1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999.
--------------
Commission file number 000-21553
----------------------------------------------------------
METROPOLITAN FINANCIAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6001 Landerhaven Drive, Mayfield Heights, Ohio 44124
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(440) 646-1111
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of May 14, 1999, there were 8,056,393 shares of the Registrant's Common Stock
issued and outstanding.
1
2
METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited)
as of March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations (Unaudited) for the
three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1999 and 1998 5
Consolidated Statement of Changes in
Shareholders' Equity (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-29
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 29
PART II. OTHER INFORMATION 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
2
3
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
Cash and cash equivalents $ 25,428 $ 29,086
Securities available for sale 37,923 19,443
Securities held to maturity 16,219 16,217
Mortgage-backed securities 183,486 198,296
Loans held for sale 33,154 15,017
Loans receivable, net 1,074,979 1,018,271
Federal Home Loan Bank stock, at cost 6,158 6,054
Accrued interest receivable 9,853 8,678
Premises and equipment, net 21,017 19,114
Real estate owned, net 5,774 5,534
Intangible assets 2,658 2,724
Loan servicing rights 15,345 13,412
Prepaid expenses and other assets 8,077 11,588
----------- -----------
Total assets $ 1,440,071 $ 1,363,434
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 64,000 $ 63,717
Interest-bearing deposits 1,074,816 987,640
Borrowings 206,349 215,486
Accrued interest payable 4,576 5,511
Other liabilities 19,409 20,685
----------- -----------
Total liabilities 1,369,150 1,293,039
----------- -----------
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S JUNIOR SUBORDINATED
DEBENTURES 27,750 27,750
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized,
7,756,393 shares issued and outstanding
Additional paid-in capital 18,505 18,505
Retained earnings 25,098 23,661
Accumulated other comprehensive income (432) 479
----------- -----------
Total shareholders' equity 43,171 42,645
----------- -----------
Total liabilities and shareholders' equity $ 1,440,071 $ 1,363,434
=========== ===========
See notes to consolidated financial statements.
3
4
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
INTEREST INCOME
Interest and fees on loans $ 21,687 $ 16,200
Interest on mortgage-backed securities 3,292 2,491
Interest and dividends on other investments 915 522
---------- ----------
Total interest income 25,894 19,213
---------- ----------
INTEREST EXPENSE
Interest on deposits 13,174 9,611
Interest on borrowings 3,136 2,046
Interest on Junior Subordinated Debentures 608
---------- ----------
Total interest expense 16,918 11,657
---------- ----------
NET INTEREST INCOME 8,976 7,556
Provision for loan losses 650 450
---------- ----------
Net interest income after provision for loan losses 8,326 7,106
---------- ----------
NONINTEREST INCOME
Gain on sale of loans 400 757
Loan servicing income, net 335 241
Service charges on deposit accounts 272 210
Loan option income 20
Gain on sale of securities, net 66
Other operating income 450 344
---------- ----------
Total noninterest income 1,457 1,638
---------- ----------
NONINTEREST EXPENSE
Salaries and related personnel costs 4,062 2,990
Occupancy and equipment expense 1,088 843
Federal deposit insurance premiums 201 158
Data processing expense 236 114
Marketing expense 201 166
State franchise taxes 248 156
Amortization of intangibles 66 66
Other operating expenses 1,439 1,077
---------- ----------
Total noninterest expense 7,541 5,570
---------- ----------
INCOME BEFORE INCOME TAXES 2,242 3,174
Provision for income taxes 804 1,187
---------- ----------
NET INCOME $ 1,438 $ 1,987
========== ==========
Basic earnings per share $ 0.19 $ 0.26
========== ==========
Diluted earnings per share $ 0.19 $ 0.25
========== ==========
Weighted average shares outstanding for basic earnings per share 7,756,393 7,756,393
Effect of dilutive options 0 147,696
---------- ----------
Weighted average shares for diluted earnings per share 7,756,393 7,904,089
========== ==========
See notes to consolidated financial statements.
4
5
METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES $ (19,226) $ 41,685
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds (106,481) (98,737)
Purchases of:
Loans (39,225) (38,892)
Mortgage-backed securities -- (28,119)
Securities available for sale (20,020) (7,523)
Mortgage loan servicing rights (2,037) (251)
Premises and equipment (2,842) (2,491)
Proceeds from maturities and repayments of:
Loans 73,481 52,597
Mortgage-backed securities 13,735 18,522
Proceeds from sale of:
Loans 18,851 9,450
Mortgage-backed securities -- 16,968
Securities available for sale 1,275 --
Premises, equipment, and real estate owned 532 334
--------- ---------
Net cash used for investing activities (62,731) (78,142)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 87,435 70,753
Proceeds from borrowings 29,043 --
Repayment of borrowings (31,279) (12,246)
Net activity on lines of credit (6,900) 1,000
--------- ---------
Net cash provided by financing activities 78,299 59,507
--------- ---------
Net change in cash and cash equivalents (3,658) 23,050
Cash and cash equivalents at beginning of period 29,086 22,511
--------- ---------
Cash and cash equivalents at end of period $ 25,428 $ 45,561
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 17,854 $ 12,264
Income taxes
See notes to consolidated financial statements.
5
6
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(In thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
----- ------- -------- ------ ------
BALANCE DECEMBER 31, 1998 $ $18,505 $23,660 $ 479 $42,644
Comprehensive income:
Net income 1,438 1,438
Change in unrealized gain on
securities (911) (911)
Total comprehensive income 527
------------------------------------------------------------------------------
BALANCE MARCH 31, 1999 $ $18,505 $25,098 $(432) $43,171
==============================================================================
See notes to consolidated financial statements.
6
7
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is a savings
and loan holding company and an Ohio corporation. Metropolitan's primary
operating subsidiary is Metropolitan Bank & Trust Company (the "Bank").
Metropolitan is engaged in the business of originating multifamily and
commercial real estate loans primarily in Ohio, Pennsylvania, Michigan, and
Kentucky and purchases multifamily and commercial real estate loans throughout
the United States. Metropolitan offers full service banking services to
communities in Northeast Ohio where its additional lending activities include
originating one- to four-family residential real estate, construction, business
and consumer loans. The accounting policies of the Corporation conform to
generally accepted accounting principles and prevailing practices within the
financial services industry. All significant intercompany transactions have
been eliminated. In the opinion of management, the accompanying unaudited
financial statements include all adjustments, consisting only of normal
recurring accruals, which the Corporation considers necessary for a fair
presentation of (a) the results of operations for the three month periods ended
March 31, 1999 and 1998; (b) the financial condition at March 31, 1999 and
December 31, 1998; (c) the statement of cash flows for the three month periods
ended March 31, 1999 and 1998; and (d) the statement of changes in
shareholders' equity for the three month period ended March 31, 1999. The
results of operations for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for any other
period. The annual report for Metropolitan for the year ended December 31,
1998, contains consolidated financial statements and related notes which should
be read in conjunction with the accompanying consolidated financial
statements.
