<PAGE> 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 June 30, 1996.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ----------
Commission file number 33-98380
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METROPOLITAN FINANCIAL CORP.
- ----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
- ---------------------------------- -----------------------------------
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
6001 Landerhaven Drive Mayfield Heights, Ohio 44124
- ----------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(216) 646-1111
- ----------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--------- ----------
As of August 12, 1996, there was issued and outstanding one share of the
Registrant's Common Stock.
1
<PAGE> 2
METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of
June 30, 1996 and December 31, 1995 ................ 3
Consolidated Statements of Operations for the three
and six months ended June 30, 1996 and 1995 ........ 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1996 and 1995 ........ 5
Notes to Consolidated Financial Statements ......... 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 12-25
PART II. OTHER INFORMATION................................... 26
SIGNATURES ................................................... 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,342 $ 18,170
Securities available for sale (Note 3) 12,136 22,806
Mortgage-backed securities (Note 3) 41,821 39,156
Loans held for sale 10,686 1,504
Loans receivable, net (Note 4) 563,883 478,345
Federal Home Loan Bank stock, at cost 3,852 3,569
Accrued interest receivable 4,240 3,708
Premises and equipment, net 8,791 7,500
Real estate owned 219 258
Prepaid expenses and other assets 3,044 2,761
Cost of loan servicing rights (Note 5) 8,693 9,130
Cost in excess of fair value of net
assets acquired 3,079 3,188
-------- --------
Total Assets $672,786 $590,095
======== ========
LIABILITIES
Deposits $558,794 $503,742
Other borrowings (Note 6) 77,074 46,874
Accrued interest payable 3,127 4,551
Official check float account 3,778 2,779
Other liabilities 3,400 6,683
-------- --------
Total Liabilities 646,173 564,629
-------- --------
SHAREHOLDER'S EQUITY
Common stock, no par value, 250,000 shares
authorized, 1 share issued and outstanding
Additional paid-in capital 7,801 7,801
Retained earnings 18,509 16,928
Unrealized gain on securities available
for sale, net of tax 303 737
-------- --------
Total Shareholder's Equity 26,613 25,466
-------- --------
Total Liabilities & Shareholder's
Equity $672,786 $590,095
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
-------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 11,718 $ 9,901 $23,040 $19,317
Interest on mortgage-backed
securities 651 391 1,265 656
Interest and dividends on other
investments 435 265 683 395
-------- ------- ------- -------
Total interest income 12,804 10,557 24,988 20,368
-------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits 6,798 5,799 13,345 10,951
Interest on other borrowings 1,018 830 2,104 1,437
-------- ------- ------- -------
Total interest expense 7,816 6,629 15,449 12,388
-------- ------- ------- -------
NET INTEREST INCOME 4,988 3,928 9,539 7,980
Provision for loan losses 379 239 685 479
-------- ------- ------- -------
Net interest income after provision
for loan losses 4,609 3,689 8,854 7,501
-------- ------- ------- -------
Non-interest income
Gain (loss) on sale of loans (67) 102 36 113
Loan servicing income, net 319 212 632 391
Loan option income 298 420 406 420
Loan credit discount income 406 406
Other operating income 441 321 972 632
-------- ------- ------- -------
Total non-interest income 991 1,461 2,046 1,962
-------- ------- ------- -------
Non-interest expense
Salaries and related personnel cost 2,023 1,612 4,071 3,259
Occupancy and equipment expense 553 501 1,124 1,025
Federal deposit insurance premiums 331 274 640 548
Data processing expense 147 189 295 328
Marketing expense 158 117 285 226
State franchise taxes 114 76 232 152
Amortization of intangibles 55 55 109 111
Other operating expenses 849 591 1,607 1,103
-------- ------- ------- -------
Total non-interest expense 4,230 3,415 8,363 6,752
-------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,370 1,735 2,537 2,711
Provision for income taxes 505 688 956 1,032
-------- ------- ------- -------
NET INCOME $ 865 $ 1,047 $ 1,581 $ 1,679
======== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
--------- ---------
(In Thousands)
<S> <C> <C>
NET CASH USED BY
OPERATING ACTIVITIES $ (8,745) $ (15,751)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (9,122) (4,101)
Proceeds from sale of securities
available for sale 19,405
Disbursement of loan proceeds (118,420) (41,573)
Purchases of loans (33,584) (33,772)
Purchases of mortgage-backed securities (6,541)
Proceeds from principal repayments 59,599 29,640
Proceeds from sale of loans 4,915
Proceeds from mortgage-backed security
principal repayments and maturities 3,607 554
Proceeds from sale of real estate owned 41 65
Purchase of premises and equipment (1,588) (2,632)
Purchase of FHLB stock (156) (1,041)
Purchase of mortgage loan servicing rights (445) (4,686)
--------- ---------
Net cash used for investing activities (82,289) (57,546)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 55,006 18,537
Proceeds from borrowings 120,650 222,800
Repayment of borrowings (90,450) (168,630)
--------- ---------
Net cash provided by financing
activities 85,206 72,707
--------- ---------
Net change in cash and cash equivalents (5,828) (590)
Cash and cash equivalent at beginning
of period 18,170 11,565
--------- ---------
Cash and cash equivalents at end
of period $ 12,342 $ 10,975
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 16,873 $ 11,582
Income taxes 895 804
Transfer from loans receivable to
other real estate 46
Loans securitized 7,803
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
METROPOLITAN FINANCIAL CORP.
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of Metropolitan Financial Corp.
("Metropolitan" or "Corporation") include the accounts of the Corporation and
the accounts of its wholly-owned subsidiaries MetroCapital Corporation and
Metropolitan Savings Bank of Cleveland (the "Bank"), and its wholly-owned
subsidiaries, Kimberly Construction Company, Incorporated, and Metropolitan
Savings Service Corporation, and its wholly-owned subsidiary Metropolitan
Securities Corporation. All significant intercompany transactions have been
eliminated. In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting only of normal recurring
accruals) which the Corporation considers necessary for a fair presentation of
(a) the results of operations for the three and six months ended June 30, 1996
and 1995; (b) the financial condition at June 30, 1996 and December 31, 1995;
and (c) the statement of cash flows for the six month periods ended June 30,
1996 and 1995. The results of operations for the six month period ended June 30,
1996 are not necessarily indicative of the results that may be expected for a
full year. The annual report for Metropolitan for the year ended December 31,
1995, contains consolidated financial statements and related notes which should
be read in conjunction with the accompanying consolidated financial statements.
2. ACCOUNTING POLICIES
SECURITIES: 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 shareholder's equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the adjusted carrying
amount of securities sold, using the specific identification method.
