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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 SEPTEMBER 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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6001 LANDERHAVEN DRIVE, MAYFIELD HEIGHTS, OHIO 44124
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(Address of Principal Executive Offices) (Zip Code)
(440) 646-1111
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(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 November 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 SEPTEMBER 30, 1998
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited)
as of September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations (Unaudited ) for the
nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1998 and 1997 5
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the nine months ended September 30, 1998 and
1997 6
Notes to Consolidated Financial Statements (Unaudited) 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
PART II. OTHER INFORMATION 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 32
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONITION (Unaudited)
(In thousands)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
ASSETS
Cash and cash equivalents $ 35,316 $ 22,511
Securities available for sale (Note 3) 11,262 1,706
Securities held to maturity (Note 3) 16,216 4,740
Mortgage-backed securities (Note 3) 88,992 143,167
Loans held for sale 14,097 14,230
Loans receivable, net (Note 4) 953,121 693,655
Federal Home Loan Bank stock, at cost 5,673 5,350
Accrued interest receivable 7,303 5,752
Premises and equipment, net 17,602 13,928
Real estate owned, net 842 2,037
Intangible assets 2,790 2,986
Loan servicing rights (Note 5) 10,530 9,224
Prepaid expenses and other assets 7,678 5,699
------------------ -----------------
Total assets $1,171,422 $924,985
================== =================
LIABILITIES
Noninterest-bearing deposits (Note 6) $ 50,978 $ 46,234
Interest-bearing deposits (Note 6) 835,030 691,548
Borrowings (Note 7) 197,250 135,870
Accrued interest payable 3,991 3,272
Other liabilities 15,501 11,400
------------------ -----------------
Total liabilities 1,102,750 888,324
------------------ -----------------
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 29,184 24,270
Unrealized gain on securities available for sale,
net of tax 637 1,290
------------------ -----------------
Total shareholders' equity 40,922 36,661
------------------ -----------------
Total liabilities and shareholders' equity $1,171,422 $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 ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
INTEREST INCOME
Interest and fees on loans $ 18,793 $ 15,029 $ 52,291 $ 45,014
Interest on mortgage-backed securities 1,826 2,178 6,559 4,307
Interest and dividends on other investments 747 333 2,030 834
------------ ------------ ------------ -------------
Total interest income 21,366 17,540 60,880 50,155
------------ ------------ ------------ -------------
INTEREST EXPENSE
Interest on deposits 10,545 8,698 30,315 24,980
Interest on borrowings 2,338 1,859 6,483 5,231
Interest on Junior Subordinated Debentures 608 1,020
------------ ------------ ------------ -------------
Total interest expense 13,491 10,557 37,818 30,211
------------ ------------ ------------ -------------
NET INTEREST INCOME 7,875 6,983 23,062 19,944
Provision for loan losses 690 585 2,050 1,755
------------ ------------ ------------ -------------
Net interest income after provision for loan losses 7,185 6,398 21,012 18,189
------------ ------------ ------------ -------------
NONINTEREST INCOME
Loan servicing income, net 125 350 604 954
Service charges on deposit accounts 219 189 649 505
Gain on sale of loans, net 965 128 2,490 340
Loan option income 111 141 388 264
Loan credit discount income 137 137
Gain (loss) on sale of securities, net 32 70 89
Other operating income 335 311 1,128 876
------------ ------------ ------------ -------------
Total noninterest income 1,924 1,119 5,466 3,028
------------ ------------ ------------ -------------
NONINTEREST EXPENSE
Salaries and related personnel costs 3,573 2,666 9,691 7,899
Occupancy and equipment expense 922 813 2,650 2,254
Federal deposit insurance premiums 183 153 511 441
Data processing expense 152 81 366 350
Marketing expense 253 222 671 532
State franchise taxes 156 155 467 465
Amortization of intangibles 66 66 197 197
Other operating expenses 1,260 1,005 3,758 2,766
------------ ------------ ------------ -------------
Total noninterest expense 6,565 5,161 18,311 14,904
------------ ------------ ------------ -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 2,544 2,356 8,167 6,313
Provision for income taxes 923 867 3,008 2,320
------------ ------------ ------------ -------------
NET INCOME BEFORE EXTRAORDINARY ITEM 1,621 1,489 5,159 3,993
Extraordinary item (Note 9) 245
------------ ------------ ------------ -------------
NET INCOME $ 1,621 $ 1,489 $ 4,914 $ 3,993
============ ============ ============ =============
Basic earnings per share $ 0.23 $ 0.21 $ 0.70 $ 0.56
============ ============ ============ =============
Diluted earnings per share $ 0.23 $ 0.21 $ 0.69 $ 0.56
