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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------------ ------------------
Commission file number 000-21553
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METROPOLITAN FINANCIAL CORP.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
- ----------------------------------- -------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6001 Landerhaven Drive, Mayfield Heights, Ohio 44124
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(440) 646-1111
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of May 12, 1998, there were 7,051,270 shares of the Registrant's Common Stock
issued and outstanding.
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METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited)
as of March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations (Unaudited )for the
three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1998 and 1997 5
Consolidated Statement of Changes in
Shareholders' Equity (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 26
PART II. OTHER INFORMATION 29
SIGNATURES 31
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PART I. FINANCIAL INFORMATION
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS
Cash and cash equivalents $ 45,561 $ 22,511
Securities available for sale (Note 3) 9,229 1,706
Securities held to maturity (Note 3) 4,740 4,740
Mortgage-backed securities (Note 3) 135,431 143,167
Loans held for sale 10,961 14,230
Loans receivable, net (Note 4) 735,732 693,655
Federal Home Loan Bank stock, at cost 5,445 5,350
Accrued interest receivable 6,103 5,752
Premises and equipment, net 16,137 13,928
Real estate owned, net 1,640 2,037
Intangible assets 2,921 2,986
Loan servicing rights (Note 5) 9,367 9,224
Prepaid expenses and other assets 6,439 5,699
-------- --------
Total assets $989,706 $924,985
======== ========
LIABILITIES
Noninterest-bearing deposits (Note 6) $ 47,732 $ 46,234
Interest-bearing deposits (Note 6) 760,821 691,548
Borrowings (Note 7) 124,624 135,870
Accrued interest payable 2,666 3,272
Other liabilities 15,641 11,400
-------- --------
Total liabilities 951,484 888,324
-------- --------
SHAREHOLDERS' EQUITY
Common stock, 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 26,257 24,270
Unrealized gain on securities available for sale,
net of tax 864 1,290
-------- --------
Total shareholders' equity 38,222 36,661
-------- --------
Total liabilities and shareholders' equity $989,706 $925,985
======== ========
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
INTEREST INCOME
Interest and fees on loans $ 16,200 $ 14,861
Interest on mortgage-backed securities 2,491 1,010
Interest and dividends on other investments 522 252
Total interest income 19,213 16,123
---------- ----------
INTEREST EXPENSE
Interest on deposits 9,611 7,930
Interest on other borrowings 2,046 1,755
---------- ----------
Total interest expense 11,657 9,685
---------- ----------
NET INTEREST INCOME 7,556 6,438
Provision for loan losses 450 585
---------- ----------
Net interest income after provision for loan losses 7,106 5,853
---------- ----------
NONINTEREST INCOME
Loan servicing income, net 241 295
Service charges on deposit accounts 210 149
Gain on sale of loans 757 66
Loan option income 20 48
Gain on sale of securities, net 66 89
Other operating income 344 279
---------- ----------
Total noninterest income 1,638 926
---------- ----------
NONINTEREST EXPENSE
Salaries and related personnel costs 2,990 2,677
Occupancy and equipment expense 843 692
Federal deposit insurance premiums 158 140
Data processing expense 114 143
Marketing expense 166 131
State franchise taxes 156 155
Amortization of intangibles 66 66
Other operating expenses 1,077 863
---------- ----------
Total noninterest expense 5,570 4,867
---------- ----------
INCOME BEFORE INCOME TAXES 3,174 1,912
Provision for income taxes 1,187 701
---------- ----------
NET INCOME $ 1,987 $ 1,211
========== ==========
Basic earnings per share $ 0.28 $ 0.17
========== ==========
Diluted earnings per share $ 0.28 $ 0.17
========== ==========
Weighted average shares outstanding for basic earnings per share 7,051,270 7,051,270
Effect of dilutive options 134,269 0
---------- ----------
Weighted average shares for diluted earnings per share 7,185,539 7,051,270
========== ==========
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES $ 41,685 $ 769
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (98,737) (51,898)
Purchases of:
Loans (38,892) (17,546)
Mortgage-backed securities (28,119) (10,574)
Securities available for sale (7,523) (5,029)
Mortgage loan servicing rights (251) (1)
Premises and equipment (2,491) (897)
Proceeds from maturities and repayments of:
Loans 52,597 35,470
Mortgage-backed securities 18,522 1,823
Proceeds from sale of:
Loans 9,450
Mortgage-backed securities 16,968
Securities available for sale 11,330
Premises, equipment, and real estate owned 334
Premium paid for credit card relationships (10)
-------- --------
Net cash used for investing activities (78,142) (37,332)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 70,753 36,826
Proceeds from borrowings 24,256
Repayment of borrowings (12,246) (23,956)
Net activity on lines of credit 1,000
-------- --------
Net cash provided by financing activities 59,507 37,126
-------- --------
Net change in cash and cash equivalents 23,050 563
Cash and cash equivalents at beginning of period 22,511 16,522
-------- --------
Cash and cash equivalents at end of period $ 45,561 $ 17,085
======== ========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 12,264 $ 10,955
Income taxes
Transfer from loans receivable to other real estate 1,412
Loans securitized 5,393
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
STATEMENT OF CHANGES IN EQUITY (Unaudited)
(In thousands)
Three Months ended March 31,
---------------------------------------------------------------------
Retained earnings 1998 1997
------------------------------- --------------------------------
Balance at January 1 $24,270 $18,467
Net income 1,987 $1,987 1,211 $1,211
------- ------ ------- ------
Balance at March 31 26,257 19,678
------- ------
Accumulated other comprehensive income
Balance at January 1 1,290 676
Unrealized gains on securities, net
of reclassification adjustment (426) (675)
------ ------
Other comprehensive income (426) (426) (675) (675)
------- ------ ------- ------
Comprehensive income $1,561 $ 536
====== ======
Balance at March 31 864 1
------- -------
Paid-in capital
Balance at January 1 11,101 11,101
Balance at March 31 11,101 11,101
------- -------
Total equity $38,222 $30,780
------- -------
Disclosure of reclassification amount:
Unrealized holding gains arising during period $ (468) $ (732)
Less: reclassification adjustment for gains
included in net income 42 57
------- -------
Net unrealized gains on securities $ (426) $(675)
------- -------
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of Metropolitan Financial Corp.
