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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
------------------
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 Identification No.)
Incorporation or Organization)
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)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12(g)of the Act: COMMON STOCK,WITHOUT
PAR VALUE (Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, will not be contained, to the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregated market value of voting stock held by nonaffiliates of the
Registrant as of March 23, 1999 was $15,682,000.
As of March 23, 1999, there were 7,756,393 shares of the Registrant's Common
Stock issued and outstanding.
Documents incorporated by reference:
Portions of the 1998 Annual Report - Parts I and II
Portions of the Proxy Statement for the 1999 Annual Meeting - Part III
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METROPOLITAN FINANCIAL CORP.
1998 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 34
Item 3. Legal Proceedings..................................................................... 34
Item 4. Submission of Matters to a Vote of Security Holders................................... 34
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters................. 36
Item 6. Selected Financial Data............................................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................... 36
Item 8. Financial Statements and Supplementary Data........................................... 37
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.. 37
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 38
Item 11. Executive Compensation................................................................ 38
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 38
Item 13. Certain Relationships and Related Transactions........................................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 38
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PART I
ITEM 1. BUSINESS
GENERAL
Metropolitan Financial Corp. ("Metropolitan") is a savings and loan
holding company that was incorporated in 1972. We are engaged in the principal
business of originating and purchasing mortgage and other loans through our
wholly-owned subsidiary, Metropolitan Bank & Trust Company ("the Bank"). The
Bank is an Ohio chartered stock savings association established in 1958. We
obtain funds for lending and other investment activities primarily from savings
deposits, wholesale borrowings, principal repayments on loans, and the sale of
loans. The activities of Metropolitan at the holding company level are limited
and impact the results of operations primarily through interest expense on a
consolidated basis. Unless otherwise noted, all of the activities discussed
below are of the Bank. Our executive office is located at 6001 Landerhaven
Drive, Mayfield Heights, Ohio 44124.
Robert M. Kaye of Rumson, New Jersey, is Metropolitan's current
majority shareholder. Mr. Kaye acquired Metropolitan in 1987 and remained sole
shareholder until the initial public offering of Metropolitan's Common Stock in
October 1996. Since the initial public offering, Mr. Kaye has owned 77.5% of
Metropolitan's outstanding Common Stock. Mr. Kaye has the ability to decide the
outcome of matters submitted to the shareholders for approval, the ability to
elect or remove all the directors of the Corporation and has ultimate control of
the Corporation and the Bank. In addition, Mr. Kaye is Chairman of the Board and
Chief Executive Officer of the Corporation and the Bank.
At December 31, 1998, we operated 17 full service retail offices in
Northeastern Ohio. As of December 31, 1998, we also maintained five residential
and multifamily/commercial real estate loan production offices. As a secondary
line of business, we service mortgage loans for various investors.
At December 31, 1998, we had total assets of $1.4 billion, total
deposits of $1.1 billion and shareholders' equity of $42.6 million. The Federal
Deposit Insurance Corporation insures the deposits of the Bank up to applicable
limits.
At December 31, 1998, we directly or indirectly owned the following
active and inactive subsidiaries:
ACTIVE SUBSIDIARIES INACTIVE SUBSIDIARIES
- ------------------- ---------------------
- - Metropolitan Bank and Trust Company - MetroCapital Corporation
- - Metropolitan Capital Trust I - Metropolitan Savings Service
Corporation
- - Kimberly Construction Company - Metropolitan Securities Corporation
The Bank changed its name from Metropolitan Savings Bank of Cleveland
to Metropolitan Bank & Trust Company in April 1998. We formed Metropolitan
Capital Trust I during 1998 to facilitate the issuance of cumulative trust
preferred securities. Kimberly Construction Company's sole business function is
to serve as a principal party to various construction contracts entered into in
connection with the construction of bank premises.
All required disclosures as part of Guide 3 are either included in
this document or Management's Discussion and Analysis of Financial Condition and
Results of Operations and Five Year Summary of Selected Data which are
incorporated by reference.
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LENDING ACTIVITIES
General. Our primary lending activity is the origination and purchase
of mortgage loans secured by multifamily and commercial real estate. We also
originate one- to four-family residential and construction loans, and to a
lesser extent, consumer and business loans.
Loan Portfolio Composition. The following information presents the
composition of our loan portfolio, including loans held for sale, in dollar
amounts and in percentages before deductions for loans in process, deferred fees
and discounts and allowance for losses on loans.
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DECEMBER 31,
1998 1997 1996
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 189,182 17.4% $146,685 19.2% $114,758 16.8%
Multifamily 337,412 31.1 194,450 25.4 276,544 40.3
Commercial 228,825 21.1 166,593 21.8 135,635 19.8
Construction and land 137,023 12.6 116,829 15.3 71,697 10.5
Held for sale 9,416 0.9 14,230 1.8 8,973 1.3
---------- ----- -------- ----- -------- -----
Total real estate loans 901,858 83.1 638,787 83.5 607,607 88.7
CONSUMER LOANS 96,115 8.8 68,590 9.0 54,180 7.9
CONSUMER HELD FOR SALE 5,601 0.5 -- -- -- --
BUSINESS AND OTHER LOANS 82,317 7.6 57,496 7.5 23,508 3.4
---------- ----- -------- ----- -------- -----
Total loans 1,085,891 100.0% 764,873 100.0% 685,295 100.0%
===== ===== =====
LESS:
Loans in process 46,001 46,833 31,758
Deferred fees, net 5,013 4,108 2,336
Discount (premium) on
loans, net (5,320) 425 560
Allowance for losses on
loans 6,909 5,622 4,175
---------- -------- --------
TOTAL LOANS
RECEIVABLE, NET $1,033,288 $707,885 $646,466
========== ======== ========
DECEMBER 31,
1995 1994
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 76,259 15.0% $112,840 25.2%
Multifamily 231,459 45.8 187,928 41.9
Commercial 109,403 21.5 83,354 18.6
Construction and land 48,210 9.5 38,270 8.5
Held for sale 1,504 0.2 84 0.0
-------- ----- -------- -----
Total real estate loans 466,835 92.0 422,476 94.2
CONSUMER LOANS 32,214 6.3 25,946 5.8
CONSUMER HELD FOR SALE -- -- -- --
BUSINESS AND OTHER LOANS 8,703 1.7 171 0.0
-------- ----- -------- -----
Total loans 507,752 100.0% 448,593 100.0%
===== =====
LESS:
Loans in process 23,373 19,338
Deferred fees, net 1,220 1,480
Discount (premium) on
loans, net 544 837
Allowance for losses on
loans 2,765 1,911
-------- --------
TOTAL LOANS
RECEIVABLE, NET $479,850 $425,027
======== ========
We had commitments to originate or purchase fixed and adjustable rate
loans of $69.8 million and $73.2 million, respectively, at December 31, 1998. In
addition, we had firm commitments to sell fixed rate loans of $24.0 million and
optional commitments to sell fixed rate loans of $6.6 million at December 31,
1998.
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The following table shows the composition of our loan portfolio,
including loans held for sale, in dollar amounts and in percentages before
deductions for loans in process, deferred fees and discounts and allowance for
losses on loans by fixed and adjustable rates.
DECEMBER 31,
1998 1997 1996
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
FIXED RATE LOANS:
Real estate:
One- to four-family $ 76,566 7.1% $ 59,058 7.7% $ 41,436 6.1%
Multifamily 194,521 17.9 60,136 7.9 88,529 12.9
Commercial 147,860 13.6 52,390 6.9 34,726 5.1
Construction and land 27,849 2.6 20,854 2.7 392 0.0
Held for sale 8,920 0.8 6,294 0.8 2,531 0.4
---------- ---- -------- ---- -------- ----
Total fixed rate real
estate loans 455,716 42.0 198,732 26.0 167,614 24.5
Consumer 93,689 8.6 61,307 8.0 46,725 6.8
Consumer held for sale 5,601 0.5 -- -- -- --
Business and other 25,526 2.4 19,575 2.6 5,650 0.8
---------- ---- -------- ---- -------- ----
Total fixed rate loans 580,532 53.5% 279,614 36.6% 219,989 32.1%
---------- ==== -------- ==== -------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 112,616 10.4% 87,627 11.5% 73,322 10.7%
Multifamily 142,891 13.2 134,314 17.6 188,015 27.5
Commercial 80,965 7.5 114,203 14.9 100,909 14.7
Construction and land 109,174 10.0 95,975 12.5 71,305 10.4
Held for sale 496 0.0 7,936 1.0 6,442 0.9
---------- ---- -------- ---- -------- ----
Total adjustable rate
real estate loans 446,142 41.1 440,055 57.5 439,993 64.2
Consumer 2,426 0.2 7,283 0.9 7,455 1.1
Business and other 56,791 5.2 37,921 5.0 17,858 2.6
---------- ---- -------- ---- -------- ----
Total adjustable rate
loans 505,359 46.5% 485,259 63.4% 465,306 67.9%
---------- ==== -------- ==== -------- ====
LESS:
Loans in process 46,001 46,833 31,758
Deferred fees, net 5,013 4,108 2,336
Discount (premium) on
loans, net (5,320) 425 560
Allowance for losses
on loans 6,909 5,622 4,175
---------- -------- --------
TOTAL LOANS
RECEIVABLE, NET $1,033,288 $707,885 $646,466
========== ======== ========
DECEMBER 31,
1995 1994
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
FIXED RATE LOANS:
Real estate:
One- to four-family $ 35,042 6.9% $ 46,418 10.4%
Multifamily 71,909 14.2 19,852 4.4
Commercial 17,615 3.5 7,948 1.8
Construction and land 39 0.0 -- --
Held for sale 1,504 0.3 84 0.0
-------- ---- -------- ----
Total fixed rate real
estate loans 126,109 24.9 74,302 16.6
Consumer 32,214 6.3 25,946 5.8
Consumer held for sale -- -- -- --
Business and other 2,744 0.5 20 0.0
-------- ---- -------- ----
Total fixed rate loans 161,067 31.7% 100,268 22.4%
-------- ==== -------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 41,217 8.1% 66,422 14.8%
Multifamily 159,550 31.4 168,076 37.5
Commercial 91,788 18.1 75,406 16.8
Construction and land 48,171 9.5 38,270 8.5
Held for sale -- -- -- --
-------- ---- -------- ----
Total adjustable rate
real estate loans 340,726 67.1 348,174 77.6
Consumer -- -- -- --
Business and other 5,959 1.2 151 0.0
-------- ---- -------- ----
Total adjustable rate
loans 346,685 68.3% 348,325 77.6%
-------- ==== -------- ====
LESS:
Loans in process 23,373 19,338
Deferred fees, net 1,220 1,480
Discount (premium) on
loans, net 544 837
Allowance for losses
on loans 2,765 1,911
-------- --------
TOTAL LOANS
RECEIVABLE, NET $479,850 $425,027
======== ========
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The following table illustrates the contractual maturity of our loan
portfolio, including loans held for sale at December 31, 1998. The table shows
loans that have adjustable or renegotiable interest rates as maturing in the
period during which the contract is due. The table does not reflect the effects
of possible prepayments, enforcement of due-on-sale clauses, or amortization of
premium, discounts, or deferred loan fees. The table includes demand loans,
loans having no stated maturity and overdraft loans in the due in one year or
less category.
DUE AFTER
ONE YEAR
DUE IN ONE THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
---------------- ---------------- ---------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------- ------ ---- -------- ---- ---------- ----
(DOLLARS IN THOUSANDS)
REAL ESTATE:
One- to four-family $ 1,921 9.16% $ 1,659 8.62% $195,018 7.17% $ 198,598 7.20%
Multifamily 50 8.00 2,923 8.11 334,439 8.15 337,412 8.15
Commercial 747 9.64 9,218 9.39 218,860 8.47 228,825 8.51
Construction and land 92,185 8.65 31,587 8.77 13,251 8.35 137,023 8.65
CONSUMER 8,551 13.69 16,273 9.81 76,892 10.86 101,716 10.93
BUSINESS 35,984 8.52 16,604 9.01 29,729 9.00 82,317 8.79
-------- ------- -------- ----------
Total $139,438 8.94% $78,264 9.08% $868,189 8.29% $1,085,891 8.43%
======== ======= ======== ==========
The total amount of loans due after December 31, 1999 which have
predetermined interest rates is $548.5 million. The total amount of loans due
after that date which have floating or adjustable rates is $398.0 million.
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LOAN ORIGINATIONS AND PURCHASES
Our strategy in recent years has been to increase interest-earning
assets primarily by increasing the total loan portfolio if quality loans with
the necessary portfolio characteristics were available. We accomplished this by
increasing origination capacity and emphasizing purchases. The following table
presents our loan origination, purchase, sale and repayment activities for the
periods indicated.
