1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
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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 of (I.R.S. Employer
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)
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 August 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 JUNE 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited)
as of June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations (Unaudited ) for the
six months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1998 and 1997 5
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the six months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial 7-15 Statements (Unaudited) 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-27
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 27
PART II. OTHER INFORMATION 29
Item 4. Submission of Matters to a Vote 29
of Security Holders
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
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PART I. FINANCIAL INFORMATION
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(In thousands)
June 30, 1998 December 31, 1997
------------- -----------------
ASSETS
Cash and cash equivalents $ 20,267 $ 22,511
Securities available for sale (Note 3) 19,336 1,706
Securities held to maturity (Note 3) 14,814 4,740
Mortgage-backed securities (Note 3) 108,103 143,167
Loans held for sale 42,311 14,230
Loans receivable, net (Note 4) 802,155 693,655
Federal Home Loan Bank stock, at cost 5,571 5,350
Accrued interest receivable 6,685 5,752
Premises and equipment, net 17,207 13,928
Real estate owned, net 1,530 2,037
Intangible assets 2,855 2,986
Loan servicing rights (Note 5) 9,811 9,224
Prepaid expenses and other assets 8,242 5,699
---------- ----------
Total assets $1,058,887 $ 924,985
========== ==========
LIABILITIES
Noninterest-bearing deposits (Note 6) $ 46,288 $ 46,234
Interest-bearing deposits (Note 6) 762,452 691,548
Borrowings (Note 7) 165,000 135,870
Accrued interest payable 3,149 3,272
Other liabilities 14,705 11,400
---------- ----------
Total liabilities 991,594 888,324
---------- ----------
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S JUNIOR SUBORDINATED
DEBENTURES (NOTE 8) 27,750
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 27,563 24,270
Unrealized gain on securities
available for sale, net of tax 879 1,290
---------- ----------
Total shareholders' equity 39,543 36,661
---------- ----------
Total liabilities and shareholders' equity $1,058,887 $ 924,985
========== ==========
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 Six Months
Ended June 30, Ended June 30,
-------------- ---------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $ 17,298 $ 15,124 $ 33,497 $ 29,985
Interest on mortgage-backed securities 2,242 1,119 4,733 2,129
Interest and dividends on other investments 761 249 1,284 501
---------- ---------- ---------- ----------
Total interest income 20,301 16,492 39,514 32,615
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 10,159 8,351 19,770 16,281
Interest on borrowings 2,099 1,618 4,145 3,373
Interest on Junior Subordinated
Debentures 412 412
---------- ---------- ---------- ----------
Total interest expense 12,670 9,969 24,327 19,654
---------- ---------- ---------- ----------
NET INTEREST INCOME 7,631 6,523 15,187 12,961
Provision for loan losses 910 585 1,360 1,170
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 6,721 5,938 13,827 11,791
---------- ---------- ---------- ----------
NONINTEREST INCOME
Loan servicing income, net 239 309 479 604
Service charges on deposit accounts 220 163 430 311
Gain on sale of loans, net 767 146 1,525 212
Loan option income 257 75 277 123
Gain (loss) on sale of securities, net (29) 38 89
Other operating income 450 290 793 570
---------- ---------- ---------- ----------
Total noninterest income 1,904 983 3,542 1,909
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and related personnel costs 3,128 2,543 6,118 5,220
Occupancy and equipment expense 885 740 1,727 1,432
Federal deposit insurance premiums 169 148 328 288
Data processing expense 101 126 215 269
Marketing expense 253 179 418 310
State franchise taxes 156 155 311 310
Amortization of intangibles 66 65 131 131
Other operating expenses 1,418 920 2,498 1,783
---------- ---------- ---------- ----------
Total noninterest expense 6,176 4,876 11,746 9,743
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND 2,449 2,045 5,623 3,957
EXTRAORDINARY ITEM