("Metropolitan" or "Corporation") include the accounts of the Corporation and
the accounts of its wholly-owned subsidiaries, Metropolitan Capital Trust I,
MetroCapital Corporation and Metropolitan Bank & Trust Company (the "Bank"),
formerly known as Metropolitan Savings Bank of Cleveland, and its wholly-owned
subsidiaries, Kimberly Construction Company, Incorporated, and Metropolitan
Savings Service Corporation, and its wholly-owned subsidiary Metropolitan
Securities Corporation. All significant intercompany transactions have been
eliminated. In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting only of normal recurring
accruals) which the Corporation considers necessary for a fair presentation of
(a) the results of operations for the three month periods ended March 31, 1998
and 1997; (b) the financial condition at March 31, 1998 and December 31, 1997;
and (c) the statement of cash flows for the three month periods ended March 31,
1998 and 1997. The results of operations for the three month period ended March
31, 1998 are not necessarily indicative of the results that may be expected for
any other period. The annual report for Metropolitan for the year ended December
31, 1997, contains consolidated financial statements and related notes which
should be read in conjunction with the accompanying consolidated financial
statements.
2. ACCOUNTING POLICIES
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 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 carrying amount of
securities sold adjusted for amortization of premium and accretion of discount,
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.
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Loans held for investment are stated at the principal amount outstanding
adjusted for amortization of premium and accretion of discount using the
interest method. At March 31, 1998 and December 31, 1997, management had the
intent and the Bank had the ability to hold all loans being held for investment
purposes 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.
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 common shares were
calculated assuming the exercise of stock options less 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.
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3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale at March 31, 1998 and December 31, 1997
are as follows (In thousands):
MARCH 31, 1998
-------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 1,729 $ 1,729
FHLMC preferred stock 7,500 7,500
Mortgage-backed securities 134,101 1,357 (27) 135,431
----------- ------- ---- ----------
143,330 1,357 (27) 144,660
HELD TO MATURITY
Tax-exempt municipal bond 4,740 4,740
---------- ---------
4,740 4,740
---------- ------ --- ---------
Total $ 148,070 1,357 (27) $ 149,400
========== ====== ==== =========
DECEMBER 31, 1997
-------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 1,706 $ 1,706
Mortgage-backed securities 141,149 2,077 (59) 143,167
---------- ------ --- ---------
142,855 2,077 (59) 144,873
HELD TO MATURITY
Tax-exempt municipal bond 4,740 4,740
---------- ----- --- --------
Total $ 147,595 2,077 (59) $149,613
========== ===== == ========
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4. LOANS RECEIVABLE
The composition of the loan portfolio at March 31, 1998 and December 31, 1997 is
as follows (In thousands):
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
Real estate loans
Construction loans:
Residential single family $ 72,349 $ 67,986
Commercial 12,434 19,200
Land 32,516 29,077
Loans in process (45,070) (46,833)
--------- ---------
Construction loans, net 72,229 69,430
Permanent loans:
Residential single family 162,353 146,685
Multifamily 209,737 194,450
Commercial 173,340 166,593
Other 668 566
--------- ---------
Total real estate loans 618,327 577,724
Consumer loans 66,399 68,590
Business and other loans 62,492 57,496
--------- ---------
Total loans 747,218 703,810
Discounts on loans, net (1,067) (425)
Deferred loan fees, net (4,538) (4,108)
Allowance for losses on loans (5,881) (5,622)
--------- ---------
$ 735,732 $ 693,655
========= =========
Activity in the allowance for losses on loans for the periods ended March 31,
1998 and 1997 is as follows (In thousands):
Three Months Ended March 31,
1998 1997
---- ----
Balance at the beginning of the period $ 5,622 $ 4,175
Provision for loan losses 450 585
Net charge-offs (191) (120)
------- -------
Balance at the end of the period $ 5,881 $ 4,640
======= =======
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Management analyzes loans on an individual basis and considers a loan to be
impaired when it is probable that all principal and interest amounts will not be
collected according to the terms of the contract. Information regarding impaired
loans at March 31, 1998 and December 31, 1997 is as follows (In thousands):
March 31, December 31,
1998 1997
---- ----
Balance of impaired loans $8,207 $516
Less portion for which no allowance
for losses on loans is allocated 8,207 516
------ ----
Portion of impaired loans for which
an allowance for loan losses is allocated $ 0 $ 0
====== ====
Portion of allowance for losses on loans
allocated to the impaired loan balance $ 0 $ 0
====== ====
March 31, December 31,
1998 1997
---- ----
Average investment in impaired loans
during the period $7,597 $4,220
====== ======
Interest income recognized during
impairment $ 33 $ 48
====== ======
Interest income recognized on a
cash basis during the period $ 33 $ 48
====== ======
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at March 31, 1998 and December 31, 1997 are summarized as follows
(In thousands):
March 31, December 31,
1998 1997
---- ----
Mortgage loan portfolios serviced for:
FHLMC $ 642,239 $ 656,817
FNMA 494,315 507,345
Other 27,960 26,023
---------- ----------
Total loans serviced for others $1,164,514 $1,190,185
========== ==========
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Custodial balances maintained in noninterest-bearing checking accounts in
connection with the foregoing loan servicing were approximately $22,346,000 and
$18,894,000 at March 31, 1998 and December 31, 1997, respectively.
