<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended December 31, 1996
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from_________________ to _________________
Commission file number 333-12381
-----------------------------------
METROPOLITAN FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
- ------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6001 Landerhaven Drive Mayfield Heights, Ohio 44124
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(216) 646-1111
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock,without par value
------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, will not be contained, to the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregated market value of voting stock held by nonaffiliates of the
Registrant as of March 3, 1997 was $ 7,608,850.
As of March 3, 1997, there were 3,525,635 shares of the Registrant's Common
Stock issued and outstanding.
Documents incorporated by reference:
Portions of the 1996 Annual Report - Part II
Portions of the Proxy Statement for the 1997 Annual Meeting - Part III
1
<PAGE> 2
<TABLE>
<CAPTION>
METROPOLITAN FINANCIAL CORP.
1996 FORM 10-K
TABLE OF CONTENTS
PART I
<S> <C> <C>
ITEM 1. BUSINESS.................................................................. 3
ITEM 2. PROPERTIES................................................................ 32
ITEM 3. LEGAL PROCEEDINGS......................................................... 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS....................... 33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................................... 33
ITEM 6. SELECTED FINANCIAL DATA................................................... 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................. 33
PART III
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................ 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES...................................................... 33
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................... 34
ITEM 11. EXECUTIVE COMPENSATION..................................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .......... 34
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is a
savings and loan holding company incorporated in 1972 that is engaged in the
principal business of originating and purchasing mortgage and other loans
through its wholly-owned subsidiary, Metropolitan Savings Bank of Cleveland (the
"Bank"). Funds for lending and other investment activities are obtained
primarily from savings deposits, wholesale borrowings, principal repayments on
loans and the sale of loans. The activities of the Corporation are limited and
impact the results of operations primarily through interest expense on a
consolidated basis. Unless otherwise noted, all of the activities discussed
below are of the Bank. Metropolitan's corporate headquarters is located at 6001
Landerhaven Drive, Mayfield Heights, Ohio 44124.
The Corporation's current majority shareholder is Robert M. Kaye of
Rumson, New Jersey. Mr. Kaye acquired the Corporation in 1987 and remained sole
shareholder until the initial public offering ("IPO") of the Corporation's
Common Stock in October, 1996. As a result of the IPO, Mr. Kaye currently owns
77.5% of the Corporation's outstanding Common Stock and has the ability to
control the outcome of various matters submitted to the shareholders for
approval, the ability to elect or remove all the directors of the Corporation
and has ultimate control of the Corporation and the Bank. In addition, Mr. Kaye
is Chairman of the Board and Chief Executive Officer of the Corporation.
The Bank is a state chartered savings association established in 1958.
At December 31, 1996, the Bank operated fourteen full service retail offices
throughout Eastern Cuyahoga, Summit, Lake and Geauga Counties. As of December
31, 1996, the Bank also maintained five residential and multifamily loan
production offices. In addition to its principal business of originating and
purchasing mortgage and other loans, the Bank services a significant portfolio
of mortgage loans for various investors. The Bank has recently formed a Trust
Service Department to manage investment assets for individual and institutional
clients.
At December 31, 1996, Metropolitan had total assets of $769.1 million,
total deposits of $622.1 million and shareholders' equity of $30.2 million. The
deposits of the Bank are insured by the Federal Deposit Insurance Corporation
("FDIC") up to applicable limits.
In addition to the Bank, Metropolitan has four other subsidiaries, each
of which are either directly or indirectly wholly-owned by Metropolitan. These
subsidiaries include: MetroCapital Corporation; Kimberly Construction Company,
Incorporated ("Kimberly Construction"); Metropolitan Savings Service
Corporation; and Metropolitan Securities Corporation. Each of these
subsidiaries, with the exception of Kimberly Construction, is inactive.
Currently, Kimberly Construction's sole business function is to serve as a
principal party to various construction contracts entered into in connection
with the construction of Bank premises.
LENDING ACTIVITIES
General. Metropolitan primarily originates and purchases mortgage loans
secured by multifamily residential real estate. Metropolitan also originates
one- to four-family residential, construction and commercial real estate loans,
and to a lesser extent, consumer and business loans. In order to minimize
interest rate risk, the majority of the residential real estate loans retained
by Metropolitan in its portfolio are adjustable rate mortgages ("ARMs").