LOANS: Loans receivable, net are held for investment and are stated at the
principal amount outstanding adjusted for amortization of premium and accretion
of discount using the interest method. 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. The Bank re-evaluates its intent to hold
loans at each balance sheet date based on the then current environment and, if
appropriate, reclassifies loans as held for sale and records them at the lower
of
6
<PAGE> 7
cost or market. At June 30, 1996 and December 31, 1995, management had the
intent and the Bank had the ability to hold all loans being held for investment
purposes for the foreseeable future. Gains and losses on the sale of loans are
determined by the identified loan method and are reflected in operations at the
time of sale.
ALLOWANCE FOR LOSSES ON LOANS: An allowance for losses on loans is maintained
because some loans may not be repaid in full. 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.
Statement of Financial Accounting Standards ("SFAS") No. 114 was adopted January
1, 1995. Under this standard, 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 cause the allowance for losses on loans to require an
increase, such an increase is reported as a provision for loan losses. Based on
the analysis prepared, no provision for loan losses was recorded in connection
with adopting this standard. As allowed, management excludes all consumer loans
and residential single family loans with balances less than $200,000 from
classification as impaired.
The Corporation's policy for recognition of interest on impaired loans including
how cash receipts are recorded is essentially unchanged as a result of the
adoption of SFAS Nos. 114 and 118. A loan (including a loan impaired under SFAS
No. 114) is classified as non-accrual when collectability is in doubt (this is
generally when the borrower is 90 days past due on contractual principal or
interest payments). When a loan is placed on non-accrual status, unpaid interest
is reversed. Income is subsequently recognized only to the extent that cash
payments are received. Loans are returned to accrual status when, in
management's judgment, the borrower has the ability and intent to make periodic
principal and interest payments (this generally requires that the loan be
brought current in accordance with its original contractual terms.)
7
<PAGE> 8
3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale at June 30, 1996 and December 31, 1995
are as follows (In Thousands):
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 6,112 $ 29 $ (112) $ 6,029
Mutual fund 1,132 1,132
Preferred Stock 5,000 (25) 4,975
------- -------- --------- -------
Total investment securities 12,244 29 (137) 12,136
------- -------- --------- -------
Mortgage-backed securities 41,234 626 (39) 41,821
------- -------- --------- -------
Totals $ 53,478 $ 655 $ (176) $53,957
======= ======== ========= =======
December 31, 1995
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Treasury securities $12,195 $ 277 $ (30) $12,442
Mutual fund 10,364 10,364
------- -------- --------- -------
Total investment securities 22,559 277 (30) 22,806
------- -------- --------- -------
Mortgage-backed securities 38,286 870 39,156
------- -------- --------- -------
Totals $60,845 $ 1,147 $ (30) $61,962
======= ======== ========= =======
</TABLE>
4. LOANS RECEIVABLE
The following table presents, for the periods indicated, the composition of the
loan portfolio (In Thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Real estate loans
Construction loans
Residential single family $ 39,424 $ 37,118
Commercial 2,325 440
Loans in process (28,095) (23,373)
-------- --------
Construction loans, net 13,654 14,185
Permanent loans
Residential single family 96,346 76,259
Residential apartments 264,827 231,459
Commercial 122,937 109,402
Other 14,574 10,652
-------- --------
Total real estate loans 512,338 441,957
Consumer loans 41,787 32,213
Business and other loans 15,034 8,704
-------- --------
Total loans 569,159 482,874
Premiums(discounts) on loans (84) (544)
Deferred loan fees (1,755) (1,220)
Allowance for losses on loans (3,437) (2,765)
-------- --------
$563,883 $478,345
======== ========
</TABLE>
8
<PAGE> 9
Activity in the allowance for losses on loans for the periods indicated is as
follows (In Thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
-------------------------
<S> <C> <C>
Balance at the beginning of the period $ 2,765 $ 1,910
Provision for loan losses 685 479
Net charge-offs (13) (39)
-------- --------
Balance at the end of the period $ 3,437 $ 2,350
======== ========
</TABLE>
Management analyzes loans on an individual basis and considers a loan to be
impaired when it is probable that all principal and interest amounts will not be
collected according to the terms of the contract. Information regarding impaired
loans at June 30, 1996 and December 31, 1995 is as follows (In Thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Balance of impaired loans $ 4,583 $ 3,569
Less portion for which no allowance
for losses on loans is allocated 2,651 3,569
------- --------
Portion of impaired loans for which
an allowance for loan losses is
allocated $ 1,932 $
======= ========
Portion of allowance for losses on
loans allocated to the impaired
loan balance $ 175 $
======= ========
</TABLE>
Information regarding impaired loans is as follows for the six months ended June
30, 1996 and the year ended December 31, 1995:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Average investment in impaired loans
during the period $ 4,958 $ 2,144
Interest income recognized on impaired
loans including income recognized on
a cash basis $ 45 $ 36
</TABLE>
9
<PAGE> 10
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at June 30, 1996 and December 31, 1995 are summarized as follows (In
Thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Mortgage loans underlying pass-through
securities
FNMA $ 128,374 $ 112,657
Mortgage loan portfolios serviced for
FHLMC 749,284 781,402
FNMA 225,987 224,545
Other 31,970 63,611
---------- ----------
Total loans serviced for others $1,135,615 $1,182,215
========== ==========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $8,432,000 and $14,198,000 at June 30, 1996 and
December 31, 1995, respectively.
The following is an analysis of the changes in cost of loan servicing rights for
the three and six month periods ended June 30, 1996 and 1995 (In Thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
--------- ---------
<S> <C> <C>
Balance at the beginning of the period $ 9,130 $ 4,825
Acquired or originated 618 4,686
Amortization (1,055) (601)
------- -------
Balance at the end of the period $ 8,693 $ 8,910
======= =======
</TABLE>
6. OTHER BORROWINGS
The following table presents, for the periods indicated, the composition of
other borrowings (In Thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Federal Home loan Bank Advances
(5.7% at June 30, 1996 and
December 31, 1995) $58,200 $28,000
Subordinated debt maturing December 31,
2001 (10% fixed rate) 4,874 4,874
Subordinated debt maturing January 1,
2005 (9.625% fixed rate) 14,000 14,000
------- -------
Total $77,074 $46,874
======= =======
</TABLE>
10
<PAGE> 11
7. 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.
The Bank had fixed and variable rate commitments to originate and/or purchase
loans (at market rates) of approximately $18,891,000 and $23,724,000, and
$18,543,000 and $11,152,000, at June 30, 1996 and December 31, 1995,
respectively. In addition, the Bank had commitments to sell loans totalling
$1,483,000 and $2,006,000, at June 30, 1996 and December 31, 1995, respectively.