YEAR ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to four-family $ 77,297 $ 28,017 $ 56,519
Multifamily 29,215 12,600 20,669
Commercial 9,350 29,304 14,667
Construction and land 73,125 77,062 60,566
Consumer 18,888 12,719 10,062
Business 8,606 27,058 18,536
--------- --------- ---------
Total adjustable rate 216,481 186,760 181,019
--------- --------- ---------
FIXED RATE:
Real Estate:
One- to four-family 223,846 53,712 44,795
Multifamily 75,626 9,490 15,759
Commercial 84,511 1,300 --
Construction and land 16,229 25,333 328
Consumer 66,941 17,598 17,242
Business 20,137 15,003 4,249
--------- --------- ---------
Total fixed rate 487,290 122,436 82,373
--------- --------- ---------
Total loans originated 703,771 309,196 263,392
--------- --------- ---------
PURCHASES BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to four-family -- 90 1,835
Multifamily 21,611 19,433 45,184
Commercial 36,458 22,541 16,905
Construction and land 1,365 347 --
Consumer -- -- 5,432
--------- --------- ---------
Total adjustable rate 59,434 42,411 69,356
--------- --------- ---------
FIXED RATE:
Real Estate:
One- to four-family 1,077 -- 1,125
Multifamily 118,434 23,195 22,971
Commercial 70,753 46,729 21,296
Construction and land 4,072 1,975 --
Consumer 23,622 16,900 12,224
--------- --------- ---------
Total fixed rate 217,958 88,799 57,616
--------- --------- ---------
Total loans purchased 277,392 131,210 126,972
--------- --------- ---------
SALES:
Real Estate:
One- to four-family (233,620) (34,887) (36,392)
Multifamily (6,117) (9,678) (11,539)
Commercial (30,055) (20,782) (7,808)
Construction and land (3,496) (600) --
Business (559) -- --
--------- --------- ---------
Total loan sales (273,847) (65,947) (55,739)
--------- --------- ---------
Loans securitized (100,995) (98,325) (14,458)
Principal repayments (285,303) (196,556) (142,624)
--------- --------- ---------
Total reductions (660,145) (360,828) (212,821)
--------- --------- ---------
Increase (decrease) in other items, net 4,385 (18,159) (10,927)
--------- --------- ---------
NET INCREASE $ 325,403 $ 61,419 $ 166,616
========= ========= =========
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Multifamily Lending. We emphasize multifamily real estate loans. We
originate these loans from referrals by present customers of the Bank and
mortgage and real estate brokers. Through our existing referral network and
advertising efforts, we have become known for originating multifamily loans in
our primary multifamily lending markets of Ohio, Kentucky, Michigan,
Pennsylvania, and New Jersey. Although we operate full service retail sales
offices solely in Northeast Ohio, we have loan origination offices in Southern
Ohio, Western Pennsylvania, and Southeastern Michigan.
At December 31, 1998, our multifamily loans totaled $337.4 million,
with an average loan size of approximately $534,000. Of this amount, we
originated $123.7 million, or 36.6%. Currently, we emphasize the origination of
multifamily loans with principal amounts of $2.0 to $6.0 million and balloon
maturities of 10 years. Adjustable loans are adjustable on a one-, three- or
five-year schedule with amortization periods of 25 or 30 years. We base rate
adjustments on the appropriate term U.S. Treasury securities plus a margin. The
loans are subject to a maximum individual aggregate interest rate adjustment as
well as a maximum aggregate adjustment over the life of the loan (generally 6%).
Due to increasing demand for fixed rate loans, we have allocated more funds for
fixed rate programs. Typically, the loans have balloon maturities of 10 years.
The maximum loan to value ratio of multifamily residential loans is 75%.
We recognize that multifamily loans generally involve a higher degree
of risk than one- to four-family residential real estate loans. Multifamily
loans involve more risk because they typically involve larger loan balances to
single borrowers or groups of related borrowers. The payment experience on these
loans typically depends upon the successful operation of the related real estate
project and is subject to risks such as excessive vacancy rates or inadequate
rental income levels. In order to manage and reduce these risks, we use strict
underwriting standards in our multifamily residential lending process.
Apartment buildings, generally with less than 75 residential units,
typically secure loans originated in this area. Our underwriting process
includes a site evaluation, which considers factors such as location, access by
roadways, condition of the apartments, and amenities. One of our employees
visits each location before a loan approval is made. The underwriting process
involves an evaluation of the borrower, whether the borrower is an individual or
a group of individuals acting as a separate entity. We review the financial
statements of each of the individual borrowers and generally obtain personal
guarantees in an amount equal to the original principal amount of the loan.
Staff independent of the lending department reviews the financial statements of
individual guarantors. In addition, we complete an analysis of debt service
coverage of the property. Debt service coverage requirements are determined
based upon the individual characteristics of each loan. Typically, these
requirements range from a ratio of 1.15:1 to 1.30:1. For the multifamily loans,
the debt service coverage is calculated based on the maximum interest rate of
the loan.
At December 31, 1998, $213.8 million or 63.4% of our multifamily loan
portfolio was purchased. Prior to purchasing these loans, we use a similar
underwriting process with substantially the same standards as for our originated
loans. In some cases, when we consider the purchase of a portfolio with a
considerable number of moderate balance loans, we use an independent contract
inspector for property inspections. Real estate located in Ohio secures 37.5% of
our multifamily loan portfolio. Underlying real estate for the remaining loans
is primarily located in California, Michigan, Pennsylvania and New Jersey.
Commercial Real Estate Lending. At December 31, 1998, loans secured by
commercial real estate totaled $228.8 million or 21.1% of our total portfolio.
The average size of these loans was $618,000. Of this amount, we originated
$75.2 million or 32.9% and $153.6 million or 67.1% represented loans purchased
from a variety of sources, predominantly other financial institutions.
We purchase loans secured by commercial real estate generally when
these loans are secured by retail strip shopping centers or office buildings and
the loan yields and other terms meet our requirements. In 1997, we began to
introduce more geographic
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diversity into the portfolio based on our desire to acquire high credit quality
loans. We believe a certain amount of geographic diversity is important to
reduce the risk of loss due to regional economic downturns.
We recognize that commercial real estate loans generally involve a
higher degree of risk than the financing of one- to four-family residential real
estate. These loans typically involve larger loan balances to single borrowers
or groups of related borrowers. The payment experience on these loans is
typically dependent upon the successful operation of the related real estate
project and is subject to certain risks including excessive vacancy brought on
by tenant turnover and inadequate rental income levels. In addition, the
profitability of the business operating in the property may affect the
borrower's ability to make timely payments. In order to manage and reduce these
risks, we focus our lending on existing properties with a record of satisfactory
performance and target retail strip centers and office buildings with multiple
tenants.
We purchase commercial real estate loans secured by strip shopping
centers and small office buildings to a much greater extent than we originate
commercial real estate loans. Through customer referrals and real estate
brokers, we lend on commercial real estate in many states, but predominantly in
Ohio, Pennsylvania, Northern Kentucky, Michigan and California. These loans are
typically ten year balloon loans with an amortization period of 25 years at a
margin over the appropriate term U.S. Treasury securities. The maximum loan to
value ratio is generally 75%.
The following table presents information as to the locations and types
of properties securing the multifamily and commercial real estate portfolio as
of December 31, 1998. We have loans in 41 states. Properties securing loans in
38 states are aggregated in the table because none of those states exceed 5.0%
of the outstanding principal balance of the total multifamily and commercial
real estate portfolio.
NUMBER
OF LOANS PERCENT PRINCIPAL PERCENT
-------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Ohio
Apartments 160 16.0% $126,649 22.4%
Office buildings 31 3.1 14,836 2.6
Retail centers 16 1.6 8,698 1.5
Other 22 2.2 5,532 1.0
----- -------- -------- -----
Total 229 22.9 155,715 27.5
----- ----- -------- -----
California:
Apartments 226 22.5 100,783 17.8
Office buildings 43 4.3 15,760 2.8
Retail centers 66 6.6 30,712 5.5
Other 36 3.6 17,790 3.1
----- ----- -------- -----
Total 371 37.0 165,045 29.2
----- ----- -------- -----
Pennsylvania:
Apartments 47 4.7 25,995 4.6
Office buildings 7 0.7 19,363 3.4
Retail centers 5 0.5 13,170 2.3
Other 4 0.4 1,036 0.2
----- -------- -------- -----
Total 63 6.3 59,564 10.5
----- ----- -------- -----
Other states:
Apartments 199 19.8 83,985 14.8
Office Buildings 49 4.9 41,328 7.3
Retail centers 38 3.8 28,958 5.1
Other 53 5.3 31,642 5.6
----- ----- ------ -------- ------
Total 339 33.8 185,913 32.8
----- ----- -------- ------
1,002 100.0% $566,237 100.0%
===== ===== ======== ======
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The following table presents aggregate information as to the type of
security as of December 31, 1998:
AVERAGE
NUMBER BALANCE
OF LOANS PER LOAN PRINCIPAL PERCENT
-------- -------- --------- -------
(DOLLARS IN THOUSANDS)
Apartments 632 $534 $337,412 59.6%
Office buildings 130 702 91,287 16.1
Retail centers 125 652 81,538 14.4
Other 115 487 56,000 9.9
----- -------- -----
Total 1,002 $565 $566,237 100.0%
===== ======== =====
One- to Four-family Residential Lending. In 1998, we originated
approximately 20.1% of our one- to four-family residential loans through our
full service retail sales offices. We originated the remainder with commissioned
loan officers, correspondent lenders, or our telemarketing department
established in 1998. We maintain one- to four-family residential loan
origination offices in North Olmsted, Ohio and Bloomfield, Michigan. We have
focused our one- to four-family residential lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied residences. As
of December 31, 1998, the one- to four-family residential mortgages totaled
$189.2 million or 17.4% of our loan portfolio.
We emphasize the origination of conventional ARM loans for retention in
our loan portfolio and fixed rate loans suitable for sale in the secondary
market. In addition, we offer fixed rate end loan financing to borrowers
building homes with our approved construction loan builders. We retain only a
limited dollar amount of this fixed rate end loan financing in our portfolio. We
closely monitor the amount being originated and subsequently retained. Property
located in Northeastern Ohio secures substantially all of the one- to
four-family residential mortgage loan originated for retention in our portfolio.
At December 31, 1998, our fixed rate residential mortgage loan portfolio totaled
$76.6 million, or 7.1%, of our total loan portfolio.
We are presently originating three types of ARM products for our
portfolio. The first product is a one-year adjustable ARM. The interest rate is
subject to change annually. The adjustments are based upon the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year.
In addition, the adjustments are generally limited to a 2% maximum annual
interest rate adjustment and a maximum lifetime adjustment of 6%. The second
product, known as a five/one ARM, has the same index and caps as the one year
ARM. The five/one ARM, however, retains its initial interest rate for the first
five years of the loan and then begins to adjust annually in the sixth year. The
third product, the three-year ARM, allows for interest rate adjustments every
three years. The adjustments are based upon the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of three years. In addition,
the adjustments are generally limited to a 2% maximum interest rate adjustment
per change and a maximum lifetime adjustment of 6%.
Our originated ARMs do not permit negative amortization of principal
and most of them are convertible into fixed rate mortgages. We typically sell
these loans in the secondary market if the option to convert to a fixed rate is
exercised. We originate ARMs with terms to maturity of up to 30 years. Borrowers
are qualified based upon secondary market requirements.
At December 31, 1998, $23.8 million, or 12.6% of our one- to
four-family residential loan portfolio was purchased. We use an underwriting
process with substantially the same standards as for our originated loans when
purchasing these loans.
Construction Lending and Land Development. We originate construction
loans on single family homes to local builders in our primary lending market and
to individual borrowers on owner-occupied properties. We also make loans to
builders for the purchase of fully-improved single family lots and to developers
for the purpose of developing land into single family lots. Our primary market
area for construction
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lending is in Northeastern Ohio, in the counties of Cuyahoga, Lake, Geauga,
Summit, Medina, Portage, and Lorain. We currently have one commissioned
construction loan originator in the high volume Columbus, Ohio construction
market to originate single family construction loans and improved lot loans.
The following table presents the number, amount, and type of properties
securing construction and land development loans at December 31, 1998:
NUMBER OF PRINCIPAL
LOANS BALANCE
----- -------
(DOLLARS IN
THOUSANDS)
RESIDENTIAL CONSTRUCTION LOANS:
Owner-occupied 74 $ 20,611
Builder presold 42 9,733
Builder model homes 129 26,810
Builder lines of credit 26 24,430
Lot loans 55 8,188
Development loans 28 18,650
--- --------
Total residential construction loans 354 108,422
NONRESIDENTIAL CONSTRUCTION LOANS:
Multifamily 3 3,956
Commercial 5 15,173
--- --------
Total nonresidential construction loans 8 19,129
LAND LOANS 5 8,152
--- --------
Total 367 $135,703
=== ========
The risk of loss on a construction loan largely depends upon the
accuracy of the initial estimate of the property's value upon completion of the
project and the estimated cost of the project. The application process includes
a submission of the cost, specifications and plans. We also review the
borrower's financial position and require a personal guarantee on all builder
loans. We base all loans upon the appraised value of the underlying collateral,
as completed. Qualified independent fee appraisers who have been approved by the
Board of Directors complete the appraisals.
We establish a maximum loan to value ratio for each type of loan based
upon the contract price, cost estimate or appraised value, whichever is less.
The maximum loan to value ratio by type of construction loan is as follows:
- owner-occupied homes--80%;
- builder presold homes--80%;
- builder models or speculative homes--75%;
- lot loans--75%;
- development loans--70% (development of single-family home
lots for resale to builders); and
- builder lines of credit--75% (development of land for cluster
or condominium projects which will be part of builder line of
credit).
All construction loans that we make to builders are for relatively
short terms (6 to 24 months) and are at an adjustable rate of interest.
Owner-occupied loans are generally fixed rate. These loans increase the yield
on, and the proportion of interest rate sensitive loans in, the loan portfolio.