3
<PAGE> 4
Loan Portfolio Composition. The following information presents the
composition of Metropolitan's loan portfolio, including loans held for sale, in
dollar amounts and in percentages (before deductions for loans in process,
deferred fees and discounts and allowance for losses on loans) as of the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993
------------------- --------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------- -------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS
One- to four-family $114,758 16.8% $ 76,259 15.0% $112,840 25.2% $ 39,510 12.7%
Multifamily 276,544 40.3 231,459 45.8 187,928 41.9 166,221 53.2
Commercial 135,635 19.8 109,403 21.5 83,354 18.6 54,819 17.5
Construction and land 71,697 10.5 48,210 9.5 38,270 8.5 30,894 9.9
Held for sale 8,973 1.3 1,504 0.2 84 0.0 10,391 3.3
-------- ------ -------- ------- -------- ------- -------- -------
Total real estate loans 607,607 88.7 466,835 92.0 422,476 94.2 301,835 96.6
CONSUMER LOANS 54,180 7.9 32,214 6.3 25,946 5.8 10,687 3.4
BUSINESS AND OTHER LOANS 23,508 3.4 8,703 1.7 171 0.0 50 0.0
-------- ------ ------- ------- -------- ------- -------- -------
Total loans 685,295 100.0% 507,752 100.0% 448,593 100.0% 312,572 100.0%
====== ======= ======= =======
LESS:
Loans in process 31,758 23,373 19,338 14,656
Deferred fees, premiums and
discounts, net 2,896 1,764 2,317 1,998
Allowance for losses
on loans 4,175 2,765 1,911 1,239
-------- -------- -------- --------
TOTAL LOANS RECEIVABLE, NET $646,466 $479,850 $425,027 $294,679
======== ======== ======== ========
<CAPTION>
December 31
---------------------
1992
---------------------
Amount Percent
<S> <C> <C>
REAL ESTATE LOANS
One- to four-family $ 36,351 15.3%
Multifamily 129,599 54.7
Commercial 36,717 15.5
Construction and land 24,255 10.2
Held for sale 5,082 2.2
-------- ------
Total real estate loans 232,004 97.9
CONSUMER LOANS 5,022 2.1
BUSINESS AND OTHER LOANS 50 0.0
--------- ------
Total loans 237,076 100.0%
=====
LESS:
Loans in process 11,222
Deferred fees, premiums and
discounts, net 3,359
Allowance for losses
on loans 725
---------
TOTAL LOANS RECEIVABLE, NET $221,770
========
Metropolitan had commitments to originate or purchase loans of $70.7 million and $29.7 million at December 31, 1996 and 1995,
respectively. In addition, Metropolitan had commitments to sell loans of $2.1 million and $2.0 million and optional commitments to
sell loans of $6.4 million and $458,000 at December 31, 1996 and 1995, respectively.
</TABLE>
4
<PAGE> 5
The following table shows the composition of Metropolitan's loan portfolio
including loans held for sale, by fixed and adjustable rate at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993
-------------------- ---------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- --------- -------- ----------- ------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED RATE LOANS:
Real estate:
One- to four-family $ 41,436 6.1% $ 35,042 6.9% $ 46,418 10.4% $ 20,448 6.5%
Multifamily 88,529 12.9 71,909 14.2 19,852 4.4 5,281 1.7
Commercial 34,726 5.1 17,615 3.5 7,948 1.8 8,325 2.7
Construction and land 392 0.0 39 0.0
Held for sale 2,531 0.4 1,504 0.3 84 0.0 10,391 3.3
--------- ---- --------- ---- --------- ---- --------- -----
Total fixed rate real
estate loans 167,614 24.5 126,109 24.9 74,302 16.6 44,445 14.2
Consumer 46,725 6.8 32,214 6.3 25,946 5.8 10,687 3.4
Business and other 5,650 0.8 2,744 0.5 20 0.0
--------- ---- -------- ---- --------- ---- --------- ----
Total fixed rate loans 219,989 32.1% 161,067 31.7% 100,268 22.4% 55,132 17.6%
-------- ==== ------- ==== ------- ==== --------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 73,322 10.7% 41,217 8.1% 66,422 14.8% 19,062 6.1%
Multifamily 188,015 27.5 159,550 31.4 168,076 37.5 160,940 51.5
Commercial 100,909 14.7 91,788 18.1 75,406 16.8 46,494 14.9
Construction and land 71,305 10.4 48,171 9.5 38,270 8.5 30,894 9.9
Held for sale 6,442 0.9
-------- ---- --------- ---- --------- ----- ---------- ----
Total adjustable rate real
estate loans 439,993 64.2 340,726 67.1 348,174 77.6 257,390 82.4
Consumer 7,455 1.1
Business and other 17,858 2.6 5,959 1.2 151 0.0 50 0.0
-------- ---- --------- ---- --------- ----- ---------- ----
Total adjustable rate loans 465,306 67.9% 346,685 68.3% 348,325 77.6% 257,440 82.4%
------- ==== -------- ==== -------- ==== --------- ====
LESS:
Loans in process 31,758 23,373 19,338 14,656
Deferred fees, premiums
and discounts, net 2,896 1,764 2,317 1,998
Allowance for losses on loans 4,175 2,765 1,911 1,239
-------- -------- -------- --------
TOTAL LOANS RECEIVABLE,NET $646,466 $479,850 $425,027 $294,679
======= ======= ======= =======
<CAPTION>
December 31
----------------------
1992
----------------------
Amount Percent
---------- -------
FIXED RATE LOANS:
Real estate:
One- to four-family $ 19,571 8.3%
Multifamily 10,370 4.4
Commercial 8,291 3.5
Construction and land
Held for sale 5,082 2.1
-------- ----
Total fixed rate real
estate loans 43,314 18.3
Consumer 5,022 2.1
Business and other
Total fixed rate loans 48,336 20.4%
-------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 16,780 7.1%
Multifamily 119,229 50.3
Commercial 28,426 12.0
Construction and land 24,255 10.2
Held for sale -------- ----
Total adjustable rate real
estate loans 188,690 79.6
Consumer
Business and other 50 0.0
-------- ----
Total adjustable rate loans 188,740 79.6%
-------- ====
LESS:
Loans in process 11,222
Deferred fees, premiums
and discounts, net 3,359
Allowance for losses on loans 725
--------
TOTAL LOANS RECEIVABLE,NET $221,770
========
</TABLE>
5
<PAGE> 6
The following table illustrates the interest rate sensitivity of
Metropolitan's loan portfolio, including loans held for sale at December 31,
1996. Loans which have adjustable or renegotiable interest rates are shown as
maturing in the period during which the contract is due. The schedule does not
reflect the effects of possible prepayments, enforcement of due-on-sale clauses,
or the effect of the amortization of premium, discounts, or deferred loan fees.