Provision for income taxes 898 752 2,085 1,453
---------- ---------- ---------- ----------
NET INCOME BEFORE 1,551 1,293 3,538 2,504
EXTRAORDINARY ITEM
Extraordinary item (Note 9) 245 0 245 0
---------- ---------- ---------- ----------
NET INCOME $ 1,306 $ 1,293 $ 3,293 $ 2,504
========== ========== ========== ==========
Basic earnings per share $ 0.19 $ 0.18 $ 0.47 $ 0.35
========== ========== ========== ==========
Diluted earnings per share $ 0.18 $ 0.18 $ 0.46 $ 0.35
========== ========== ========== ==========
Weighted average shares
outstanding for basic
earnings per share 7,051,270 7,051,270 7,051,270 7,051,270
Effect of dilutive options 97,911 0 116,048 0
---------- ---------- ---------- ----------
Weighted average shares
outstanding for diluted
earnings per share 7,149,181 7,051,270 7,167,318 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)
Six Months Ended June 30,
-------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES $ 79,044 $ 10,164
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (263,208) (94,524)
Purchases of:
Loans (81,143) (40,464)
Mortgage-backed securities (28,119) (10,574)
Securities available for sale (20,442) (5,053)
Securities held to maturity (14,814)
Mortgage loan servicing rights (791) (340)
Premises and equipment (4,578) (2,671)
FHLB stock (27) (1,012)
Proceeds from maturities and repayments of:
Loans 116,213 78,757
Mortgage-backed securities 40,761 5,278
Securities held to maturity 4,740
Proceeds from sale of:
Loans 5,897 1,950
Mortgage-backed securities 32,479
Securities available for sale 2,700 11,430
Premises, equipment, and real estate owned 1,242 79
Premium paid for credit card relationships (10)
------- ------
Net cash used for investing activities (209,090) (57,154)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 70,922 42,423
Proceeds from borrowings 71,250 24,256
Repayment of borrowings (73,370) (29,756)
Proceeds from issuance of Guaranteed
Preferred Beneficial Interests in the
Corporation's Junior Subordinated Debentures 27,750
Net activity on line of credit (31,250) 8,700
--------- ---------
Net cash provided by financing activities 127,802 45,623
--------- ---------
Net change in cash and cash equivalents (2,244) (1,367)
Cash and cash equivalents at beginning of period 22,511 16,522
--------- ---------
Cash and cash equivalents at end of period $ 20,267 $ 15,155
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 12,264 $ 21,356
Income taxes 2,027 1,063
Transfer from loans receivable to other real estate 2,018
Loans securitized 5,363
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(In thousands)
Six Months Ended June 30,
-----------------------------------------------------
1998 1997
---------------------- -----------------------
Retained earnings
Balance at January 1 $24,270 $18,467
Net income 3,293 $3,293 2,504 $ 2,504
------- ------ ------- -------
Balance at June 30 27,563 20,971
------- -------
Accumulated other comprehensive income
Balance at January 1 1,290 676
Unrealized gains on securities, net
of reclassification adjustment (411) (256)
------ -------
Other comprehensive income (411) (411) (256) (256)
------- ------ ------- -------
Comprehensive income $2,882 $ 2,248
====== =======
Balance at June 30 879 420
------- -------
Paid-in capital
Balance at January 1 11,101 11,101
Balance at June 30 11,101 11,101
------- -------
Total shareholders' equity $39,543 $32,492
======= =======
Disclosure of reclassification amount:
Unrealized holding gains arising during period $ (435) $ (313)
Less: reclassification adjustment for gains
included in net income 24 57
Net unrealized gains on securities $(411) $(256)
======= =======
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 the "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. Metropolitan Capital Trust I was formed in the second
quarter 1998 for the purpose of the sale of the cumulative trust preferred
securities. 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 and six-month periods ended June 30, 1998 and 1997; (b)
the financial condition at June 30, 1998 and December 31, 1997; (c) the
statement of cash flows for the six-month periods ended June 30, 1998 and 1997,
and (d) the statement of changes in shareholders' equity for the six-month
periods ended June 30, 1998 and 1997. The results of operations for the
six-month period ended June 30, 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.
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 June 30, 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.