We offer builders lines of credit to build single family homes.
Builders cannot use these lines for any other purpose. We secure all lines of
credit by the homes that are built with the draws under such credit agreements.
Most of the homes built with the line of credit funds are presold homes. The
number of homes built without contracts for sale or as model homes is limited by
the financial strength of the builder. We permit the use of lines of credit only
where a builder owns a specific
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number of lots in a development. We base draws upon the percentage of
completion. At all times, we retain enough funds to complete the home. We make
disbursements only after receipt of a property inspection and a mechanic's lien
update from the title company.
We also originate construction loans on multifamily and commercial real
estate projects where we intend to provide the financing once construction is
complete. We underwrite these loans in a manner similar to our originated and
purchased multifamily residential and commercial real estate loans described
above.
Consumer Lending. The underwriting standards we employ for consumer
loans include a determination of the applicant's payment history on other debts
and an assessment of the applicant's ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is a
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or are secured by
rapidly depreciable assets, such as automobiles. At December 31, 1998, secured
loans comprised $91.0 million or 89.5% of the $101.7 million consumer loan
portfolio. However, even in the case of secured loans, repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance due to the higher likelihood of damage, loss or
depreciation. In addition, consumer loan collections depends upon the borrower's
continuing financial stability. Thus, personal circumstances are more likely to
have an adverse affect on collection. Furthermore, the application of various
federal and state laws, including bankruptcy and insolvency laws, may limit the
amount recovered on such loans in the event of default.
In order to supplement the growth in the consumer loan portfolio, we
have been purchasing loans through correspondent lenders and bulk portfolios
offered for sale. At December 31, 1998, purchased consumer loans represented
$59.5 million, or 58.5% of the outstanding balance of consumer loans. Second
mortgages on one- to four-family homes, and first liens on automobiles, or
manufactured housing are the primary collateral types for these loans. In 1997,
we acquired two packages of subprime loans totaling $6.3 million. Subprime loans
are loans where the borrower's credit rating is below an A grade. These loans
require more intensive collection techniques. However, the yield is
significantly higher to cover these incremental costs. In 1998, we acquired an
additional loan package of $5.0 million of subprime loans also secured by
manufactured housing. Total subprime loans were $10.2 million, or 9.6% of total
consumer loans at December 31, 1998.
At December 31, 1998, our credit card portfolio had an outstanding
balance of $7.3 million with $26.8 million in unused credit lines. Of the
outstanding balance, $2.6 million related to cards we originated and $4.7
million related to credit card relationships we purchased.
Business Lending. We began offering business loans in 1994. At December
31, 1998, we had $82.3 million of business loans outstanding against available
lines totaling $101.0 million. Our business lending activities encompass loans
with a variety of purposes and security, including loans to finance accounts
receivable, inventory and equipment. Generally, our business lending has been
limited to borrowers headquartered, or doing business in, our retail market
area. These loans are generally adjustable interest rates at some margin over
the prime interest rate and some are guaranteed by the Small Business
Administration.
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The following table sets forth information regarding the number and
amount of our business loans as of December 31, 1998:
OUTSTANDING
NUMBER TOTAL LOAN PRINCIPAL
OF LOANS COMMITMENT BALANCE
-------- ---------- ------------
(DOLLARS IN THOUSANDS)
LOANS SECURED BY:
Accounts receivable, inventory and equipment 205 $38,060 $30,876
Second lien on real estate 67 23,835 17,865
First lien on real estate 35 28,292 27,979
Specific equipment and machinery 33 1,622 1,622
Titled vehicles 30 990 990
Stocks and bonds 5 1,492 1,367
Certificates of deposit 9 617 281
UNSECURED LOANS 18 2,602 1,337
--- ------- -------
Total 402 $97,510 $82,317
=== ======= =======
Business loans differ from residential mortgage loans. Residential
mortgage loans generally are made on the basis of the borrower's ability to make
repayment from his or her employment and other income and are secured by real
property whose value is more easily ascertainable. Business loans are of higher
risk and typically are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of business loans may substantially
depend upon the success of the business itself. Furthermore, the collateral
securing the loans may depreciate over time, may be difficult to appraise, and
may fluctuate in value based on the success of the business. We work to reduce
this risk by carefully underwriting business loans.
SECONDARY MARKET ACTIVITIES
In addition to originating loans for our own portfolio, we participate
in secondary mortgage market activities by selling whole loans, as well as
creating mortgage-backed securities, with FannieMae and the FreddieMac.
Secondary market sales allow us to make loans during periods when deposit flows
decline, or are not otherwise available, and at times when customers prefer
loans with long-term fixed interest rates which we choose not to hold in our own
portfolio. Our primary focus in mortgage banking operations is to sell fixed
rate one- to four-family residential mortgage loans.
The secondary market for mortgage loans is comprised of institutional
investors who purchase loans meeting certain underwriting specifications with
respect to loan-to-value ratios, maturities and yields. Subject to market
conditions, we tailor some of our real estate loan programs to meet the
specifications of FreddieMac and FannieMae, two of the largest institutional
investors. We generally retain a portion of the loan origination fee paid by the
borrower and receive annual servicing fees as compensation for retaining
responsibility for and performing the servicing of all loans sold to
institutional investors. See "--Loan Servicing Activities." The sale of
substantially all loans to FreddieMac and FannieMae is without recourse to us.
The terms and conditions under which such sales are made depend upon,
among other things, the specific requirements of each institutional investor,
the type of loan, the interest rate environment and our relationship with the
institutional investor. In the case of one- to four-family residential loans, we
periodically obtain formal commitments primarily with FreddieMac and FannieMae.
Pursuant to these commitments, FreddieMac or FannieMae is obligated to purchase
a specific dollar amount of whole loans over a specified period. The terms of
the commitments range from ten to sixty days. The pricing varies depending upon
the length of each commitment. We classify loans as held for sale while we are
negotiating the sale of specific loans which meet selected criteria to a
specific investor or after a sale is negotiated but before it is settled.
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During the third quarter of 1997, we completed the securitization of
$93.0 million of multifamily loans with FannieMae under a newly developed
program. This program uses insurance to provide the credit enhancement necessary
to achieve a triple A rating. We are servicing the loans as mortgage-backed
securities for FannieMae. To date, we have retained ownership of the securities
in that portfolio. During the fourth quarter of 1998, we completed the
securitization of $101.0 million of commercial real estate loans with a private
issuer in a non-rated structure. Similar to the 1997 FannieMae transaction, we
used an insurance policy to assume all credit risk. In addition to decreasing
loans receivable and increasing mortgage-backed securities, the securitizations
have had several other benefits, including the following:
- improvement in the credit risk profile of the Bank's balance
sheet by converting whole loans into mortgage-backed
securities guaranteed by others;
- reduction of the required level of risk-based capital; and
- addition of high quality collateral which can be pledged for
borrowings in the secondary market to fund future loan growth.
We also sell whole loans or participations in multifamily and
commercial real estate loans to private investors and retain the right to
service the loans. We make the majority of our sales of multifamily and
commercial real estate loans under individually negotiated whole loan or
participation sales agreements. These sales are for individual loans or for a
package of loans. During 1998, we sold $12.9 million of multifamily and
commercial real estate participations. The Bank may seek a participant when a
loan would otherwise exceed the loan-to-one borrower limit. We have sold other
loans to manage geographic concentration or interest rate risk. In addition, we
sell multifamily and commercial real estate loans that are purchased under a
loan option program. See "--Loan Option Income."
LOAN SERVICING ACTIVITIES
At December 31, 1998, the overall servicing portfolio was $2.1 billion.
Of that amount, loans serviced for others totaled $1.5 billion. The following
table summarizes the portfolio by investor and source:
ORIGINATED PURCHASED PORTFOLIO
SERVICING SERVICING SERVICING TOTAL
--------- --------- --------- -----
(DOLLARS IN THOUSANDS)
One- to Four-family:
Metropolitan portfolio $ -- $ -- $186,481 $ 186,481
FreddieMac 319,082 469,645 -- 788,727
FannieMae 57,998 428,159 -- 486,157
Private investors 3,469 7,837 -- 11,306
-------- -------- -------- ----------
Total One- to Four-family 380,549 905,641 186,481 1,472,671
-------- -------- -------- ----------
Multifamily and Commercial:
Metropolitan portfolio -- -- 430,978 430,978
FreddieMac 3,323 1,608 -- 4,931
FannieMae 78,454 22,865 -- 101,319
Private investors 77,473 25,806 -- 103,279
-------- -------- -------- ----------
Total Multifamily and
Commercial 159,250 50,279 430,978 640,507
-------- -------- -------- ----------
Total $539,799 $955,920 $617,459 $2,113,178
======== ======== ======== ==========
Generally, we service the loans we originate. When we sell loans to an
investor, such as FreddieMac or FannieMae, we generally retain the servicing
rights for the loans. We receive fee income for servicing these sold loans at
various percentages based upon the unpaid principal balances of the loans
serviced. We collect and retain service fees out of monthly mortgage payments.
To further increase our servicing fee income, the Bank has aggressively pursued
purchases of servicing portfolios from other originating institutions. These
purchased servicing portfolios are primarily FreddieMac and FannieMae single
family loans that are geographically
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located within the eastern half of the nation. At December 31, 1998, the unpaid
principal balance of our purchased servicing portfolio was $955.9 million. The
related balance of purchased mortgage servicing rights was $9.9 million.
Loan servicing functions include collecting and remitting loan
payments, accounting for principal and interest, holding escrow (impound) funds
for payment of taxes and insurance, making rate and payment changes to
contractually adjustable loans, managing loans in payment default, processing
foreclosure and other litigation activities to recover mortgage debts,
conducting property inspections and risk assessment for investment loans and
general administration of loans for the investors to whom they are sold.
LOAN OPTION INCOME
During 1995, we developed a program to purchase loans and sell loan
options in order to take advantage of our underwriting capabilities, increase
net interest income and increase noninterest income. In these transactions, we
purchase loans and sell nonrefundable options to a third party to purchase these
same loans at a specified price within a specified period. Prior to purchasing
the loans that will be subject to the options, the Bank uses an underwriting
process with substantially the same standards as in its origination process. In
the event the option is not exercised, we would sell the underlying loans or
transfer them to the Bank's portfolio at their fair value at the date of the
transfer. We negotiate a nonrefundable option fee based on a percentage of the
principal amount of the loans involved. The third party acquiring the option is
a loan broker who markets the loans to potential buyers who may be willing to
pay a higher price for the loans. To date, we have entered into these option
transactions with one loan broker. At December 31, 1998, there were $5.6 million
in loans held for sale in connection with outstanding options. We have
recognized $388,000 in income in connection with loan options during 1998.
BRIDGE LOAN ACTIVITY
During 1997, we developed a program to underwrite and originate bridge
loans to take advantage of our underwriting capabilities and to increase
interest income. A bridge loan is a short term financing arrangement provided to
a borrower until they secure more permanent financing or sell the property. For
these loans we assess the debt service capacity and underlying collateral value
as we would for other multifamily or commercial real estate loans. We collect a
fee at origination which is deferred and recognized in interest income over the
term of the loan. As a result of the comparatively short term to maturity of
these loans, the borrowers must refinance the underlying properties sooner than
is the case with longer term, permanent loans. This adds a potential element of
risk. In all cases, these loans are adequately secured by real property. During
1998, we originated three of these loans totaling $5.4 million and recognized
origination fees of $449,000 in net interest income. During the two years, we
funded ten loans totaling $21.2 million. We are no longer actively marketing
this program.
LOAN DELINQUENCIES AND NONPERFORMING ASSETS
When a borrower fails to make a required payment on a loan, we begin
work to cure the delinquency by contacting the borrower. In the case of real
estate loans, we send a late notice 15 days after the due date. If the
delinquency is not cured within 30 days of the due date, we contact the borrower
by telephone. We make additional written and verbal contacts with the borrower
between 30 and 90 days after the due date. If the delinquency continues for a
period of 90 days, we usually bring an action to foreclose on the property. If
we foreclose on the property, we sell the property at public auction where we
may be the acquirer. Delinquent consumer loans are handled in a similar manner,
except that we make our initial contact when the payment is 10 days past due. We
bring an action to collect any loan payment that is delinquent for more than 30
days. Our procedures for collection efforts, repossession, and sale of consumer
collateral must comply with various requirements under state and federal
consumer protection laws. In the case of business loans, we monitor payment
activity on a weekly basis. We make telephone contact with any borrower who has
not made their payment by its due date. If a delay in payment
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continues, we meet with the borrower. The borrowers' cash flow situation is
evaluated and a repayment plan instituted. In some situations, we exercise our
rights to collateral or assignment of receivables in order to liquidate the
debt.
The following table sets forth information concerning delinquent loans
at December 31, 1998, in dollar amounts and as a percentage of each category of
the loan portfolio. The amounts presented represent the total remaining
principal balances of the related loans, rather than the actual payment amounts
that are overdue.