2. ACCOUNTING POLICIES
Securities: The Corporation classifies debt and mortgage-backed securities as
held to maturity or available for sale. The Corporation classifies marketable
equity securities as available for sale.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts.
Securities classified as available for sale are those that management intends to
sell or that could be sold for liquidity, investment management, or similar
reasons, even if there is not a present intention for such sale. Securities
available for sale are carried at fair value with unrealized gains and losses
included as a separate component of shareholders' equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the carrying amount of
securities sold adjusted for amortization of premium and accretion of discount,
using the specific identification method.
Loans: All loans are held for investment unless specifically designated as held
for sale. When the Bank originates or purchases loans, it makes a determination
whether or not to classify loans as held for sale. The Bank re-evaluates its
intention to hold or sell loans at each balance sheet date based on the current
environment and, if appropriate, reclassifies loans as held for sale. Sales of
loans are dependent upon various factors including interest rate movements,
deposit flows, the availability and attractiveness of other sources of funds,
loan demand by borrowers, and liquidity and capital requirements.
7
8
Loans held for investment are stated at the principal amount outstanding
adjusted for amortization of premium and accretion of discount using the
interest method. At March 31, 1999 and December 31, 1998, management had the
intent and the Bank had the ability to hold all loans being held for investment
purposes for the foreseeable future.
Loans held for sale are recorded at the lower of cost or market. When the Bank
purchases real estate loans and simultaneously writes an option giving the
holder the right to purchase those loans, those loans are designated as held for
sale. Gains and losses on the sale of loans are determined by the identified
loan method and are reflected in operations at the time of the settlement of the
sale.
Allowance for Losses on Loans: Because some loans may not be repaid in full, an
allowance for losses on loans is maintained. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loans, the whole allowance is available for any loan charge-offs that
occur. A loan is charged off against the allowance by management as a loss when
deemed uncollectible, although collection efforts continue and future recoveries
may occur.
Loans considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral, by allocating a portion of
the allowance for losses on loans to such loans. If these allocations require an
increase in the allowance for losses on loans, such increase is reported as a
provision for loan losses. Management excludes all consumer loans and
residential single family loans with balances less than $200,000 from its review
for impairment. However, these loans are considered in determining the
appropriate level of the allowance for loss on loans. All impaired loans are
placed on nonaccrual status.
Earnings Per Share: Basic and diluted earnings per share are computed based on
weighted average shares outstanding during the period. Basic earnings per share
has been computed by dividing net income by the weighted average shares
outstanding. Diluted earnings per share has been computed by dividing net income
by the diluted weighted average shares outstanding. Diluted weighted average
common shares were calculated assuming the exercise of stock options less
treasury shares assumed to be purchased from the proceeds using the average
market price of the Corporation's stock. All per share information has been
retroactively adjusted to reflect the effect of the stock dividends and stock
splits.
New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not recorded. This is not expected to have a
material effect, but the effect will depend on derivative holdings when this
standard applies.
8
9
Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard for 1999 will allow classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect but the effect will vary depending on the level and designation
of securitizations as well as on market price movements.
3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale at March 31, 1999 and December 31, 1998
are as follows (In thousands):
March 31, 1999
--------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 804 $ 804
FreddieMac preferred stock 7,500 $ (75) 7,425
FannieMae medium term notes 19,929 (201) 19,728
FreddieMac note 10,000 (34) 9,966
Mortgage-backed securities 183,841 $ 729 (1,084) 183,486
--------- --------- --------- ---------
222,074 729 (1,394) 221,409
HELD TO MATURITY
Tax-exempt municipal bond 14,819 14,819
Revenue bond 1,400 1,400
--------- ---------
16,219 16,219
--------- --------- --------- ---------
Total $ 238,293 $ 729 $ (1,394) $ 237,628
========= ========= ========= =========
December 31, 1998
---------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Mutual funds $ 2,059 $ 2,059
FreddieMac preferred stock 7,500 7,500
FannieMae medium term note 9,921 $ (37) 9,884
Mortgage-backed securities 197,521 $ 954 (179) 198,296
--------- --------- --------- ---------
217,001 954 (216) 217,739
HELD TO MATURITY
Tax-exempt municipal bond 14,817 14,817
Revenue bond 1,400 1,400
--------- --------- --------- ---------
16,217 16,217
--------- --------- --------- ---------
Total $ 233,218 $ 954 $ (216) $ 233,956
========= ========= ========= =========
9
10
4. LOANS RECEIVABLE
The composition of the loan portfolio at March 31, 1999 and December 31, 1998 is
as follows (In thousands):
March 31, 1999 December 31, 1998
-------------- -----------------
Real estate loans
Construction loans:
Residential single family $ 82,937 $ 81,584
Commercial 10,800 19,129
Land 38,274 34,990
Loans in process (50,766) (46,001)
----------- -----------
Construction loans, net 81,245 89,702
Permanent loans:
Residential single family 191,115 189,182
Multifamily 361,905 337,412
Commercial 247,497 228,824
Other 813 1,320
----------- -----------
Total real estate loans 882,575 846,440
Consumer loans 99,107 96,115
Business and other loans 101,330 82,318
----------- -----------
Total loans 1,083,012 1,024,873
Premiums on loans, net 4,860 5,320
Deferred loan fees, net (5,615) (5,013)
Allowance for losses on loans (7,278) (6,909)
----------- -----------
$ 1,074,979 $ 1,018,271
=========== ===========
Activity in the allowance for losses on loans for the periods ended March 31,
1999 and 1998 is as follows (In thousands):
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Balance at the beginning of the period $ 6,909 $ 5,622
Provision for loan losses 650 450
Net charge-offs (281) (191)
------- -------
Balance at end of period $ 7,278 $ 5,881
======= =======
10
11
Management analyzes loans on an individual basis and considers a loan to be
impaired when it is probable that all principal and interest amounts will not be
collected according to the terms of the contract. Information regarding impaired
loans for the periods indicated is as follows (In thousands):
March 31, December 31,
1999 1998
---- ----
Balance of impaired loans $ 8,303 $10,142
Less portion for which no allowance
for losses on loans is allocated 7,126 9,002
------- -------
Portion of impaired loans for which
an allowance for loan losses is allocated $ 1,177 $ 1,140
======= =======
Portion of allowance for losses on loans
allocated to the impaired loan balance $ 1,002 $ 1,012
======= =======
March 31, March 31,
1999 1998
---- ----
Average investment in impaired loans
during the period $ 9,761 $ 7,597
======= =======
Interest income recognized during
Impairment $ 101 $ 33
======= =======
Interest income recognized on a
cash basis during the period $ 101 $ 33
======= =======
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at March 31, 1999 and December 31, 1998 are summarized as follows
(In thousands):
March 31, March 31,
1999 1998
---- ----
Mortgage loan portfolios serviced for:
FreddieMac $ 791,026 $ 794,286
FannieMae 640,965 587,476
Other 136,070 114,585
---------- ----------
Total loans serviced for others $1,568,061 $1,496,347
========== ==========
11
12
Custodial balances maintained in noninterest-bearing checking accounts in
connection with the foregoing loan servicing were approximately $27,658,000 and
$28,066,000 at March 31, 1999 and December 31, 1998, respectively.