<TABLE>
<CAPTION>
DUE IN ONE DUE AFTER ONE YEAR DUE AFTER
YEAR OR LESS(1) THROUGH FIVE YEARS FIVE YEARS TOTAL
------------------- ------------------ ---------- -----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to Four-family $ 122 6.52% $ 2,099 8.04% $115,100 7.36% $117,321 7.37%
Multifamily 12,616 8.76 62,414 8.95 204,574 8.42 279,604 8.55
Commercial 23,112 9.66 58,311 9.11 57,562 8.97 138,985 9.14
Construction and land 57,346 8.87 14,351 9.53 --- --- 71,697 9.01
Consumer 8,568 12.66 18,109 9.04 27,503 10.28 54,180 10.24
Business 10,911 9.24 3,733 9.57 8,864 9.42 23,508 9.36
------- -------- -------- -------
Total $112,675 9.34% $159,017 9.07% $413,603 8.35% $685,295 8.68%
======== ======== ======== ========
<FN>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after December 31, 1997 which have predetermined interest rates is $159.4 million, while
the total amount of loans due after such date which have floating or adjustable rates is $413.3 million.
</TABLE>
6
<PAGE> 7
LOAN ORIGINATIONS AND PURCHASES
Metropolitan's strategy in recent years has been to increase
interest-earning assets, primarily by increasing the total loan portfolio, as
long as quality assets with the necessary portfolio characteristics were
available. The following table sets forth loan origination, purchase, sale and
repayment activities of Metropolitan for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
Real Estate
One- to four-family $ 56,519 $ 22,503 $ 47,136
Multifamily 20,669 24,542 20,588
Commercial 14,667 5,919 8,486
Construction and land 60,566 41,559 44,053
Consumer 10,062 -- --
Business 18,536 6,814 20
-------- -------- --------
Total adjustable rate 181,019 101,337 120,283
-------- -------- --------
FIXED RATE:
Real Estate
One- to four-family 44,795 24,230 37,030
Multifamily 15,759 13,957 8,745
Commercial -- 4,400 3,220
Construction and land 328 37 --
Consumer 17,242 15,048 17,124
Business 4,249 2,915 101
-------- -------- --------
Total fixed rate 82,373 60,587 66,220
-------- -------- --------
Total loans originated 263,392 161,924 186,503
-------- -------- --------
PURCHASES BY TYPE:
ADJUSTABLE RATE:
Real Estate
One- to four-family 1,835 -- 4,939
Multifamily 45,184 3,694 10,129
Commercial 16,905 13,939 23,632
Construction and land -- --
Consumer 5,432 -- --
Business -- -- --
--------- --------- ---------
Total adjustable rate 69,356 17,633 38,700
-------- -------- --------
FIXED RATE:
Real Estate
One- to four-family 1,125 19,381 13,079
Multifamily 22,971 50,420 12,218
Commercial 21,296 15,879 3,904
Construction and land -- -- --
Consumer 12,224 387 6,213
Business -- -- --
--------- --------- --------
Total fixed rate 57,616 86,067 35,414
-------- -------- --------
Total loans purchased 126,972 103,700 74,114
-------- -------- --------
SALES:
Real Estate
One- to four-family (36,392) (35,770) (23,000)
Multifamily (11,539) (27,094) (22,082)
Commercial (7,808) (1,835) (6,285)
-------- -------- --------
Total loan sales (55,739) (64,699) (51,367)
Loans securitized (14,476) (53,795) --
Principal repayments (142,606) (87,972) (73,229)
-------- -------- ---------
Total reductions (212,821) (206,466) (124,596)
-------- -------- ---------
Increase (decrease) in other items, net (10,927) (4,336) (5,673)
-------- -------- ---------
Net increase (decrease) $166,616 $ 54,822 $ 130,348
======== ======== =========
</TABLE>
7
<PAGE> 8
Multifamily Residential Lending. Metropolitan focuses its primary
portfolio lending efforts on multifamily residential real estate loans.
Multifamily loans are originated by Metropolitan from referrals by present
customers of the Bank and mortgage and real estate brokers. Through its existing
referral network and advertising efforts, Metropolitan has become known for
multifamily lending in its primary multifamily lending markets of Ohio, Northern
Kentucky, Southeastern Michigan, Western Pennsylvania, and Northern and Central
New Jersey. Although Metropolitan operates full service retail sales offices
solely in Northeast Ohio, it has loan origination offices in Southern Ohio,
Western Pennsylvania, and Southeastern Michigan.