At June 30, 1996 and December 31, 1995, 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 and recognized the non-refundable
fee on the date the options were issued. At June 30, 1996, loans with an unpaid
principal balance of $13,358,000 and a carrying value of $10,015,000 were held
for sale in connection with outstanding purchase options. At December 31, 1995,
a loan with an unpaid principal balance of $583,000 and a carrying amount of
$458,000 was held for sale in connection with an outstanding purchase option.
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.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of the
Bank. Metropolitan's results of operations are dependent on a variety of
factors, including the general interest rate environment, competitive conditions
in the industry, governmental policies and regulations and conditions in the
markets for financial assets. Like most financial institutions, the primary
contributor to Metropolitan's income is net interest income, the difference
between the interest Metropolitan earns on interest-earning assets, such as
loans and securities, and the interest Metropolitan pays on interest-bearing
liabilities, such as deposits and borrowings. Metropolitan's operations are also
affected by non-interest income, such as loan servicing fees and gains or losses
from sales of loans and securities. From time to time, Metropolitan engages in
certain transactions aimed at increasing its non-interest income such as loan
option income. Metropolitan's principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, occupancy costs, federal
deposit insurance premiums, and other general and administrative expenses.
Average Balances and Yields. The following table presents, for the periods
indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollar and
rates, and the net interest margin. Net interest margin refers to net interest
income divided by total interest-earning assets and is influenced by the level
and relative mix of interest-earning assets and interest-bearing liabilities.
All average balances are daily average balances. Non-accruing loans are
considered in average loan balances.
12
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended June 30,
1996 1995
------------------------- ------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 554,494 $11,718 8.45% $460,377 $9,901 8.60%
Mortgage-backed securities
available for sale(1) 38,857 651 6.70 24,596 391 6.36
Other(1) 26,572 435 6.55 16,062 265 6.60
--------- ------ -------- ------
Total interest-earning assets 619,923 12,804 8.26 501,035 10,557 8.43
------ ------
Nonearning assets 34,020 26,248
--------- --------
Total assets $ 653,943 $527,283
========= ========
Interest-bearing liabilities:
Deposits $ 521,607 6,798 5.24 $427,312 5,799 5.44
Other borrowings 61,626 1,018 6.64 48,309 830 6.89
--------- ------ -------- ------
Total interest-bearing
liabilities 583,233 7,816 5.39 475,621 6,629 5.59
------ -------
Noninterest-bearing liabilities 44,406 29,386
Shareholder's equity 26,304 22,276
--------- --------
Total liabilities and
shareholder's equity $ 653,943 $527,283
========= ========
Net interest income and
interest rate spread $4,988 2.87% $3,928 2.84%
====== ==== ====== ====
Net interest margin 3.22% 3.14%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 106.29% 105.34%
====== ======
<CAPTION>
Six Months Ended June 30,
1996 1995
------------------------- ------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 538,347 $23,040 8.56% $453,516 $19,317 8.52%
Mortgage-backed securities
available for sale(1) 38,301 1,265 6.61 20,684 656 6.34
Other(1) 21,720 683 6.29 13,604 395 5.81
--------- ------ -------- ------
Total interest-earning assets 598,368 24,988 8.35 487,804 20,368 8.35
------ ------
Nonearning assets 36,781 24,597
--------- --------
Total assets $ 635,149 $512,401
========= ========
Interest-bearing liabilities:
Deposits $ 507,053 13,345 5.29 $424,215 10,951 5.21
Other borrowings 61,624 2,104 6.87 39,890 1,437 7.26
--------- ------ -------- ------
Total interest-bearing
liabilities 568,677 15,449 5.46 464,105 12,388 5.38
------ ------
Noninterest-bearing liabilities 40,480 26,750
Shareholder's equity 25,992 21,546
--------- --------
Total liabilities and
shareholder's equity $ 635,149 $512,401
========= ========
Net interest income and
interest rate spread $9,539 2.89% $7,980 2.97%
====== ==== ====== ====
Net interest margin 3.19% 3.27%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 105.22% 105.11%
====== ======
<FN>
(1) The average balance of mortgage-backed securities and securities available
for sale are presented at historical cost.
</TABLE>
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<PAGE> 14
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.
<TABLE>
<CAPTION>
Three Months ended June 30,
1996 vs. 1995
Increase (Decrease)
---------------------------------
Change Change
Total Due to Due to
Change Volume Rate
-------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME ON:
Loans receivable $ 1,817 $ 1,986 $ (169)
Mortgage-backed securities 260 238 22
Other 170 172 (2)
-------- ------- -------
Total interest income 2,247 $ 2,396 $ (149)
-------- ======= =======
INTEREST EXPENSE ON:
Deposits 999 1,256 (257)
Other borrowings 188 225 (37)
------- ------ -------
Total interest expense 1,187 $ 1,481 $ (294)
-------- ======= =======
Increase in net interest income $ 1,060
========
<CAPTION>
Six Months ended June 30,
1996 vs. 1995
Increase (Decrease)
---------------------------------
Change Change
Total Due to Due to
Change Volume Rate
<S> <C> <C> <C>
INTEREST INCOME ON:
Loans receivable $ 3,723 $ 3,630 $ 93
Mortgage-backed securities 609 581 28
Other 288 253 35
------- ------- -------
Total interest income 4,620 $ 4,464 $ 156
-------- ======= =======
INTEREST EXPENSE ON:
Deposits 2,394 2,205 189
Other borrowings 667 742 (75)
------- ------- --------
Total interest expense 3,061 $ 2,947 $ 114
-------- ======= =======
Increase in net interest income $ 1,559
========
</TABLE>
RESULTS OF OPERATIONS
Net Income. Net income declined to $865,000 and $1,581,000 for the
three and six months ended June 30, 1996, respectively, as compared to
$1,047,000 and $1,679,000 for the same periods in 1995. Net interest
14
<PAGE> 15
income and non-interest income increased 19.3% and 4.3%, respectively, in the
six month period ended June 30, 1996 as compared to the same period in 1995,
however, the provision for loan losses and non-interest expense increased 43.0%
and 23.9%, respectively, in the six months ended June 30, 1996.
Metropolitan's net interest margin increased 8 basis points to 3.22% for the
three month period ended June 30, 1996 as compared to 3.14% for the same period
in 1995, largely as a result of the decline in cost of funds. Net interest
margin declined 8 basis points to 3.19% for the six month period ended June 30,
1996, as compared to 3.27% for the same period in 1995, largely as a result of
the changing mix of interest earning assets and an increase in the costs paid
for deposits over the first half of 1995. Cost of deposits was slightly lower
during the three month periods compared, however; the cost of deposits during
the six month period ended June 30, 1996 is still higher than the same period in
1995.