The following is an analysis of the changes in cost of loan servicing rights for
the three month period ended March 31, 1998 and 1997 (In thousands):
Three Months Ended March 31,
1998 1997
---- ----
Balance at the beginning of the period $ 9,224 $ 8,051
Acquired or originated 783 83
Amortization (640) (488)
------- -------
Balance at the end of the period $ 9,367 $ 7,646
======= =======
6. DEPOSITS
Deposits consist of the following (In thousands):
March 31, December 31,
1998 1997
---- ----
Noninterest-bearing checking accounts $ 47,732 $ 46,234
Interest-bearing checking accounts 43,709 43,080
Passbook savings and statement savings 180,370 170,443
Certificates of deposit 536,742 478,025
-------- --------
Total interest-bearing deposits 760,821 691,548
-------- --------
$808,553 $737,782
======== ========
At March 31, 1998, scheduled maturities of certificates of deposit are as
follows (In thousands):
Year Weighted Average
Ended Amount Interest Rate
----- ------ -------------
1998 $253,643 5.74%
1999 215,636 6.04
2000 55,184 6.41
2001 6,558 5.98
2002 1,722 6.05
Thereafter 3,999 6.16
-------
$536,742 5.94
========
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7. BORROWINGS
Borrowings consisted of the following at March 31, 1998 and December 31, 1997
(In thousands):
March 31, December 31,
1998 1997
---- ----
Federal Home Loan Bank Advances (5.6% and 5.7% at
March 31, 1998 and December 31, 1997, respectively) $ 41,000 $ 41,000
Reverse repurchase agreements (5.7% and 5.7% at
March 31, 1998 and December 31, 1997, respectively) 62,250 74,496
Commercial bank line of credit (8.0% and 8.5% at
March 31, 1998 and December 31, 1997, respectively) 2,500 1,500
Subordinated debt maturing December 31, 2001
(10% fixed rate) 4,874 4,874
Subordinated debt maturing January 1, 2005
(9.625% fixed rate) 14,000 14,000
-------- --------
$124,624 $135,870
======== ========
At March 31, 1998, scheduled payments on borrowings are as follows (In
thousands):
Weighted Average
Year Ended Amount Interest Rate
---------- ------ -------------
1998 $ 30,286 5.53
1999 23,607 5.70
2000 656 7.94
2001 8,825 8.73
2002 47,250 5.77
Thereafter 14,000 10.48
--------
Total $124,624 6.45
========
Federal Home Loan Bank ("FHLB") advances are collateralized by FHLB stock and
residential first mortgage loans with an aggregate carrying value of
$162,800,000 and $147,000,000 at March 31, 1998 and December 31, 1997,
respectively.
The Corporation has a commercial line of credit agreement with the Huntington
National Bank. Effective March 31, 1998, the terms of the agreement were
renegotiated. The maximum borrowing under the line was increased
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from $4,000,000 to $8,000,000 and the line of credit is now a revolving
structure which matures in one year and is renewable at that time. As collateral
for the loan, the Corporation's largest shareholder has agreed to pledge a
portion of his common shares in an amount at least equal to 200% of any
outstanding balance. At March 31, 1998, the outstanding balance under this
agreement was $2,500,000.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank can be a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial commitments include commitments to make loans. The Bank's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to make loans is represented by the contractual
amount of these instruments. The Bank follows the same credit policy to make
such commitments as is followed for those loans recorded in the financial
statements.
As of March 31, 1998, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $49,003,000
and $45,605,000, respectively. Metropolitan's commitments to originate and
purchase loans are for loans with rates ranging from 6.5% to 16% and commitment
periods up to one year. In addition, the Bank has firm commitments to sell loans
totaling $2,046,000 and optional commitments to sell loans totaling $7,140,000.
At March 31, 1998 and December 31, 1997, the Bank had outstanding options which
gave the holder the option to purchase certain loans at a specified price within
a specified time period. The Bank collected a non-refundable fee on each option
which is recognized as income at the time the transaction is complete. At March
31, 1998, loans with a carrying value of $7,140,000 were held for sale in
connection with outstanding purchase options. The options may be exercised at
the carrying value for an initial period. The option price escalates after the
initial period until the option expires.