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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 at June 30, 1998 and December 31, 1997 are as follows (In
thousands):
JUNE 30, 1998
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $11,948 $ 11,948
FHLMC preferred stock 7,500 (112) 7,388
Mortgage-backed securities 106,880 1,235 (12) 108,103
------- ----- ---- --------
126,328 1,235 (124) 127,439
HELD TO MATURITY
Tax-exempt municipal bond 14,814 14,814
------ ---- ---- ------
Total $141,142 1,235 (124) $142,253
======== ===== ==== ========
DECEMBER 31, 1997
------------------------------------------------
Gross Gross
Amortized Unrealized 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 June 30, 1998 and December 31, 1997 is
as follows (In thousands):
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Real estate loans
Construction loans:
Residential single family $ 79,854 $ 67,986
Commercial 13,238 19,200
Land 32,323 29,077
Loans in process (50,455) (46,833)
--------- ---------
Construction loans, net 74,960 69,430
Permanent loans:
Residential single family 166,993 146,685
Multifamily 235,151 194,450
Commercial 207,107 166,593
Other 846 566
--------- ---------
Total real estate loans 685,057 577,724
Consumer loans 64,189 68,590
Business and other loans 63,084 57,496
--------- ---------
Total loans 812,330 703,810
Premium (discount) on loans, net 1,183 (425)
Deferred loan fees, net (4,842) (4,108)
Allowance for losses on loans (6,516) (5,622)
--------- ---------
$ 802,155 $ 693,655
========= =========
Activity in the allowance for losses on loans for the periods ended June 30,
1998 and 1997 is as follows (In thousands):
Six Months Ended June 30,
1998 1997
------ --------
Balance at the beginning of the period $ 5,622 $ 4,175
Provision for loan losses 1,360 1,170
Net charge-offs (466) (190)
------ --------
Balance at the end of the period $ 6,516 $ 5,155
========= ========
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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 June 30, 1998 and December 31, 1997 is as follows (In thousands):
June 30, December 31,
1998 1997
-------- ------------
Balance of impaired loans $12,581 $ 516
Less portion for which no allowance
for losses on loans is allocated 11,491 516
------- -------
Portion of impaired loans for which
an allowance for loan losses is allocated $ 4,326 $ 0
======= =======
Portion of allowance for losses on loans
allocated to the impaired loan balance $ 850 $ 0
======= =======
June 30, December 31,
1998 1997
-------- ------------
Average investment in impaired loans
during the period $ 9,459 $ 4,220
======= =======
Interest income recognized during
Impairment $ 64 $ 48
======= =======
Interest income recognized on a
cash basis during the period $ 64 $ 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 June 30, 1998 and December 31, 1997 are summarized as follows (In
thousands):
June 30, December 31,
1998 1997
---- ----
Mortgage loan portfolios serviced for:
FHLMC $ 649,403 $ 656,817
FNMA 504,115 507,345
Other 22,386 26,023
---------- ----------
Total loans serviced for others $1,175,904 $1,190,185
========== ==========
Custodial balances maintained in noninterest-bearing checking accounts in
connection with the foregoing loan servicing were approximately $18,633,000 and
$18,894,000 at June 30, 1998 and December 31, 1997, respectively.
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The following is an analysis of the changes in cost of loan servicing rights for
the six-month period ended June 30, 1998 and 1997 (In thousands):
Six Months Ended June 30,
1998 1997
---- ----
Balance at the beginning of the period $ 9,224 $ 8,051
Acquired or originated 1,840 462
Amortization (1,253) (950)
------- -------
Balance at the end of the period $ 9,811 $ 7,563
======= =======
6. DEPOSITS
Deposits consist of the following (In thousands):
June 30, December 31,
1998 1997
---- ----
Noninterest-bearing checking accounts $ 46,288 $ 46,234
Interest-bearing checking accounts 46,587 43,080
Passbook savings and statement savings 185,425 170,443
Certificates of deposit 530,440 478,025
-------- --------
Total interest-bearing deposits 762,452 691,548
-------- --------
$808,740 $737,782
======== ========
At June 30, 1998, scheduled maturities of certificates of deposit are as follows
(In thousands):
Year Weighted Average
Ended Amount Interest Rate
----- ------ -------------
1998 $174,223 5.63%
1999 279,863 5.99
2000 62,389 6.35
2001 7,577 5.95
2002 1,798 6.07
Thereafter 4,590 6.16
-------- 5.91
$530,440
========
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7. BORROWINGS
Borrowings consisted of the following at June 30, 1998 and December 31, 1997 (In
thousands):
June 30, December 31,
1998 1997
---- ----
Federal Home Loan Bank Advances (5.8% and 5.7% at
June 30, 1998 and December 31, 1997, respectively) $ 88,750 $ 41,000
Reverse repurchase agreements (5.7% and 5.7% at
June 30, 1998 and December 31, 1997, respectively) 62,250 74,496
Commercial bank line of credit (8.5% at
December 31, 1997) 1,500
Subordinated debt maturing December 31, 2001
(10% fixed rate) 4,874
Subordinated debt maturing January 1, 2005
(9.625% fixed rate) 14,000 14,000
-------- --------
$165,000 $135,870
======== ========
At June 30, 1998, scheduled payments on borrowings are as follows (In
thousands):
Average Weighted
Year Ended Amount Interest Rate
---------- ------ -------------
1998 $ 47,750 5.58%
1999 23,000 5.64
2001 50,250 5.80
2002 15,000 5.90
Thereafter 29,000 8.21
--------
Total $165,000 6.15
========
Federal Home Loan Bank ("FHLB") advances are collateralized by FHLB stock and
residential first mortgage loans with an aggregate carrying value of
$181,000,000 and $147,000,000 at June 30, 1998 and December 31, 1997,
respectively.