Interest Income. Total interest income increased 21.3% and 22.3% to $12.8
million $25.0 million in the three and six month periods ended June 30, 1996,
respectively, as compared to $10.6 million and $20.4 million in the same periods
in 1995. This increase primarily resulted from a 23.9% and 22.9% increase in
average interest-earning assets between the two respective periods. The average
balance of loans increased $94.1 million and $84.8 million, respectively, which
was a result of Metropolitan's consistent strategy of increasing assets so long
as quality loans with acceptable yield and term characteristics are available.
As a result of pricing pressure from competition and a shift in consumer demand
toward lower rate adjustable rate loans, the weighted average yield on
interest-earning assets declined to 8.25% and 8.35% during the three and six
month periods ended June 30, 1996, respectively, as compared to 8.43% and 8.35%
during the same periods in 1995.
Interest Expense. Total interest expense increased 17.9% and 24.7% to $7.8
million and $15.4 million for the three and six month periods ended June 30,
1996, respectively, as compared to $6.6 million and $12.4 million for the same
periods in 1995. Interest expense increased due to a higher average balance of
interest-bearing liabilities outstanding for the three and six month periods
ending June 30, 1996 compared to the same periods in 1995 and due to a higher
cost of funds during the six months ended June 30, 1996, as compared to the same
period in 1995. In accordance with Metropolitan's stated business strategy, the
average balance of deposit accounts increased $94.3 million, or 22.1%, during
the three months ended June 30, 1996 compared to 1995, and increased $82.8
million, or 19.5%, during the six months ended June 30, 1996 compared to 1995.
Metropolitan's cost of funds decreased to 5.39% in the three months ended June
30, 1996 as compared to 5.59% in the same period in 1995 due to a decline in the
market interest rates paid for deposits. Cost of
15
<PAGE> 16
funds increased to 5.46% in the six months ended June 30, 1996 as compared to
5.38% in the same period in 1995, primarily due to the changing mix of funding
sources. Cost of funds was slightly lower during the three month periods
compared, however; the cost of funds during the six month period ended June 30,
1996 is still higher than the same period in 1995.
Provision for Loan Losses. The provision for loan losses increased 58.2% and
43.0% to $379,000 and $685,000 in the three and six month periods ended June 30,
1996, respectively, as compared to $239,000 and $479,000 for the comparable
periods in 1995. The increase was related to the increase in total loans and
management's estimate of the adequacy of the allowance for losses on loans.
Total loans (including loans held for sale but not including the allowance for
loss) increased 19.8% to $578.0 million at June 30, 1996 from $482.6 million at
December 31, 1995. The allowance for losses on loans at June 30, 1996 was $3.4
million or 0.59% of total loans, as compared to $2.8 million, or 0.57% of total
loans, at December 31, 1995. Management's estimate of the adequacy of the
allowance for losses on loans is based upon an analysis of such factors as
historical loan loss experience, an analysis of impaired loans, economic
conditions affecting real estate markets, regulatory considerations, and other
matters.
Non-Interest Income. Total non-interest income decreased 32.2% to $1.0 million
in the three months ended June 30, 1996 as compared to $1.5 million in the same
period in 1995, but increased 4.3% to $2.0 million in the six months ended June
30, 1996 as compared to $2.0 million in the same period in 1995. The following
table sets forth Metropolitan's non-interest income for the periods indicated.
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
1996 1995 1996 1995
---- ---- ---- ---
(In thousands)
<S> <C> <C> <C> <C>
Loan servicing income, net $ 319 $ 212 $ 632 $ 391
Gain (loss) on sale of loans (67) 102 36 113
Loan option income 298 420 406 420
Loan credit discount income 406 406
Other 441 321 972 632
------ ------- ------ ------
Total $ 991 $ 1,461 $2,046 $1,962
====== ======= ====== ======
</TABLE>
Net loan servicing income increased 50.5% and 61.6% to $319,000 and $632,000 in
the three and six month periods ended June 30, 1996, respectively, as compared
to $212,000 and $391,000 in the same period in 1995 due to the increase in the
portfolio being serviced for others. The increase in the servicing portfolio and
related net loan servicing fees was a result of Metropolitan's strategy of
increasing non-credit based fee income. Although the portfolio of loans serviced
for others declined to $1.1 billion at June 30, 1996 compared to $1.2 billion at
June 30, 1995, servicing rights for $371.2 million were only acquired in June of
1995 and had not been serviced long enough to contribute to loan servicing
income during the first half of 1995. The benefit of this
16
<PAGE> 17
acquisition did not begin to be realized until the third quarter of 1995.
Sale of loans was a loss of $67,000 in the three months ended June 30, 1996 and
a gain of $36,000 in the six months ended June 30, 1996. This compared to a gain
on sale of loans of $102,000 and $113,000 in the same three and six month
periods in 1995. This income was dependent upon both the amount of loans sold,
secondary market pricing, and the value allocated to mortgage servicing rights,
and these variables in turn were directly affected by prevailing interest rates.
The proceeds from sale of loans decreased $13.1 million and $2.6 million to
$13.4 million and $24.6 million during the three and six month periods ended
June 30, 1996, respectively, as compared to $26.5 and $27.2 million in the same
periods in 1995. The loss occurred during the second quarter of 1996 as interest
rates increased sharply.
Loan option income was $298,000 and $406,000 in the three and six month periods
ended June 30, 1996, respectively, as compared to $420,000 in each of the same
periods in 1995. This represented a new source of non-interest income for the
Bank beginning in the second quarter of 1995. In these transactions Metropolitan
purchased loans and sold nonrefundable options to a third party to purchase
these same loans at a later date.
Loan credit discount income was $406,000 during the three month period ended
June 30, 1995. Metropolitan frequently purchases multifamily and commercial real
estate loans in the secondary market. These loans are often purchased at a
discount due to Metropolitan's assessment of the interest rates, credit risk and
value of the underlying collateral. The portion of the discount attributable to
interest rate is accreted to interest income over the life of the loan. When
these loans payoff, and Metropolitan receives the full contractual principal
due; any unamortized discount related to management's initial assessment of the
deficiency in collateral values is recognized as non-interest income.
Other noninterest income increased $120,000 or 37.4% and $340,000 or 53.7% for
the three months and the six months ended June 30, 1996 compared to the same
periods in the previous year. This increase was primarily due to fee income
earned on checking accounts and from branch transactions as both the number of
branch offices and the number of checking accounts are up in 1996 compared with
1995.