9. SUBSEQUENT EVENT
On April 30 and May 4, 1998, the Corporation issued 2,500,000 and 275,000 shares
($10 liquidation amount per security), respectively, of 8.60% cumulative trust
preferred securities (the "Trust Preferred") through a newly formed,
wholly-owned subsidiary, Metropolitan Capital Trust I (the "Trust Issuer"). The
Trust Issuer invested the total proceeds from the sale of the Trust Preferred in
the 8.60% Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures") issued by the Corporation which mature on June 30,
2028. 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 $4,873,673 currently outstanding 10% subordinated
notes; capital contributions to the Bank to support growth and for working
capital; acquisitions by either the Corporation or the Bank, although there
presently exists no such agreement or understanding with respect to such
acquisitions; and possible repurchase of the Corporation's common shares,
subject to regulatory requirements and acceptable market conditions. The Trust
Preferred securities are listed on the NASDAQ Stock Market's National Market
under the symbol "METFP."
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of the
Bank. Metropolitan's results of operations are dependent on a variety of
factors, including the general interest rate environment, competitive conditions
in the industry, governmental policies and regulations and conditions in the
markets for financial assets. Like most financial institutions, the primary
contributor to Metropolitan's income is net interest income, the difference
between the interest Metropolitan earns on interest-earning assets, such as
loans and securities, and the interest Metropolitan pays on interest-bearing
liabilities, such as deposits and borrowings. Metropolitan's operations are also
affected by noninterest income, such as loan servicing fees and gains or losses
from sales of loans and securities. From time to time, Metropolitan engages in
certain transactions aimed at increasing its non-interest income such as loan
option income. Metropolitan's principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, occupancy costs, federal
deposit insurance premiums, and other general and administrative expenses.
Average Balances and Yields. The following table presents, for the periods
indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates, and the net interest margin. Net interest margin refers to net interest
income divided by total interest-earning assets and is influenced by the level
and relative mix of interest-earning assets and interest-bearing liabilities.
All average balances are daily average balances. Non-accruing loans are
considered in average loan balances. The average balances of mortgage-backed
securities are presented at historical cost.
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Three Months Ended March 31,
1998 1997
------------------------------------- ---------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $ 727,046 $16,200 9.04% $673,275 $14,861 8.95%
Mortgage-backed securities
available for sale 133,359 2,491 7.57 61,348 1,010 6.68
Other 28,251 522 7.51 17,234 252 5.93
--------- -------- -------- --------
Total interest-earning
assets 888,656 19,213 8.77 751,857 16,123 8.70
------ ------
Nonearning assets 59,737 37,648
--------- --------
Total assets $ 948,393 $789,505
========= ========
Interest-bearing liabilities:
Deposits $ 719,396 9,611 5.42 $606,144 7,930 5.31
Borrowings 125,379 2,046 6.62 109,776 1,755 6.48
--------- ------- --------- -------
Total interest-bearing
liabilities 844,775 11,657 5.60 715,920 9,685 5.49
------ ---- ------- ----
Noninterest-bearing
liabilities 66,176 43,073
Shareholders' equity 37,442 30,512
--------- --------
Total liabilities and
shareholders' equity $ 948,393 $789,505
========= ========
Net interest income $ 7,556 $ 6,438
====== ======
Interest rate spread 3.17% 3.21%
==== ====
Net interest margin 3.45% 3.47%
Average interest-earning
assets to average
interest-bearing
liabilities 105.19% 105.02%
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Rate and Volume Variances. Net interest income is affected by changes in
the level of interest-earning assets and interest-bearing liabilities and
changes in yields earned on assets and rates paid on liabilities. The following
table sets forth, for the periods indicated, a summary of the changes in
interest earned and interest paid resulting from changes in average asset and
liability balances and changes in average rates. Changes attributable to the
combined impact of volume and rate have been allocated proportionately to change
due to volume and change due to rate.
Three Months ended March 31,
1998 vs. 1997
Increase (Decrease)
---------------------------------
Change
Total Due to Due to
Change Volume Rate
------ ------ ----
(In thousands)
INTEREST INCOME ON:
Loans receivable $1,339 $1,187 $152
Mortgage-backed securities 1,480 1,186 294
Other 271 161 110
------ ------ ----
Total interest income 3,090 $2,534 $556
------ ====== ====
INTEREST EXPENSE ON:
Deposits 1,681 $1,482 $199
Borrowings 291 249 42
------ ------ ----
Total interest expense 1,972 $1,731 $241
------ ====== ====
Increase in net interest income $1,118
======
RESULTS OF OPERATIONS
Net Income. Net income increased $0.8 million to $2.0 million for the three
months ended March 31, 1998 as compared to net income of $1.2 million for the
first quarter, 1997. Net interest income and noninterest income increased $1.1
million and $0.7 million, respectively, for the three months ended March 31,
1998 over the prior year period and the provision for loan losses decreased
$135,000 from the same prior year period. Noninterest expense increased $0.7
million to $5.6 million for the quarter from $4.9 million from the prior year
quarter primarily as a result of increased personnel related costs, occupancy
expense, and expenses related to increased business levels.