The following is an analysis of the changes in cost of loan servicing rights for
the three month period ended March 31, 1999 and 1998 (In thousands):
Three Months Ended March 31,
1999 1998
---- ----
Balance at the beginning of the period $ 13,412 $ 9,224
Acquired or originated 2,650 783
Amortization (717) (640)
-------- --------
Balance at the end of the period $ 15,345 $ 9,367
======== ========
6. DEPOSITS
Deposits consist of the following (In thousands):
March 31, December 31,
1999 1998
---- ----
Noninterest-bearing checking accounts $ 64,000 $ 63,717
Interest-bearing checking accounts 55,105 54,159
Passbook savings and statement savings 222,314 212,710
Certificates of deposit 797,397 720,771
---------- ----------
Total interest-bearing deposits 1,074,816 987,640
---------- ----------
$1,138,816 $1,051,357
========== ==========
At March 31, 1999, scheduled maturities of certificates of deposit are as
follows (In thousands):
Year Weighted Average
Ended Amount Interest Rate
----- ------ -------------
1999 $434,235 5.50%
2000 296,205 5.57
2001 49,863 5.63
2002 3,654 5.79
2003 7,323 5.99
Thereafter 6,117 5.71
--------
$797,397 5.54
========
12
13
7. BORROWINGS
Borrowings consisted of the following at March 31, 1999 and December 31, 1998
(In thousands):
March 31, December 31,
1999 1998
---- ----
Federal Home Loan Bank Advances (5.5% and 5.4% at
March 31, 1999 and December 31, 1998, respectively) $ 100,169 $ 111,236
Reverse repurchase agreements (5.5% and 5.6% at
March 31, 1999 and December 31, 1998, respectively) 80,180 82,250
Commercial bank line of credit (7.0% and 7.7% at
March 31, 1999 and December 31, 1998, respectively) 12,000 8,000
Subordinated debt maturing January 1, 2005
(9.625% fixed rate) 14,000 14,000
-------- --------
$206,349 $215,486
======== ========
At March 31, 1999, scheduled payments on borrowings are as follows (In
thousands):
Weighted Average
Year Ended Amount Interest Rate
---------- ------ -------------
1999 $ 49,430 6.36%
2000 13,000 5.16
2001 3,000 6.15
2002 62,250 5.81
2003 50,000 5.42
Thereafter 28,669 7.44
--------
Total $206,349 6.04
========
Federal Home Loan Bank ("FHLB") advances are collateralized by FHLB stock and
residential first mortgage loans with an aggregate carrying value of
$199,000,000 and $184,000,000 at March 31, 1999 and December 31, 1998,
respectively.
The Corporation has a commercial line of credit agreement with a commercial
bank. The maximum borrowing under the line is $12,000,000, which is also the
balance at March 31, 1999. During 1998, the term of the agreement was modified
so that the line matures May 30, 1999, but can be renewed annually as agreed by
both
13
14
parties. As collateral for the loan, the Corporation's largest shareholder,
Robert Kaye, has agreed to pledge a portion of his common shares in an amount at
least equal to 200% of any outstanding balance.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank can be a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial commitments include commitments to make loans. The Bank's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to make loans is represented by the contractual
amount of these instruments. The Bank follows the same credit policy to make
such commitments as is followed for those loans recorded in the financial
statements.
As of March 31, 1999, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $63,981,000
and $84,621,000, respectively. Metropolitan's commitments to originate and
purchase loans are for loans with rates ranging from 5.63% to 16.00% and
commitment periods up to one year.
At March 31, 1999 and December 31, 1998, the Bank had outstanding options which
gave the holder the option to purchase certain loans at a specified price within
a specified time period. The Bank collected a non-refundable fee on each option
which is recognized as income at the time the transaction is complete. At March
31, 1999, loans with a carrying value of $5,498,000 were held for sale in
connection with outstanding purchase options. The options may be exercised at
the carrying value for an initial period. The option price escalates after the
initial period until the option expires.
9. SUBSEQUENT EVENT
On May 14, 1999, the Corporation issued 1,600,000 shares ($10 liquidation
amount per security), of 9.50% cumulative trust preferred securities (the
"Trust Preferred") through a newly formed, wholly-owned subsidiary,
Metropolitan Capital Trust II (the "Trust Issuer") and 300,000 shares of common
stock. The Trust Issuer invested the total proceeds from the sale of the Trust
Preferred in the 9.50% Junior Subordinated Deferrable Interest Debentures (the
"Junior Subordinated Debentures") issued by the Corporation which mature on
June 30, 2029. The Corporation intends to use the net proceeds from the sale of
the Junior Subordinated Debentures and the common stock for general corporate
purposes, including but not limited to, repayment of the $12.0 million
commercial bank line of credit; capital contributions to the Bank to support
growth and for working capital; and acquisitions by either the Corporation or
the Bank, although there presently exists no such agreement or understanding
with respect to such acquisitions. The Trust Preferred securities are listed on
the NASDAQ Stock Market's National Market under the symbol "METFO."
14
15
10. SEGMENT REPORTING
Metropolitan's operations include two major operating segments. A description of
those segments follows:
Retail and Commercial Banking--Retail and commercial banking is the segment of
the business that brings in deposits and lends those funds out to businesses and
consumers. The local market for deposits is the consumers and businesses in the
neighborhoods surrounding our 18 retail sales offices in Northeastern Ohio. The
market for lending is Ohio and the surrounding states for originations and
throughout the United States for purchases. The majority of loans are secured by
multifamily and commercial real estate. Loans are also made to businesses
secured by business assets and consumers secured by real or personal property.
Business and consumer loans are concentrated in Northeastern Ohio.
Mortgage banking--Mortgage banking is the segment of our business that
originates, sells and services permanent or construction loans secured by one-
to four-family residential properties. These loans are primarily originated
through commissioned loan officers located in Northeastern Ohio and Southeastern
Michigan. In general, fixed rate loans are originated for sale and adjustable
rate loans are originated to be retained in the portfolio. Loans being serviced
include loans originated and still owned by Metropolitan, loans originated by
Metropolitan but sold to others with servicing rights retained by Metropolitan,
and servicing rights to loans originated by others but purchased by
Metropolitan. The servicing rights Metropolitan purchases may be located in a
variety of states and are typically being serviced for FannieMae or FreddieMac.
The category below labeled Parent and Other consists of the remaining segments
of Metropolitan's business. It includes corporate treasury, interest rate risk,
and financing operations which do not generate revenue from outside customers.