The Corporation has a commercial bank 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 from
$4,000,000 to $8,000,000 and the line of credit is now a revolving structure
that matures in one year and is renewable at that time. As collateral for the
loan, the Corporation's largest shareholder has agreed to
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pledge a portion of his common shares in an amount at least equal to 200% of any
outstanding balance. As of June 30, 1998, there was no outstanding balance under
this agreement.
8. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR
SUBORDINATED DEBENTURES
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% Guaranteed Preferred Beneficial Interests in the Corporation's Junior
Subordinated Debentures (the "Junior Subordinated Debentures"), which mature on
June 30, 2028. The Corporation has used or 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 outstanding 10%
Subordinated Notes and $2,500,000 of the $4,000,000 commercial bank line of
credit; 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 are listed on the NASDAQ Stock Market's National Market under the
symbol "METFP."
9. EXTRAORDINARY ITEM
In the second quarter, 1998, earnings were affected by an extraordinary item of
($245,000), net of tax, or ($0.03) per common share, pertaining to the
Corporation's early retirement of $4.9 million of 10% Subordinated Notes which
were scheduled to mature December 31, 2001. This amount represents the write-off
of the unamortized issuance costs and the prepayment premium resulting from the
early retirement. The retirement of the 10% Subordinated Notes was funded during
the quarter through the issuance of the 8.60% Guaranteed Preferred Beneficial
Interests in the Junior Subordinated Debentures.
10. 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 June 30, 1998, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $47,918,000
and $76,842,000, 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 $19,864,000 and optional commitments to sell loans totaling
$22,447,000.
At June 30, 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
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on each option which is recognized as income at the time the transaction is
complete. At June 30, 1998, loans with a carrying value of $22,447,000 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.
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 noninterest 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 tables present, 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 June 30,
------------------------------------------------------------------------
1998 1997
--------------------------------- --------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $ 785,379 $17,298 8.81% $682,625 $15,124 8.86%
Mortgage-backed securities 113,029 2,242 7.93 68,706 1,119 6.51
Other 47,478 761 6.41 15,670 249 6.36
----------- ------- -------- -------
Total interest-earning assets 945,886 20,301 8.58 767,001 16,492 8.60
------- ------
Nonearning assets 55,344 39,967
-------- --------
Total assets $ 1,001,230 $806,968
========= ========
Interest-bearing liabilities:
Deposits $ 749,246 10,159 5.44 $627,070 8,351 5.34
Borrowings 133,737 2,099 6.30 98,925 1,618 6.56
Junior Subordinated Debentures 18,808 412 8.76
-------- ------- -------- -------
Total interest-bearing liabilities 901,791 12,670 5.63 725,995 9,969 5.51
------- ---- ------- ----
Noninterest-bearing liabilities 60,539 49,337
Shareholders' equity 38,900 31,636
-------- --------
Total liabilities and
shareholders' equity $ 1,001,230 $806,968
========= ========
Net interest income $ 7,631 $ 6,523
====== ======
Interest rate spread 2.95% 3.09%
==== ====
Net interest margin 3.23% 3.40%
Average interest-earning
assets to average
interest-bearing
liabilities 104.89% 105.65%
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17
Six Months Ended June 30,
------------------------------------------------------------------------
1998 1997
--------------------------------- --------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable $ 756,374 $33,497 8.86% $673,497 $29,985 8.90%
Mortgage-backed securities 123,138 4,733 7.69 65,027 2,129 6.55
Other 37,918 1,284 6.77 16,464 501 6.09
-------- -------- -------- --------
Total interest-earning assets 917,430 39,514 8.61 754,988 32,615 8.64
------ ------
Nonearning assets 57,527 43,349
-------- --------
Total assets $ 974,957 $798,337
======= =======
Interest-bearing liabilities:
Deposits $ 734,404 19,770 5.43 $616,606 16,281 5.32
Borrowings 130,042 4,145 6.43 104,350 3,373 6.52
Junior Subordinated Debentures 8,995 412 8.76
--------- -------- -------- --------
Total interest-bearing liabilities 873,441 24,327 5.61 720,956 19,654 5.50
------ ---- ------- ----
Noninterest-bearing liabilities 63,362 46,209
Shareholders' equity 38,154 31,172
-------- --------
Total liabilities and
shareholders' equity $ 974,957 $798,337
======= =======
Net interest income $ 15,187 $ 12,961
======= =======
Interest rate spread 3.00% 3.14%
==== ====
Net interest margin 3.31% 3.43%
Average interest-earning
assets to average
interest-bearing
liabilities 105.04% 104.72%
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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 June 30,
