 $ 16,492 $ 17,540 $ 19,192
Net interest income 6,438 6,523 6,983 7,699
Provision for loan losses 585 585 585 585
Net income 1,211 1,293 1,489 1,810
Basic earnings per share $ 0.17 $ 0.18 $ 0.21 $ 0.26
Diluted earnings per share $ 0.17 $ 0.18 $ 0.21 $ 0.23
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
Basic earnings (loss) per share $ 0.11 $ 0.14 $ (0.18) $ 0.17
Diluted earnings (loss) per share $ 0.11 $ 0.14 $ (0.18) $ 0.17
F-24
118
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION, THE TRUST
ISSUER OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE CORPORATION SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
Page
----
Summary............................... 1
Summary Consolidated Financial and
Other Data.......................... 7
Risk Factors.......................... 9
Use of Proceeds....................... 16
Market for the Preferred Securities... 17
Accounting Treatment.................. 17
Ratio of Earnings to Fixed Charges.... 18
Capitalization........................ 18
Selected Consolidated Financial and
Other Data.......................... 19
Management's Discussion and Analysis
of
Financial Condition and
Results of Operations............... 21
Business.............................. 31
Regulation and Supervision............ 51
Management............................ 58
Description of the Preferred
Securities.......................... 64
Description of the Junior Subordinated
Debentures.......................... 72
Description of the Guarantee.......... 79
Relationship Among the Preferred
Securities
the Junior Subordinated Debentures,
the Expense Agreement and the
Guarantee........................... 81
Description of the 1995 Notes......... 82
Certain Federal Income Tax
Consequences........................ 83
ERISA Considerations.................. 85
Underwriting.......................... 85
Validity of Securities................ 86
Experts............................... 86
Available Information................. 87
Index to Consolidated Financial
Statements.......................... F-1
============================================
======================================================
[METROPOLITAN LOGO]
$25,000,000
METROPOLITAN
CAPITAL TRUST I
% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT
$10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
METROPOLITAN
FINANCIAL CORP.
------------------------
PROSPECTUS
------------------------
[RYAN, BECK LOGO]
, 1998
======================================================
119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by Metropolitan
Financial Corp. ("Metropolitan" or the "Corporation") in connection with the
offering of the securities being registered, other than underwriting
commissions. All of the amounts shown are estimated except the Securities and
Exchange Commission ("SEC") registration fee, the Nasdaq National Market
("Nasdaq") filing fee and the National Association of Securities Dealers, Inc.
("NASD") filing fee. All of such expenses will be paid by Metropolitan.
SEC registration fee.............................................................................$ 8,481.25
Nasdaq filing fee................................................................................ 14,375.00
NASD filing fee.................................................................................. 3,375.00
Trustees' fees and expenses...................................................................... 10,000.00
Legal fees and expenses.......................................................................... 137,500.00
Accounting fees and expenses..................................................................... 12,000.00
Printing expenses................................................................................ 80,000.00
Underwriter expenses............................................................................. 10,000.00
Miscellaneous expenses........................................................................... 4,268.75
----------
Total............................................................................................$ 280,000.00
----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Ohio law, Ohio corporations are authorized to indemnify
directors, officers, employees, and agents within prescribed limits and must
indemnify them under certain circumstances. Ohio law does not provide statutory
authorization for a corporation to indemnify directors, officers, employees, and
agents for settlements, fines, or judgments in the context of derivative suits.
However, it provides that directors (but not officers, employees, and agents)
are entitled to mandatory advancement of expenses, including attorneys' fees,
incurred in defending any action, including derivative actions, brought against
the director, provided the director agrees to cooperate with the corporation
concerning the matter and to repay the amount advanced if it is proved by clear
and convincing evidence that his act or failure to act was done with deliberate
intent to cause injury to the corporation or with reckless disregard for the
corporation's best interests.
Ohio law does not authorize payment of judgments to a director,
officer, employee, or agent after a finding of negligence or misconduct in a
derivative suit absent a court order. Indemnification is required, however, to
the extent such person succeeds on the merits. In all other cases, if a
director, officer, employee, or agent acting in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, indemnification is discretionary except as otherwise provided by a
corporation's articles, code of regulations, or by contract except with respect
to the advancement of expenses of directors.