17
<PAGE> 18
Non-Interest Expense. Total non-interest expense increased to $4.2 million and
$8.4 million in the three and six month periods ended June 30, 1996,
respectively, as compared to $3.4 million and $6.8 million for the same periods
in 1995, or an increase of 23.9% in each period. The following table sets forth
Metropolitan's non-interest expense for the periods indicated:
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Personnel related costs $ 2,023 $ 1,612 $ 4,071 $ 3,259
Occupancy costs 553 501 1,124 1,025
Federal deposit insurance 331 274 640 548
Data processing expense 147 189 295 328
Amortization of intangibles 55 55 109 111
State franchise tax 114 76 232 152
Marketing expense 158 117 285 226
Other operating expenses 849 591 1,607 1,103
-------- ------- ------- -------
Total $ 4,230 $ 3,415 $ 8,363 $ 6,752
======== ======= ======= =======
</TABLE>
Personnel related expenses increased $411,000 and $812,000, which represented
50.3% and 50.4% of the increase in total non-interest expense in the three and
six month periods ended June 30, 1996, respectively, over the same periods in
1995. The increase was primarily a result of having two additional full service
retail sales offices open in the 1996 periods and to a lesser extent reflects
the effects of merit increases over the two time periods. Occupancy costs
increased $52,000 and $99,000, which represented 6.3% and 6.2% of the increase
in total non-interest expense in the three and six month periods ended June 30,
1996, respectively, over the same periods in 1995, generally as a result of an
increase in the number of full service retail sales offices. Other operating
expenses, which include miscellaneous general and administrative costs in
addition to certain loan servicing and loan processing costs, increased $258,000
and $504,000, which represented 31.8% and 31.2% of the increase in total
non-interest expense in the three and six month periods ended June 30, 1996,
respectively, over the same periods in 1995, as a result of the overall increase
in business levels (loans and deposits).
Provision for Income Taxes. The provision for income taxes decreased 26.7% and
7.4% to $505,000 and $956,000 in the three and six month periods ended June 30,
1996, respectively, as compared to $688,000 and $1.0 million in the same periods
in 1995. The effective tax rate was 36.8% and 37.7% for the three and six month
periods ended June 30, 1996, respectively, as compared to 39.7% and 38.0% for
the same periods in 1995.
18
<PAGE> 19
ASSET QUALITY
Metropolitan's goal is to maintain the above average asset quality of its loan
portfolio through conservative lending policies and prudent underwriting.
Detailed reviews of the loan portfolio are undertaken regularly to identify
potential problem loans or trends early and to provide for adequate estimates of
potential losses. In performing these reviews, Metropolitan's management
considers, among other things, current economic conditions, portfolio
characteristics, delinquency trends, and historical loss experiences.
Metropolitan normally considers loans to be non-performing when payments are 90
days or more past due or when the loan review analysis indicates that
repossession of the collateral may be necessary to satisfy the loan. In
addition, Metropolitan considers loans to be impaired when, in management's
opinion, it is probable that the borrower will be unable to meet the contractual
terms of the loan. When loans are classified as non-performing, an assessment is
made as to the collectability of the unpaid interest. Interest determined to be
uncollectible is reversed from interest income and future interest income is
recorded only if the loan principal and interest due is considered collectible
and is less than the estimated fair value of the underlying collateral.
The table below provides information concerning Metropolitan's non-performing
assets and the allowance for losses on loans as of the dates indicated. All
loans classified by management as impaired were also classified as
non-performing.
<TABLE>
<CAPTION>
At June 30, December 31,
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans $4,750 $3,103
Loans past due greater than
90 days or impaired, still accruing 945 204
------ ------
Total non-performing loans 5,695 3,307
Real estate owned 219 258
------ ------
Total non-performing assets $5,914 $3,565
====== ======
Allowance for losses on loans $3,437 $2,765
====== ======
Non-performing loans to total loans 0.99% 0.69%
Non-performing assets to total assets 0.88% 0.60%
Net charge-offs to average loans 0.00%(1) 0.02%
Provision for loan losses to
average loans 0.25%(1) 0.21%
Allowance for losses on loans to
total non-performing loans at
end of period 60.34% 83.61%
Allowance for losses on loans to
total loans at end of period 0.59% 0.57%
<FN>
(1) Annualized for comparative purposes.
</TABLE>
19
<PAGE> 20
Non-performing loans at June 30, 1996 increased $2.4 million, or 72.2% to $5.7
million as compared to $3.3 million at December 31, 1995. The increase was due
to four large credits, two secured by multifamily properties and two secured by
commercial real estate. One of these multifamily loans is current despite a debt
service coverage ratio below 1.0. Management will likely move to foreclose on
the remaining three properties and expects that non-accrual status will continue
through the rest of 1996 and into 1997. Based upon recent appraisals of the
underlying collateral the loans are adequately secured by the collateral value
and no material losses are anticipated. Management considers all four of these
loans to be impaired.
Non-performing loans at December 31, 1995 included a $1.5 million loan secured
by an apartment building in Southern California which was damaged in the January
1994 earthquake. The apartment building has been reconstructed. Under the terms
of a loan workout agreement the borrower has resumed regular principal and
interest payments, and is also repaying interest accrued during the
reconstruction period. This loan is no longer considered impaired by management.
Non-performing loans include $4.6 million and $3.6 million of loans at June 30,
1996 and December 31, 1995, respectively, considered by management to be
impaired. The circumstances and trends associated with these loans have been
included in management's consideration of the adequacy of the allowance for
losses on loans.
FINANCIAL CONDITION
Total assets amounted to $672.8 million at June 30, 1996, as compared to $590.1
million at December 31, 1995, an increase of $82.7 million, or 14.0%. The
increase in assets was funded with deposit growth of $55.1 million and an
increase in Federal Home Loan Bank ("FHLB") advances and other borrowings of
$30.2 million.
Cash and cash equivalents decreased $5.8 million, or 32.1%, to $12.3 million.
The decline is due to a lower volume of transactions in process at month-end
June 30, 1996.
Securities decreased $10.7 million, or 46.8%, to $12.1 million. The decline is
largely due to a reduction in excess short-term liquidity which was used to fund
loan purchases early in 1996.
Net loans receivable increased $85.5 million, or 17.9% to $563.9 million at June
30, 1996. This increase was consistent with Metropolitan's overall strategy of
increasing assets while adhering to prudent underwriting standards and
preserving its adequately capitalized status. The loan growth was proportionate
and the mix of loan types has not changed significantly compared to December 31,
1995.