Metropolitan's net interest margin decreased two basis points to 3.45% for the
three month period ended March 31, 1998 as compared to 3.47% for the same period
in 1997, primarily because the increased costs of interest-bearing liabilities
exceeded the increased yield of interest-earning assets.
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Interest Income. Total interest income increased 19.2% to $19.2 million in the
three month period ended March 31, 1998, as compared to $16.1 million in the
same period in 1997. This increase primarily resulted from an 18.2% increase in
average interest-earning assets in the three month period ended March 31, 1998
as compared to the prior year. Average earning assets increased as a result of
Metropolitan's strategy of increasing assets as long as assets with acceptable
portfolio characteristics are available. Increases in the weighted average rate
on loans receivable, which rose as a result of greater consumer and business
loan demand and increased prepayment penalties due to loan refinancing activity,
also contributed to the increase in interest income.
Interest Expense. Total interest expense increased 20.4% to $11.7 million for
the three month period ended March 31, 1998, as compared to $9.7 million for the
same period in 1997. Interest expense increased due to a higher average balance
of interest-bearing liabilities outstanding and an increased cost of funds for
the three month period ending March 31, 1998 compared to the same period in
1997. In accordance with Metropolitan's strategy to fund its growth in assets
primarily with deposits, the average balance of deposit accounts increased
$113.3 million, or 18.7%, during the three months ended March 31, 1998 compared
to 1997.
Due to an increase in the market interest rates paid to increase deposit
balances and lengthen maturities and the changing mix of borrowings,
Metropolitan's cost of funds increased to 5.60% for the first quarter, 1998 as
compared to 5.49% for the same period in 1997.
Provision for Loan Losses. The provision for loan losses decreased $135,000 for
the first quarter, 1998, as compared to the first quarter, 1997. Management
decreased the provision for loan losses because the credit risk profile of the
loan portfolio was improved when in the third quarter of 1997, $93.0 million of
multifamily residential loans were securitized with FNMA and due to management's
estimate of the adequacy of the allowance for losses on loans. The allowance for
losses on loans at March 31, 1998 was $5.9 million or 0.78% of total loans, as
compared to $5.6 million, or 0.79% of total loans, at December 31, 1997.
Management's estimate of the adequacy of the allowance for losses on loans is
based upon an analysis of such factors as historical loan loss experience, an
analysis of impaired loans, economic conditions affecting real estate markets,
regulatory considerations, and other matters.
Noninterest Income. Total noninterest income increased 76.9% to $1.6 million in
the three months ended March 31, 1998 as compared to $0.9 million in the same
period in 1997. The following table sets forth Metropolitan's noninterest income
for the periods indicated (In thousands):
Three Months ended March 31,
1998 1997
---- ----
Loan servicing income, net $ 241 $295
Service charges on deposit accounts 210 149
Gain on sale of loans 757 66
Loan option income 20 48
Gain on sale of securities, net 66 89
Other operating income 344 279
------ ----
Total $1,638 $926
====== ====
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Net loan servicing income decreased 18.3% to $241,000 in the three month period
ended March 31, 1998 as compared to the same period in 1997. The primary reason
for this decrease was the writedown of originated mortgage servicing rights on
the FNMA multifamily loans securitized in 1997 which experienced significant
unanticipated prepayments in the first quarter, 1998. Metropolitan remains
committed to this line of 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.
Service charges on deposit accounts increased $61,000 to $210,000 in the three
month period ended March 31, 1998 compared to the first quarter, 1997. The
primary reason for the increase was greater fee income derived from consumer
checking, commercial checking, and credit cards due to increased business
levels.
Gain on sale of loans was $757,000 in the three month period ended March 31,
1998, as compared to $66,000 during the same period in 1997. This income was
dependent upon the amount of loans sold, secondary market pricing, and the value
allocated to mortgage servicing rights, and these variables in turn were
directly affected by decreasing interest rates. As such, the primary reasons for
the gain in the first quarter, 1997 were the sale of residential fixed rate
loans into a favorable rate market during the quarter and increased volume over
the prior year. The proceeds of residential loan sales in the first quarter,
1998 were $34.7 million as compared to $6.5 million in the same period in 1997.
Loan option income was $20,000 in the three month period ended March 31, 1998 as
compared to $48,000 in the same period in 1997. 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. In these transactions,
Metropolitan purchased loans and sold nonrefundable options to a third party to
purchase these same loans at a later date. At the time the transaction is
complete, Metropolitan recognizes a non-refundable fee in income.
Net gain on sale of securities in the three months ended March 31, 1998, was
$66,000 as compared to $89,000 for the prior year period. This gain in the first
quarter, 1998 was the result of the sale of securities originally purchased to
satisfy regulatory liquidity requirements which were no longer necessary for
that purpose due to revisions to those requirements.
Other noninterest income increased $65,000 in the three month period ended March
31, 1998, compared to the same period in the previous year. This increase was
primarily due to increased fee income generated from the increased level of
business in the first quarter, 1998.