============ ============ ============ =============
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 31,599 92,556
------------ ------------ ------------ -------------
Weighted average shares outstanding for diluted
earnings per share 7,082,869 7,051,270 7,143,826 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)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES $ (8,678) $ (13,560)
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (274,055) (163,098)
Purchases of:
Loans (196,767) (60,855)
Mortgage-backed securities (18,608) (10,574)
Securities available for sale (20,554) (5,077)
Securities held to maturity (16,214)
Mortgage loan servicing rights (1,602) (881)
Premises and equipment (5,311) (3,025)
FHLB stock (27) (1,012)
Proceeds from maturities and repayments of:
Loans 199,250 136,367
Mortgage-backed securities 42,054 11,974
Securities held to maturity 4,740
Proceeds from sale of:
Loans 15,927 1,950
Mortgage-backed securities 43,211
Securities available for sale 10,975 11,430
Premises, equipment, and real estate owned 1,163 79
Premium paid for credit card relationships (10)
---------- ----------
Net cash used for investing activities (215,818) (82,732)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 148,171 64,656
Proceeds from borrowings 189,250 60,833
Repayment of borrowings (141,370) (53,464)
Proceeds from issuance of Guaranteed Preferred Beneficial
Interests in the Corporation's Junior Subordinated Debentures 27,750
Net activity on line of credit 13,500 22,200
---------- ----------
Net cash provided by financing activities 237,301 94,225
---------- ----------
Net change in cash and cash equivalents 12,805 (2,067)
Cash and cash equivalents at beginning of period 22,511 16,522
---------- ----------
Cash and cash equivalents at end of period $ 35,316 $ 14,455
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 37,518 $ 31,520
Income taxes 2,895 1,101
Transfer from loans receivable to other real estate 1,955
Loans securitized 98,359
See notes to consolidated financial statements.
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METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(In thousands)
Nine Months Ended September 30,
------------------------------------------------------------------------
1998 1997
----------------------------------- ---------------------------------
Retained earnings
Balance at January 1 $24,270 $18,467
Net income 4,914 $4,914 3,993 $3,993
------- ------ ------- ------
Balance at September 30 29,184 22,460
------- -------
Accumulated other comprehensive income
Balance at January 1 1,290 676
Unrealized gains on securities, net
of reclassification adjustment (653) 674
------ ------
Other comprehensive income (653) (653) 674 674
------- ------ ------- ------
Comprehensive income $4,261 $4,667
====== ======
Balance at September 30 637 1,350
------- -------
Paid-in capital
Balance at January 1 11,101 11,101
Balance at September 30 11,101 11,101
------- -------
Total shareholders' equity $40,922 $34,911
======= =======
Disclosure of reclassification amount:
Unrealized holding gains arising during period $ (699) $ 617
Less: reclassification adjustment for gains
included in net income 46 57
------- -------
Net unrealized gains on securities $(653) $ 674
======= =======
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 nine-month periods ended September 30, 1998 and
1997; (b) the financial condition at September 30, 1998 and December 31, 1997;
(c) the statement of cash flows for the nine-month periods ended September 30,
1998 and 1997, and (d) the statement of changes in shareholders' equity for the
nine-month periods ended September 30, 1998 and 1997. The results of operations
for the nine-month period ended September 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 September 30, 1998 and December 31, 1997, management had
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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 at September 30, 1998 and December 31, 1997 are as follows
(In thousands):
SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
-------------- ---------------- ---------------- ----------
AVAILABLE FOR SALE
Mutual funds $ 3,837 $ 3,837
FHLMC preferred stock 7,500 (75) 7,425
Mortgage-backed securities 87,937 1,068 (13) 88,992
-------------- ---------------- ---------------- ----------
99,274 1,068 (88) 100,254
HELD TO MATURITY
Tax-exempt municipal bond 14,816 14,816
Revenue bond 1,400 1,400
-------------- ---------------- ---------------- ----------
16,216 16,216
-------------- ---------------- ---------------- ----------
Total $ 115,490 1,068 (88) $116,470
============== ================ ================ ==========
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 September 30, 1998 and December 31,
1997 is as follows (In thousands):
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Real estate loans
Construction loans:
Residential single family $ 81,859 $ 67,986
Commercial 11,826 19,200
Land 32,142 29,077
Loans in process (45,786) (46,833)
-------- --------
Construction loans, net 80,041 69,430
Permanent loans:
Residential single family 176,080 146,685
Multifamily 313,487 194,450
Commercial 245,569 166,593