1998 vs. 1997
Increase (Decrease)
----------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ----
(In thousands)
INTEREST INCOME ON:
Loans receivable $2,174 $2,260 $ (86)
Mortgage-backed securities 1,123 840 283
Other 512 510 2
------ ------ ------
Total interest income 3,809 $3,610 $ 199
------ ====== ======
INTEREST EXPENSE ON:
Deposits 1,808 $1,628 $ 180
Borrowings 481 583 (102)
Junior Subordinated Debentures 412 412
------ ------
Total interest expense 2,701 $2,623 $ 78
------ ====== ======
Increase in net interest income $1,108
======
Six Months ended June 30,
1998 vs. 1997
Increase (Decrease)
----------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ----
(In thousands)
INTEREST INCOME ON:
Loans receivable $3,512 $3,669 $ (157)
Mortgage-backed securities 2,604 2,180 424
Other 783 727 56
------ ------ ------
Total interest income 6,899 $6,576 $ 323
------ ====== ======
INTEREST EXPENSE ON:
Deposits 3,489 $3,166 $ 323
Borrowings 772 818 (46)
Junior Subordinated Debentures 412 412
------ ------ ------
Total interest expense 4,673 $4,396 $ 277
------ ====== ======
Increase in net interest income $2,226
======
18
19
RESULTS OF OPERATIONS
Net Income. Net income for the second quarter, 1998 was $1.31 million as
compared to net income of $1.29 million for the second quarter, 1997. Net income
before the extraordinary item was $1.55 million, as compared to $1.29 million
for the prior year period, an increase of 20.0% in net income before
extraordinary items. Net interest income and noninterest income increased $1.1
million and $0.9 million, respectively, for the three months ended June 30, 1998
over the prior year period. The provision for loan losses increased $0.3 million
from the same prior year period and noninterest expense increased $1.3 million
to $6.2 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.
Net income for the six-month period ended June 30, 1998 was $3.3 million as
compared to net income of $2.5 million for the first six months of 1997. Net
income before the extraordinary item was $3.5 million, as compared to $2.5
million for the prior year period, an increase of 41.3% in net income before
extraordinary items. Net interest income and noninterest income increased $2.2
million and $1.6 million, respectively, for the six months ended June 30, 1998
over the prior year period. The provision for loan losses increased $0.2 million
from the same prior year period and noninterest expense increased $2.0 million
to $11.7 million for the six-month period ended June 30, 1998 from $9.7 million
from the prior year period primarily as a result of increased personnel related
costs, occupancy expense, and expenses related to increased business levels.
Second quarter and year-to-date earnings in 1998 were affected by an
extraordinary item of ($245,000) pertaining to the early retirement of $4.9
million of 10% Subordinated Notes which were scheduled to mature December 31,
2001. This amount represents the write-off of the unamortized issuance costs and
the prepayment premium resulting from the early retirement, net of income taxes.
Metropolitan's net interest margin decreased seventeen and twelve basis points
to 3.23% and 3.31% for the three and six-month periods ended June 30, 1998,
respectively, as compared to 3.40% and 3.43% for the same periods in 1997. The
decrease in net interest margin resulted primarily from the increased costs of
interest-bearing liabilities, influenced by lengthened maturities on deposits
and borrowings and the additional debt issued by the Corporation, exceeding the
relatively stable yield of interest-earning assets.
Interest Income. Total interest income increased 23.1% and 21.1% to $20.3
million and $39.5 million in the three and six-month periods ended June 30,
1998, respectively, as compared to $16.5 million and $32.6 million in the same
periods in 1997. This increase primarily resulted from a 15.1% and 21.5%
increase in average interest-earning assets in the three and six-month periods
ended June 30, 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.
Interest Expense. Total interest expense increased 27.1% and 23.8% to $12.7
million and $24.3 million for the three and six-month periods ended June 30,
1998, respectively, as compared to $10.0 million and $19.7 million for the same
periods 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 and six-month periods ending June 30, 1998 compared to the same periods in
1997. The average balance of deposit accounts increased 19.5% and 19.1% to
$749.2 million
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20
and $734.4 million for the three and six-month periods ended June 30, 1998,
respectively, compared to 1997 primarily in order to fund the growth experienced
in average assets. The Corporation has increased its use of other sources of
borrowings, including Federal Home Loan Bank advances, reverse repurchase
agreements, and the previously mentioned Trust Preferred. Metropolitan's cost of
funds increased to 5.63% for the second quarter, 1998 and 5.61% for the six
months ended June 30, 1998 as compared to 5.51% and 5.50% for the same periods
in 1997 due to higher rates paid as maturities were lengthened on deposits and
borrowings.