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Noninterest Expense. Total noninterest expense increased to $5.6 million in the
three month period ended March 31, 1998 as compared to $4.9 million for the same
period in 1997. The following table sets forth Metropolitan's noninterest
expense for the periods indicated (In thousands):
Three Months ended March 31,
1998 1997
---- ----
Salaries and related personnel costs $2,990 $2,677
Occupancy and equipment expense 843 692
Federal deposit insurance premiums 158 140
Data processing expense 114 143
Marketing expense 166 131
State franchise taxes 156 155
Amortization of intangibles 66 66
Other operating expenses 1,077 863
------ ------
Total $5,570 $4,867
====== ======
Personnel related expenses increased $313,000 in the three month period ended
March 31, 1998 as compared to the same period in 1997. These increases were
primarily a result of increased staffing levels to meet business needs during
the 1998 period and additional incentive payments based on increased business
volumes.
Occupancy costs increased $151,000 in the three month period ended March 31,
1998, over the same periods in 1997. This increase was generally the result of
one additional full service retail sales office and expanded space at the
corporate headquarters office.
Marketing expense increased $35,000 in the three month period ending March 31,
1997 as compared to the same period in 1997. This increase was the result of the
increased marketing efforts related to increasing retail deposits.
Other operating expenses, which include miscellaneous general and administrative
costs such as loan servicing, loan processing costs, business development, check
processing and ATM expenses, increased $214,000 for the three month period ended
March 31, 1998 as compared to the same period in 1997. This increase was
generally the result of increases in expenses pertaining to increased loan
origination volume, real estate owned expenses, and increased loan servicing
costs.
Provision for Income Taxes. The provision for income taxes increased $0.5
million for the three month period ended March 31, 1998 as compared to the same
period in 1997. The primary reason for the increase in the provision was the
increased level of income over the prior year. The effective tax rate was 37.4%
for the three month period ended March 31, 1998 as compared to 36.7% for the
same period in 1997.
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ASSET QUALITY
Metropolitan's goal is to maintain the above average asset quality of its loan
portfolio through conservative lending policies and prudent underwriting.
Detailed reviews of the loan portfolio are undertaken regularly to identify
potential problem loans or trends early and to provide for adequate estimates of
potential losses. In performing these reviews, Metropolitan's management
considers, among other things, current economic conditions, portfolio
characteristics, delinquency trends, and historical loss experiences.
Metropolitan normally considers loans to be non-performing when payments are 90
days or more past due or when the loan review analysis indicates that
repossession of the collateral may be necessary to satisfy the loan. In
addition, Metropolitan considers loans to be impaired when, in management's
opinion, it is probable that the borrower will be unable to meet the contractual
terms of the loan. When loans are classified as non-performing, an assessment is
made as to the collectability of the unpaid interest. Interest determined to be
uncollectible is reversed from interest income and future interest income is
recorded only if the loan principal and interest due is considered collectible
and is less than the estimated fair value of the underlying collateral.
The table below provides information concerning Metropolitan's non-performing
assets and the allowance for losses on loans as of the dates indicated. All
loans classified by management as impaired were also classified as
nonperforming.
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
Nonaccrual loans $ 7,045 $ 2,763
Loans past due greater than
90 days or impaired, still accruing 400 384
--------- ---------
Total nonperforming loans 7,445 3,147
Real estate owned 1,640 2,037
--------- ---------
Total nonperforming assets $ 9,085 $ 5,184
========= =========
Allowance for losses on loans $ 5,881 $ 5,623
========= =========
Nonperforming loans to total loans 1.00% 0.44%
Nonperforming assets to total assets 0.92% 0.56%
Net charge-offs to average loans 0.11%(1) 0.13%
Provision for loan losses to
average loans 0.25%(1) 0.35%
Allowance for losses on loans to
total nonperforming loans at
end of period 78.99% 178.68%
Allowance for losses on loans to
total loans at end of period 0.78% 0.79%
(1) Annualized for comparative purposes.
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Nonperforming assets at March 31, 1998 increased $3.9 million, or 75.3% to $9.1
million as compared to $5.2 million at December 31, 1997. The primary reason for
this increase is a $4.0 million participation in a $9.0 million loan secured by
a waterpark in Southern California. The borrower is currently attempting to
refinance the property with another lender. The Bank has been contacted by the
refinancing lender regarding the payoff and expects the problem loan to be
resolved in the near future. If the borrower is unable to complete the refinance
of this property with another lender, the borrower's ability to repay the loan
will be contingent upon the successful operation of the park during 1998, its
first full year of operation. The Bank anticipates that no loss will be
recognized in connection with this loan.
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 $5.2 million of loans in this category at
March 31, 1998. The largest loan in this category is a $3.7 million commercial
loan secured by a motel in Northeast Ohio. Management believes the
Bank is well secured against loss.
FINANCIAL CONDITION
Total assets amounted to $989.7 million at March 31, 1998, as compared to $925.0
million at December 31, 1997, an increase of $64.7 million, or 7.0%. The
increase in assets was funded primarily with deposit growth of $70.8 million.
Securities increased $7.5 million to $14.0 million compared to December 31,
1997. The increase was primarily due to the purchase of $7.5 million of Federal
Home Loan Mortgage Corporation ("FHLMC") preferred stock in the first quarter,
1998.