Under Ohio law, a director is not liable for monetary damages unless it
is proved by clear and convincing evidence that his action or failure to act was
undertaken with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interests of the corporation. There is, however,
no comparable provision limiting the liability of officers, employees, or agents
of a corporation. The statutory right to indemnification is not exclusive in
Ohio, and Ohio corporations may, among other things, procure insurance for such
persons.
Metropolitan's Amended and Restated Code of Regulations provides that
Metropolitan shall indemnify, subject to certain limitations, any person (and
the heirs, executors and administrators of each such person) made or threatened
to be made a party to any
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120
action, suit, proceeding or claim by reason of the fact that he is or was a
director or officer of Metropolitan or of another corporation for which he was
serving as a director or officer at the request of Metropolitan for all expenses
and liabilities incurred by him in connection with the defense of any such
action, suit or proceeding or claim.
Under a directors' and officers' liability insurance policy, directors
and officers of Metropolitan are insured against certain liabilities, including
certain liabilities under the Securities Act.
Under the Trust Agreement, Metropolitan will agree to indemnify each of
the Trust Issuer Trustees or any predecessor trustee for the Trust Issuer, and
to hold harmless against, any loss, damage, claim, liability or expense incurred
without negligence or willful misconduct on its part, arising out of or in
connection with the acceptance of the administration of the Trust Agreement,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties under the Trust Agreement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
No securities of the Corporation that were not registered under the
Securities Act have been issued or sold by the Corporation within the last three
years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation of the
Corporation (filed as Exhibit 2 to the Corporation's
Form 8-A, filed October 15, 1996 and incorporated
herein by reference)
3.2 Amended and Restated Code of Regulations of the
Corporation (filed as Exhibit 3 to the Corporation's
Form 8-A, filed October 15, 1996 and incorporated
herein by reference)
4.1 Indenture of the Corporation relating to the Junior
Subordinated Debentures
4.2 Form of Certificate of Junior Subordinated Debenture
(included as Exhibit A to Exhibit 4.1)
4.3 Certificate of Trust of Metropolitan Capital Trust I
4.4 Amended and Restated Trust Agreement of Metropolitan
Capital Trust I
4.5 Form of Trust Preferred Security Certificate for
Metropolitan Capital Trust I (included as Exhibit C
to Exhibit 4.4)
4.6 Form of Guarantee of the Corporation relating to the
Trust Preferred Securities
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121
4.7 Agreement as to Expenses and Liabilities (included as
Exhibit D to Exhibit 4.4)
5.1 Opinion and consent of Thompson Hine & Flory LLP as
to legality of the Junior Subordinated Debentures and
the Guarantee to be issued by the Corporation *
5.2 Opinion and consent of Richards, Layton & Finger,
P.A. as to legality of the Trust Preferred Securities
to be issued by Metropolitan Capital Trust I *
8 Opinion of Thompson Hine & Flory LLP as to certain
federal income tax matters *
10.1 Incentive Pay Plan (filed as Exhibit 10.1 to the
Corporation's Form 10-K, filed March 30, 1998 and
incorporated herein by reference) **
10.2 Metropolitan Financial Corp. 1997 Stock Option Plan
(filed as Exhibit A to the Corporation's Definitive
Proxy Statement, filed March 27, 1998 and
incorporated herein by reference) **
12 Computation of ratio of earnings to fixed charges
21 List of subsidiaries of the Corporation (filed as
Exhibit 21 to the Corporation's Form 10-K, filed
March 28, 1996 and incorporated herein by reference)
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Thompson Hine & Flory LLP (included in
Exhibit 5.1) *
23.3 Consent of Richards, Layton & Finger, P.A. (included
in Exhibit 5.2) *