Provision for Loan Losses. The provision for loan losses increased $325,000 for
the second quarter, 1998, and $190,000 for the six month period ended June 30,
1998 as compared to the same periods in 1997. Management increased the provision
due to the increased number of nonperforming loans as a percentage of total
loans in the loan portfolio and its assessment of the collectibility of those
loans. 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 93.4% and 85.5% to $1.9
million and $3.5 million for the three and six-month periods ended June 30, 1998
as compared to $1.0 million and $1.9 million for the prior year periods.
Net loan servicing income decreased 22.7% to $239,000 in the three month period
ended June 30, 1998 as compared to the same period in 1997 and 20.7% to $479,000
for the six months ended June 30, 1998 as compared to the prior year period. The
primary reason for this decrease was the writedown of originated
mortgage servicing rights due to significant unanticipated prepayments in the
first half of 1998. Metropolitan remains committed to this line of business and
continues to evaluate new acquisitions. Metropolitan focuses on the acquisition
of 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 $57,000 to $220,000 in the three
month period ended June 30, 1998 compared to the same period in 1997 and
$119,000 to $430,000 for the six months ended June 30, 1998 as compared to the
prior year period. 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 $767,000 in the three-month period ended June 30,
1998, as compared to $146,000 during the same period in 1997. For the six-month
period ended June 30, 1998, gain on sale of loans was $1,525,000 as compared to
$212,000 for the prior year period. 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 half of 1998 were the sale of residential fixed rate loans into a
favorable rate market and greatly increased volume over the prior year. The
proceeds of residential loan sales in the first six months of 1998 were $113.6
million as compared to $31.8 million in the same period in 1997.
Loan option income was $257,000 and $277,000 in the three and six-month periods
ended June 30, 1998 as compared to $75,000 and $123,000 in the same periods 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
20
21
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 loss on sale of securities in the three months ended June 30, 1998, was
($29,000) as a result of the sale of a Collateralized Mortgage Obligation
("CMO") during the quarter. Net gain on sale of securities for the six months
ended June 30, 1998 was $38,000 as compared to $89,000 for the prior year
period. This gain in the first half of 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 and the previously discussed CMO sale.
Other noninterest income increased $160,000 and $223,000 in the three and
six-month periods ended June 30, 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, especially lending activities, in the
first half of 1998.
Noninterest Expense. Total noninterest expense increased to $6.2 million and
$11.7 million in the three and six-month periods ended June 30, 1998 as compared
to $4.9 million and $9.7 million for the same periods in 1997.
Personnel related expenses increased $585,000 and $898,000 in the three-month
and six-month periods ended June 30, 1998 as compared to the same periods in
1997. These increases were primarily a result of increased staffing levels to
meet business needs, including temporary employees, during the 1998 period and
additional incentive payments based on increased business volumes.
Occupancy costs increased $145,000 and $295,000 in the three and six-month
periods ended June 30, 1998, over the same periods in 1997. This increase was
generally the result of one additional full service retail sales office,
maintenance costs, and expanded space at the corporate headquarters office.
Marketing expense increased $74,000 and $108,000 in the three and six-month
periods ending June 30, 1998 as compared to the same periods 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 $498,000 and $715,000 for the three and
six-month periods ended June 30, 1998 as compared to the same periods in 1997.
This increase was generally the result of increases in expenses pertaining to
increased loan origination/purchase volume, real estate owned expenses, and
increased loan servicing costs.
Provision for Income Taxes. The provision for income taxes increased $146,000
and $632,000 for the three and six-month periods ended June 30, 1998 as compared
to the same periods in 1997. The primary reason for the increase in the
provision was the increased level of income over the prior year. The effective
tax rates were 36.7% and 37.1% for the three and six-month periods ended June
30, 1998 as compared to 36.8% and 36.7% for the same periods in 1997.
21
22
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, management of Metropolitan
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.
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.
June 30, December 31,
1998 1997
---- ----
(Dollars in thousands)
Nonaccrual loans $ 12,269 $ 2,763
Loans past due greater than
90 days or impaired, still accruing 1,552 384
---------- ----------
Total nonperforming loans 13,821 3,147
Real estate owned 1,530 2,037
---------- ----------
Total nonperforming assets $ 15,351 $ 5,184
========== ==========
Allowance for losses on loans $ 6,516 $ 5,623
========== ==========
Nonperforming loans to total loans 1.64% 0.44%
Nonperforming assets to total assets 1.45% 0.56%
Net charge-offs to average loans 0.12%(1) 0.13%
Provision for loan losses to
average loans 0.36%(1) 0.35%
Allowance for losses on loans to
total nonperforming loans at
end of period 47.15% 178.68%
Allowance for losses on loans to
total loans at end of period 0.77% 0.79%
(1) Annualized for comparative purposes.