Operating results and other financial data for the current and
preceding year are as follows (In thousands):
As of or for the three months ended March 31, 1999
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $ 6,624 $ 1,775 $ 577 $ 8,976
Provision for losses on loans 600 50 650
-------- -------- -------- ----------
Net interest income after
provision for loan losses 6,024 1,725 577 8,326
Noninterest income 878 649 (70) 1,457
Direct noninterest expense 3,802 1,355 92 5,249
Allocation of overhead 1,606 686 2,292
-------- -------- -------- ----------
Net income before income taxes $ 1,494 $ 333 $ 415 $ 2,242
======== ======== ======== ==========
15
16
FINANCIAL DATA:
Segment assets $ 1,032,273 $ 312,981 $ 94,817 $1,440,071
Depreciation and amortization 430 639 97 1,166
Expenditures for additions
to premises and equipment 2,707 135 2,842
As of or for the three months ended March 31, 1998
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------- ------- --------- -----
OPERATING RESULTS:
Net interest income $ 5,162 $ 1,378 $ 1,016 $ 7,556
Provision for losses on loans 427 23 450
-------- -------- ------- --------
Net interest income after
provision for loan losses 4,735 1,355 1,016 7,106
Noninterest income 649 902 87 1,638
Direct noninterest expense 2,875 997 92 3,964
Allocation of overhead 1,192 414 1,606
-------- -------- ------- --------
Net income before income taxes $ 1,317 $ 846 $ 1,011 $ 3,174
======== ======== ======= ========
FINANCIAL DATA:
Segment assets $644,772 $252,861 $92,073 $989,706
Depreciation and amortization 349 566 81 996
Expenditures for additions
to premises and equipment 2,302 189 2,491
The financial information provided for each major operating segment has been
derived from the internal profitability system used to monitor and manage
financial performance and allocate resources. The internal profitability system
has been in place for only the two latest years; therefore only two years
segment information is presented. Prior to the adoption of the internal
profitability system the Company operated as one segment.
The measurement of performance for the operating segments is based on the
organizational structure of Metropolitan and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not indicative of the segments' financial condition and
results of operations if they were independent entities.
Metropolitan evaluates segment performance based on contribution to income
before income taxes. Certain indirect expenses have been allocated based on
various criteria considered by management to best reflect benefits derived. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Indirect expense allocations and
accounting policies have been consistently applied for the periods presented.
There are no differences between segment profits and assets and the consolidated
profits and
16
17
assets of Metropolitan. The net interest income that results from investing in
assets and liabilities with different terms to maturity or repricing has been
eliminated from the two major operating segments and is included in the category
labeled Parent and Other.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED FINANCIAL DATA
Three months ended March 31,
1999 1998
---- ----
Net income (in thousands) $1,438 $1,987
Basic earnings per share (1) $0.19 $0.26
Diluted earnings per share (1) $0.19 $0.25
Return on average assets 0.41% 0.84%
Return on average equity 13.40% 21.23%
Noninterest expense to average assets 2.17% 2.35%
Efficiency ratio 71.65% 60.31%
Net interest margin 2.76% 3.45%
Net charge-offs to average loans 0.11% 0.11%
(1) Per share data has been adjusted for a 10% stock dividend completed in
December, 1998.
March 31, December 31, March 31,
1999 1998 1998
---- ---- ----
Total assets (in thousands) $1,440,071 $1,363,434 $989,706
Shareholders' equity (in thousands) $ 43,171 $ 42,645 $38,222
Shareholders' equity to total assets 3.00% 3.13% 3.86%
Shares outstanding 7,756,393 7,756,393 7,756,393
Book value per share $5.57 $5.50 $4.93
Tangible book value per share $5.22 $5.14 $4.54
Market value of common stock $9.38 $10.50 $15.45
Nonperforming assets to total assets (2) 1.27% 1.34% 0.92%
Allowance for losses on loans to total loans (2) 0.66% 0.66% 0.78%
(2) Ratios are based on period end balances.
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of the
Bank. Our results of operations are dependent on a variety of factors, including
the general interest rate environment, competitive conditions in the industry,
governmental policies and regulations and conditions in the markets for
financial assets. Like most financial institutions, the primary contributor to
our income is net interest income, the difference between the interest we earn
on interest-earning assets, such as loans and securities, and the interest we
pay on interest-bearing liabilities, such as deposits and borrowings. Our
operations are also affected by noninterest income, such as loan servicing fees,
service charges on deposit accounts, gains or losses on the sales of loans and
securities and loan
18
19
option income. Our principal operating expenses, aside from interest expense,
consist of compensation and employee benefits, occupancy costs, and general and
administrative expenses.
Average Balances and Yields. The following table presents the total dollar
amount of interest income from average interest-earning assets and the resulting
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. Net interest
margin is influenced by the level and relative mix of interest-earning assets
and interest-bearing liabilities. All average balances are daily average
balances. Nonaccruing loans are included in average loan balances. The average
balances of mortgage-backed securities and securities are presented at
historical cost.
19
20
Three Months Ended March 31,
----------------------------------------------------------------------------
1999 1998
------------------------------------ -----------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- ------- ---------- ---------- ------
Interest-earning assets:
Loans receivable $1,068,940 $ 21,687 8.23% $ 727,046 $ 16,200 9.04%
Mortgage-backed securities
available for sale 189,843 3,292 7.03 133,359 2,491 7.57
Other 59,237 915 6.27 28,251 522 7.51
---------- ---------- ---------- ----------
Total interest-earning
assets 1,318,020 25,894 7.97 888,656 19,213 8.77
---------- ----------
Nonearning assets 71,882 59,737
---------- ----------
Total assets $1,389,902 $ 948,393
========== ==========
Interest-bearing liabilities:
Deposits $1,029,351 13,174 5.19 $ 719,396 9,611 5.42
Borrowings 212,094 3,136 6.00 125,379 2,046 6.62
Junior Subordinated Debentures 27,750 608 8.76
---------- ---------- ---------- ----------
Total interest-bearing
liabilities 1,269,195 16,918 5.41 844,775 11,657 5.60
---------- ------ ---------- ------
Noninterest-bearing
liabilities 77,834 66,176
Shareholders' equity 42,873 37,442
---------- ----------
Total liabilities and
shareholders' equity $1,389,902 $ 948,393
========== ==========
Net interest income $ 8,976 $ 7,556
========== ==========
Interest rate spread 2.56% 3.17%
====== ======
Net interest margin 2.76% 3.45%
Average interest-earning
assets to average
interest-bearing
liabilities 103.85% 105.19%
20
21
Rate and Volume Variances. Net interest income is affected by changes in
the level of interest-earning assets and interest-bearing liabilities and
changes in yields earned on assets and rates paid on liabilities. The following
table sets forth, for the periods indicated, a summary of the changes in
interest earned and interest paid resulting from changes in average asset and
liability balances and changes in average rates. Changes attributable to the
combined impact of volume and rate have been allocated proportionately to change
due to volume and change due to rate.