At December 31, 1996, Metropolitan's multifamily loans totalled $276.5
million, with an average loan size of approximately $676,000. Of this amount,
$165.2 million or 59.7% were originated by Metropolitan. Currently, Metropolitan
emphasizes the origination of ARMs with principal amounts of less than $2.0
million and maturities of 10 years. The loans are adjustable on a one-, three-
or five-year schedule with an amortization of 25 or 30 years. Rate adjustments
are based on the appropriate term U.S. Treasury securities plus a margin. The
loans are subject to a maximum individual aggregate interest rate adjustment as
well as a maximum aggregate adjustment over the life of the loan (generally 6%).
Due to increasing demand for fixed rate loans, Metropolitan has allocated some
funds for fixed rate programs, typically those with 7 to 10-year maturities. The
maximum loan to value ratio of Metropolitan's multifamily residential loans is
75%.
Metropolitan recognizes that multifamily residential property loans
generally involve a higher degree of risk than the financing of one- to
four-family residential real estate because they typically involve larger loan
balances to single borrowers or groups of related borrowers. The payment
experience on these loans is typically dependent upon the successful operation
of the related real estate project and is subject to certain risks including
excessive vacancy rates or inadequate rental income levels. In order to manage
and reduce these risks, Metropolitan uses strict underwriting standards in its
multifamily residential lending process.
The loans originated in this area are typically less than $2.0 million
in principal amount and are secured by garden-style apartments with generally
under 75 residential units. The underwriting process includes a site evaluation
which considers such factors as location, access by roadways, condition of the
apartments and amenities. In addition, a Metropolitan employee visits each
location before a loan approval is made. The underwriting process also involves
an evaluation of the borrower, whether the borrower is an individual or a group
of individuals acting as a separate entity. The financial statements of each of
the individual borrowers are reviewed and personal guarantees in an amount equal
to the original principal amount of the loan are generally obtained. The
financial statements of individual guarantors are reviewed by senior officers of
Metropolitan. Another important aspect of Metropolitan's underwriting of its
multifamily residential loans is the debt service coverage test of the property.
Debt service coverage requirements are determined based upon the individual
characteristics of each loan, and are typically a ratio of at least 1.15. In
order to factor in the adjustable rate of the multifamily loans, the debt
service coverage is calculated at a rate in excess of the initial interest rate
of the loan.
At December 31, 1996, $111.3 million or 40.3% of Metropolitan's
multifamily residential loan portfolio was purchased. Prior to purchasing these
loans, Metropolitan utilizes a similar underwriting process with substantially
the same standards as for its originated loans. Real estate located in Ohio
secures 54.9% of Metropolitan's multifamily residential loan portfolio.
Underlying real estate for the remaining loans is primarily located in Michigan,
Pennsylvania and New Jersey. In addition, at December 31, 1996, 11.6% of the
multifamily residential loan portfolio was secured by real estate in California.
Commercial Real Estate Lending. Although Metropolitan has always held
a limited investment in loans secured by commercial real estate, this portion of
the portfolio has increased mainly through purchases in the last three years. At
December 31, 1996, Metropolitan's loans secured by commercial real estate
totalled $135.6 million or 19.8% of Metropolitan's total portfolio, with an
average loan size of $506,000. Of this amount, $43.0 million or 31.7% was
originated by Metropolitan and $92.6 million or 68.3% represented seasoned loans
purchased from a variety of sources.
Loans secured by commercial real estate are purchased by Metropolitan
when they are in the primary lending markets being targeted by Metropolitan, are
generally secured by retail strip shopping centers or office buildings, and meet
Metropolitan's yield and term requirements. The $92.6 million of purchased
commercial real estate loans were acquired by Metropolitan from 1993 to 1996.
To a much lesser extent Metropolitan originates commercial real estate
loans secured by strip shopping centers and small office buildings. Through
customer referrals and real estate brokers, Metropolitan lends on commercial
real estate in Northern and Central Ohio, Northern Kentucky, and Southeastern
Michigan. These loans are adjustable on a one-, three- or five-year schedule
with amortization of 25 or 30 years at a margin over the appropriate term
treasuries. The maximum loan to value ratio is 75%.
8
<PAGE> 9
The following table presents information as to the locations and types
of properties securing Metropolitan's multifamily and commercial real estate
portfolio as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER
OF LOANS % PRINCIPAL %
-------- - --------- -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Ohio:
Apartments 229 33.8% $151,795 36.8%
Office buildings 57 8.4 26,202 6.4
Retail centers 42 6.2 31,320 7.6
Other 42 6.2 12,044 2.9
---- ----- -------- ----
Total 370 54.6 221,361 53.7
--- ----- -------- ----
California:
Apartments 45 6.7 32,100 7.8
Office buildings 5 0.7 6,234 1.5
Retail centers 2 0.3 1,690 0.4
Other 4 0.6 3,353 0.8
---- ----- -------- -----
Total 56 8.3 43,377 10.5
--- ----- -------- -----
Pennsylvania:
Apartments 57 8.4 20,837 5.1
Office buildings 2 0.3 86 ---
Retail centers 6 0.9 9,536 2.3
Other 4 0.6 638 0.1
---- ----- -------- ----
Total 69 10.2 31,097 7.5
---- ----- -------- ----
Michigan:
Apartments 11 1.6 23,401 5.7
Office buildings 6 0.9 7,229 1.8
Retail centers 6 0.9 9,644 2.3
Other 1 0.2 357 0.1
---- ----- -------- -----
Total 24 3.6 40,631 9.9
---- ----- -------- -----
Other states(1):
Apartments 67 9.9 48,411 11.8
Office buildings 32 4.7 9,562 2.3
Retail centers 27 4.0 11,513 2.8
Other 32 4.7 6,227 1.5
--- ----- -------- -----
Total 158 23.3 75,713 18.4
--- ----- -------- -----
677 100.0% $412,179 100.0%
=== ===== ======= =====
<FN>
(1) Properties securing loans in other states are located in eleven other states, none of which exceed 5.0% of the outstanding
principal balance of the total multifamily and commercial real estate portfolio.