24 Power of Attorney
25.1 Form T-1 Statement of Eligibility of Wilmington Trust
Company to act as trustee under the Indenture
25.2 Form T-1 Statement of Eligibility of Wilmington Trust
Company to act as trustee under the Amended and
Restated Trust Agreement
25.3 Form T-1 Statement of Eligibility of Wilmington Trust
Company under the Guarantee for the benefit of the
holders of the Trust Preferred Securities
99.1 Specimen Subordinated Note relating to the 9 5/8%
Subordinated Notes due January 1, 2005 (found at
Sections 2.2 and 2.3 of the Form of Indenture filed
as Exhibit 4.1 to the Corporation's Amendment No. 1
to Registration Statement on Form S-1, filed November
13, 1995 and incorporated herein by reference)
99.2 Form of Indenture entered into December 1, 1995
between the Corporation and Boatmen's Trust Company
(filed as Exhibit 4.1 to the Corporation's Amendment
No. 1 to Registration Statement on Form S-1, filed
November 13, 1995 and incorporated herein by
reference)
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122
99.3 Specimen Subordinated Note relating to the 10%
Subordinated Notes due December 31, 2001 (filed as
Exhibit 99.1 to the Corporation's Registration
Statement on Form S-1, filed October 20, 1995 and
incorporated herein by reference)
99.4 The Restated Loan Agreement by and between The
Huntington National Bank and the Corporation dated as
of October 16, 1996 (filed as Exhibit 99.4 to the
Corporation's Amendment No. 1 to Registration
Statement on Form S-1, filed October 18, 1996 and
incorporated herein by reference)
<FN>
*To be filed by amendment.
**Indicates that the exhibit is a management contract or compensatory plan or
arrangement.
(b) Financial Statement Schedules
Parent Company Financial Statements
Incorporated by reference from Note 16 to the
Corporation's Consolidated Financial Statements
included in the prospectus filed as a part of this
Registration Statement.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a trustee, director, officer or
controlling person of the Registrants in the successful defense of any action,
suit or proceeding) is asserted by such trustee, director, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
Metropolitan Financial Corp. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Mayfield Heights, State of Ohio, on the 8th day of April, 1998.
METROPOLITAN FINANCIAL CORP.
By:/s/ David G. Lodge
------------------------------------------------------
David G. Lodge
President, Assistant Secretary and Assistant Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
By:/s/ Robert M. Kaye
---------------------
Robert M. Kaye Chairman of the Board, Chief Executive Officer April 8, 1998
and Director (Principal Executive Officer)
By:/s/ David G. Lodge
---------------------
David G. Lodge President, Assistant Secretary, Assistant April 8, 1998
Treasurer and Director (Principal Financial
and Accounting Officer)
By:/s/ Malvin E. Bank
---------------------
Malvin E. Bank Director April 8, 1998
By:/s/ Robert R. Broadbent
---------------------
Robert R. Broadbent Director April 8, 1998
By:/s/ Marjorie M. Carlson
---------------------
Marjorie M. Carlson Director April 8, 1998
By:/s/ Lois K. Goodman
---------------------
Lois K. Goodman Director April 8, 1998
By:/s/ Marguerite B. Humphrey
---------------------
Marguerite B. Humphrey Director April 8, 1998
By:/s/ James A. Karman
---------------------
James A. Karman Director April 8, 1998
By:/s/ Ralph D. Ketchum
---------------------
Ralph D. Ketchum Director April 8, 1998
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124
Name Title Date
---- ----- ----
By:/s/ Alfonse M. Mattia
------------------------
Alfonse M. Mattia Director April 8, 1998
By:/s/ David P. Miller
------------------------
David P. Miller Director April 8, 1998
By:/s/ Judith Z. Adam
------------------------
Judith Z. Adam, Attorney-in- April 8, 1998
Fact for the Officers and Directors
signing in the capacities indicated
Pursuant to the requirements of the Securities Act of 1933,
Metropolitan Capital Trust I has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Mayfield Heights, State of Ohio, on the 8th day of April, 1998.