22
23
Nonperforming assets at June 30, 1998 increased $10.2 million to $15.4 million
as compared to $5.2 million at December 31, 1997. As previously reported in the
March 31, 1998 Form 10-Q, 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 and a $3.7 million commercial loan secured by a motel in Northeast
Ohio. It is anticipated that these loans will remain delinquent or move to Real
estate owned and remain as nonearning assets at least through year end.
Nonperforming assets at June 30, 1998 also include three loans held for sale
totaling $1.9 million and secured by commercial real estate which have
subsequently been sold. In addition, $1.1 million of commercial loans have
become nonperforming during the second quarter, 1998. The underlying collateral
for all of these nonperforming loans has been evaluated for collectibility and
as a result, $850,000 of the allowance for loan losses has been allocated to
cover estimated losses on these loans.
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 $3.6 million of loans in this category at
June 30, 1998. Management believes that the security held by the Bank on those
potential problem loans classified as substandard for regulatory purposes is
adequate to prevent the Bank from incurring a material loss on such loans.
FINANCIAL CONDITION
Total assets amounted to $1,058.9 million at June 30, 1998, as compared to
$925.0 million at December 31, 1997, an increase of $133.9 million, or 14.5%.
The increase in assets was funded primarily with deposit growth of $71.0
million, increased borrowings of $29.1 million, and the Trust Preferred of $27.8
million.
Securities available for sale increased $17.6 million to $19.3 million at June
30, 1998 compared to $1.7 million at 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 and $11.9 million of
mutual funds readily convertible to cash purchased by the Corporation with the
proceeds of the Trust Preferred issuance.
Securities held to maturity increased $10.1 million to $14.8 million at June 30,
1998 compared to at December 31, 1997. The increase was primarily due to the
purchase of $14.8 million of tax-exempt municipal bonds which was offset by the
redemption of $4.7 million of tax-exempt bonds.
Loans receivable, including loans held for sale, increased $136.6 million, or
19.3% to $844.5 million at June 30, 1998 from $707.9 million at December 31,
1997. 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.
Total deposits were $808.8 million at June 30, 1998, an increase of $71.0
million, or 9.6%, over the balance of $737.8 million at December 31, 1997. The
increase resulted from management's marketing efforts, continued growth at newer
retail sales offices, and increased custodial checking balances.
23
24
Borrowings increased $29.1 million, or 21.4% from December 31, 1997 to June 30,
1998. The increase was the result of increased use of FHLB advances. The Trust
Preferred were issued in the second quarter, 1998, in the amount of $27.8
million. Metropolitan intends to use the proceeds from the offering that have
not already been utilized for general corporate purposes, including but not
limited to, repayment of currently outstanding debt, acquisitions by either the
Corporation or the Bank, capital contributions to the Bank to support growth and
for working capital, and the possible repurchase of Metropolitan's common
shares.
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 June 30, 1998
was 11.95%.
The Corporation's primary source of funds currently is dividends from the Bank,
which are subject to restrictions imposed by federal bank regulatory agencies
and debt or equity security issues. The Corporation's primary use of funds is
for interest payments on its existing debt. At June 30, 1998, the Corporation,
excluding the Bank, had cash and readily convertible investments of $12.3
million. This included the portion of the proceeds of the Trust Preferred
issuance which have not been utilized.
At June 30, 1998, $99.3 million, or 12.3%, 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 June 30, 1998, approximately $61.5 million, or 7.6%, of
Metropolitan's accounts were held by these individuals and entities. If
Metropolitan were unable to replace these deposits upon maturity,
24
25
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 $120.4 million at June 30, 1998, of which $88.8 million was
utilized. The financial market makes funds available through reverse repurchase
agreements by accepting various investment and mortgage-backed securities as
collateral. The Bank had borrowing capacity for reverse repurchase agreements of
approximately $119.4 million at June 30, 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 June 30, 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 $62,448 6.00% $62,694 6.02% $66,309 8.32%
Required 15,614 1.50 41,648 4.00 63,767 8.00
------- ------- --------
Excess $46,834 4.50% $21,046 2.02% $ 2,542 0.32%
======= ======= ========
Metropolitan believes that under the current regulations, the Bank will continue
to meet its minimum capital requirements in the foreseeable future. During the
second quarter of 1998, the Corporation contributed $8.0 million from the Trust
Preferred issuance to the capital of the Bank. 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 June 30, 1998, there
was no 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.