Other 832 566
-------- --------
Total real estate loans 816,009 577,724
Consumer loans 72,130 68,590
Business and other loans 74,172 57,496
-------- --------
Total loans 962,311 703,810
Premium (discount) on loans, net 2,931 (425)
Deferred loan fees, net (5,062) (4,108)
Allowance for losses on loans (7,059) (5,622)
-------- --------
$953,121 $693,655
======== ========
Activity in the allowance for losses on loans for the periods ended September
30, 1998 and 1997 is as follows (In thousands):
Nine Months Ended September 30,
1998 1997
--------- --------
Balance at the beginning of the period $ 5,622 $ 4,175
Provision for loan losses 2,050 1,755
Net charge-offs (613) (512)
--------- --------
Balance at the end of the period $ 7,059 $ 5,418
========= ========
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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 September 30, 1998 and December 31, 1997 is as follows (In thousands):
September 30, December 31,
1998 1997
------------ ------------
Balance of impaired loans $10,891 $ 516
Less portion for which no allowance
for losses on loans is allocated 6,044 516
------- -----
Portion of impaired loans for which
an allowance for loan losses is allocated $ 4,847 $ 0
======= =====
Portion of allowance for losses on loans
allocated to the impaired loan balance $ 1,195 $ 0
======= =====
September 30, December 31,
1998 1997
------------ ------------
Average investment in impaired loans
during the period $ 9,265 $4,220
============ ============
Interest income recognized during
Impairment $ 190 $ 48
============ ============
Interest income recognized on a
Cash basis during the period $ 190 $ 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 September 30, 1998 and December 31, 1997 are summarized as
follows (In thousands):
September 30, December 31,
1998 1997
------------ ------------
FHLMC $ 651,662 $ 656,817
FNMA 517,910 507,345
Other 29,952 26,023
------------ -----------
Total loans serviced for others $ 1,199,524 $ 1,190,185
============ ===========
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Custodial balances maintained in noninterest-bearing checking accounts in
connection with the foregoing loan servicing were approximately $20,313,000 and
$18,894,000 at September 30, 1998 and December 31, 1997, respectively.
The following is an analysis of the changes in cost of loan servicing rights for
the nine-month period ended September 30, 1998 and 1997 (In thousands):
Nine Months Ended September 30,
1998 1997
--------- --------
Balance at the beginning of the period $ 9,224 $ 8,051
Acquired or originated 3,244 2,232
Amortization (1,938) (1,427)
--------- --------
Balance at the end of the period $ 10,530 $ 8,856
========= ========
6. DEPOSITS
Deposits consist of the following (In thousands):
September 30, December 31,
1998 1997
------------- ------------
Noninterest-bearing checking accounts $ 50,978 $ 46,234
Interest-bearing checking accounts 47,891 43,080
Passbook savings and statement savings 193,467 170,443
Certificates of deposit 593,672 478,025
------------- ------------
Total interest-bearing deposits 835,030 691,548
------------- ------------
$ 886,008 $ 737,782
============= ============
At September 30, 1998, scheduled maturities of certificates of deposit are as
follows (In thousands):
Year Weighted Average
Ended Amount Interest Rate
---------- --------- ----------------
1998 $106,304 5.49%
1999 378,261 5.82
2000 80,584 6.25
2001 19,822 5.91
2002 2,137 6.45
Thereafter 6,564 6.06
---------
$593,672 5.82
=========
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7. BORROWINGS
Borrowings consisted of the following at September 30, 1998 and December 31,
1997 (In thousands):
September 30, December 31,
1998 1997
------------- ------------
Federal Home Loan Bank Advances (5.8% and 5.7% at
September 30, 1998 and December 31, 1997, respectively) $101,000 $ 41,000
Reverse repurchase agreements (5.7% and 5.6% at
September 30, 1998 and December 31, 1997, respectively) 82,250 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
------------- ------------
$197,250 $135,870
============= ============
At September 30, 1998, scheduled payments on borrowings are as follows (In
thousands):
Weighted Average
Year Ended Amount Interest Rate
---------- --------- ----------------
1998 $ 30,000 5.64%
1999 23,000 5.64
2001 3,000 6.15
2002 62,250 5.81
Thereafter 79,000 6.30
---------
Total $ 197,250 5.97
=========
Federal Home Loan Bank ("FHLB") advances are collateralized by FHLB stock and
residential first mortgage loans with an aggregate carrying value of
approximately $179,000,000 and $147,000,000 at September 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
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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
pledge a portion of his common shares in an amount at least equal to 200% of any
outstanding balance. As of September 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 September 30, 1998, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $71,961,000
and $83,597,000, 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 $26,040,000 and optional commitments to sell loans totaling $5,903,000.