Deposits totalled $558.8 million at June 30, 1996, an increase of $55.1 million,
or 10.9%, over the balance at December 31, 1995. The increase resulted from
management's marketing efforts, continued growth at newer
20
<PAGE> 21
retail sales offices and increased custodial checking balances which are
maintained for the benefit of investors in the loan servicing segment of the
business.
Other borrowings increased $30.2 million to $77.1 million at June 30, 1996, as
compared to $46.9 million at December 31, 1995. Based on the lower cost of
wholesale funds as compared to comparable maturity retail deposits, management
chose to fund a portion of the loan growth discussed above with wholesale funds.
FHLB advances were the source of borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to Metropolitan's ability to generate
adequate amounts of cash to meet its needs, typically for funding loan
originations and purchases. Metropolitan's primary sources of internally
generated funds are principal repayments and payoffs of loans receivable, cash
flows from operations and proceeds from sales of loans. External sources of
funds include increases in deposits, FHLB advances, and reverse repurchase
agreements.
While principal repayments and FHLB advances are fairly stable sources of funds,
deposit flows and loan prepayments are greatly influenced by prevailing interest
rates, economic conditions, and competition. Metropolitan regularly reviews cash
flow needed to fund its operations and believes that the aforementioned
resources are adequate for its foreseeable requirements.
The Bank is required by regulation to maintain a liquidity ratio (average daily
balance of liquid assets to average daily balance of net withdrawable accounts
and short-term borrowings) of 5%. The Bank's liquidity ratio for June 1996 was
5.74%. Historically, Metropolitan has maintained its liquidity close to the
required minimum since the yield available on qualifying investments is lower
than alternative uses of funds and is generally not at an attractive spread over
incremental cost of funds.
The Corporation's primary source of funds currently is dividends from the Bank,
which are subject to restrictions imposed by federal bank regulatory agencies.
The Corporation's primary use of funds is for interest payments on its existing
debt. At June 30, 1996, the Corporation, excluding the Bank, had cash of
$756,000.
21
<PAGE> 22
Metropolitan's liquidity, represented by cash equivalents, is a result of its
operating, investing, and financing activities. These activities are summarized
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Net cash used for operating
activities $ (8,745) $ (15,751)
Net cash used for investing
activities (82,289) (57,546)
Net cash provided by
financing activities 85,206 72,707
--------- ---------
Net change in cash and
cash equivalents (5,828) (590)
Cash and cash equivalents
at beginning of period 18,170 11,565
--------- ---------
Cash and cash equivalents
at end of period $ 12,342 $ 10,975
========= =========
</TABLE>
Cash provided or used by operating activities is determined largely by changes
in the level of loans held for sale. The level of loans held for sale depends on
the level of loan originations and the time until an investor funds the purchase
of the loan from the Bank.
Cash provided from investing activities consists primarily of principal payments
on loans and mortgage-backed securities. The level of these payments increases
and decreases depending on the size of the loan and mortgage-backed securities
portfolios and the general trend and level of interest rates, which influences
the level of refinancings and mortgage repayments. During the six months ended
June 30, 1996 and 1995, net cash was used in investing activities, primarily to
fund and purchase new loans.
Cash provided from financing activities consists primarily of increased deposits
but also includes wholesale borrowings like FHLB advances and reverse repurchase
agreements.
At June 30, 1996, $43.8 million, or 7.8%, 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.
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
22
<PAGE> 23
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The Bank's regulatory capital ratios at June 30, 1996 were in excess of the
capital requirements specified by OTS regulations as shown by the following
table:
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
---------------- ------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital amount
Actual $39,278 5.89% $39,570 5.93% $42,461 8.82%
Required 10,003 1.50 26,687 4.00 38,500 8.00
------- ------- -------
Excess $29,275 4.39% $12,883 1.93% $ 3,961 0.82%
======= ======= =======
</TABLE>
Metropolitan anticipates 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.
In late 1995, Congress passed legislation as part of its balanced budget bill
providing for the merger of the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF") effective January 1, 1998. The president
vetoed this legislation in December 1995. Since the issues of the
undercapitalization of SAIF and the difference in premium rates between BIF and
SAIF have not been resolved it is very possible that similar legislation could
be passed in the future. One feature of the prior legislation authorized the
Federal Deposit Insurance Corporation ("FDIC") to impose a one-time special
assessment on SAIF-insured deposits in an amount equal to approximately 85 cents
per $100 in insured deposits for the purpose of recapitalizing SAIF. Based upon
deposits at June 30, 1996, such an assessment would be approximately $4.7
million, or $3.1 million after-tax. The Corporation, through its line of credit,
has $4 million available to contribute to the capital of the Bank and therefore,
management does not believe that such an assessment would have a material
adverse effect on the Bank or Metropolitan. There can be no assurance as to the
ultimate form this legislation will take or its impact on the Bank.
ASSET/LIABILITY MANAGEMENT
Metropolitan, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. The Bank's Asset and Liability Committee, which
includes representatives of senior management, monitors the level and relative
mix of its interest-earning assets and interest-bearing liabilities. The
principal strategy used by Metropolitan to manage interest rate risk has been to
build a portfolio of adjustable rate interest-earning assets.
23
<PAGE> 24
Presented below, as of June 30, 1996 and 1995, is an analysis of Metropolitan's
interest rate risk measured using Net Portfolio Value ("NPV") methodology.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning assets and outgoing cash flows on
interest-bearing and other liabilities. The table also contains the policy
limits set by the Board of Directors of the Bank established with consideration
of the dollar impact of various rate changes and the Bank's capital position.
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
CHANGES IN
INTEREST RATE BOARD LIMIT CHANGE IN % CHANGE CHANGE IN % CHANGE
(BASIS POINTS) % CHANGE NPV IN NPV NPV IN NPV
- -------------- ----------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400 (75)% $(23,339) (43)% $(26,493) (61)%
+300 (50) (17,235) (32) (19,072) (44)
+200 (25) (11,114) (21) (11,864) (28)
+100 (10) (5,205) (10) (5,268) (12)
-100 (10) 4,164 8 4,883 11
-200 (25) 9,387 17 9,866 23
-300 (50) 18,071 33 15,741 37
-400 (75) 30,127 56 22,287 52
</TABLE>
As illustrated in the table, Metropolitan's NPV is unfavorably affected in the
rising rate scenarios. This occurs principally because the interest rates paid
on deposits would increase more rapidly than interest rates earned on assets
because deposits generally have shorter periods to repricing. In addition, the
fixed rate assets in portfolio will only reprice as the loans are repaid and new
loans at higher rates are made. Furthermore, even for the adjustable rate
assets, repricing may lag behind the rate change due to contractual time frames.