Loans receivable, including loans held for sale, increased $38.8 million, or
5.5% to $746.7 million at March 31, 1998. This increase was the effect of
increased lending volume for all loan classifications in response to the
favorable interest rate environment. This increase is consistent with
Metropolitan's overall strategy of increasing assets while adhering to prudent
underwriting standards and preserving its adequately capitalized status.
Deposits totaled $808.6 million at March 31, 1998, an increase of $70.8 million,
or 9.6%, over the balance at December 31, 1997. The increase resulted from
management's marketing efforts, continued growth at newer retail sales offices,
and increased custodial checking balances.
Borrowings decreased $11.2 million, or 8.3% from December 31, 1997 to March 31,
1998. The decline was the result of decreased use of Reverse Repurchase
Agreements and increased reliance on deposits to fund asset growth.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to Metropolitan's ability to generate
adequate amounts of cash to meet its needs, typically for funding loan
originations and purchases. Metropolitan's primary sources of internally
generated funds are principal repayments and payoffs of loans receivable, cash
flows from operations and proceeds from sales of loans. External sources of
funds include increases in deposits, FHLB advances, and reverse repurchase
agreements.
While principal repayments and FHLB advances are fairly stable sources of funds,
deposit flows and loan prepayments are greatly influenced by prevailing interest
rates, economic conditions, and competition. Metropolitan regularly reviews cash
flow needed to fund its operations and believes that the aforementioned
resources are adequate for its foreseeable requirements.
The Bank is required by regulation to maintain a liquidity ratio (average daily
balance of liquid assets to average daily balance of net withdrawable accounts
and short-term borrowings) of 4%. The Bank's liquidity ratio for March, 1998 was
5.33%. Historically, Metropolitan has maintained its liquidity close to the
required minimum since the yield available on qualifying investments is lower
than alternative uses of funds and is generally not at an attractive spread over
incremental cost of funds.
The Corporation's primary source of funds currently is dividends from the Bank,
which are subject to restrictions imposed by federal bank regulatory agencies.
The Corporation's primary use of funds is for interest payments on its existing
debt. At March 31, 1998, the Corporation, excluding the Bank, had cash and
readily convertible investments of $2.0 million.
At March 31, 1998, $97.9 million, or 12.1%, of Metropolitan's deposits were in
the form of certificates of deposit of $100,000 and over. If a large number of
these certificates of deposits matured at approximately the same time and were
not renewed, there could be an adverse effect on Metropolitan's liquidity.
Metropolitan monitors maturities to attempt to minimize the potential adverse
effect on liquidity.
When evaluating sources of funds, Metropolitan considers the cost of various
alternatives such as local retail deposits, FHLB advances and other wholesale
borrowings. One option considered and utilized in the past has been the
acceptance of out-of-state time deposits from individuals and entities,
predominantly credit unions. These deposits typically have balances of $90,000
to $100,000 and have a term of one year or more. They are not accepted through
brokers. At March 31, 1998, approximately $87.7 million, or 10.8% 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.
Metropolitan has access to wholesale borrowings based on the availability of
eligible collateral. The FHLB makes funds available for housing finance based
upon the blanket or specific pledge of certain one- to four-family loans and
various types of investment and mortgage-backed securities. The Bank had
borrowing capacity at the FHLB under its blanket pledge agreement of
approximately $108.5 million at March 31, 1998, of which $41.0 million
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was utilized. The financial market makes funds available through reverse
repurchase agreements by accepting various investment and mortgage-backed
securities as collateral. The Bank had borrowing capacity for reverse repurchase
agreements of approximately $128.8 million at March 31, 1998, of which $62.3
million was utilized.
Capital. The Office of Thrift Supervision ("OTS") imposes capital requirements
on savings associations. Savings associations are required to meet three minimum
capital standards: (i) a leverage requirement, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. Such standards must be
no less stringent than those applicable to national banks. In addition, the OTS
is authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The Bank's regulatory capital ratios at March 31, 1998 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 $52,868 5.38% $53,147 5.40% $57,177 8.35%
Required 14,752 1.50 39,351 4.00 54,810 8.00
------- ------ -------
Excess $38,116 3.88% $13,796 1.40% $ 2,367 0.35%
======= ======= =======
Metropolitan anticipates that under the current regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future. The
Corporation maintains a $8.0 million line of credit with the Huntington National
Bank which it could access to make future contributions to the capital of the
Bank. At March 31, 1998, there was a $2.5 million outstanding balance under the
line of credit. However, events beyond the control of the Bank, such as
increased interest rates or a downturn in the economy, could adversely affect
future earnings and consequently, the ability of the Bank to meet its future
capital requirements.
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.
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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 June, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The purpose of reporting comprehensive income is to report
a measure of all changes in equity that result from recognized transactions and
other economic events of the period other than transactions with owners. This
Statement is effective for fiscal years beginning after December 15, 1997. The
Corporation expects SFAS No. 130 to have no effect on its financial position
other than changes in financial presentation classifications.
Also in June, 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
presentation of information about operating segments in financial statements
including interim financial statements to shareholders. Under SFAS No. 131,
financial information is to be reported on the basis that it is used internally
for evaluating segment performance and asset allocation. This Statement is
effective for fiscal years beginning after December 15, 1997. Similar to SFAS
No. 130, the Corporation expects SFAS No. 131 to have no effect on its financial
position other than changes in financial presentation classifications.