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At September 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 may have collected a non-refundable fee
on each option which is recognized as income at the time the transaction is
complete or the Bank may have agreed to receive a share of the excess of
proceeds over the option price at the time the transaction is complete. At
September 30, 1998, loans with a carrying value of $5,903,000 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 reflect and are primarily affected by the
operations of its largest subsidiary, 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.
15
16
Three Months Ended September 30,
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------ -------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
----------- -------- ----- -------- ------- -----
Interest-earning assets:
Loans receivable $ 857,612 $18,793 8.77% $651,525 $15,029 9.23%
Mortgage-backed securities 100,101 1,826 7.30 125,345 2,178 6.95
Other 48,564 747 6.15 19,340 333 6.89
----------- -------- -------- -------
Total interest-earning assets 1,006,277 21,366 8.49 796,210 17,540 8.81
-------- -------
Nonearning assets 57,827 46,105
----------- --------
Total assets $ 1,064,104 $842,315
=========== ========
Interest-bearing liabilities:
Deposits $ 778,666 10,545 5.37 $642,115 8,698 5.37
Borrowings 148,702 2,338 6.24 113,665 1,859 6.49
Junior Subordinated Debentures 27,750 608 8.76
----------- -------- -------- ------
Total interest-bearing liabilities 955,118 13,491 5.60 755,780 10,557 5.60
-------- ----- ------ ----
Noninterest-bearing liabilities 68,753 52,833
Shareholders' equity 40,233 33,702
----------- --------
Total liabilities and
shareholders' equity $ 1,064,104 $842,315
=========== ========
Net interest income $ 7,875 $ 6,983
======== =======
Interest rate spread 2.89% 3.21%
===== ====
Net interest margin 3.13% 3.51%
Average interest-earning
assets to average
interest-bearing
liabilities 105.36% 105.35%
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17
Nine Months Ended September 30,
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------ -------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
----------- -------- ----- -------- -------- -----
Interest-earning assets:
Loans receivable $ 790,491 $ 52,291 8.82% $666,093 $ 45,014 9.01%
Mortgage-backed securities 115,375 6,559 7.58 85,354 4,307 6.73
Other 41,505 2,030 6.52 18,649 834 5.96
----------- -------- -------- --------
Total interest-earning assets 947,371 60,880 8.57 770,096 50,155 8.68
-------- --------
Nonearning assets 57,628 43,061
----------- --------
Total assets $1,004,999 $813,157
=========== ========
Interest-bearing liabilities:
Deposits $ 749,320 30,315 5.41 $625,202 24,980 5.34
Borrowings 136,330 6,483 6.36 107,489 5,231 6.50
Junior Subordinated Debentures 15,520 1,020 8.76
----------- -------- -------- --------
Total interest-bearing liabilities 901,170 37,818 5.61 732,691 30,211 5.51
-------- ---- -------- ====
Noninterest-bearing liabilities 64,961 48,359
Shareholders' equity 38,868 32,107
----------- --------
Total liabilities and
shareholders' equity $1,004,999 $813,157
=========== ========
Net interest income $ 23,062 $ 19,944
======== ========
Interest rate spread 2.96% 3.17%
===== =====
Net interest margin 3.25% 3.45%
Average interest-earning
assets to average
interest-bearing
liabilities 105.13% 105.11%
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18
RATE AND VOLUME VARIANCES. Net interest income is affected by changes in the
level of interest-earning assets and interest-bearing liabilities and changes in
yields earned on assets and rates paid on liabilities. The following table sets
forth, for the periods indicated, a summary of the changes in interest earned
and interest paid resulting from changes in average asset and liability balances
and changes in average rates. Changes attributable to the combined impact of
volume and rate have been allocated proportionately to change due to volume and
change due to rate.