The Bank's sensitivity to rising rates at June 30, 1996 is improved compared to
the sensitivity at the same point in time in 1995 due to the increased capital
level and the changing mix of assets. At June 30, 1996, the Bank was within the
Board established limits for various changes in interest rates.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, as a result of
competition, the interest rates on certain assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types of assets and liabilities may lag behind changes in market rates. Further,
in the event of a change in interest rates, expected rates of repayment on
assets and early withdrawal levels from certificates of deposit would likely
deviate from those scheduled. Despite its limitations, management considers NPV
the best method for monitoring interest rate risk since core repricing and
24
<PAGE> 25
maturity relationships are very clearly seen. The clarity of the risk relations
is enhanced by the simplicity of the rate changes and the fact that all rates,
short-term and long-term, change by the same degree.
The steps being taken by the Bank to manage interest rate risk include: (i) the
continued focus of originating and purchasing adjustable rate assets for
portfolio; (ii) the sale of fixed rate one- to four-family loans with servicing
retained; (iii) focus on shortening the term of fixed rate lending by increasing
the percent of the fixed rate loan portfolio represented by consumer loans; (iv)
increasing business lending which will result in loans with generally adjustable
rates and shorter terms; (v) increasing the loan servicing portfolio; (vi)
emphasizing transaction account deposit products which are less susceptible to
repricing in a rising interest rate environment; (vii) maintaining competitive
pricing on longer term certificates of deposit; and (viii) utilizing term
advances and other borrowings rather than short-term funds.
ACCOUNTING DEVELOPMENTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
122, "Accounting for Mortgage Servicing Rights." This statement requires lenders
who sell originated loans and retain the servicing rights to recognize as
separate assets the rights to service mortgage loans for others. It also
requires that capitalized mortgage servicing rights be assessed for impairment
based on the fair value of those rights. Management elected to adopt this
statement effective January 1, 1995. At June 30, 1996 and December 31, 1995, the
fair value of such rights was in excess of the amount capitalized.
FEDERAL TAXATION
In August 1996, legislation was passed, but not yet signed into law as of the
date of this report, which eliminates the percentage of taxable income method
for deducting additions to the tax bad debt reserve for all thrifts for tax
years beginning after December 31, 1995. The new legislation would require
Metropolitan to recapture the excess of its bad debt reserve at December 31,
1995 over the balance of the tax bad debt reserve outstanding at the end of the
base year which is 1988. The tax due would be paid ratably over a six year
period. Metropolitan has provided deferred taxes for this excess as required by
current accounting rules and therefore the change in this legislation should not
have a material adverse effect on the results of operation. Going forward,
Metropolitan will use the direct write-off method for deducting tax bad debts,
under which charge-offs are deducted and recoveries are taken into taxable
income as incurred.
25
<PAGE> 26
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 Articles of Incorporation of Metropolitan
Financial Corp. (incorporated by reference
to Exhibit 3.1 to Metropolitan's
Registration Statement on Form S-1 filed
with the Securities and Exchange Commission
on November 28, 1995 (Registration
No. 33-98380), as amended).
3.2 Code of Regulations of Metropolitan
Financial Corp. (incorporated by reference
to Exhibit 3.2 to Metropolitan's
Registration Statement on Form S-1 filed
with the Securities and Exchange Commission
on November 28, 1995 (Registration
No. 33-98380), as amended).
27 Financial Data Schedule(1)
99.1 The Loan Agreement by and between The
Huntington National Bank and Metropolitan
Financial Corp., dated February 22, 1995,
relating to the Huntington Bank Loan
(incorporated by reference to Exhibit 99.1
to Metropolitan's Registration Statement on
Form S-1 filed with the Securities and
Exchange Commission on November 28, 1995
(Registration No. 33-98380), as amended), as
amended by Amendments 1, 2, and 3 previously
filed, and as amended by Amendment 4 filed
herewith.
b. Reports on Form 8-K - No reports on Form 8-K were filed by
Metropolitan during the first six months of 1996.
(1) Filed only in electronic format pursuant to item 601(b)(27) of
Regulation S-K.
26
<PAGE> 27
METROPOLITAN FINANCIAL CORP.
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 (principal
financial and accounting
officer)
Date: August 13, 1996
27
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM METROPOLITAN
FINANCIAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED
STATEMENTS OF OPERATIONS, CONSOLIDATED STATEMENTS OF CASH FLOWS AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
SIX MONTH PERIOD ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,042
<INT-BEARING-DEPOSITS> 300
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,957
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 574,569
<ALLOWANCE> 3,437
<TOTAL-ASSETS> 672,786
<DEPOSITS> 558,794
<SHORT-TERM> 38,200
<LIABILITIES-OTHER> 10,305
<LONG-TERM> 38,874
<COMMON> 0
0
0
<OTHER-SE> 26,613
<TOTAL-LIABILITIES-AND-EQUITY> 672,786
<INTEREST-LOAN> 23,040
<INTEREST-INVEST> 1,948
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,988
<INTEREST-DEPOSIT> 13,345
<INTEREST-EXPENSE> 15,449
<INTEREST-INCOME-NET> 9,539
<LOAN-LOSSES> 685
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,363
<INCOME-PRETAX> 2,537
<INCOME-PRE-EXTRAORDINARY> 1,581
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,581
<EPS-PRIMARY> 1,581,000.00
<EPS-DILUTED> 1,581,000.00
<YIELD-ACTUAL> 3.19
<LOANS-NON> 4,750
<LOANS-PAST> 314
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,765
<CHARGE-OFFS> 13
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,437
<ALLOWANCE-DOMESTIC> 3,437
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
FOURTH AMENDMENT TO
-------------------
LOAN AGREEMENT
--------------
THIS FOURTH AMENDMENT TO LOAN AGREEMENT, dated as of May 31,
1996, is entered into by and between METROPOLITAN FINANCIAL CORP., an OHIO
Corporation (the "Borrower"), and THE HUNTINGTON NATIONAL BANK (the "Bank").
WITNESSETH
----------
WHEREAS, the Borrower and the Bank entered into a Loan
Agreement dated February 22, 1995 (the "Loan Agreement"); and
WHEREAS, the Borrower and the Bank have agreed to amend the
Loan Agreement as set forth herein and to enter into this Amendment to
effectuate such agreement. Terms defined in the Loan Agreement shall, unless
otherwise defined herein, have the meaning ascribed therein. All references to
"Paragraphs" or "Sections" herein are references to paragraphs and sections of
the Loan Agreement.