60-89 DAYS 90 DAYS AND OVER TOTAL DELINQUENT LOANS
---------- ---------------- ----------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------ -------- ------ ------ --------
(DOLLARS IN THOUSANDS)
REAL ESTATE
One- to four-family 1 $ 104 0.05% 7 $ 512 0.26% 8 $ 616 0.31%
Multifamily -- -- -- -- -- -- -- -- --
Commercial 1 142 0.06 6 6,123 2.68 7 6,265 2.74
Construction and land -- -- -- 4 1,824 1.33 4 1,824 1.33
CONSUMER 58 669 0.66 365 2,498 2.46 423 3,167 3.11
BUSINESS 4 863 1.05 14 1,734 2.11 18 2,597 3.15
-- ------ --- ------- --- -------
Total 64 $1,778 0.16% 396 $12,691 1.17% 460 $14,469 1.33%
== ====== === ======= === =======
Nonperforming assets include all nonaccrual loans, loans past due
greater than 90 days still accruing, and real estate owned. Interest is not
accrued on loans contractually past due 90 days or more as to interest or
principal payments. In addition, interest is not accrued on loans as to which
payment of principal and interest in full is not expected unless in our judgment
the loan is well secured, and we expect no loss in principal or interest.
When a loan reaches nonaccrual status, we discontinue interest accruals
and reverse prior accruals. The classification of a loan on nonaccrual status
does not necessarily indicate that the principal is uncollectible in whole or in
part. We consider both the adequacy of the collateral and the other resources of
the borrower in determining the steps to take to collect nonaccrual loans. The
final determination as to these steps is made on a case-by-case basis.
Alternatives we consider are commencing foreclosure, collecting on guarantees,
restructuring the loan, or instituting collection lawsuits.
The following table summarizes non-performing assets by category as of
the dates indicated.
AT DECEMBER 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccruing loans
One-to four-family $ 512 $ 792 $ 950 $ 293 $ 337
Multifamily -- -- 871 2,138 1,585
Commercial real estate 6,123 198 2,032 391 150
Construction and land
development 1,824 -- -- 15 15
Consumer 2,038 1,562 802 266 153
Business 1,734 211 268 -- --
------- ------ ------ ------ ------
Total nonaccruing loans 12,231 2,763 4,923 3,103 2,240
Loans past due greater
than 90
days still accruing 460 384 271 204 128
------- ------ ------ ------ ------
Total nonperforming loans 12,691 3,147 5,194 3,307 2,368
Real estate owned 5,534 2,037 177 258 53
------- ------ ------ ------ ------
Total nonperforming
assets $18,225 $5,184 $5,371 $3,565 $2,421
======= ====== ====== ====== ======
Nonperforming loans to
total loans 1.23% 0.44% 0.80% 0.69% 0.55%
Nonperforming assets
to total assets 1.34% 0.56% 0.70% 0.60% 0.51%
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For the years ended December 31, 1998 and 1997, gross interest income
which would have been recorded had the nonaccruing loans been current in
accordance with their original terms amounted to $788,000 and $151,000,
respectively. The amounts that were included in interest income on these loans
were $291,000 and $132,000 for the years ended 1998 and 1997, respectively.
Nonperforming assets were $18.2 million at December 31, 1998, an
increase of $13.0 million from $5.2 million at December 31, 1997. During the
same period, total net loans receivable increased $325.4 million to $1.0 billion
at December 31, 1998. The nonaccrual loan component of nonperforming assets
increased $9.5 million to $12.2 million while real estate owned increased $3.5
million to $5.5 million. Nonperforming loans showed significant increases in
four areas: commercial real estate; construction and land development; business
loans; and consumer loans. Real estate owned increased due to two properties
acquired in December.
The $5.9 million increase in nonperforming commercial real estate is
attributable to three loans including a $4.0 million loan financing a waterpark
in Southern California. This loan and one other are bridge loans, a program we
are no longer actively marketing. Based on appraisals and other current
estimates of value, we do not anticipate losses on these three loans. The $1.8
million increase in nonperforming construction and land development loans is
related to two borrowers. The largest is a $1.3 million land development loan
for residential lots that has experienced slower than anticipated lot
absorption. The remaining loans are model home construction loans. Based on
appraised values and current market research, we do not anticipate losses on
these two relationships.
The $1.5 million increase in nonperforming business loans is consistent
with the growth in business loans. We introduced this product in 1995. From 1996
to 1997, this loan category grew $34.0 million to $57.5 million. In 1998, this
loan category grew another $24.8 million to $82.3 million. Total nonperforming
business loans are $1.7 million, or 2.1% of that loan category. Unlike the real
estate lending which comprises 80% of our loan portfolio, business loans often
depend on the successful operation of a business and depreciable collateral.
Therefore, we expect nonperforming loans and losses to be higher for business
loans than for real estate loans. Management currently estimates probable losses
on these five loans at $900,000. We have allocated a portion of the allowance
for loan losses to this estimate until the actual loss is determined and
charged-off. We are aggressively pursuing collection of all nonperforming loans
including those described above.
Nonperforming consumer loans have increased to $2.5 million at December
31, 1998 and represent 2.5% of the consumer portfolio. This increase is
primarily attributable to subprime lending. We began suprime lending in 1997.
These loans typically carry higher delinquency rates than other consumer loans
and provide a greater yield to compensate for the related increase in costs.
These loans account for $240,000, or 29.7% of consumer loan charge-offs in 1998.
The aggregate balance of the subprime portfolio at December 31, 1998 was $10.2
million or less than one percent of total loans. All consumer loans that are
delinquent 120 days or more are 100% covered by loan insurance or a portion of
the allowance for loan losses equal to the estimated loss has been allocated to
that loan.
In December 1998, we acquired title to a motel in Northeast Ohio and a
marina in California through foreclosure. We adjusted the carrying value of
these properties to their estimated fair value of $3.4 million and $1.3 million,
respectively, at the time of acquisition. We are actively pursuing the sale of
both properties. We anticipate no further losses.
At December 31, 1998, we had potential problem loans totaling $3.1
million which were classified by management as substandard and were not included
in the table above. Seven loans secured by multifamily and commercial real
estate are $1.8 million of this amount. Although these loans were current or not
seriously delinquent, there is some unfavorable development involving each loan.
If not corrected, the unfavorable development could result in the loan changing
to nonaccrual status or a loss being incurred. We are in contact with these
borrowers, and we monitor their status closely.
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ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS
We maintain an allowance for losses on loans because some loans may not
be repaid in full. We maintain the allowance at a level we consider 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 we may
periodically allocate portions of the allowance for specific problem loans, the
whole allowance is available for any loan charge-offs that occur. We charge a
loan against the allowance as a loss when, in our opinion, it is uncollectible.
Despite the charge-off, we continue collection efforts. As a result, future
recoveries may occur.
The following table sets forth an allocation of the allowance for
losses on loans among categories as of December 31 of the years indicated based
on our estimate of probable losses that were currently anticipated based largely
on past loss experience. Since the factors influencing such estimates are
subject to change over time, we believe that any allocation of the allowance for
losses on loans into specific categories lends an appearance of precision which
does not exist. In practice, we use the allowance as a single unallocated
allowance available for all loans. The allowance can also be reallocated among
different loan categories if actual losses differ from expected losses and based
upon changes in our expectation of future losses. The following allocation table
should not be interpreted as an indication of the actual amounts or the relative
proportion of future charges to the allowance.
DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
One-to four-family $ 304 18.3% $ 237 19.8% $ 228 17.1% $ 172 15.2% $ 189 25.2%
Multifamily 648 31.1 482 25.4 1,020 40.8 887 45.8 733 41.9
Commercial real estate 1,019 21.1 1,400 23.0 937 20.3 676 21.5 358 18.6
Construction and land 237 12.6 353 15.3 193 10.5 167 9.5 99 8.5
Consumer 2,335 9.3 2,132 9.0 1,182 7.9 512 6.3 340 5.8
Business 1,675 7.6 456 7.5 197 3.4 74 1.7 1 --
Unallocated 691 -- 562 -- 418 -- 277 -- 191 --
------ ----- ------ ----- ------ ------ ------ ----- ------ -----
Total $6,909 100.0% $5,622 100.0% $4,175 100.0% $2,765 100.0% $1,911 100.0%
====== ===== ====== ===== ====== ====== ====== ===== ====== =====
With the uncertainties that could adversely affect the overall quality
of the loan portfolio, we consider an adequate allowance for losses on loans
essential. We consider the unallocated allowance adequate to cover losses from
the existing loans that have not demonstrated problems such as late payments,
financial difficulty of the borrower, or deterioration of collateral values. In
our opinion the risks associated with off-balance sheet commitments are
insignificant. Therefore, we have not provided an allowance for these
commitments.
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20
The following table provides an analysis of the allowance for losses on
loans for the periods indicated. In each period, we base the provision for loan
losses on an analysis of individual credits, prior and current loss experience,
overall growth in the portfolio, and current economic conditions.
AT DECEMBER 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING
OF PERIOD $5,622 $4,175 $2,765 $1,911 $1,239
Charge-offs:
One- to four-family 5 32 22 23 23
Multifamily 39 494 119 -- 64
Commercial real estate -- -- -- 27 --
Construction and land -- -- -- -- --
Consumer 809 363 95 56 14
Business 565 10 -- -- --
------ ------ ------ ------ ------
Total charge-offs 1,418 899 236 106 101
------ ------ ------ ------ ------
Recoveries:
One-to four-family 25 -- -- 1 1
Multifamily 13 -- -- -- 6
Commercial real estate -- -- -- -- --
Construction and land -- -- -- -- --
Consumer 17 6 11 -- --
Business -- -- -- -- --
------ ------ ------ ------ ------
Total recoveries 55 6 11 1 7
------ ------ ------ ------ ------
Net charge-offs 1,363 893 225 105 94
Provision for loan losses 2,650 2,340 1,635 959 766
------ ------ ------ ------ ------
BALANCE AT END OF PERIOD $6,909 $5,622 $4,175 $2,765 $1,911
====== ====== ====== ====== ======
Net charge-offs to
average loans 0.16% 0.13% 0.04% 0.02% 0.03%
Provision for loan
losses to average loans 0.31% 0.35% 0.28% 0.21% 0.21%
Allowance for losses on
loans to total
nonperforming loans
at end of period 54.44% 178.60% 80.38% 83.61% 80.70%
Allowance for losses on
loans to total loans
at end of period 0.66% 0.79% 0.64% 0.57% 0.45%
INVESTMENT PORTFOLIO
We maintain our investment portfolio in accordance with policies
adopted by the Board of Directors that consider the regulatory requirements and
restrictions which dictate the type of securities that we can hold. As a member
of the Federal Home Loan Bank System, the Bank is required to hold a minimum
amount of Federal Home Loan Bank stock based upon asset size and mix. As the
Bank grows, management anticipates this investment will increase.
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21
The following table summarizes the amounts and the distribution of
securities held as of the dates indicated:
AT DECEMBER 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
SECURITIES:
Mutual funds $ 2,059 $ 1,706 $ 2,009
Tax-exempt bond 14,817 4,740 --
Revenue bond 1,400 -- --
FannieMae medium term note 9,884 -- 6,065
FreddieMac preferred stock 7,500 -- --
FannieMae preferred stock -- -- 5,100
Federal Home Loan Bank stock 6,054 5,350 3,989
------- ------- -------
Total $41,714 $11,796 $17,163
======= ======= =======
OTHER INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks $ 9,275 $ 1,961 $ 2,745
Term repurchase agreements -- 6,397 6,000
------- ------- -------
Total $ 9,275 $ 8,358 $ 8,745
======= ======= =======
The following table sets forth the contractual maturities and approximate
weighted average yields of debt securities at December 31, 1998.
DUE IN
----------------------
ONE YEAR FIVE TO MORE THAN
OF LESS TEN YEARS TEN YEARS TOTAL
-------- ---------------------- -----
(DOLLARS IN THOUSANDS)
Mutual funds $ 2,059 $ -- $ -- $ 2,059
Tax-exempt bond -- -- 14,817 14,817
Revenue bond -- -- 1,400 1,400
FannieMae medium term note -- 9,884 -- 9,884
------- ------- ------- -------
Total $ 2,059 $ 9,884 $16,217 $28,160
======= ======= ======= =======
Weighted average yield 5.06% 5.89% 7.07% 6.51%
MORTGAGE-BACKED SECURITIES PORTFOLIO
Mortgage-backed securities offer higher rates than treasury or agency
securities with similar maturities because the timing of the repayment of
principal can vary based on the level of prepayments. However, they offer lower
yields than similar loans because the risk of loss of principal is often
guaranteed by the issuing entity or through mortgage insurance. We acquire
mortgage-backed securities through purchases and securitization of loans from
our own portfolio. As rates declined during 1998 we experienced an increase in
prepayments on mortgage-backed securities over the level experienced in 1997
and 1996. We classify all mortgage-backed securities as available for sale.
The following table sets forth the mortgage-backed securities portfolio
at the dates indicated.
AT DECEMBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
FannieMae pass-through certificates $ 61,705 $ 97,146 $19,775
GNMA pass-through certificates 5,870 8,037 9,700
FreddieMac participation certificates 13,149 37,714 26,713
BPA Commercial Capital L.L.C.
mortgage-backed security 100,995 -- --
FreddieMac Collateralized Mortgage
Obligation 8,494 -- --
FannieMae Collateralized Mortgage
Obligation 7,868 -- --
Other 214 270 484
-------- -------- -------
Total $198,295 $143,167 $56,672
======== ======== =======
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The following table sets forth the contractual maturities and
approximate weighted average yields of mortgage-backed securities at December
31, 1998.