METROPOLITAN CAPITAL TRUST I
By: METROPOLITAN FINANCIAL CORP., AS DEPOSITOR
By: /s/ David G. Lodge
------------------------------------------------------
David G. Lodge
President, Assistant Secretary and Assistant Treasurer
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125
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1 Form of Underwriting Agreement *
3.1 Amended and Restated Articles of Incorporation of the
Corporation (filed as Exhibit 2 to the Corporation's
Form 8-A, filed October 15, 1996 and incorporated
herein by reference)
3.2 Amended and Restated Code of Regulations of the
Corporation (filed as Exhibit 3 to the Corporation's
Form 8-A, filed October 15, 1996 and incorporated
herein by reference)
4.1 Indenture of the Corporation relating to the Junior
Subordinated Debentures
4.2 Form of Certificate of Junior Subordinated Debenture
(included as Exhibit A to Exhibit 4.1)
4.3 Certificate of Trust of Metropolitan Capital Trust I
4.4 Amended and Restated Trust Agreement of Metropolitan
Capital Trust I
4.5 Form of Trust Preferred Security Certificate for
Metropolitan Capital Trust I (included as Exhibit C
to Exhibit 4.4)
4.6 Form of Guarantee of the Corporation relating to the
Trust Preferred Securities
4.7 Agreement as to Expenses and Liabilities (included as
Exhibit D to Exhibit 4.4)
5.1 Opinion and consent of Thompson Hine & Flory LLP as
to legality of the Junior Subordinated Debentures and
the Guarantee to be issued by the Corporation *
5.2 Opinion and consent of Richards, Layton & Finger,
P.A. as to legality of the Trust Preferred Securities
to be issued by Metropolitan Capital Trust I *
8 Opinion of Thompson Hine & Flory LLP as to certain
federal income tax matters *
10.1 Incentive Pay Plan (filed as Exhibit 10.1 to the
Corporation's Form 10-K, filed March 30, 1998 and
incorporated herein by reference)
10.2 Metropolitan Financial Corp. 1997 Stock Option Plan
(filed as Exhibit A to the Corporation's Definitive
Proxy Statement, filed March 27, 1998 and
incorporated herein by reference)
12 Computation of ratio of earnings to fixed charges
21 List of subsidiaries of the Corporation (filed as
Exhibit 21 to the Corporation's Form 10-K, filed
March 28, 1996 and incorporated herein by reference)
23.1 Consent of Crowe, Chizek and Company LLP
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126
23.2 Consent of Thompson Hine & Flory LLP (included in
Exhibit 5.1) *
23.3 Consent of Richard, Layton & Finger, P.A. (included
in Exhibit 5.2) *
24 Power of Attorney
25.1 Form T-1 Statement of Eligibility of Wilmington Trust
Company to act as trustee under the Indenture
25.2 Form T-1 Statement of Eligibility of Wilmington Trust
Company to act as trustee under the Amended and
Restated Trust Agreement
25.3 Form T-1 Statement of Eligibility of Wilmington Trust
Company under the Guarantee for the benefit of the
holders of the Trust Preferred Securities
99.1 Specimen Subordinated Note relating to the 9 5/8%
Subordinated Notes due January 1, 2005 (found at
Sections 2.2 and 2.3 of the Form of Indenture filed
as Exhibit 4.1 to the Corporation's Amendment No. 1
to Registration Statement on Form S-1, filed November
13, 1995 and incorporated herein by reference)
99.2 Form of Indenture entered into December 1, 1995
between the Corporation and Boatmen's Trust Company
(filed as Exhibit 4.1 to the Corporation's Amendment
No. 1 to Registration Statement on Form S-1, filed
November 13, 1995 and incorporated herein by
reference)
99.3 Specimen Subordinated Note relating to the 10%
Subordinated Notes due December 31, 2001 (filed as
Exhibit 99.1 to the Corporation's Registration
Statement on Form S-1, filed October 20, 1995 and
incorporated herein by reference)
99.4 The Restated Loan Agreement by and between The
Huntington National Bank and the Corporation dated as
of October 16, 1996 (filed as Exhibit 99.4 to the
Corporation's Amendment No. 1 to Registration
Statement on Form S-1, filed October 18, 1996 and
incorporated herein by reference)
<FN>
*To be filed by amendment.
II-8