In March 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128
simplifies the calculation of earnings per share ("EPS") by replacing primary
EPS with basic EPS. Basic EPS includes no dilution and is computed by dividing
net income by weighted average shares outstanding. SFAS No. 128 is effective for
financial statements for both interim and annual reports ending after December
15, 1997. The Corporation expects SFAS No. 128 to have no effect on its earnings
per share calculation, other than changing terminology.
In February, 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This statement revises the
disclosure requirements for pensions and other postretirement benefits ,
requires additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures required under previous
FASB pronouncements. This statement is effective for fiscal years beginning
after December 31, 1997. The Corporation expects SFAS No.
132 to have no effect on its financial position or financial presentation
classifications.
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
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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.
ITEM 3. 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 result in loans with generally adjustable rates and shorter terms; (v)
increasing the loan servicing portfolio; (vi) emphasizing transaction account
deposit products which are less susceptible to repricing in a rising interest
rate environment; (vii) maintaining competitive pricing on longer term
certificates of deposit; and (viii) utilizing term advances and other borrowings
rather than short-term funds.
Presented below, as of March 31, 1998 and December 31, 1997, is an analysis of
Metropolitan's interest rate risk measured using Net Portfolio Value ("NPV")
methodology. Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning assets and outgoing cash flows
on interest-bearing and other liabilities. The table also contains the policy
limits set by the Board of Directors of the Bank established with consideration
of the dollar impact of various rate changes and the Bank's capital position.
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March 31, 1998 December 31, 1997
------------------------- --------------------
Changes in
Interest Rate Board Limit Change in % Change Change in % Change
(basis points) % Change NPV in NPV NPV in NPV
- -------------- --------- --------- -------- --------- --------
(Dollars in thousands)
+400 (65)% $(37,088) (49)% $(27,474) (36)%
+300 (45) (27,208) (36) (20,131) (27)
+200 (25) (17,328) (23) (12,743) (17)
+100 (15) (7,782) (10) (5,829) (8)
- -100 (15) 9,044 12 5,631 7
- -200 (25) 24,624 32 13,381 18
- -300 (45) 47,652 63 25,415 33
- -400 (65) 74,936 99 40,157 53
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 interest rates earned on assets
because deposits generally have shorter periods to maturity which is when they
reprice. In addition, the fixed rate assets in the 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 March 31, 1998 and December 31, 1997, the
Bank was within the Board established limits for various changes in interest
rates and the Bank's level of sensitivity to rising rates is relatively
unchanged.
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 March 31, 1998, 58.4%
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. Within the remaining fixed
rate portfolio, Metropolitan has focused on short-term loan types.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, as a result of
competition, the interest rates on certain assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types of assets and liabilities may lag behind changes in market rates. Further,
in the event of a change in interest rates, expected rates of repayment on
assets and early withdrawal levels from certificates of deposit would likely
deviate from those scheduled. Despite its limitations, management considers NPV
the best method for monitoring interest rate risk since core repricing and
maturity relationships are very clearly seen. The clarity of the risk relations
is enhanced by the simplicity of the rate changes and the fact that all rates,
short-term and long-term, change by the same degree.
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PART II. OTHER INFORMATION
Items 1-5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of Metropolitan
Financial Corp. (filed as Exhibit 2 to Metropolitan's Form 8-A
filed October 15, 1996 and incorporated herein by reference).
3.2 Amended and Restated Code of Regulations of Metropolitan
Financial Corp. (filed as Exhibit 3 to Metropolitan's Form 8-A
filed October 15, 1996 and incorporated herein by reference).
4.1 Indenture, dated as of April 30, 1998, between Metropolitan
Financial Corp. and Wilmington Trust Company, as trustee,
relating to Metropolitan's 8.60% Junior Subordinated
Deferrable Interest Debentures due June 30, 2028.
4.2 Amended and Restated Trust Agreement, dated as of April 30,
1998, among Metropolitan Financial Corp., as depositor,
Wilmington Trust Company, as property trustee, the
administrative trustees named therein and the several holders
of the 8.60% Cumulative Trust Preferred Securities of
Metropolitan Capital Trust I.
4.3 Preferred Securities Guarantee Agreement, dated as of April
30, 1998, between Metropolitan Financial Corp. and Wilmington
Trust Company, as trustee, for the benefit of the holders of
the 8.60% Cumulative Trust Preferred Securities of
Metropolitan Capital Trust I.
4.4 Agreement as to Expenses and Liabilities, dated as of April
30, 1998, between Metropolitan Financial Corp. and
Metropolitan Capital Trust I.
27 Financial Data Schedule(1)
99 The Restated Loan Agreement by and between the Huntington
National Bank and the Corporation dated as of March 31, 1998.
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(1) Filed only in electronic format pursuant to item 601(b)(27) of
Regulation S-K.
b. Reports on Form 8-K - No reports on Form 8-K were filed by
Metropolitan during the first three months of 1998.
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METROPOLITAN FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METROPOLITAN FINANCIAL CORP.
By: /s/ David G. Lodge
-------------------------------------
David G. Lodge,
President, Assistant Secretary and
Assistant Treasurer,
(principal financial
and accounting officer)
Date: May 15, 1998
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