</TABLE>
The following table presents aggregate information as to the type of
security as of December 31, 1996:
<TABLE>
<CAPTION>
AVERAGE
NUMBER BALANCE
OF LOANS PER LOAN PRINCIPAL %
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Apartments 409 $676 $276,544 67.1%
Office buildings 102 483 49,312 12.0
Retail centers 83 768 63,704 15.4
Other 83 273 22,619 5.5
--- -------- -----
Total 677 $609 $412,179 100.0%
=== ======= =====
</TABLE>
9
<PAGE> 10
One- to Four-family Residential Lending. In 1996, about 50% of
Metropolitan's one- to four-family residential loans were originated through its
full service retail sales offices. The remainder were originated by commissioned
loan officers. Metropolitan has focused its one- to four-family residential
lending efforts primarily on the origination of loans secured by first mortgages
on owner-occupied residences. As of December 31, 1996, Metropolitan's one- to
four-family residential mortgages totalled $114.8 million or 16.8% of
Metropolitan's loan portfolio.
Metropolitan emphasizes the origination of conventional ARM loans for
retention in Metropolitan's portfolio and fixed rate loans suitable for sale in
the secondary market. In addition, Metropolitan offers fixed rate end loan
financing to purchasers building homes with Metropolitan's approved construction
loan builders. Metropolitan retains only a limited dollar amount of this fixed
rate end loan financing in its portfolio. The amount being originated and
subsequently retained is monitored very closely. Substantially all of
Metropolitan's one- to four-family residential mortgage loans originated for
retention in Metropolitan's portfolio are secured by property located in its
Northeast Ohio market area. At December 31, 1996, Metropolitan's fixed rate
residential mortgage loan portfolio totalled $41.4 million, or 6.1% of
Metropolitan's total loan portfolio.
Metropolitan is presently originating three types of ARM products for
retention in its portfolio. The first product is a one-year adjustable ARM, the
interest rate being subject to change annually. The adjustments are based upon
the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year, and are generally limited to a 2% maximum annual interest
rate adjustment, as well as a maximum lifetime adjustment of 6%. The second
product, known as a five/one ARM, has the same index and caps as the one year
ARM; the five/one ARM, however, retains its initial interest rate for the first
five years of the loan and then begins to adjust annually in the sixth year. The
third product, the three-year ARM, allows for interest rate adjustments every
three years. The adjustments are based upon the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of three years, and are
generally limited to a 2% maximum interest rate adjustment per change, as well
as a maximum lifetime adjustment of 6%.
Metropolitan's originated ARMs do not permit negative amortization of
principal and most of them are convertible into fixed rate mortgages. If
converted, they are typically sold in the secondary market. ARMs are originated
with terms to maturity of up to 30 years, and borrowers are qualified based upon
secondary market requirements.
At December 31, 1996, $23.4 million, or 20.4% of Metropolitan's one-
to four-family residential loan portfolio was purchased. Prior to purchasing
these loans, Metropolitan utilizes an underwriting process with substantially
the same standards as for its originated loans. During 1995 and 1996,
Metropolitan purchased fixed rate one- to four-family residential loans in the
manner previously described and at the same time sold non-refundable options to
purchase those loans to a third party. In all cases, these options were
exercised.
Construction Lending and Land Development. Metropolitan originates
construction loans on single family homes to small, local builders (who
typically build less than fifteen homes per year) in Metropolitan's primary
lending market and to individual borrowers on owner-occupied properties.
Metropolitan also makes loans to builders for the purchase of fully-improved
single family lots and to developers for the purpose of developing land into
single family lots. Metropolitan's market area for construction lending is in
Ohio and primarily in Cuyahoga County, but loans are also made in Lake, Geauga,
Summit, Medina, Portage, and Lorain counties. Metropolitan has one commissioned
construction loan originator in the high volume Columbus, Ohio construction
market to originate single family construction loans and improved lot loans.
The following table presents the number, amount, and type of
properties securing Metropolitan's residential construction and land development
loans at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER PRINCIPAL
OF LOANS BALANCE
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
RESIDENTIAL CONSTRUCTION LOANS:
Owner-occupied 27 $ 6,767
Builder presold 45 7,450
Builder spec/model 89 16,721
Allocated construction loans (LOC) 18 17,060
Lot loans 51 4,810
Development loans 17 8,926
COMMERCIAL CONSTRUCTION LOANS 2 9,825
LAND LOANS 5 138
---- -------
Total: 254 $71,697
=== ======
</TABLE>
10
<PAGE> 11
Metropolitan's risk of loss on a construction loan is largely
dependent upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost of the project. The application
process includes a submission of the cost, specifications and plans.