Three Months ended March 31,
1999 vs. 1998
Increase (Decrease)
------------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ----
(In thousands)
INTEREST INCOME ON:
Loans receivable $ 5,487 $ 7,618 $(2,131)
Mortgage-backed securities 801 1,055 (254)
Other 393 573 (180)
------- ------- -------
Total interest income 6,681 $ 9,246 $(2,565)
------- ======= =======
INTEREST EXPENSE ON:
Deposits $ 3,563 $ 4,141 $ (578)
Borrowings 1,089 1,415 (326)
Junior Subordinated Debentures 609 609 0
------- ------- -------
Total interest expense 5,261 $ 6,165 $ (904)
------- ======= =======
Increase in net interest income $ 1,420
=======
RESULTS OF OPERATIONS
Net Income. Net income decreased $0.6 million to $1.4 million for the three
months ended March 31, 1999 as compared to net income of $2.0 million for the
first quarter, 1998. Net interest income and provision for loan losses increased
$1.4 million and $0.2 million, respectively, for the three months ended March
31, 1999 over the prior year period and noninterest income decreased $0.2
million from the same prior year period. Noninterest expense increased $1.9
million to $7.5 million for the quarter from $5.6 million from the prior year
quarter primarily as a result of increased personnel and occupancy costs.
Our net interest margin decreased sixty-nine basis points to 2.76% for the three
month period ended March 31, 1999 as compared to 3.45% for the same period in
1998, primarily due to a decreased yield on interest-earning assets.
21
22
Interest Income. Total interest income increased 34.8% to $25.9 million in the
three month period ended March 31, 1999, as compared to $19.2 million in the
same period in 1998. This increase primarily resulted from a 48.3% increase in
average interest-earning assets in the three month period ended March 31, 1999
as compared to the prior year. Average earning assets increased as a result of
our strategy of increasing assets as long as assets with acceptable portfolio
characteristics are available. The increase in interest income attributable to
the increase in the average balance of interest-earning assets was partially
offset by the decline in the weighted average yield. The decline in the weighted
average yield is due mostly to the decline in overall market interest rates and
the decline in prepayment penalties.
Interest Expense. Total interest expense increased 45.1% to $16.9 million for
the three month period ended March 31, 1999, as compared to $11.7 million for
the same period in 1998. Interest expense increased due to a higher average
balance of interest-bearing liabilities outstanding which was partially offset
by a decreased cost of funds for the three month period ending March 31, 1999
compared to the same period in 1998. In accordance with our strategy to fund
growth in assets primarily with deposits, the average balance of
interest-bearing deposit accounts increased $310.0 million, or 43.1%, at
March 31, 1999 as compared to the same date in 1998. Due to a decrease in the
market interest rates paid to increase deposit balances, Metropolitan's cost of
funds decreased to 5.41% for the first quarter, 1999 as compared to 5.60% for
the same period in 1998.
Provision for Loan Losses. The provision for loan losses increased $200,000 for
the first quarter, 1999, as compared to the first quarter, 1998. Management
increased the provision for loan losses due to the ongoing analysis of the
appropriate allowance for loan losses as the Bank continues to grow and increase
its amount of loans, and not as a response to any material change in the level
of nonperforming loans or charge-offs. Going forward, we expect to continue to
increase the allowance for loan losses. The allowance for losses on loans at
March 31, 1999 was $7.3 million or 0.66% of total loans, as compared to $6.9
million, or 0.66% of total loans, at December 31, 1998.
Noninterest Income. Total noninterest income decreased 13.4% to $1.5 million in
the three months ended March 31, 1999 as compared to $1.6 million in the same
period in 1998.
Gain on sale of loans was $400,000 in the three month period ended March 31,
1999, as compared to $757,000 during the same period in 1998. The primary reason
for the decline in the first quarter, 1999 was a decline in the prices available
in the market which was due to the slight rise in long term interest rates
experienced in the first quarter of 1999 compared to the same period in 1998.
The proceeds of residential loan sales in the first quarter, 1999 were $59.7
million as compared to $46.8 million in the same period in 1998.
Net loan servicing income increased 39.0% to $335,000 in the three month period
ended March 31, 1999 as compared to the same period in 1998. The increase in
loan servicing fees was a result of the strategy to increase fee income. The
portfolio of loans serviced for others increased to $1.6 billion at March 31,
1999 as compared to $1.5 billion at December 31, 1998. Purchases of loan
servicing rights and origination of loan servicing more than offset payoffs and
the amortization of existing loans serviced. Metropolitan remains committed to
this line of business and continues to evaluate new acquisitions. Metropolitan
will only acquire the rights to service portfolios where the loan
characteristics and pricing are consistent with management's long-term
profitability objectives.
22
23
Service charges on deposit accounts increased $62,000 to $272,000 in the three
month period ended March 31, 1999 compared to the first quarter, 1998. The
primary reasons for the increase were the overall growth in deposit accounts and
increases in deposit account prices for fees during the first quarter of 1999.
There was no loan option income in the three month period ended March 31, 1999
as compared to $20,000 in the same period in 1998. This income was dependent
upon the amount of loans for which options were written and the price
negotiated, both of which are affected by market conditions. In these
transactions, Metropolitan purchased loans and sold nonrefundable options to a
third party to purchase these same loans at a later date. At the time the
transaction is complete, Metropolitan recognizes a non-refundable fee as income.
Metropolitan has not purchased any of these loans in 1999.
There were no gains on sale of securities in the three months ended March 31,
1999, compared to $66,000 for the prior year period. The gain in the first
quarter, 1998 was the result of the sale of securities originally purchased to
satisfy regulatory liquidity requirements which were no longer necessary for
that purpose due to revisions to those requirements.
Other noninterest income increased $106,000 in the three month period ended
March 31, 1999, compared to the same period in the previous year. This increase
was primarily due to increased fee income generated from the increased level of
business and increased rental income in the first quarter, 1999.
Noninterest Expense. Total noninterest expense increased to $7.5 million in the
three month period ended March 31, 1999 as compared to $5.6 million for the same
period in 1998.
Personnel related expenses increased $1.1 million in the three month period
ended March 31, 1999 as compared to the same period in 1998. These increases
were primarily a result of increased staffing levels to support expanded
activities such as trust services, new retail sales offices locations, and new
mortgage origination offices.
Occupancy costs increased $245,000 in the three month period ended March 31,
1999, over the same period in 1998. This increase was generally the result of
two additional full service retail sales offices and three mortgage origination
offices.
Data processing expense increased $122,000 in the three month period ending
March 31, 1999 as compared to the same period in 1998. This increase was the
result of expenses incurred for consulting services and Year 2000 testing.