25
26
As a result of the recognition of this potential problem, Metropolitan has
addressed this issue by forming a task force to plan for and implement any
changes necessary to ensure year 2000 readiness. 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 has completed the assessment phase of this project and is currently
testing the applications which affect the majority of the Bank's customer's
accounts. At December 31, 1998, after the completion of the testing phase,
Metropolitan and the service bureau will assess its ability to be year 2000
ready. If the determination is made that it can not be year 2000 ready, the
parent company of the service bureau has committed to convert Metropolitan's
applications to another data center in their network which is or will be year
2000 ready.
Metropolitan believes the plans currently in place will ensure external
suppliers' Year 2000 readiness and that internal components will be adequate to
provide quality service to customers without interruption. In management's
opinion, any related incremental costs or potential loss of revenues would not
have a material impact on the financial condition, operations, or cash flows of
the Corporation.
RECENT ACCOUNTING DEVELOPMENTS
In June, 1997, Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("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.
The Corporation expects SFAS No. 131 to have no effect on its financial
position other than changes in financial presentation classifications.
Also, in June, 1997, FASB issued 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.
26
27
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.
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.
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.
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
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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 June 30, 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.
June 30, 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)% $(29,535) (37)% $(27,474) (36)%
+300 (45) (22,309) (28) (20,131) (27)
+200 (25) (13,670) (17) (12,743) (17)
+100 (15) (6,448) (8) (5,829) (8)
- -100 (15) 6,532 8 5,631 7
- -200 (25) 13,938 18 13,381 18
- -300 (45) 24,777 31 25,415 33
- -400 (65) 37,924 48 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 June 30, 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 June 30, 1998, 54.6% 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
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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.
PART II. OTHER INFORMATION
Items 1,2,3, and 5 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of Metropolitan Financial Corp. was
held on April 28, 1998, at 9:00 a.m. ("the Annual Meeting") at 6001
Landerhaven Drive, Mayfield Heights, Ohio.
At the Annual Meeting, the shareholders of Metropolitan considered and voted
upon proposals to (i) elect Ralph D. Ketchum, James A. Karman, Robert R.
Broadbent, and Marjorie M. Carlson as directors of Metropolitan to serve for the
term expiring at the Annual Meeting of Shareholders to be held in the year 2001,
(ii) approve the Metropolitan Financial Corp. 1997 Stock Option Plan and (iii)
ratify the appointment of Crowe, Chizek and Company LLP as independent auditors
for the fiscal year ending December 31, 1998. The shares represented at the
Annual Meeting in person or by proxy were voted as follows with respect to each
of the proposals:
PROPOSAL #1 FOR WITHHELD ABSTAINED NON-VOTES
Election of Directors
Ralph D. Ketchum 6,823,177 7,150 0 220,943
James A. Karman 6,821,177 9,150 0 220,943
Robert R. Broadbent 6,823,227 7,100 0 220,943
Marjorie M. Carlson 6,823,227 7,100 0 220,943
PROPOSAL #2 FOR WITHHELD ABSTAINED NON-VOTES
Approval of Metropolitan Financial
Corp. 1997 Stock Option Plan 6,258,181 31,930 8,400 752,759
PROPOSAL #3 FOR AGAINST ABSTENTIONS NON-VOTES
Ratification of appointment of Crowe,
Chizek and Company LLP 6,761,302 66,825 2,200 220,943
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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 Form of Indenture of the Corporation relating to the Junior
Subordinated Debentures (filed as Exhibit 4.1 to the
Corporation's Form 10-Q filed May 14, 1998 and incorporated
herein by reference).
4.2 Form of Amended and Restated Trust Agreement of Metropolitan
Capital Trust I (filed as Exhibit 4.4 to the Corporation's Form
10-Q filed May 14, 1998 and incorporated herein by reference).
4.3 Form of Guarantee of the Corporation relating to the Trust
Preferred Securities (filed as Exhibit 4.6 to the Corporation's
Form 10-Q filed May 14, 1998 and incorporated herein by
reference).
4.4 Form of Agreement as to Expenses and Liabilities (filed as
Exhibit 4.7 to the Corporation's Form 10-Q filed May 14, 1998
and incorporated herein by reference).
10.1 The Restated Loan Agreement by and between the Huntington
National Bank and the Corporation dated as of March 31, 1998.
(incorporated herein by reference to Exhibit 99.1 to the
Corporation's Form 10-Q filed May 14, 1998).
27 Financial Data Schedule(1)
(1) Filed only in electronic format pursuant to item 601(b)(27) of
Regulation S-K.
b. Reports on Form 8-K - None
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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: August 14, 1998
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