Three Months ended September 30,
1998 vs. 1997
Increase (Decrease)
---------------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------- ------ ------
(In thousands)
INTEREST INCOME ON:
Loans receivable $3,764 $4,471 $ (707)
Mortgage-backed securities (352) (468) 116
Other 414 445 (31)
------- ------ ------
Total interest income 3,826 $4,448 $ (622)
------- ====== ======
INTEREST EXPENSE ON:
Deposits 1,847 $1,851 $ (4)
Borrowings 479 572 (93)
Junior Subordinated Debentures 608 608
------- ------ ------
Total interest expense 2,934 $3,031 $ (97)
------- ====== ======
Increase in net interest income $ 892
=======
Nine Months ended September 30,
1998 vs. 1997
Increase (Decrease)
---------------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------- ------ ------
(In thousands)
INTEREST INCOME ON:
Loans receivable $7,277 $ 8,206 $ (929)
Mortgage-backed securities 2,252 1,656 596
Other 1,196 1,111 85
------ ------- ------
Total interest income 10,725 $10,973 $ (248)
------ ======= ======
INTEREST EXPENSE ON:
Deposits 5,335 $ 4,996 $ 339
Borrowings 1,252 1,364 (112)
Junior Subordinated Debentures 1,020 1,020
------ ------- ------
Total interest expense 7,607 $ 7,380 $ 227
------ ======= ======
Increase in net interest income $3,118
======
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19
RESULTS OF OPERATIONS
NET INCOME. Net income for the third quarter, 1998 was $1.6 million as compared
to net income of $1.5 million for the third quarter, 1997, an increase of 8.9%.
Net interest income and noninterest income increased $0.9 million and $0.8
million, respectively, for the three months ended September 30, 1998 over the
prior year period. The provision for loan losses increased $0.1 million from the
same prior year period and noninterest expense increased $1.4 million to $6.6
million for the quarter from $5.2 million from the prior year quarter.
Net income for the nine-month period ended September 30, 1998 was $4.9 million
as compared to net income of $4.0 million for the first nine months of 1997. Net
income before the extraordinary item was $5.2 million, as compared to $4.0
million for the prior year period, an increase of 29.2% in net income before
extraordinary items. Net interest income and noninterest income increased $3.1
million and $2.4 million, respectively, for the nine months ended September 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 $3.4
million to $18.3 million for the nine-month period ended September 30, 1998 from
$14.9 million from the prior year period.
Year-to-date earnings in 1998 were affected by an extraordinary item of
($245,000) in the second quarter 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 thirty-eight and twenty basis
points to 3.13% and 3.25% for the three and nine-month periods ended September
30, 1998, respectively, as compared to 3.51% and 3.45% for the same periods in
1997. A basis point is equal to one-one hundredth of one percent. The decrease
in net interest margin resulted from the decreased yield on interest earning
assets in the current declining interest rate environment and increased costs of
interest-bearing liabilities, due to lengthening maturities on deposits and
borrowings and the cost of the additional debt issued by the Corporation.
INTEREST INCOME. Total interest income increased 21.8% and 21.4% to $21.4
million and $60.9 million in the three and nine-month periods ended September
30, 1998, respectively, as compared to $17.5 million and $50.2 million in the
same periods in 1997. This increase primarily resulted from a 26.4% and 23.0%
increase in average interest-earning assets in the three and nine-month periods
ended September 30, 1998 as compared to the prior year which more than offset a
decline in the yield on interest earning assets of 32 basis points in the three
months and 11 basis points in the nine months ended September 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. The decline in yield is due primarily
to declining yields in the loan portfolio caused by the overall decline of
interest rates and the narrowing of spreads on nonresidential loans caused by
competition from other lenders.