NOW, THEREFORE, for valuable consideration, the sufficiency of
which is hereby acknowledged by the parties, the parties do hereby amend the
Loan Agreement and agree as follows:
1. The definition of "LIBO Rate" is hereby deleted and
the following is substituted in lieu thereof:
"LIBO Rate" means, relative to each applicable Interest
period the LIBO Rate (Reserve Adjusted) per annum, determined by the
Bank, at which dollar deposits in immediately available funds are
offered to the Bank two business days prior to the beginning of such
Interest Period by prime banks in the interbank eurodollar market for
delivery on the first day of such Interest Period, for the number of
days comprised therein and in an amount equal to the amount of the
Loan to be outstanding during such Interest Period."
2. Section 2.02(A) of the Loan Agreement is hereby
deleted and the following is substituted in lieu thereof:
"(A) Subject to the terms and conditions hereof, the Bank
may lend the Borrower, from time to time until
<PAGE> 2
the Conversion Date, such sums as the Borrower may request, but
which shall not exceed in the aggregate amount at any one time
outstanding the amount of Four Million Dollars ($4,000,000). It is
the intention of the parties that the outstanding principal amount
of the Loan shall at no time exceed the amount of Four Million
Dollars ($4,000,000) and if, at any time, an excess shall for any
reason exist, the Borrower shall repay to the Bank forthwith such
amounts as may be necessary to eliminate such excess. Subject to
this limitation and the limitations contained in Sections 2.02(b)
and 2.03 below, the Borrower may borrow, repay without penalty or
premium, and reborrow hereunder, from the date of this Agreement
to the Conversion Date, the full amount permitted hereunder. A fee
equal to twenty-five (25) basis points of the amount of the
average unused portion of the principal amount of the Loan will be
payable quarterly commencing on August 31, 1996. For purposes of
determining the amount of such fee, the stated amount of unexpired
letters of credit issued by the Bank pursuant to Section 2.02(B)
below shall be considered an advance."
3. Section 2.05(A)(1), (2) and (3) are hereby deleted
and the following is substituted in lieu thereof:
"(1) Prior to May 31, 1998 (the "Conversion Date"), interest
on the principal balance of the Loan, from time to time
outstanding, will be payable monthly commencing on June 30, 1996,
at either the Prime Rate in effect from time to time, or the LIBO
Rate in effect on the date the Bank receives written notice from
the Borrower of its election to convert the interest rate to the
LIBO Rate for a ninety (90) day period, plus two hundred
twenty-five (225) basis points. Following the Conversion Date,
interest on the principal balance of the Loan shall be at the
Prime Rate in effect from time to time. After maturity, (whether
maturity is brought about by acceleration in the Event of Default
or otherwise) the interest rate shall be two hundred (200) basis
points in excess of the higher of: (i) the interest rate in
effect at the time of such maturity or acceleration, as the case
may be; or (ii) the Prime Rate in effect from time to time.
(2) On the Conversion Date, the unpaid principal
<PAGE> 3
amount of the Loan, together with interest at the rate provided
for in Section (1) above, shall be repaid by the Borrower in
thirty-six (36) equal monthly installments commencing thirty (30)
days after the Conversion Date. The amount of the installments
shall be calculated by the Bank based on the outstanding balance
of the Loan as of the Conversion Date and as if the Loan were
being repaid on a sixty (60) month amortization schedule. On the
due date of the thirty-sixth (36th) monthly installment, any
principal, interest, and other Obligations of the Borrower
remaining unpaid shall be paid in full by the Borrower, unless
otherwise provided by the terms of such Obligations.
(3) If the Return on Average Assets ("ROA") ratio of
Metropolitan Savings Bank of Cleveland, as determined as of the
end of each such calendar quarter in accordance with Section
6.01(H) below shall be greater than .8% and less than .9%, the
applicable interest rate provided for in Section 2.05(A)(1) or
(2) above, as the case may be, shall be reduced by twenty-five
(25) basis points, effective as of the day after the end of such
quarter. If, as of the end of such calendar quarter, such ROA
ratio shall be equal to or greater than .9% and less than 1.0%,
the applicable interest rate provided for in Section 2.05(A)(1)
or (2) above, as the case may be, shall be reduced by a second
twenty-five (25) basis points, effective as of the day after the
end of such quarter. If, as of the end of such calendar quarter,
such ROA ratio shall be greater than 1.0%, the applicable
interest rate provided for in Section 2.05(A)(1) or (2) above, as
the case may be, shall be reduced by a third additional
twenty-five (25) basis points. The basis point reductions
provided for in this Section (3) shall occur only if the Borrower
has elected to have the interest rate be based on the LIBO Rate
in accordance with 2.05(A)(1) below for the period during which
such reductions would apply."
4. Section 6.01(C)(3) and (4) are hereby deleted and the
following is substituted in lieu thereof:
"(3) Within one hundred twenty (120) days after the close of
each annual accounting period in each Fiscal Year: (a) income
statements of the Borrower and
<PAGE> 4
Metropolitan Savings Bank, on a consolidated basis, for such
year; and (b) balance sheets of the Borrower and Metropolitan
Savings Bank, on a consolidated basis, for such year; and -- all
in reasonable detail, subject to normal year-end audit
adjustments, certified by an outside auditor satisfactory to the
Bank to have been prepared in accordance with GAAP;
(4) Borrower and Metropolitan Savings Bank of Cleveland
shall provide the Bank with a quarterly "Covenant Compliance
Certificate" in the form prescribed by the Bank and signed by the
Chief Financial Officer or President of the Borrower; and
(5) Upon request from time to time of copies of any
agreements, contracts, or commitments referred to in schedule
5.01(I) hereof."
5. The first sentence of Section 6.01(H) of the Loan Agreement
is hereby deleted and the following is substituted in lieu thereof:
"(H) Metropolitan Savings Bank of Cleveland shall maintain a
return on assets (ROA") ratio as of each calendar quarter-end of
at least 0.7% on a weighted average basis for the preceding three
quarters; provided, however, that any assessments against
Metropolitan Savings Bank of Cleveland by or for the benefit of
the Savings Association Insurance Fund ("SAIF") shall be
considered an extraordinary event and will not be included in the
calculation of the ROA ratio for purposes of this Section
6.01(H)."
In all other respects the parties hereto hereby ratify and
affirm the terms and conditions of the Loan Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the day and year first above written.
THE BANK: THE BORROWER:
THE HUNTINGTON NATIONAL BANK METROPOLITAN FINANCIAL CORP.
By: /s/Charles B. Knowles, Jr. By: /s/David G. Lodge
--------------------------- --------------------------
Name: Charles B. Knowles, Jr. Name: David G. Lodge
Title: Vice President Title: President