State franchise taxes increased $92,000 in the three month period ended March
31, 1999, over the same periods in 1998. The primary reason for this increase is
the significant increase in capital at the Bank, which is the basis for the tax.
Other operating expenses, which include miscellaneous general and administrative
costs such as loan servicing, loan processing costs, business development, check
processing and ATM expenses, increased $362,000 for the
23
24
three month period ended March 31, 1999 as compared to the same period in 1998.
This increase was generally the result of increases in expenses pertaining to
increased business activities, real estate owned expenses, credit card expenses,
and increased costs for professional services.
Provision for Income Taxes. The provision for income taxes decreased $383,000
for the three month period ended March 31, 1999 as compared to the same period
in 1998. The primary reason for the decrease in the provision was the decreased
level of income over the prior year. The effective tax rate was 35.9% for the
three month period ended March 31, 1999 as compared to 37.4% for the same period
in 1998.
ASSET QUALITY
Metropolitan's goal is to maintain the above average asset quality of its loan
portfolio through conservative lending policies and prudent underwriting.
Detailed reviews of the loan portfolio are undertaken regularly to identify
potential problem loans or trends early and to provide for adequate estimates of
potential losses. In performing these reviews, Metropolitan's management
considers, among other things, current economic conditions, portfolio
characteristics, delinquency trends, and historical loss experiences.
Metropolitan normally considers loans to be nonperforming when payments are 90
days or more past due or when the loan review analysis indicates that
repossession of the collateral may be necessary to satisfy the loan. In
addition, Metropolitan considers loans to be impaired when, in management's
opinion, it is probable that the borrower will be unable to meet the contractual
terms of the loan. When loans are classified as nonperforming, an assessment is
made as to the collectability of the unpaid interest. Interest determined to be
uncollectible is reversed from interest income and future interest income is
recorded only if the loan principal and interest due is considered collectible
and is less than the estimated fair value of the underlying collateral.
The table below provides information concerning Metropolitan's non-performing
assets and the allowance for losses on loans as of the dates indicated. All
loans classified by management as impaired were also classified as
nonperforming.
March 31, December 31,
1999 1998
---- ----
(Dollars in thousands)
Nonaccrual loans $ 12,009 $ 12,231
Loans past due greater than
90 days or impaired, still accruing 534 460
---------- ----------
Total nonperforming loans 12,543 12,691
Real estate owned 5,774 5,534
---------- ----------
Total nonperforming assets $ 18,317 $ 18,225
========== ==========
Allowance for losses on loans $ 7,278 $ 6,909
========== ==========
Nonperforming loans to total loans 1.13% 1.23%
Nonperforming assets to total assets 1.27% 1.34%
24
25
Net charge-offs to average loans 0.11%(1) 0.16%
Provision for loan losses to
average loans 0.24%(1) 0.31%
Allowance for losses on loans to
total nonperforming loans at
end of period 59.22% 54.44%
Allowance for losses on loans to
total loans at end of period 0.66% 0.66%
(1) Annualized for comparative purposes.
Nonperforming assets at March 31, 1999 increased $100,000 to $18.3 million as
compared to $18.2 million at December 31, 1998. In spite of the growth
experienced in the loan portfolio, total nonperforming loans have increased
minimally in 1999.
In addition to the nonperforming assets included in the table above, we identify
potential problem loans which are still performing but have a weakness which
causes us to classify those loans as substandard for regulatory purposes. There
was $2.1 million of loans in this category at March 31, 1999. Management
believes the bank is well secured against loss.
FINANCIAL CONDITION
Total assets amounted to $1.44 billion at March 31, 1999, as compared to $1.36
billion at December 31, 1998, an increase of $76.7 million, or 5.6%. The
increase in assets was concentrated in loans and was funded primarily with
deposit growth of $87.5 million.
Securities available for sale increased $18.5 million to $37.9 million compared
to December 31, 1998. The increase was primarily due to the purchase of a $10.0
million FreddieMac Note and a $10.0 million FannieMae medium term note in the
first quarter to meet regulatory liquidity requirements.
Loans receivable, including loans held for sale, increased $74.8 million, or
7.2%, during the three months ended March 31, 1999. This increase was primarily
due to increases in multifamily loans of $13.1 million, commercial real estate
loans of $22.0 million, and business loans of $19.0 million. These increases
resulted from high demand due to the relatively low interest rate environment
experienced in the first quarter and increased marketing efforts.
Deposits totaled $1.14 billion at March 31, 1999, an increase of $87.5 million,
or 8.3%, over the balance at December 31, 1998. The increase resulted from
management's marketing efforts, continued growth at newer retail sales offices,
increased custodial checking balances, and payment of competitive rates to
increase certificate of deposit balances.
25
26
Borrowings decreased $9.1 million, or 4.2% from December 31, 1998 to March 31,
1999. The decline was the result of decreased use of Federal Home Loan Bank
advances and Reverse Repurchase Agreements offset by a $4.0 million increase in
the commercial bank line of credit. The net decrease in borrowings was funded by
growth in deposits.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to our ability to generate adequate
amounts of cash for funding loan originations, loan purchases, deposit
withdrawals, maturities of borrowings, and operating expenses. Our primary
sources of internally generated funds are principal repayments and payoffs of
loans, cash flows from operations, and proceeds from sales of assets. External
sources of funds include increases in deposits and borrowings, and public or
private offerings by Metropolitan.
The Corporation's primary source of funds currently is dividends from the Bank,
which are subject to restrictions imposed by federal bank regulatory agencies.
The Corporation's primary use of funds is for interest payments on its existing
debt. At March 31, 1999, the Corporation, excluding the Bank, had cash and
readily convertible investments of $1.8 million.
The Bank is required by regulation to maintain a liquidity ratio (average daily
balance of liquid assets to average daily balance of net withdrawable accounts
and short-term borrowings) of 4%. The Bank's liquidity ratio for March, 1999 was
5.08%. Historically, Metropolitan has maintained its liquidity close to the
required minimum since the yield available on qualifying investments is lower
than alternative uses of funds and is generally not at an attractive spread over
incremental cost of funds.
While principal repayments and FHLB advances are fairly stable sources of funds,
deposit flows and loan prepayments are greatly influenced by prevailing interest
rates, economic conditions, and competition. Metropolitan regularly reviews cash
flow needed to fund its operations and believes that the existing resources are
adequate for its foreseeable requirements.
At March 31, 1999, $143.0 million, or 12.6%, of Metropolitan's deposits were in
the form of certificates of deposit of $100,000 and over. If a large number of
these certificates of deposits matured at approximately the same time and were
not renewed, there could be an adverse effect on Metropolitan's liquidity.
Metropolitan monitors maturities to attempt to minimize the potential adverse
effect on liquidity.