DUE IN
------
ONE FIVE
YEAR TO TO TEN OVER
FIVE YEARS YEARS TEN YEARS TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
FannieMae pass-through
certificates $6,743 $53,757 $ 1,205 $ 61,705
GNMA pass-through certificates 81 -- 5,789 5,870
FreddieMac participation
certificates -- -- 13,149 13,149
BPA Commercial Capital L.L.C.
Mortgage-backed security -- -- 100,995 100,995
FreddieMac Collateralized
Mortgage Obligation -- -- 8,494 8,494
FannieMae Collateralized
Mortgage Obligation -- -- 7,868 7,868
Other -- 214 214
------- -------- -------- --------
Total mortgage-backed securities $6,824 $53,757 $137,714 $198,295
====== ======= ======== ========
Weighted average yield 7.41% 7.27% 7.26% 7.27%
SOURCES OF FUNDS
The Bank's primary sources of funds are deposits, amortization and
repayment of loan principal, borrowings, sales of mortgage loans, sales or
maturities of mortgage-backed securities, securities, and short-term
investments. Deposits are the principal source of funds for lending and
investment purposes. The following paragraphs provide a brief description of the
types of accounts offered:
Passbook and Statement Savings Accounts. Consumers may invest savings
in and withdraw savings from regular passbook, tiered passbook and statement
savings accounts without restriction. We compound interest on tiered passbook
accounts monthly and credit the account monthly. We compound interest on regular
passbook and statement savings accounts quarterly and credit the account
quarterly.
Checking Accounts. We offer two interest-bearing checking and one
noninterest-bearing checking account for consumers. The noninterest checking
requires no minimum balance and has no monthly service fees. The rate paid on
the interest checking account depends upon the balance in the account. We can
waive monthly service charges on personal interest-bearing checking accounts if
the consumer maintains either a $1,000 minimum balance or a greater than $5,000
minimum balance in another deposit account or establish a direct deposit
relationship. All accounts have no minimum maturity or penalty for early
withdrawal and no restrictions on the size and frequency of the withdrawals or
additional deposits. We review the interest rate paid on the interest-bearing
checking accounts regularly and adjust the rate based on cash flow projections
and market interest rates.
In connection with loan servicing activities, we maintain custodial
checking accounts for principal and interest payments collected for investors
monthly and for tax and insurance escrow balances. This remains a recurring but
relatively short-term source of funds given the level of loans serviced for
others.
We also offer a commercial checking account. This account is
noninterest bearing and is assessed monthly service charges based upon
transaction activity levels.
Certificates of Deposit. We offer fixed rate, fixed term certificates
of deposit. Terms are from seven days to five years. There are no regulatory
rate ceilings. Certificates of deposit require a penalty for withdrawal prior to
maturity dates. These accounts generally bear the highest interest rates of any
deposit product offered. We review interest rates offered on certificates of
deposit regularly and adjust them based on cash flow projections and market
interest rates.
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From time to time, we have accepted certificates of deposit from
out-of-state individuals and entities, predominantly financial institutions.
These deposits typically have balances of $90,000 to $100,000 and have a term of
one year or more. We do not accept these deposits through brokers. At December
31, 1998, these individuals and entities held approximately $166.3 million of
certificates of deposits, or 15.8% of total deposits.
Individual Retirement Accounts ("IRA"). We also offer IRAs. Customers
may invest funds in a passbook account or any certificate of deposit we
currently offer.
The following table provides information regarding trends in average
deposits for the periods indicated. The noninterest bearing demand deposit
category includes principal and interest custodial accounts and taxes and
insurance custodial accounts for loans serviced for FreddieMac, FannieMae and
private investors.
DECEMBER 31,
------------
1998 1997 1996
---- ---- ----
PERCENT PERCENT PERCENT
AVERAGE OF RATE AVERAGE OF RATE AVERAGE OF RATE
AMOUNT TOTAL PAID AMOUNT TOTAL PAID AMOUNT TOTAL PAID
------ ----- ---- ------ ----- ---- ------ ----- ----
(DOLLARS IN THOUSANDS)
Noninterest-bearing
demand deposits $ 51,385 6.1% $ 38,837 5.8% $ 31,248 5.5%
Interest bearing deposits:
Demand deposits 45,980 5.5 2.75% 39,965 5.9 2.66% 36,273 6.4 2.64%
Savings deposits 184,907 21.9 4.54 170,362 25.2 4.56 169,866 30.2 4.79
Time deposits 560,010 66.5 5.87 426,450 63.1 5.93 325,960 57.9 5.83
-------- ----- -------- ----- -------- -----
Total interest-bearing
deposits 790,897 93.9 5.38 636,777 94.2 5.36 532,099 94.5 4.97
-------- ----- -------- ----- -------- -----
Total average deposits $842,282 100.0% $675,614 100.0% $563,347 100.0%
======== ===== ======== ===== ======== =====
Deposits increased 42.5% to $1.1 billion at December 31, 1998 from a
year earlier. This increase was consistent with the overall growth of the Bank.
The increase was primarily due to a 50.8% increase in time deposits to $720.8
million. During the same period, the Bank experienced overall growth in other
types of savings accounts.
The following table shows rate and maturity information for
certificates of deposit as of December 31, 1998.
PERCENT OF
2.00-4.99% 5.00-5.99% 6.00-6.99% 7.00-8.99% TOTAL TOTAL
--------- --------- --------- --------- ------- ------------
(DOLLARS IN THOUSANDS)
CERTIFICATE ACCOUNTS
MATURING IN QUARTER ENDING:
March 31, 1999 $ 35,159 $ 99,440 $ 68,790 $ 355 $203,744 28.3%
June 30, 1999 13,833 106,047 33,787 78 153,745 21.3
September 30, 1999 834 53,522 8,521 -- 62,877 8.7
December 31, 1999 4,573 80,689 25,509 1,472 112,243 15.6
March 31, 2000 656 39,042 21,761 5,262 66,721 9.3
June 30, 2000 341 13,370 8,504 29 22,244 3.1
September 30, 2000 5 16,583 2,351 8,436 27,375 3.8
December 31, 2000 -- 26,786 2,167 1,222 30,175 4.2
March 31, 2001 -- 13,914 2,351 134 16,399 2.3
June 30, 2001 -- 6,753 637 -- 7,390 1.0
September 30, 2001 -- 2,768 220 -- 2,988 0.4
December 31, 2001 -- 2,378 28 -- 2,406 0.3
Thereafter -- 8,102 3,966 396 12,464 1.7
------- -------- -------- ------- -------- -----
Total $55,401 $469,394 $178,592 $17,384 $720,771 100.0%
======= ======== ======== ======= ======== =====
Percent of total 7.7% 65.1% 24.8% 2.4%
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The following table shows the remaining maturity for time deposits of
$100,000 or more as of December 31, 1998.
DECEMBER 31, 1998
-------------------
(DOLLARS IN THOUSANDS)
Three months or less $ 34,994
Over three through six months 24,130
Over six through twelve months 32,889
Over twelve months 37,417
--------
Total $129,430
========
In addition to deposits, we rely on borrowed funds. The discussion
below describes our current borrowings.
Subordinated Note Offering. In December 1995, we issued subordinated
notes with an aggregate principal balance of $14.0 million through a public
offering. The interest rate on the notes is 9.625%. We pay interest monthly.
These subordinated notes are unsecured.
Line of Credit. We have a commercial line of credit agreement with a
commercial bank. The maximum borrowing under the line is $12.0 million. We
modified the agreement during 1998 to increase the borrowing limit from $4.0
million. The line matures May 30, 1999, but we can renew the line annually as
agreed by both parties. The interest rate on the line of credit is tied to LIBOR
or prime at our option. As collateral for the loan, our largest shareholder,
Robert Kaye, has agreed to pledge a portion of his shares of Common Stock of
Metropolitan in an amount at least equal in value to 200% of any outstanding
balance. At December 31, 1998, the outstanding balance under this agreement was
$8.0 million.
Federal Home Loan Bank Advances. The Federal Home Loan Bank makes funds
available for housing finance to eligible financial institutions like the Bank.
The Federal Home Loan Bank generally limits advances to 50% of assets from all
borrowing sources. We collateralize advances by any combination of the following
assets and collateralization rates: one- to four-family first mortgage loans,
not past due greater than 90 days, pledged on a blanket basis at 150% of the
advance amount, specifically identified residential mortgage loans at 125% of
the advance amount and various types of investment and mortgage-backed
securities at rates ranging from 101% to 110% of the advance amount. We pledge
Federal Home Loan Bank stock owned by the Bank as additional collateral, but
this stock is not available as primary collateral. The aggregate balance of
assets pledged as collateral for Federal Home Loan Bank advances at December 31,
1998 was $184.0 million. All of these were one- to four-family loans pledged
under the blanket pledge agreement.
Reverse Repurchase Agreements. From time to time, the Bank borrows
funds by using its investment or mortgage-backed securities to issue reverse
repurchase agreements. This type of borrowing provides an alternative source of
funds to Federal Home Loan Bank borrowings and at times, more favorable rates.
The aggregate balance of mortgage-backed securities pledged as collateral for
reverse repurchase agreements at December 31, 1998 was $87.7 million.
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The following table shows the maximum month-end balance, the average
balance, and the ending balance of borrowings during the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
MAXIMUM MONTH-END BALANCE:
FHLB advances $119,000 $73,700 $75,150
1993 subordinated notes 4,874 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 8,000 4,000 --
Reverse repurchase agreements 97,983 74,496 23,500
AVERAGE BALANCE:
FHLB advances $ 65,714 $59,325 $50,546
1993 subordinated notes 1,999 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 2,147 114 --
Reverse repurchase agreements 70,368 38,843 4,480
ENDING BALANCE:
FHLB advances $111,236 $41,000 $59,500
1993 subordinated notes -- 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 8,000 1,500 --
Reverse repurchase agreements 82,250 74,496 23,500
The following table provides the interest rates of borrowings during
the periods indicated.
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances 5.68% 5.65% 5.43%
1993 subordinated notes 10.47 10.47 10.47
1995 subordinated notes 10.48 10.48 10.48
Line of credit 8.49 8.98 --
Reverse repurchase agreements 5.66 5.73 5.61
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN METROPOLITAN'S JUNIOR SUBORDINATED
DEBENTURES
During 1998, Metropolitan's wholly owned subsidiary, Metropolitan
Capital Trust I, issued 2,775,000 shares ($10 liquidation amount per security)
of 8.60% cumulative trust preferred securities. Metropolitan Capital Trust I
invested the total proceeds from the sale of the 8.60% cumulative trust
preferred securities in the 8.60% guaranteed preferred beneficial interests in
junior subordinated debentures of Metropolitan. These debentures mature on June
30, 2028. We are amortizing total issuance costs of $1.4 million on a
straight-line basis over the life of the junior subordinated debentures. The
8.60% cumulative trust preferred securities are listed on the Nasdaq Stock
Market's National Market under the symbol "METFP." At December 31, 1998, the
outstanding balance of the junior subordinated debentures was $27.8 million. The
average balance outstanding during 1998 was $18.6 million. The weighted average
rate was 8.79%.
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COMPETITION
The Bank faces strong competition both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks,
mortgage companies, credit unions, finance companies, and insurance companies.
The Bank competes for loans principally on the basis of the interest rates and
loan fees it charges, the type of loans it originates, and the quality of
services it provides to borrowers. Some of the Bank's competitors, however, have
higher lending limits and substantially greater financial resources than the
Bank.
The Bank attracts its deposits through its retail sales offices,
primarily from the communities in which those retail sales offices are located.
Therefore, competition for those deposits is principally from other savings
institutions, commercial banks, credit unions, mutual funds, and brokerage
companies located in the same communities. The Bank competes for these deposits
by offering a variety of deposit accounts at competitive rates, convenient
business hours, convenient branch locations, and high quality service.
EMPLOYEES
At December 31, 1998, we had a total of 354 employees, including
part-time and seasonal employees. Our employees are not represented by any
collective bargaining group. Management considers its employee relations to be
excellent.
ADDITIONAL INFORMATION INCORPORATED BY REFERENCE
Additional information required by Guide 3 is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Five Year Summary of Selected Data of the Annual Report.
REGULATION AND SUPERVISION
INTRODUCTION
Metropolitan is a savings and loan holding company within the meaning
of the Home Owners' Loan Act. As a savings and loan holding company, we are
subject to the regulations, examination, supervision, and reporting requirements
of the Office of Thrift Supervision. The Bank, an Ohio-chartered savings and
loan association, is a member of the Federal Home Loan Bank System. Its deposits
are insured by the Federal Deposit Insurance Corporation through the Savings
Association Insurance Fund. The Bank is subject to examination and regulation by
the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and
the Ohio Division of Financial Institutions. The Bank must comply with
regulations regarding matters such as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. The purpose of this examination and regulation is primarily to
protect depositors.
The descriptions of the statutes and regulations which are applicable
to Metropolitan and the Bank and the effects of the statutes and regulations are
summarized below and elsewhere in this prospectus. This summary does not purport
to be a complete description of the statutes and regulations and their effects
on Metropolitan or the Bank. In addition, this summary does not identify every
statute and regulation that may apply to Metropolitan or the Bank.
METROPOLITAN
As a savings and loan holding company, we are subject to restrictions
relating to our activities and investments. Among other things, we are generally
prohibited, either directly or indirectly, from acquiring control of any other
savings association or savings and loan holding company, without prior approval
of the Office
26
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of Thrift Supervision, and from acquiring more than 5% of the voting stock of
any savings association or savings and loan holding company which is not a
subsidiary.