INTEREST EXPENSE. Total interest expense increased 27.8% and 25.2% to $13.5
million and $37.9 million for the three and nine-month periods ended September
30, 1998, respectively, as compared to $10.6 million and $30.2 million for the
same periods in 1997. Interest expense increased due to a higher average balance
of interest-bearing liabilities outstanding and a stable cost of funds for the
three-month period and an increased cost of funds for the
19
20
nine-month period ending September 30, 1998 compared to the same periods in
1997. The average balance of deposit accounts increased 21.3% and 19.9% to
$778.7 million and $749.3 million for the three and nine-month periods ended
September 30, 1998, respectively, compared to the same periods in 1997 primarily
in order to fund the growth experienced in assets. The Corporation has increased
its use of borrowings, including FHLB advances, reverse repurchase agreements,
and the previously mentioned Trust Preferred. Metropolitan's cost of funds was
5.60% for the third quarter, 1998 and 5.61% for the nine months ended September
30, 1998 as compared to 5.60% and 5.51% for the same periods in 1997 due to
higher rates paid as maturities were lengthened on deposits and borrowings in
order to reduce the risk of decline in net interest income from rising interest
rates.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $105,000 for
the third quarter, 1998, and $295,000 for the nine-month period ended September
30, 1998 as compared to the same periods in 1997. Management increased the
provision due to the overall increase in loan balances and the increased balance
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, mix of loan types, regulatory
considerations, and other matters.
NONINTEREST INCOME. Total noninterest income increased 71.9% and 80.5% to $1.9
million and $5.5 million for the three and nine-month periods ended September
30, 1998 as compared to $1.1 million and $3.0 million for the prior year
periods.
Net loan servicing income decreased 64.3% to $125,000 in the three-month period
ended September 30, 1998 as compared to the same period in 1997 and 36.7% to
$604,000 for the nine months ended September 30, 1998 as compared to the prior
year period. The primary reason for this decrease was the writedown of purchased
and originated mortgage servicing rights due to the high level of prepayments in
the first nine months of 1998 caused by the decline in long-term interest rates.
Management believes that based on the current level of long-term interest rates,
early repayments may continue through year-end. 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 $30,000 to $219,000 in the
three-month period ended September 30, 1998 compared to the same period in 1997
and $144,000 to $649,000 for the nine months ended September 30, 1998 as
compared to the prior year period. The primary reason for the increase was
greater fee income derived from consumer and commercial checking due to
increased business levels.
Gain on sale of loans was $965,000 in the three-month period ended September 30,
1998, as compared to $128,000 during the same period in 1997. For the nine-month
period ended September 30, 1998, gain on sale of loans was $2,490,000 as
compared to $340,000 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 nine months 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 nine months of 1998 were $165.4
million as compared to $24.6 million in the same period in 1997.
20
21
Loan option income was $111,000 and $388,000 in the three and nine-month periods
ended September 30, 1998 as compared to $141,000 and $264,000 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 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.
Loan credit discount income of $137,000 was recognized in the third quarter,
1998. Metropolitan purchases loans at a discount due to its assessment of credit
risk and the value of the underlying collateral. These collateral discounts are
not recognized in income over the life of the loan. When these loans are paid,
any discount related to management's initial assessment of the deficiency in
collateral values which is not utilized as part of the payoff is recognized as
noninterest income. This income in the third quarter, 1998 is the result of
realizing collateral discounts on two loans which were paid in September.
Net gain on sale of securities in the three months ended September 30, 1998, was
$32,000 as a result of the sale of a mortgage-backed security during the
quarter. Net gain on sale of securities for the nine months ended September 30,
1998 was $70,000 as compared to $89,000 for the prior year period. This gain in
the first nine months 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 sale of a mortgage-backed security.
Other noninterest income increased $24,000 and $252,000 in the three and
nine-month periods ended September 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, in the first nine months of 1998.
NONINTEREST EXPENSE. Total noninterest expense increased to $6.6 million and
$18.3 million in the three and nine-month periods ended September 30, 1998 as
compared to $5.2 million and $14.9 million for the same periods in 1997.
Personnel related expenses increased $907,000 and $1,792,000 in the three-month
and nine-month periods ended September 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 $109,000 and $396,000 in the three and nine-month
periods ended September 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 all
required to support the increased business volumes.