When evaluating sources of funds, we consider the cost of various alternatives
such as local retail deposits, FHLB advances and other wholesale borrowings. One
option considered and utilized in the past has been the acceptance of
out-of-state time deposits from individuals and entities, predominantly credit
unions. These deposits typically have balances of $90,000 to $100,000 and have a
term of one year or more. They are not accepted through brokers. At March 31,
1999, approximately $202.3 million, or 17.7% of our accounts were held by these
individuals and entities. If we were unable to replace these deposits upon
maturity, there could be an adverse effect on our liquidity. We monitor
maturities to attempt to minimize any potential adverse effect on liquidity.
26
27
We have access to wholesale borrowings based on the availability of eligible
collateral. The FHLB makes funds available for housing finance based upon the
blanket or specific pledge of certain one- to four-family loans and various
types of investment and mortgage-backed securities. The Bank had borrowing
capacity at the FHLB under its blanket pledge agreement of approximately $133
million at March 31, 1999, of which $100 million was utilized. The financial
market makes funds available through reverse repurchase agreements by accepting
various investment and mortgage-backed securities as collateral. The Bank had
borrowings through reverse repurchase agreements of approximately $80 million at
March 31, 1999, which utilized substantially all of the Bank's eligible
collateral.
Capital. The Office of Thrift Supervision ("OTS") imposes capital requirements
on savings associations. Savings associations are required to meet three minimum
capital standards: (i) a leverage requirement, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. Such standards must be
no less stringent than those applicable to national banks. In addition, the OTS
is authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The Bank's regulatory capital ratios at March 31, 1999 were in excess of the
capital requirements specified by OTS regulations as shown by the following
table:
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------- ------------ ------------------
(DOLLARS IN THOUSANDS)
Capital amount
Actual $90,111 6.27% $90,248 6.28% $94,316 8.11%
Required 21,559 1.50 57,495 4.00 93,024 8.00
------- ---- ------- ---- ------- ----
Excess $68,552 4.77% $32,753 2.28% $ 1,292 0.11%
======= ==== ======= ==== ======= ====
We anticipate that under the current regulations, the Bank will continue to meet
its minimum capital requirements in the foreseeable future. However, events
beyond the control of the Bank, such as increased interest rates or a downturn
in the economy, could adversely affect future earnings and consequently, the
ability of the Bank to meet its future capital requirements.
YEAR 2000
The year 2000 issue refers to computer programs being written using two digits
rather than four to define an applicable year. A company's hardware, date driven
automated equipment or computer programs that have a two digit field to define
the year may recognize a date using "00" as the year 1900 rather than the year
2000. This faulty recognition could result in a system failure, disruption of
operations, or inaccurate information or calculations. Similar to other
companies, we face the challenge of ensuring that all of our computer related
functions will work properly from the year 2000 and beyond.
27
28
We completed the assessment and planning phases, and substantially completed the
remediation and testing phases, of our year 2000 program by December 31, 1998.
By June 30, 1999, we expect to complete the testing and remediation of our
internal equipment and software. We also expect to retest our equipment and
software during the remainder of 1999. As part of our year 2000 program, we have
fully upgraded and tested our computer systems which service the majority of our
customers accounts. As a result of these upgrades, we believe that these systems
are year 2000 ready. During the first quarter of 1999, we completed our testing
and remediation of our interface systems with third parties. We believe that
all of these internal components will be adequate to provide quality service to
our customers without interruption by January 1, 2000. We continue to test our
non-critical systems and expect to retest our interface systems with third
parties during the remainder of 1999.
In addition to internal resources, we are utilizing external resources to
implement our year 2000 program. We have contracted with outside consultants to
verify our assessment of our year 2000 problems and to assist us with our
remediation efforts.
We may experience an increase in problem loans and credit losses if borrowers
fail to respond to year 2000 issues. In addition, higher funding costs may
result if consumers react to publicity about the issue by withdrawing deposits.
In response to these concerns, we formed a task force. The task force has
conducted a survey of significant credit customers to determine their year 2000
readiness and to evaluate the level of potential credit risk to us. These
customers have assured us that they are or will be year 2000 compliant. We have
also implemented a customer awareness program to provide deposit customers with
an understanding of our year 2000 readiness.
On an ongoing basis, we are contacting our key suppliers and third parties with
whom we conduct business to determine their year 2000 readiness. We have put in
place a program to monitor third party progress on year 2000 issues during 1999.
Despite our efforts, we can make no assurances that the critical third parties
with whom we do business will adequately address their year 2000 issues. If our
suppliers and customers are not year 2000 compliant by January 1, 2000, their
noncompliance could materially affect our business, results of operations and
financial condition.
We are in the process of developing contingency plans that focus on reducing any
disruption that might be created by third parties with whom we do business being
year 2000 noncompliant. We have also created a task force to document and test a
business resumption plan. This plan is anticipated to be in place and tested by
June 30, 1999.
We believe that our worst case scenario involves the inability of electric
utility companies to service our various offices due to year 2000 problems. If
the electric utility companies cannot provide power to a significant number of
our offices, our business and operations could be materially disrupted.
In management's opinion, any incremental costs or potential loss of revenues
would not have a material impact on our financial condition, operations, or cash
flows. To date, we have spent $54,000 for incremental services directly related
to ensuring year 2000 readiness. In addition, we have spent $133,000 to upgrade
computer hardware and software which was necessary to ensure year 2000
readiness. We do not expect future expenditures to upgrade computer hardware
and software to be material.
28
29
RECENT ACCOUNTING DEVELOPMENTS
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement of Financial
Accounting Standard No. 133 addresses the accounting for derivative instruments
and certain derivative instruments embedded in other contracts, and hedging
activities. The statement standardizes the accounting for derivative instruments
by requiring that an entity recognize those items as assets or liabilities in
the statement of financial position and measure them at fair value. This
statement is effective for all fiscal years beginning after June 15, 1999.
In October, 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 will, in 1999, allow mortgage loans
held for sale that are subsequently securitized to be classified as trading,
available for sale, or in certain circumstances held to maturity. Currently,
these securitized mortgage loans must be classified as trading. We do not expect
these statements to have a material effect on the Corporation's consolidated
financial position or results of operation.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to Metropolitan or its management are
intended to identify such forward looking statements. Metropolitan's actual
results, performance or achievements may materially differ from those expressed
or implied in the forward looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Metropolitan, like other financial institutions, is subject to market risk.
Market risk is the risk that a company can suffer economic loss due to changes
in the market values of various types of assets or liabilities. As a financial
institution, we make a profit by accepting and managing various types of risks.
The most significant of these risks are credit risk and interest rate risk. The
principal market risk for us is interest rate risk. Interest rate risk is the
risk that changes in market interest rates will cause significant changes in net
interest income because interest-bearing assets and interest-bearing liabilities
mature at different intervals and reprice at different times.
We manage interest rate risk in a number of ways. Some of the tools used to
monitor and quantify interest rate risk include:
29
30
o annual budgeting process;
o quarterly review of certificate of deposit maturities by day;
o monthly forecast of balance sheet activity;
o monthly review of listing of liability rates and maturities by
month;
o monthly shock report of effect of sudden interest rate changes
on net interest income;
o monthly shock report of effect of sudden interest rate changes
on net value of portfolio equity; and
o monthly analysis of rate and volume changes in historic net
interest income.