Similarly, a person must obtain Office of Thrift Supervision approval
prior to that person's acquiring control of the Bank or Metropolitan. Control is
conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the institution or holding company or
controls in any manner the election of a majority of the directors of the
institution or the holding company. Control is presumed to exist if, among other
things, a person acquires more than 10% of any class of voting stock (or 25% of
any class of stock) and is subject to any certain specified "control factors."
This presumption is rebuttable.
THE BANK
General. The Office of Thrift Supervision also has enforcement
authority over all savings associations. This enforcement authority includes the
ability to impose penalties for and to seek correction of violations of laws and
regulations and unsafe or unsound practices. This authority includes the power
to assess civil money penalties, issue cease and desist or removal and
prohibition orders against an institution, its directors, officers or employees
and other persons, or initiate injunctive actions.
As a lender and a financial institution, the Bank is subject to various
regulations promulgated by the Federal Reserve Board including, without
limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves),
Regulation E (Electronic Fund Transfers), Regulation F (Interbank Liabilities),
Regulation Z (Truth in Lending), Regulation CC (Availability of Funds), and
Regulation DD (Truth in Savings). As lenders of loans secured by real property,
and as owners of real property, financial institutions, including the Bank, are
subject to compliance with various statutes and regulations applicable to
property owners generally. These statutes and regulations include statutes and
regulations relating to the environmental condition of the property.
Insurance of Accounts and Regulation by the Federal Deposit Insurance
Corporation. The Bank is a member of the Savings Association Insurance Fund,
which is administered by the Federal Deposit Insurance Corporation. The Federal
Deposit Insurance Corporation insures deposits up to applicable limits and the
full faith and credit of the United States Government back such insurance. As
insurer, the Federal Deposit Insurance Corporation imposes deposit insurance
premiums and conducts examinations of and requires reporting by Federal Deposit
Insurance Corporation-insured institutions. It also may prohibit any Federal
Deposit Insurance Corporation-insured institution from engaging in any activity
the Federal Deposit Insurance Corporation determines by regulation or order to
pose a serious risk to the Federal Deposit Insurance Corporation. The Federal
Deposit Insurance Corporation also has the authority to initiate enforcement
actions against savings associations, after giving the Office of Thrift
Supervision an opportunity to take such action. It may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
Under the Federal Deposit Insurance Corporation risk-based deposit
insurance assessment system all insured depository institutions are placed into
one of nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well-capitalized and requiring little supervision would pay the lowest premium.
Institutions classified as undercapitalized and requiring substantial
supervision would pay the highest premium. The Federal Deposit Insurance
Corporation makes a risk classification of all insured institutions for each
semi-annual assessment period. Effective January 1, 1997, the Savings
Association Insurance Fund assessment rates are identical to those for Bank
Insurance Fund insured institutions.
In addition to its authority to assess risk-based premiums for deposit
insurance, the Federal Deposit Insurance Corporation has assessment authority to
collect funds from Federal Deposit Insurance Corporation-insured institutions
sufficient to pay interest on Financing Corporation bonds. The Deposit Insurance
Funds Act of 1996 authorized the Financing Corporation to assess both Bank
Insurance
27
28
Fund- and Savings Association Insurance Fund-insured deposits. It also required
the Bank Insurance Fund rate to equal one-fifth the Savings Association
Insurance Fund rate through 1999, or until the insurance funds were merged,
whichever occurs first. After that time, Bank Insurance Fund- and Savings
Association Insurance Fund-insured deposits will be assessed the same rate.
Thus, Savings Association Insurance Fund institutions, such as the Bank, will
continue to be subject to a greater burden than Bank Insurance Fund institutions
through 1999.
In addition, the Deposit Insurance Funds Act of 1996 required the
merger of the Bank Insurance Fund and Savings Association Insurance Fund into a
single insurance by January 1, 1999 assuming certain pre-conditions. Those
pre-conditions were not met and a timetable for merger of the Bank Insurance
Fund and Savings Association Insurance Fund has not been established. In
connection with the merger of the Bank Insurance Fund and the Savings
Association Insurance Fund, Savings Association Insurance Fund-insured
institutions could be forced to convert to state bank charters or national bank
charters. If that proposal became law, Metropolitan would become a bank holding
company. As a result, Metropolitan would be subject to regulation by the Federal
Reserve Board. That regulation imposes capital requirements on bank holding
companies.
Regulatory Capital Requirements. The capital regulations of the Office
of Thrift Supervision establish a "leverage limit," a "tangible capital
requirement," and a "risk-based capital requirement." In addition, the Office of
Thrift Supervision may establish, on a case by case basis, individual minimum
capital requirements for a savings association which vary from the requirements
that would otherwise apply under the Capital Regulations. The Office of Thrift
Supervision has not established an individual minimum capital requirements for
the Bank.
A savings association which fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
Office of Thrift Supervision. A capital directive could include requiring the
following:
- an increase in capital;
- reduction of rates paid on savings accounts;
- cessation of or limitations on deposit-taking and lending;
- limitations on operational expenditures;
- an increase in liquidity; and
- such other actions deemed necessary or appropriate by the
Office of Thrift Supervision.
In addition, a conservator or receiver may be appointed under these
circumstances.
The leverage limit currently requires a savings association to maintain
"core capital" of not less than 3% of adjusted total assets. The Office of
Thrift Supervision has taken the position, however, that the prompt corrective
action regulation has effectively raised the leverage ratio requirement for all
but the most highly-rated institutions. The leverage ratio has in effect
increased to 4% since an institution is "undercapitalized" if, among other
things, its leverage ratio is less than 4%.
The tangible capital requirement requires a savings association to
maintain "tangible capital" in an amount not less than 1.5% of adjusted total
assets.
The risk-based capital requirement generally provides that a savings
association must maintain total capital in an amount at least equal to 8.0% of
its risk-weighted assets. The risk-based capital regulations are similar to
those applicable to national banks. The regulations assign each asset and
certain off-balance sheet assets held by a savings association to one of four
risk-weighting
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29
categories, based upon the degree of credit risk associated with the particular
type of asset.
Each bank regulatory agency and the Office of Thrift Supervision review
each of their capital standards every two years. The purpose of this review is
to determine whether those standards require sufficient capital to facilitate
prompt corrective action to prevent or minimize loss to the deposit insurance
funds. Each bank regulatory agency and the Office of Thrift Supervision revise
each of their risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk, and the
risk of non-traditional activities.
At December 31, 1998, the Bank complied with each of the tangible
capital, the core capital, and the risk-based capital requirements. The
following table presents the Bank's regulatory capital position at December 31,
1998.
PERCENT
OF ASSETS
AS DEFINED
FOR EACH
AMOUNT CAPITAL TEST
-------- ------------
(DOLLARS IN THOUSANDS)
Tangible capital $84,935 6.26%
Tangible capital requirement 20,361 1.50
------- ------
Excess $64,574 4.76%
======= =====
Core capital $85,113 6.27%
Core capital requirement 54,296 4.00
------- ------
Excess $30,817 2.27%
======= =====
Risk-based capital $89,086 8.22%
Risk-based capital requirement 86,731 8.00
------- ------
Excess $ 2,355 0.22%
======= =====
The Bank is also subject to the capital adequacy requirements under the
Federal Deposit Insurance Corporation Investment Act of 1991. The additional
capital adequacy ratio imposed under Federal Deposit Insurance Corporation
Investment Act is the Tier 1 capital to risk adjusted assets ratio. This ratio
must be at least 6.0% for a "well capitalized" institution. At December 31,
1998, the Tier 1 risk-based capital ratio of the Bank was 7.85%.
Prompt Corrective Action. Banks and savings associations are classified
into one of five categories based upon capital adequacy, ranging from
"well-capitalized" to "critically undercapitalized." Generally, the regulations
require the appropriate federal banking agency to take prompt corrective action
with respect to an institution which becomes "undercapitalized" and to take
additional actions if the institution becomes "significantly undercapitalized"
or "critically undercapitalized."
The federal banking agencies have issued a joint rule under which, in
general, an institution is:
- "well capitalized" if it has total risk-based capital of 10%
or greater, Tier 1 risk-based capital of 6% or greater,
leverage ratio of 5% or greater, and is not subject to an
order or other supervisory directive to meet and maintain a
specific capital level for any capital measure;
- "adequately capitalized" if it has total risk-based capital of
8% or greater, Tier 1 risk-based capital of 4% or greater, and
leverage ratio of 4% or greater (3% or greater if rated
Composite 1 under the CAMELS rating system);
- "undercapitalized" if it has total risk-based capital of less
than 8%, Tier 1 risk-based capital of less than 4%, or a
leverage ratio of less than 4% (3% if rated Composite 1 under
the CAMELS rating system);
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- "significantly undercapitalized" if it has total risk-based
capital of less than 6%, Tier 1 risk-based capital of less
than 3%, or a leverage ratio of less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible
equity to total assets equal to or less than 2%.
Based on these requirements, the Bank is an "adequately capitalized"
institution.
The appropriate federal banking agency has the authority to reclassify
a well-capitalized institution as adequately capitalized. In addition, the
agency may treat an adequately capitalized or undercapitalized institution as if
it were in the next lower capital category, if the agency determines, after
notice and an opportunity for a hearing, that the institution is in an unsafe or
unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings, or liquidity in its most recent examination. As a result
of such reclassification or determination, the appropriate federal banking
agency may require an adequately capitalized or under-capitalized institution to
comply with mandatory and discretionary supervisory actions. A significantly
undercapitalized savings association may not be reclassified, however, as
critically undercapitalized.
Restrictions on Dividends and Other Capital Distributions. Savings
association subsidiaries of holding companies generally are required to provide
their Office of Thrift Supervision Regional Director not less than thirty days'
advance notice of any proposed declaration of a dividend on the association's
stock. Any dividend declared within the notice period, or without giving the
prescribed notice, is invalid. In some circumstances, an association may be
required to provide their Office of Thrift Supervision regional director with an
application for a proposed declaration of a dividend on the association's stock.
The Office of Thrift Supervision regulations impose limitations upon
certain "capital distributions" by savings associations. These distributions
include cash dividends, payments to repurchase or otherwise acquire an
association's shares, payments to shareholders of another institution in a
cash-out merger, and other distributions charged against capital.
An application is required if:
- the proposed capital distribution for a calendar year exceeds
an association's net income for that year to date plus its
retained net income for the preceding two years;
- the association would not be at least adequately capitalized
following the distribution;
or
- the proposed capital distribution would violate a prohibition
contained in any statute or regulation, or an agreement
between the association and the Office of Thrift Supervision.
A notice is required if the association is not required to file an
application as described above, but:
- the association would not be well capitalized following the
distribution;
- the proposed capital distribution will reduce or retire any
part of common or preferred stock or any part of debt
instruments included in capital; or
- the association is a subsidiary of a savings and loan holding
company.
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The Office of Thrift Supervision retains the authority to prohibit any
capital distribution otherwise authorized under the regulation if the Office of
Thrift Supervision determines that the capital distribution would constitute an
unsafe or unsound practice. The regulation also states that the capital
distribution limitations apply to direct and indirect distributions to
affiliates, including those occurring in connection with corporate
reorganizations.
Under the "prompt corrective action" provisions, a Federal Deposit
Insurance Corporation-insured institution may not make a "capital distribution,"
which includes, among other things, cash dividends and stock purchases, if,
after making the distribution, the institution would be "undercapitalized" for
such purposes.
Liquidity. Federal regulations currently require savings associations
to maintain, for each calendar month, an average daily balance of liquid assets
equal to at least 4% of the ending or average daily balance of deposit accounts
with maturities less than a year and short-term borrowings with maturities less
than a year. Liquid assets include cash, certain time deposits, bankers'
acceptances, and specified United States Government, state or federal agency
obligations. From time to time, the Office of Thrift Supervision may change this
liquidity requirement to an amount within a range of 4% to 10% of such accounts
and borrowings depending upon economic conditions and the deposit flows of
savings associations. The Office of Thrift Supervision may impose monetary
penalties for failure to meet liquidity ratio requirements. At December 31,
1998, the liquidity ratio of the Bank was 5.04%. This ratio exceeded the
applicable requirement.
Qualified Thrift Lender Test. Pursuant to the Qualified Thrift Lender
test, a savings institution must invest at least 65% of its portfolio assets in
qualified thrift investments on a monthly average basis on a rolling 12-month
look-back basis. Portfolio assets are an institution's total assets less
goodwill and other intangible assets, the institution's business property, and a
limited amount of the institution's liquid assets.
A savings association's failure to remain a Qualified Thrift Lender may
result in: a) limitations on new investments and activities; b) imposition of
branching restrictions; c) loss of Federal Home Loan Bank borrowing privileges;
and d) limitations on the payment of dividends. If a savings institution that is
a subsidiary of a savings and loan holding company fails to regain Qualified
Thrift Lending status within one year of its loss of such status, the holding
company must register as, and will be deemed to be, a bank holding company. As a
result, it will be subject to, among other things, the business activity
restrictions and capital regulations of the Bank Holding Company Act.
The qualified thrift investments of the Bank were in excess of 67.2% of
its portfolio assets as of December 31, 1998.