Metropolitan also reviews the borrower's financial position and requires a
personal guarantee on all builder loans. All loans are based upon the appraised
value of the underlying collateral, as completed. Appraisals are completed by
qualified outside fee appraisers who have been approved by Metropolitan's Board
of Directors.
Each type of loan has a maximum loan to value ratio which is
established by the contract price, cost estimate or appraised value, whichever
is less. The maximum loan to value ratio for each type of construction loan is
as follows: owner-occupied homes - 80%; builder presold homes - 80%; builder
models or speculative homes - 75%; lot loans - 75%; development loans - 70%
(development of single-family home lots for resale to builders) and 75%
(development of land for cluster or condominium projects which will be part of
an allocated construction loan).
All of Metropolitan's construction loans that are made to builders are
made for relatively short terms (six to 24 months) and are made with an
adjustable rate of interest. Owner-occupied loans are initially adjustable rate
loans with the option to convert to a fixed rate product only upon the
completion of the home. These loans increase the yield on, and the proportion of
interest rate sensitive loans in, Metropolitan's portfolio.
Lines of credit or allocated construction loans are used to build
single family homes only and cannot be used for any other purpose. All lines of
credit are secured by the homes that are built with the draws under such credit
agreements. Most of the homes built with the line of credit funds are presold
homes, and the number of spec and model homes allowed to be built is limited by
the financial strength of the builder. Lines of credit can only be utilized
where a builder owns a specific number of lots in a development. Draws are based
upon the percentage of completion, and at all times, funds remain to complete
the home. Disbursements are only made after receipt of a property inspection and
a mechanic's lien update from the title company.
To a much lesser extent, Metropolitan originates construction loans on
commercial real estate projects where Metropolitan intends to provide the
financing once construction is complete. These loans are underwritten in a
manner similar to originated and purchased commercial real estate loans
described above.
Consumer Lending. The underwriting standards employed by Metropolitan
for consumer loans include a determination of the applicant's payment history on
other debts and an assessment of the applicant's ability to meet existing
obligations and payments on the proposed loan. Although creditworthiness of the
applicant is a primary consideration, the underwriting process also includes a
comparison of the value of the security, if any, in relation to the proposed
loan amount.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or are secured by
rapidly depreciable assets, such as automobiles. At December 31, 1996, $44.6
million or 82.4% of Metropolitan's $54.2 million consumer loan portfolio was
secured. However, even in the case of secured loans, repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance due to the higher likelihood of damage, loss or
depreciation. In addition, consumer loan collections are dependent upon the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans.
At December 31, 1996, Metropolitan's credit card portfolio had an
outstanding balance of $7.5 million with $22.5 million in unused credit lines.
Of the outstanding balance, $2.2 million related to cards originated by
Metropolitan and $5.3 million related to credit card relationships purchased by
Metropolitan.
Business Lending. Metropolitan began offering business loans in late 1994. At
December 31, 1996, Metropolitan had $23.5 million of business loans outstanding,
or 3.4% of Metropolitan's total loan portfolio, against available lines on
existing business loans totalling $29.7 million. Metropolitan's business lending
activities encompass loans with a variety of purposes and security, including
loans to finance accounts receivable, inventory and equipment. Generally,
Metropolitan's business lending has been limited to borrowers headquartered, or
doing business in, Metropolitan's retail market area.
11
<PAGE> 12
The following table sets forth information regarding the number and
amount of Metropolitan's business loans as of December 31, 1996:
<TABLE>
<CAPTION>
TOTAL OUTSTANDING
NUMBER LOAN PRINCIPAL
OF LOANS COMMITMENT BALANCE
-------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LOANS SECURED BY:
Accounts receivable, inventory and equipment 107 $22,599 $18,194
Second lien on real estate 9 3,432 1,852
First lien on real estate 12 1,972 1,848
Specific equipment and machinery 15 631 631
Titled vehicles 13 309 309
Stocks and bonds 4 148 148
Certificates of deposit 2 120 117
UNSECURED LOANS 12 450 409
---- -------- --------
Total business loans 174 $29,661 $23,508
=== ======= =======
</TABLE>
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, business loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of business loans may be substantially dependent upon the success of
the business itself. Furthermore, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
SECONDARY MARKET ACTIVITIES
In addition to originating loans for its own portfolio, Metropolitan
participates in secondary mortgage market activities by selling whole loans and
creating mortgage-backed securities to the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Secondary
market sales allow Metropolitan to make loans during periods when deposit flows
decline, or are not otherwise available, and at times when customers prefer
loans with long-term fixed interest rates which Metropolitan does not choose to
originate for its own portfolio. Metropolitan's primary focus in its mortgage
banking operations is on the sale of fixed rate one- to four-family residential
mortgage loans.
The secondary market for mortgage loans is comprised of institutional
investors who purchase loans meeting certain underwriting specifications with
respect to loan-to-value ratios, maturities and yields. Subject to market
conditions, Metropolitan tailors certain real estate loan programs to meet the
specifications of FHLMC and FNMA, two of the largest institutional investors.