Marketing expense increased $31,000 and $139,000 in the three and nine-month
periods ending September 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 and consumer loans.
21
22
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 $255,000 and $992,000 for the three and
nine-month periods ended September 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 $56,000 and
$688,000 for the three and nine-month periods ended September 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 36.3% and 36.8% for the three and nine-month periods ended
September 30, 1998 as compared to 36.8% and 36.7% for the same periods in 1997.
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.
22
23
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.
September 30, June 30, December 31,
1998 1998 1997
------------- ------------- -------------
(Dollars in thousands)
Nonaccrual loans $14,039 $12,269 $2,763
Loans past due greater than
90 days or impaired, still accruing 422 1,552 384
------------- ------------- -------------
Total nonperforming loans 14,461 13,821 3,147
Real estate owned 842 1,530 2,037
------------- ------------- -------------
Total nonperforming assets $15,303 $15,351 $5,184
============= ============= =============
Allowance for losses on loans $ 7,059 $ 6,516 $5,622
============= ============= =============
Nonperforming loans to total loans 1.50% 1.64% 0.44%
Nonperforming assets to total assets 1.31% 1.45% 0.56%
Net charge-offs to average loans 0.10%(1) 0.12%(1) 0.13%
Provision for loan losses to
average loans 0.34%(1) 0.36%(1) 0.35%
Allowance for losses on loans to
total nonperforming loans at
end of period 48.82% 47.15% 178.68%
Allowance for losses on loans to
Total loans at end of period 0.72% 0.77% 0.79%
(1) Annualized for comparative purposes.
Nonperforming assets at September 30, 1998 increased $10.1 million to $15.3
million as compared to $5.2 million at December 31, 1997. Although this is a
significant change, as you can see from the table above, asset quality has not
deteriorated significantly since the last quarter end. As previously reported in
the March 31, 1998 Form 10-Q, the primary reason for this increase related to 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. In addition, $2.7 million of commercial loans have become nonperforming
since March 31, 1998. The underlying collateral for all of these nonperforming
loans has been evaluated for collectibility and as a result, $1.2 million 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 $2.9 million of loans in this category at
September 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.
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24
FINANCIAL CONDITION
Total assets amounted to $1,171.4 million at September 30, 1998, as compared to
$925.0 million at December 31, 1997, an increase of $246.4 million, or 26.6%.
The increase in assets was funded primarily with deposit growth of $148.2
million, increased borrowings of $61.4 million, and the Trust Preferred of $27.8
million.
Securities available for sale increased $9.6 million to $11.3 million at
September 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 $3.8 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 $11.5 million to $16.2 million at
September 30, 1998 compared to $4.7 million at December 31, 1997. The increase
was primarily due to the purchase of $14.8 million of tax-exempt municipal bonds
and $1.4 million of revenue bonds which were offset by the early redemption of
$4.7 million of tax-exempt bonds.
Loans receivable, including loans held for sale, increased $259.3 million, or
36.6%, to $967.2 million at September 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 increased origination and acquisition efforts.
This increase is consistent with Metropolitan's overall strategy of increasing
assets while adhering to prudent underwriting standards and preserving its
adequately capitalized status.
Other assets include a $1,000,000 investment in a limited partnership which is
in the business of servicing real estate loans. The loans in this servicing
portfolio have prepaid more quickly during 1998 than in 1997. If these
prepayments increase or remain at current levels for a long period of time, the
full value of this asset might not be realized. Management believes that no
permanent impairment of this asset has taken place at this time.
Total deposits were $886.0 million at September 30, 1998, an increase of $148.2
million, or 20.1%, 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.
Borrowings increased $61.4 million, or 45.2%, from December 31, 1997 to
September 30, 1998. The increase was the result of increased use of FHLB
advances and reverse repurchase agreements. In addition to increased borrowings,
the Trust Preferred securities were issued in the second quarter, 1998, in the
amount of $27.8 million. Metropolitan intends to use the net proceeds from the
Trust Preferred 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.
24
25
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 September 30,
1998 was 4.97%. In the event that the Bank's liquidity ratio would fall below
the required 4.00%, the Corporation has the ability to borrow on the
previously-mentioned commercial bank line of credit for any short-term funding
needs.