Ohio Regulation. As a savings and loan association organized under the
laws of the State of Ohio, the Bank is subject to regulation by the Ohio
Division of Financial Institutions. Regulation by the Ohio Division of Financial
Institutions affects the internal organization of the Bank as well as its
savings, mortgage lending, and other investment activities. Periodic
examinations by the Ohio Division of Financial Institutions are usually
conducted on a joint basis with the Office of Thrift Supervision. Ohio law
requires the Bank to maintain federal deposit insurance as a condition of doing
business.
Under Ohio law and regulations, an Ohio association may invest in loans
and interests in loans, secured or unsecured, of any type or amount for any
purpose, subject to requirements including but not limited to:
- loans secured by liens on income-producing real estate may not
exceed 20% of an association's assets;
- all loans for educational purposes may not exceed 5% of an
association's assets;
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32
- consumer loans, commercial paper and corporate debt securities
may not exceed 20% of an association's assets; and
- loans for commercial, corporate, business or agricultural
purposes may not exceed 10% of an association's assets
(subject to certain exceptions).
In addition, no association may make loans for the acquisition and
development of undeveloped or partially developed land for primarily residential
use to one borrower in excess of 2% of assets of the association. The total
investment in commercial paper or corporate debt of any issuer cannot exceed 1%
of an association's assets, with certain exceptions.
Ohio law authorizes Ohio-chartered associations to, among other things:
- invest up to 15% of assets in the capital stock, obligations
and other securities of service corporations organized under
the laws of Ohio, and an additional 20% of net worth may be
invested in loans to majority owned service corporations;
- invest up to 10% of assets in corporate equity securities,
bonds, debentures, notes, or other evidence of indebtedness;
- exceed limits otherwise applicable to certain types of
investments (other than investments in service corporations)
by between 3% and 10% of assets, depending upon the level of
the institution's permanent stock, general reserves, surplus
and undivided profits; and
- invest up to 15% of assets in any loans or investments not
otherwise specifically authorized or prohibited, subject to
authorization by the institution's board of directors.
An Ohio association may invest in real property as its board of
directors deems necessary or convenient for the conduct of the business of the
association. However, the amount invested may not exceed the net worth of the
association at the time the investment is made. Additionally, an association may
invest an amount equal to 10% of its assets in any other real estate. This
limitation does not apply, however, to real estate acquired by foreclosure,
conveyance in lieu of foreclosure, or other legal proceedings in relation to
loan security interests.
Notwithstanding the above powers authorized under Ohio law and
regulation, a state-chartered savings association, such as the Bank, is subject
to limitations on its permitted activities and investments under federal law.
These limitations may restrict the ability of an Ohio-chartered association to
engage in activities and make investments otherwise authorized under Ohio law.
Ohio has adopted a statutory limitation on the acquisition of control
of an Ohio savings and loan association which requires the written approval of
the Division prior to the acquisition by any person or entity of a controlling
interest in an Ohio association. For purposes of Ohio law, control exists when
any person or entity, either directly or indirectly, or acting in concert with
one or more other persons or entities, owns, controls, holds with power to vote,
or holds proxies representing, 15% or more of the voting shares or rights of an
association, or controls in any manner the election or appointment of a majority
of the directors.
Under certain circumstances, interstate mergers and acquisitions
involving associations incorporated under Ohio law are permitted by Ohio law. A
savings and loan association or savings and loan holding company with its
principal place of business in another state may acquire a savings and loan
association or savings and loans holding company incorporated under Ohio law if
laws of that other state permit an Ohio savings and loan association or an Ohio
holding company reciprocal rights.
Ohio law requires prior written approval of the Ohio Division of
Financial Institution of a merger of an Ohio association with another savings
and loan association or a holding company affiliate.
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33
FEDERAL AND STATE TAXATION
The following discussion of tax matters is only a summary and does not
purport to be a comprehensive description of the tax rules applicable to
Metropolitan or the Bank.
Savings associations such as the Bank are generally taxed in the same
manner as other corporations. For taxable years beginning prior to January 1,
1996, savings associations such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their supervision and
business operations were permitted to establish a reserve for bad debts and to
make annual additions to it, which additions may, within specified formula
limits, be deducted in arriving at taxable income. The Bank's bad debt deduction
for qualifying real property loans, which are generally loans secured by
interests in real property, may have been computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the reserve for nonqualifying loans. The Bank's bad debt
deduction for nonqualifying loans was computed under the experience method,
which essentially allows a deduction based on the actual loss experience of the
Bank over a period of several years. Each year the Bank selected the most
favorable way to calculate the deduction attributable to an addition to the tax
bad debt reserve.
Legislation enacted during 1996 repealed the existing reserve method of
accounting for bad debt reserves for tax years beginning after December 31,
1995. As a result, savings associations may no longer calculate their deduction
for bad debts using the percentage of taxable income method. Instead, savings
associations like the Bank with more than $500 million in assets must compute
their deduction for bad debts based on specific charge-offs during the taxable
year. This legislation also requires a savings association (or its controlled
group) with assets of more than $500 million to recapture into income over a
six-year period their post-1987 additions to their bad debt tax reserves for
qualifying real property loans and nonqualifying loans, thereby generating
additional tax liability. However, we recognized this liability in 1988 and
later years by recording a deferred tax liability from post-1987 additions to
the tax bad debt reserves. The recapture may be suspended for up to two years
if, during those years, the savings association satisfies a residential loan
requirement.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to an alternative minimum
tax. An alternative minimum tax is imposed at a tax rate of 20% on alternative
minimum taxable income ("AMTI"), which is the sum of a corporation's regular
taxable income with certain adjustments and tax preference items, less any
available exemption. Adjustments and preferences include depreciation deductions
in excess of those allowable for alternative minimum tax purposes, tax-exempt
interest on most private activity bonds issued after August 7, 1986 (reduced by
any related interest expense disallowed for regular tax purposes), and, for 1990
and succeeding years, 75% of the difference (positive or negative) between
adjusted current earnings ("ACE") and AMTI. Any ACE reductions to AMTI are
limited to prior aggregate ACE increases to AMTI. ACE equals pre-adjustment
AMTI: (a) increased or decreased by certain ACE adjustments; which include
tax-exempt interest on municipal bonds, depreciation deductions in excess of
those allowable for ACE purposes and, in certain cases, the dividend received
deduction, and (b) determined without regard to the ACE adjustment and the
alternative tax net operating loss. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax, and alternative tax
net operating losses can offset no more than 90% of AMTI. The payment of
alternative minimum tax will give rise to a minimum tax credit which will be
available with an indefinite carry forward period to reduce federal income taxes
in future years (but not below the level of alternative minimum tax arising in
each of the carry forward years).
Metropolitan, the Bank and other includable subsidiaries file
consolidated federal income tax returns on a December 31 calendar year basis
using the accrual method of accounting. The Internal Revenue Service has audited
Metropolitan, the Bank and other includable subsidiaries through December 31,
1994.
33
34
The Bank is subject to the Ohio corporate franchise tax. As a financial
institution, the Bank computes its franchise tax based on its net worth. Under
this method, the Bank will compute its Ohio corporate franchise tax by
multiplying its net worth (as determined under generally accepted accounting
principles) as specifically adjusted pursuant to Ohio law, by the applicable tax
rate, which is currently 1.4% and will drop to 1.3% for tax years 2000 and
thereafter. As an Ohio-chartered savings and loan association, the Bank also
receives a credit against the franchise tax for a portion of the state
supervisory fees paid by it.
Metropolitan, at the holding company level, is subject to an Ohio
corporation franchise tax payable in an amount equal to the greater of a
specified percentage of net income (currently 5.1% of the first $50,000 and 8.5%
of the remainder, with an additional add-on tax not to exceed $5,000) or a
specified percentage of net worth (currently approximately 0.4%, with a cap on
the net worth tax of $150,000, plus an add-on tax not to exceed $5,000). In
calculating net income for this purpose, dividends from wholly-owned
subsidiaries, such as the Bank, would be excluded. Beginning with the 1999 tax
year, Metropolitan may be exempt from the net worth portion of the franchise tax
if it satisfies the requirements, including appropriate election, to be treated
as a qualified holding company.
ITEM 2. PROPERTIES
Our executive office is leased under an agreement that extends through
December 31, 2000. It is located at 6001 Landerhaven Drive, Mayfield Heights,
Ohio 44124. We have executed an option to purchase land in Highland Hills, Ohio.
We have preliminary plans to build an executive office at the location. We
anticipate that design of the office will take place during 1999 and
construction will be completed during 2000. We operate seventeen branch
locations. We lease seven of these locations under long-term lease agreements
with various parties. We own the other ten branches, located in Cleveland,
Euclid, Willoughby Hills, Mayfield Heights, Macedonia, Cleveland Heights,
Hudson, Aurora, Stow, and Twinsburg, Ohio. In addition, we own land in Auburn
and Medina, and land and a building in Willoughby. We plan on using these sites,
along with leased space in Beachwood, Ohio, for future full service retail
offices. The Bank currently leases office space for its loan production offices
in North Olmsted and Cincinnati, Ohio, Grosse Point and West Bloomfield,
Michigan, and Pittsburgh, Pennsylvania. We are planning future loan production
offices for Columbus, North Canton and Fairlawn, Ohio, in 1999.
ITEM 3. LEGAL PROCEEDINGS
The Bank is involved in various legal proceedings incidental to the
conduct of its business. We do not expect that any of these proceedings will
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders of the Corporation
during the fourth quarter of the fiscal year covered by this Report, through the
solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE COMPANY
(Included pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation
S-K)
The executive officers of the Company as of March 1, 1999, unless otherwise
indicated, were as follows:
NAME BUSINESS EXPERIENCE
Positions held with Metropolitan
and the Bank
Robert M. Kaye Mr. Kaye has served as Chairman and Chief Executive
Age 62 Officer of Metropolitan and the Bank since 1987. He
Chairman and Chief has also served as President of Planned Residential
Executive Officer, Communities, Inc. since 1960. Planned Residential
and a Director, of Communities, Inc. is actively engaged in every aspect
Metropolitan of multifamily housing from new construction and
rehabilitation to acquisition and management. Mr.
Chairman and Chief Kaye serves as a member of the Board of Directors of
Executive Officer, Community Bank of New Jersey. He has also been a
and a Director, of member of the Corporate Council of the Cleveland
the Bank Museum of Art since its inception in 1993 and has
been a member of the Board of Trustees of the College
of New Jersey since 1980 and of The Peddie School
since 1988.
David G. Lodge Mr. Lodge joined Metropolitan in December
Age 59 1988 as Executive Vice President. He has
served as President of Metropolitan and the
President, Director, Bank since August 1991. Mr. Lodge has also
Assistant Secretary served as Director of Metropolitan and the
and Assistant Bank since 1991 and as Assistant Secretary
Treasurer of and Assistant Treasurer of Metropolitan
Metropolitan since 1992. Mr. Lodge has served as a
Director of University Circle Incorporated
President and Chief and Vocational Guidance Services since 1994
Operating Officer and became a member of the Board of Trustees
Of the Bank of The Cleveland Playhouse in June 1995.
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35
MALVIN E. BANK Mr. Bank has been the Secretary, Assistant Treasurer and a Director of Metropolitan
Age 68 and Secretary and Director of the Bank for more than five years. Mr. Bank is a
senior partner with the Cleveland law firm of Thompson Hine & Flory LLP. Mr. Bank
Director, Secretary also serves as a Director of Oglebay Norton Company. Mr. Bank also serves as a
and Assistant Trustee of Case Western Reserve University, The Holden Arboretum, Chagrin River Land
Treasurer of Conservancy, Cleveland Center for Research in Child Development, Hanna Perkins
Metropolitan School, and numerous other civic and charitable organizations and foundations.
Director, Secretary
and Assistant
Treasurer of
the Bank
DAVID P. MILLER Mr. Miller has served as a Director of Metropolitan and the Bank since 1992. Mr.
Age 66 Miller has also held the positions of Treasurer and Assistant Secretary of
Metropolitan. Since 1986, Mr. Miller has been the Chairman and Chief Executive
Director, Treasurer Officer of Columbia National Group, Inc., a Cleveland-based scrap and waste materials
And Assistant wholesaler and steel manufacturer. He is currently commissioner of the Ohio Lottery.
Secretary of
Metropolitan
Director of the Bank
PATRICK W. BEVACK Mr. Bevack has been Executive Vice President of the Bank since May 1992. Mr. Bevack
Age 52 became Treasurer and Assistant Secretary of the bank in 1993. Prior to joining
Metropolitan, Mr. Bevack was Executive Vice president of TransOhio Savings Bank.
Executive Vice
President of the Bank
KENNETH T. KOEHLER Mr. Koehler became Executive Vice President of the Bank in January 1999. Prior to
Age 52 joining Metropolitan, Mr. Koehler was President and Chief Executive Officer of United
Heritage Bank, Edison, NJ, a community bank (1998 to January 1999); President and
Chief Executive Officer of Golden City Commercial Bank, New York, NY, a community
Executive Vice bank (1994 - 1998); and Principal of Lyons, Zombach & Ostrowski, Inc., New York, NY
President of the Bank bank and thrift consultants (1992 to 1993).