Metropolitan may retain a portion of the loan origination fee paid by the
borrower and receive annual servicing fees as compensation for retaining
responsibility for and performing the servicing of all loans sold to
institutional investors. See "--Loan Servicing Activities." The sale of
substantially all loans to FHLMC and FNMA is nonrecourse to Metropolitan.
The terms and conditions under which such sales are made depend upon,
among other things, the specific requirements of each institutional investor,
the type of loan, the interest rate environment and Metropolitan's relationship
with the institutional investor. In the case of single-family residential loans,
Metropolitan periodically obtains formal commitments primarily with FHLMC and
FNMA. Pursuant to these commitments, FHLMC or FNMA is obligated to purchase a
specific dollar amount of whole loans over a specified period of time. The terms
of the commitments range from ten to sixty days. The pricing will vary,
depending upon the length of each commitment. Loans are classified as held for
sale while Metropolitan is negotiating the sale of specific loans which meet
selected criteria to a specific investor. Metropolitan also sells multifamily
and commercial real estate loans to private investors. The majority of
Metropolitan's sales of multifamily and commercial real estate loans are made
pursuant to individually negotiated whole loan or participation sales agreements
for individual loans or for a package of such loans.
12
<PAGE> 13
LOAN SERVICING ACTIVITIES
At December 31, 1996, Metropolitan's overall servicing portfolio was
$1.6 billion. Of such amount, loans serviced for others totalled $1.1 billion.
The following table summarizes the portfolio by investor and source:
<TABLE>
<CAPTION>
ORIGINATED PURCHASED
SERVICING SERVICING TOTAL
--------- --------- -----
(IN THOUSANDS)
<S> <C> <C>
One- to Four-family:
Metropolitan portfolio $ 105,769 $ 105,769
FHLMC 170,106 $521,728 691,834
FNMA 63,588 236,698 300,286
Private investors -- 11,929 11,929
--------- -------- ---------
Total One- to Four-family 339,463 770,355 1,109,818
-------- -------- ---------
Multifamily and Commercial:
Metropolitan portfolio 354,558 354,558
FHLMC 13,791 7,664 21,455
FNMA 28,149 25,428 53,577
Private investors 20,531 2,902 23,433
-------- -------- ----------
Total Multifamily and Commercial 417,029 35,994 453,023
-------- -------- ----------
Total $756,492 $806,349 $1,562,841
======== ======== ==========
</TABLE>
Metropolitan services the loans that it originates. When Metropolitan
sells loans to an investor, such as FHLMC or FNMA, it retains the servicing
rights for the loans. Servicing fee income is generated from the loans sold to
investors. In order to further increase Metropolitan's servicing fee income, the
Bank has aggressively pursued purchases of servicing portfolios from other
originating institutions. These purchased servicing portfolios are primarily
FHLMC and FNMA single family loans that are geographically located within the
eastern half of the nation. At December 31, 1996, Metropolitan's purchased
servicing portfolio was $806.3 million and the related balance of PMSRs was $7.3
million.
Approximately 70% of the overall servicing portfolio (by dollar
volume) is comprised of loans sold to investors, primarily FHLMC and FNMA.
Metropolitan receives fee income for servicing these sold loans, ranging from
0.125% on multifamily loans to 0.250% on fixed rate or 0.375% on adjustable rate
residential loans (percentage based upon unpaid principal balances of the loans
serviced). Servicing fees are collected and retained by Metropolitan out of
monthly mortgage payments.
Loan servicing functions include collecting and remitting loan
payments, accounting for principal and interest, holding escrow (impound) funds
for payment of taxes and insurance, making rate and payment changes to
contractually adjustable loans, managing loans in payment default, processing
foreclosure and other litigation activities to recover mortgage debts,
conducting property inspections and risk assessment for investment loans and
general administration of loans for the investors to whom they are sold, and for
Metropolitan as mortgagee.
LOAN OPTION INCOME
During 1995, Metropolitan developed a program to purchase loans and
sell loan options in order to take advantage of its underwriting capabilities,
increase net interest income and increase non-interest income. In these
transactions, Metropolitan purchases loans and sells nonrefundable options to a
third party to purchase these same loans at a specified price within a specified
time period. The Bank, prior to purchasing the loans that will be subject to the
options, utilizes a similar underwriting process with substantially the same
standards as in its origination process. In the event the option is not
exercised, Metropolitan would sell the underlying loans or transfer them to the
Bank's portfolio at its fair value at the date of the transfer. A nonrefundable
option fee is negotiated based on a percentage of the principal amount of the
loans involved. The third party acquiring the option is a loan broker who
markets the loans to potential buyers who may be willing to pay a higher price
for the loans. To date, Metropolitan has entered into these option transactions
with one loan broker. At December 31, 1996, loans with a carrying value of $6.4
million were held for sale in connection with outstanding options and $696,000
has been recognized in income in connection with these loan options during the
year then ended.