We have established an asset and liability committee to monitor interest rate
risk. This committee is made up of senior officers from finance, lending and
deposit operations. The committee meets at least quarterly, reviews our current
interest rate risk position, and determines strategies to pursue for the next
quarter. The activities of this committee are reported to the Board of Directors
of the Bank quarterly. Between meetings the members of this committee are
involved in setting rates on deposits, setting rates on loans and serving on
loan committees where they work on implementing the established strategies.
During 1998 and 1999, like many financial institutions, we had exposure to
potential declines in net interest income from rising interest rates. This is
because Metropolitan has had more short-term interest rate sensitive liabilities
than short-term interest rate sensitive assets. One of the ways we monitor
interest rate risk quantitatively is to measure the potential change in net
interest income based on various immediate changes in market interest rates. The
following table shows the change in net interest income for immediate sustained
parallel shifts of 1% and 2% in market interest rates for year-end 1998 and the
most recent quarter.
EXPECTED CHANGE IN
NET INTEREST INCOME
-------------------
CHANGE IN INTEREST RATE MARCH 31, 1999 DECEMBER 31, 1998
- ----------------------- -------------- -----------------
+2% -9% -19%
+1% -5% -10%
-1% +2% +9%
-2% +4% +18%
The change in net interest income from a change in market rates is a short-term
measure of interest rate risk. The results above indicate that we have a
significant short-term exposure to rising rates but that the exposure declined
during the quarter.
30
31
Another quantitative measure of interest rate risk is the change in the market
value of all financial assets and liabilities based on various immediate
sustained shifts in market interest rates. This concept is also known as net
portfolio value and is the methodology used by the Office of Thrift Supervision
in measuring interest rate risk. The following table shows the change in net
portfolio value for immediate sustained parallel shifts of 1% and 2% in market
interest rates for year-end 1998 and the most recent quarter.
EXPECTED CHANGE IN
NET PORTFOLIO VALUE
CHANGE IN INTEREST RATE MARCH 31, 1999 DECEMBER 31, 1998
- ----------------------- -------------- -----------------
+2% -39% -39%
+1% -20% -20%
-1% 24% +25%
-2% 55% +55%
The change in net portfolio value is a long-term measure of interest rate risk.
It assumes that no significant changes in assets or liabilities held would take
place if there were a sudden change in interest rates. Because we monitor
interest rate risk regularly and actively manage that risk, these projections
serve as a worst case scenario assuming no reaction to changing rates. The
results above indicate that long-term interest rate risk has remained stable
over the past quarter.
Our strategies to limit interest rate risk from rising interest rates are as
follows:
o originate one- to four-family adjustable rate loans for the
portfolio;
o originate one- to four-family fixed rate loans for sale;
o originate the majority of business loans to float with prime
rates;
o increase core deposits which have low interest rate
sensitivity;
o increase certificates of deposit with maturities over one
year;
o borrow funds with maturities greater than a year; and
o increase the volume of loans serviced since they rise in value
as rates rise.
We also follow strategies that increase interest rate risk in limited ways
including:
o originating and purchasing fixed rate multifamily and
commercial real estate loans limited to ten year maturities;
and
31
32
o originating and purchasing fixed rate consumer loans with
terms from two to fifteen years.
We feel that the current level of interest rate risk is acceptable for several
reasons. The risk is weighted toward the long-term where changes in assets and
liabilities can be made if rates do rise. We have a history of growth of 20% to
30% in assets over the past five years. As long as growth can be maintained at
20% per year interest rate risk can be rapidly diluted by growth in short term
and adjustable rate assets funded by long term liabilities. If we grow at a rate
significantly lower than 20%, we could still decrease interest rate risk by
taking actions such as selling fixed rate assets and investing in short-term
assets or assets with short repricing periods. However, this could result in
losses on the sale of assets or a decrease in the yield on assets. We feel that
the likelihood of large increases in market rates is low at this time. An
analysis of the average quarterly change in the Treasury yield curve from 1988
to 1997 indicates that a parallel curve shift of 1.5% or more is an event that
has less than a 0.1% chance of occurrence. In addition, the asset and liability
committee has developed strategies designed to reduce our exposure to rising
interest rates. Management anticipates that the current level of interest rate
risk will be maintained or will decline modestly in 1999.
We are also aware that any method of measuring interest rate risk including the
two used above has certain shortcomings. For example, certain assets and
liabilities may have similar maturities or repricing dates but their repricing
rates may not follow the general trend in market interest rates. Also, as a
result of competition, the interest rates on certain assets and liabilities may
fluctuate in advance of changes in market interest rates while rates on other
assets and liabilities may lag market rates. In addition, any projection of a
change in market rates requires that prepayment rates on loans and early
withdrawal of certificates of deposits be projected and those projections may be
inaccurate. We focus on the change in net interest income and the change in net
portfolio value as a result of immediate and sustained parallel shifts in
interest rates as a balanced approach to monitoring interest rate risk when used
with budgeting and the other tools noted above.
At the present time we do not hold any trading positions, foreign currency
positions, or commodity positions. Equity investments are approximately 1% of
assets and half of that amount is held in Federal Home Loan Bank stock which can
be sold to the Federal Home Loan Bank of Cincinnati at par. Therefore, we do not
consider any of these areas to be a source of significant market risk.
32
33
PART II. OTHER INFORMATION
Items 1-5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of Metropolitan Financial Corp. (filed
as Exhibit 2 to Metropolitan's Form 8-A filed October 15, 1996 and incorporated herein
by reference).
3.2 Amended and Restated Code of Regulations of Metropolitan Financial Corp. (filed as
Exhibit 3 to Metropolitan's Form 8-A filed October 15, 1996 and incorporated herein by
reference).
4.1 Form of Indenture of the Corporation relating to the
Junior Subordinated Debentures Dated May 14, 1999.
4.2 Form of Amended and Restated Trust Agreement of Metropolitan Capital Trust I
Dated May 14, 1999.
4.3 Form of Guarantee of the Corporation relating to the
Trust Preferred Securities Dated May 14, 1999.
4.4 Form of Agreement as to Expenses and Liabilities dated May 14, 1999.
27 Financial Data Schedule.(1)
(1) Filed only in electronic format pursuant to item 601(b)(27) of Regulation S-K.
b. Reports on Form 8-K - No reports on Form 8-K were filed
by Metropolitan during the first three months of 1999.
33
34
METROPOLITAN FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METROPOLITAN FINANCIAL CORP.
By: /s/ David G. Lodge
----------------------------------
David G. Lodge,
President, Assistant Secretary and
Assistant Treasurer,
(principal financial
and accounting officer)
Date: May 17, 1999
34