JUDITH Z. ADAM Ms. Adam became Senior Vice President and Chief Financial Officer of the Bank in
Age 43 September 1998). Prior to that, Ms. Adam held the positions of Senior Vice President
- Finance & Accounting (and Chief Financial Officer) (1997 - 1998) and Vice President
Senior Vice President - Finance (1992 - 1997), with the Bank.
and Chief Financial
Officer of the Bank
LLOYD W. W. BELL, JR. Mr. Bell has held several positions with Metropolitan, including Senior Vice
Age 57 President - Chief Lending Officer (July 1998 to present); Senior Vice President -
Commercial Real Estate (1997 to July 1998) and was given responsibility for the
Senior Vice President Commercial Lending Department in April 1998. Prior to joining Metropolitan, Mr. Bell
and Chief Lending was a partner in O'Brien & Bell, an executive search and consulting firm specializing
Officer of the Bank in financial institutions (1991 - 1997).
CARL R. STAUFFENEGER Mr. Stauffeneger has held the position of Senior Vice President - Consumer Banking
Age 50 since 1995. Prior to joining Metropolitan, Mr. Stauffeneger was responsible for
client services at Money Access Service (MAC), Midwest Division, a provider of
Senior Vice Consumer automated teller machine services (1992 - 1995).
President-Banking
of the Bank
All executive officers serve at the pleasure of the Board of Directors, with no
fixed term of office.
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36
PART II
STOCKHOLDER REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
ITEM 5. MARKET FOR STOCKHOLDER MATTERS
Metropolitan's Common Stock, no par value ("Common Stock"), the only
outstanding class of equity securities of Metropolitan, is traded on the Nasdaq
National Market System. There are 10,000,000 shares of Common Stock authorized
and 7,756,393 shares issued and outstanding. The first day of trading in the
Corporation's Common Stock was October 29, 1996. Detailed in the table below is
the quarterly high and low price for the Corporation's Common Stock during 1998
and 1997(adjusted for a two-for-one split completed in the fourth quarter of
fiscal 1997 and the 10% stock dividend in the fourth quarter 1998):
High Low
------ ------
First quarter 1997 $ 5.11 $ 4.89
Second quarter 1997 7.39 4.89
Third quarter 1997 9.09 7.05
Fourth quarter 1997 14.32 8.64
First quarter 1998 17.16 13.64
Second quarter 1998 15.46 13.18
Third quarter 1998 13.75 8.64
Fourth quarter 1998 12.00 8.18
Metropolitan paid no dividends during the past three years and has no
intention of paying dividends in the foreseeable future. The Indenture dated as
of December 1, 1995 between the Corporation and Bank of New York covering the
1995 Subordinated Notes and the Huntington Loan Agreement prohibit the
Corporation from paying a dividend or other distribution on its equity
securities unless the Corporation's ratio of tangible equity to total assets
exceeds 7%.
The approximate number of record common shareholders at March 2, 1999
was 1,099. Robert M. Kaye, previously the sole shareholder, controlled 6,013,997
shares or 77.5% of the amount outstanding on this date.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this item is set forth in the sections
captioned FIVE YEAR SUMMARY OF SELECTED DATA on pages 1 and 2 of the
Corporation's 1998 Annual Report to Shareholders which are incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information in response to this item is set forth in the section
captioned MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION on pages 3 through 22 of the Corporation's 1998 Annual
Report to Shareholders which are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this item is set forth in the section
captioned Quantitative and Qualitative Disclosures About Market Risk on pages 18
through 21 of the Corporation's 1998 Annual Report to Shareholders which are
incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements together with the report thereon
of Crowe, Chizek and Company LLP, dated February 12, 1999, appearing on pages 24
through 56 of the Corporation's 1998 Annual Report to Shareholders under the
sections captioned REPORT OF INDEPENDENT AUDITORS, CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION, OPERATIONS, SHAREHOLDERS' EQUITY, AND CASH FLOWS AND NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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38
PART III
Information in this Part III required by Item 10 ("Directors and Executive
Officers of the Company"), Item 11 ("Executive Compensation"), Item 12
(Security Ownership of Certain Beneficial Owners and Management") and Item 13
("Certain Relationships and Related Transactions") is incorporated herein by
reference to the information contained in the Proxy Statement, dated March 26,
1999 and filed on that date in connection with the Company's 1999 Annual
Meeting of Shareholders. Information concerning executive officers of the
Company also required by Item 10 is contained in Part I of this report under
the heading "Executive Officers of the Company."
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) EXHIBITS, FINANCIAL STATEMENTS, AND FINANCIAL STATEMENT SCHEDULES.
1.FINANCIAL STATEMENTS PAGE NO.*
-------------------- --------
Report of Independent Auditors 23
Consolidated Statements of Financial Condition 24
Consolidated Statements of Operations 25
Consolidated Statements of Changes in Shareholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
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39
2. FINANCIAL STATEMENT SCHEDULES
Parent Company Financial Statements 53
* Incorporated by reference from the indicated page of the Corporation's 1998
Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.
3. EXHIBITS
3.1 Amended and Restated Articles of Incorporation of Metropolitan (filed
as Exhibit 2 to the Corporation's Form 8-A, filed October 15, 1996 and
incorporated herein by reference)
3.2 Amended and Restated Code of Regulations of Metropolitan (filed as
Exhibit 3.2 to Metropolitan's Registration Statement on Form S-1, filed
February 26, 1999 and incorporated herein by reference)
10.1 Form of Incentive Pay Plan (filed as Exhibit 10.1 to Metropolitan's
Form 10-K, filed March 30, 1998 and incorporated herein by reference)**
10.2 Metropolitan Financial Corp. 1997 Stock Option Plan (filed as Exhibit A
to the Metropolitan's Definitive Proxy Statement, filed March 27, 1998
and incorporated herein by reference)
10.3 Indenture, dated as of April 30, 1998, between Metropolitan and
Wilmington Trust Company, as trustee, relating to the 8.60% Junior
Subordinated Deferrable Interest Debentures due June 30, 2028 (filed as
Exhibit 4.1 to Metropolitan's Form 10-Q, filed May 15, 1998 and
incorporated herein by reference)
10.4 Amended and Restated Trust Agreement, dated as of April 30, 1998, among
Metropolitan, as depositor, Wilmington Trust Company, as property
trustee, the administrative trustees named therein and the several
holders of the 8.60% Cumulative Trust Preferred Securities of
Metropolitan Capital Trust I (filed as Exhibit 4.2 to Metropolitan's
Form 10-Q, filed May 15, 1998 and incorporated herein by reference)
10.5 Preferred Securities Guarantee Agreement, dated as of April 30, 1998,
between Metropolitan and Wilmington Trust Company, as trustee, for the
benefit of the holders of the 8.60% Cumulative Trust Preferred
Securities of Metropolitan Capital Trust I (filed as Exhibit 4.3 to
Metropolitan's Form 10-Q, filed May 15, 1998 and incorporated herein by
reference)
10.6 Agreement as to Expenses and Liabilities, dated as of April 30, 1998,
between Metropolitan and Metropolitan Capital Trust I (filed as Exhibit
4.4 to Metropolitan's Form 10-Q, filed May 15, 1998 and incorporated
herein by reference)
13 1998 Annual Report to Shareholders
21 List of subsidiaries of the Corporation (filed as Exhibit 21 to
Metropolitan's Registration Statement on Form S-1, filed February 26,
1999 and incorporated herein by reference)
24 Power of Attorney
27 Financial Data Schedule
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40
EXHIBIT
NO. DESCRIPTION
------ -----------
99.1 Specimen Subordinated Note relating to the 9 5/8% Subordinated Notes
due January 1, 2005 (found at Sections 2.2 and 2.3 of the Form of
Indenture filed as Exhibit 4.1 to Metropolitan's Amendment No. 1 to
Registration Statement on Form S-1, filed November 13, 1995 and
incorporated herein by reference)
99.2 Form of Indenture entered into December 1, 1995 between Metropolitan
and Boatmen's Trust Company (filed as Exhibit 4.1 to Metropolitan's
Amendment No. 1 to Registration Statement on Form S-1, filed November
13, 1995 and incorporated herein by reference)
99.3 The Restated Loan Agreement by and between The Huntington National Bank
and Metropolitan dated as of March 31, 1998 (filed as Exhibit 99.1 to
Metropolitan's Form 10-Q, filed May 14, 1998 and incorporated herein by
reference)
99.4 Second Amendment to Restated Loan Agreement by and between The
Huntington National Bank and the Corporation dated as of December 18,
1998 (filed as Exhibit 99.4 to Metropolitan's Registration Statement on
Form S-1 filed on February 29, 1999 and incorporated herein by
reference)
** Indicates that the exhibit is a management contract or compensatory
plan or arrangement.
Reports on Form 8-K
On December 8, 1998 the Corporation filed a Current Report on Form 8-K
to report, under Item 5, that on November 24, 1998, its Board of Directors
authorized 10% stock dividend of the Corporation's common stock, to be effected
in the form of a 10% stock dividend to shareholders of record on December 15,
1998.
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SIGNATURES
----------
Pursuant to the requirements of Sections 13 and 15 (d) 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,
Assistant Treasurer, and Director
Date: March 30, 1999
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ David G. Lodge
---------------------------------------
David G. Lodge,
President,
Assistant Secretary,
Assistant Treasurer, and Director
(Principal Financial and Accounting Officer)
Date: March 30, 1999
---------------------------------------
Robert M. Kaye, Chairman of the Board and Director (Principal Executive
Officer); Malvin E. Bank, Secretary, Assistant Treasurer, and Director; David P.
Miller, Treasurer, Assistant Secretary and Director; Robert R. Broadbent,
Director; Marjorie M. Carlson, Director; Lois K. Goodman, Director; Marguerite
B. Humphrey, Director; James A. Karman, Director; Ralph D. Ketchum, Director;
Alfonse M. Mattia, Director.
By: /s/ David G. Lodge
---------------------------------------
David G. Lodge
Attorney-in-Fact
Date: March 30, 1999
---------------------------------------
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42
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------ -----------
3.1 Amended and Restated Articles of Incorporation of Metropolitan (filed
as Exhibit 2 to the Corporation's Form 8-A, filed October 15, 1996 and
incorporated herein by reference)
3.2 Amended and Restated Code of Regulations of the Corporation (filed as
Exhibit 3.2 to Metropolitan's Registration Statement on Form S-1, filed
February 26, 1999 and incorporated herein by reference)
10.1 Form of Incentive Pay Plan (filed as Exhibit 10.1 to Metropolitan's
Form 10-K, filed March 30, 1998 and incorporated herein by reference)
10.2 Metropolitan Financial Corp. 1997 Stock Option Plan (filed as Exhibit A
to Metropolitan's Definitive Proxy Statement, filed March 27, 1998 and
incorporated herein by reference)
10.3 Indenture, dated as of April 30, 1998, between Metropolitan and
Wilmington Trust Company, as trustee, relating to the 8.60% Junior
Subordinated Deferrable Interest Debentures due June 30, 2028 (filed as
Exhibit 4.1 to Metropolitan's Form 10-Q, filed May 15, 1998 and
incorporated herein by reference)
10.4 Amended and Restated Trust Agreement, dated as of April 30, 1998, among
Metropolitan, as depositor, Wilmington Trust Company, as property
trustee, the administrative trustees named therein and the several
holders of the 8.60% Cumulative Trust Preferred Securities of
Metropolitan Capital Trust I (filed as Exhibit 4.2 to Metropolitan's
Form 10-Q, filed May 15, 1998 and incorporated herein by reference)
10.5 Preferred Securities Guarantee Agreement, dated as of April 30, 1998,
between Metropolitan and Wilmington Trust Company, as trustee, for the
benefit of the holders of the 8.60% Cumulative Trust Preferred
Securities of Metropolitan Capital Trust I (filed as Exhibit 4.3 to
Metropolitan's Form 10-Q, filed May 15, 1998 and incorporated herein by
reference)
10.6 Agreement as to Expenses and Liabilities, dated as of April 30, 1998,
between Metropolitan and Metropolitan Capital Trust I (filed as Exhibit
4.4 to Metropolitan's Form 10-Q, filed May 15, 1998 and incorporated
herein by reference)
13 1998 Annual Report to Shareholders
21 List of subsidiaries of the Corporation (filed as Exhibit 21 to
Metropolitan's Registration Statement on Form S-1 filed February 26,
1999 and incorporated herein by reference)
24 Power of Attorney
27 Financial Data Schedule
99.1 Specimen Subordinated Note relating to the 9 5/8% Subordinated Notes
due January 1, 2005 (found at Sections 2.2 and 2.3 of the Form of
Indenture filed as Exhibit 4.1 to Metropolitan's Amendment No. 1 to
Registration Statement on Form S-1, filed November 13, 1995 and
incorporated herein by reference)
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43
EXHIBIT
NO DESCRIPTION
------ -----------
99.2 Form of Indenture entered into December 1, 1995 between Metropolitan
and Boatmen's Trust Company (filed as Exhibit 4.1 to Metropolitan's
Amendment No. 1 to Registration Statement on Form S-1, filed November
13, 1995 and incorporated herein by reference)
99.3 The Restated Loan Agreement by and between The Huntington National Bank
and Metropolitan dated as of March 31, 1998 (filed as Exhibit 99.1 to
Metropolitan's Form 10-Q, filed May 14, 1998 and incorporated herein by
reference)
99.4 Second Amendment to Restated Loan Agreement by and between The
Huntington National Bank and the Corporation dated as of December 18,
1998 (filed as Exhibit 99.4 to Metropolitan's Registration Statement on
Form S-1 filed on February 26, 1999 and incorporated herein by
reference)
43