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 September 30, 1998, the
Corporation, excluding the Bank, had cash and readily convertible investments of
$3.9 million. This included the portion of the proceeds of the Trust Preferred
issuance which had not been utilized.
At September 30, 1998, $111.3 million, or 12.6%, 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 September 30, 1998, approximately $77.6 million, or 8.8%, 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 $119.3 million at September 30, 1998, of which $101.0 million was
utilized. The financial market makes funds available through reverse repurchase
agreements by
25
26
accepting various investment and mortgage-backed securities as collateral. The
Bank had borrowing capacity for reverse repurchase agreements of approximately
$83.5 million at September 30, 1998, of which $82.3 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 September 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 $73,150 6.29% $73,362 6.31% $77,099 8.50%
Required 17,436 1.50 46,505 4.00 72,557 8.00
------- ------- -------
Excess $55,714 4.79% $26,587 2.31% $ 4,542 0.50%
======= ======= =======
Metropolitan, as a savings and loan holding company, is subject to the capital
adequacy requirements under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). The additional capital adequacy ratio used
in this evaluation is the Tier 1 risk-based capital ratio which at September 30,
1998 was 6.31%.
Metropolitan believes that under the current regulations, the Bank will continue
to meet its minimum capital requirements in the foreseeable future. During the
first nine months of 1998, the Corporation contributed $16.0 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 September 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.
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
26
27
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, testing, and remediation during 1998.
Metropolitan has completed the assessment and planning phase of this project and
is currently testing the applications which affect the majority of the Bank's
customer's accounts. Metropolitan has been assured by its material external
suppliers that they are Year 2000 ready and Metropolitan believes that its
internal components will be adequate to provide quality service to customers
without interruption. However, government regulations require public companies,
such as Metropolitan, to disclose its most likely worst case year 2000 scenario.
Management believes that its most likely worst case scenario would involve the
inability of the outside service bureau to service the Bank's customer accounts.
After the completion of the testing phase, Metropolitan and the service bureau
will assess its ability to be year 2000 ready at December 31, 1998. If the
determination is made that it cannot be year 2000 ready, as a contingency plan,
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. The parent company of the service bureau has assured Metropolitan
that they have other data centers which are already year 2000 ready.
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. To date, Metropolitan has expended
$14,000 for incremental services directly related to ensuring year 2000
readiness. In addition, Metropolitan has expended $75,000 to upgrade computer
hardware and software in 1998, a portion of which was necessary to ensure year
2000 readiness.
RECENT ACCOUNTING DEVELOPMENTS
In June, 1997, the 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 additional financial disclosures.
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. 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.
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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, unforeseen
business risks related to year 2000 computer systems issues, 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.
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Presented below, as of September 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.
September 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)% $(39,161) (57)% $ (27,474) (36)%
+300 (45) (29,419) (43) (20,131) (27)
+200 (25) (19,039) (28) (12,743) (17)
+100 (15) (8,941) (14) (5,829) (8)
-100 (15) 13,619 15 5,631 7
-200 (25) 28,850 33 13,381 18
-300 (45) 48,419 56 25,415 33
-400 (65) 71,726 83 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 are made at market rates. Furthermore,
even for the adjustable rate assets, repricing may lag behind the rate change
due to contractual time frames. At September 30, 1998 and December 31, 1997, the
Bank was within the Board-established limits for various changes in interest
rates except the rising 200 basis point scenario at September 30, 1998. The
primary reason for the deviation is the increase, due to competitive pressures,
of fixed rate non-residential loans in the portfolio. Certain of these loans
are held for sale under the option program and will be sold. Management is also
evaluating alternatives to sell its current and future production of these
loans, extend the maturity of funding sources, and otherwise reduce interest
rate risk. The Bank's level of sensitivity to rising rates is slightly
increased over the same period due to the increasing level of fixed rate loans.
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 September 30, 1998,
50.2% 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 loan portfolio, Metropolitan has focused on short-term
loan types. In an effort to balance the risk of the fixed rate loan portfolio
even in the short-term, Metropolitan has placed an emphasis on lengthening
maturities for certificates of deposit, FHLB advances, and other borrowings.
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
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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 1-5 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 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 (filed as Exhibit 99.1 to the
Corporation's Form 10-Q filed May 14, 1998 and
incorporated herein by reference).
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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: November 16, 1998
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