13
<PAGE> 14
LOAN DELINQUENCIES AND NON-PERFORMING ASSETS
When a borrower fails to make a required payment on a loan,
Metropolitan attempts to cause the delinquency to be cured by contacting the
borrower. In the case of real estate loans, a late notice is sent 15 days after
the due date. If the delinquency is not cured by the 30th day, contact with the
borrower is made by phone. Additional written and verbal contacts are made with
the borrower between 30 and 90 days after the due date. If the delinquency
continues for a period of 90 days, Metropolitan usually institutes appropriate
action to foreclose on the property. If foreclosed, the property is sold at
public auction and may be purchased by Metropolitan. Delinquent consumer loans
are handled in a generally similar manner, except that initial contacts are made
when the payment is 10 days past due and appropriate action may be taken to
collect any loan payment that is delinquent for more than 30 days.
Metropolitan's procedures for repossession and sale of consumer collateral are
subject to various requirements under state consumer protection laws.
14
<PAGE> 15
The following table sets forth information concerning delinquent loans
at December 31, 1996, in dollar amounts and as a percentage of each category of
Metropolitan's loan portfolio. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
LOANS DELINQUENT FOR:
60-89 DAYS 90 DAYS AND OVER TOTAL DELINQUENT LOANS
----------- ---------------- ----------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------ -------- ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
One- to four-family 2 $ 96 0.08% 8 $ 950 0.83% 10 $1,046 0.91%
Multifamily -- -- -- 2 871 0.31 2 871 0.31
Commercial 1 127 0.09 2 2,032 1.50 3 2,159 1.59
Construction and land -- -- -- -- -- -- -- -- --
Consumer 45 206 0.38 240 1,073 1.98 285 1,279 2.36
Business -- -- -- 5 268 1.14 5 268 1.14
--- ----- ---- ------ ---- ------
Total 48 $429 0.06% 257 $5,194 0.77% 305 $5,623 0.83%
== ==== === ====== === ======
</TABLE>
15
<PAGE> 16
Non-performing assets include all non-accrual loans, loans past due
greater than 90 days still accruing and real estate acquired in foreclosure.
Interest is not accrued on loans contractually past due 90 days or more as to
interest or principal payments and as to which payment of principal and interest
in full is not expected unless in the judgment of management the loan is well
secured, and no loss in principal or interest is expected.
When a loan reaches non-accrual status, interest accruals are
discontinued and prior accruals are reversed. The classification of a loan on
non-accrual status does not necessarily indicate that the principal is
uncollectible in whole or in part. A determination as to collectibility is made
by the management of Metropolitan on a case-by-case basis. Metropolitan
considers both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect non-accrual loans. The
final determination as to these steps is made on a case-by-case basis.
Alternatives that are considered are commencing foreclosure, collecting on
guarantees, restructuring the loan or instituting collection lawsuits.
The following table summarizes non-performing assets by category as of the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accruing loans
One- to four-family $ 950 $ 293 $ 337 $ 475 $ 258
Multifamily 871 2,138 1,585 549 180
Commercial real estate 2,032 391 150 691 --
Construction and land development -- 15 15 1,051 518
Consumer 802 266 153 53 21
Business 268 -- -- -- --
------ ------ ------ ----- ---
Total non-accruing loans 4,923 3,103 2,240 2,819 977
Loans past due greater than 90
days still accruing 271 204 128 277
------ ------ ------ ------ ------
Total non-performing loans 5,194 3,307 2,368 3,096 977
Real estate owned 177 258 53 941 230
------ ------ ------ ------ ------
Total non-performing assets $5,371 $3,565 $2,421 $4,037 $1,207
====== ====== ====== ====== ======
Non-performing loans to total loans .80% 0.68% 0.55% 1.08% 0.44%
Non-performing assets to total
assets .70% 0.60% 0.51% 1.08% 0.40%
</TABLE>
For the years ended December 31, 1996 and 1995, gross interest income
which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $439,000 and $86,000,
respectively. The amounts that were included in interest income on such loans
were $85,000 and $10,000 for the years ended 1996 and 1995, respectively.
Non-performing assets were $5.4 million at December 31, 1996, an
increase of $1.8 million from $3.6 million at December 31, 1995, primarily due
to two retail strip shopping centers and one multifamily property. During the
same time period total net loans receivable increased $166.6 million to $646.5
million at December 31, 1996. One retail strip shopping center was sold to a
third party at sheriff's sale subsequent to year end and Metropolitan recovered
its full investment. Based upon current appraisals, no loss is anticipated on
the other retail strip shopping center and the anticipated loss of $236,000 on
the multifamily property has been reserved. At December 31, 1996, all loans
classified by management as impaired were included in non-performing loans.
At December 31, 1996, Metropolitan had potential problem loans
totalling $1.4 million which were classified by management as substandard and
were not included in the table above. Although these loans were current or not
seriously delinquent, there is some unfavorable circumstance surrounding each
loan which, if not corrected, could result in the loan changing to nonaccrual
status and/or a loss being incurred. Metropolitan is in contact with these
borrowers and monitors their status closely.
Metropolitan adopted SFAS No. 114 and SFAS No. 118 effective January
1, 1995. All loans identified as impaired by Metropolitan were also classified
as non-accruing loans at December 31, 1995 and 1996 and therefore the adoption
of SFAS No. 114 and SFAS No. 118 had no effect on the comparability of
non-performing assets at December 31, 1995 and 1996 to prior periods.
16
<PAGE> 17
ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS
Because some loans may not be repaid in full, an allowance for losses
on loans is maintained. 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.
17
<PAGE> 18
The following table sets forth an allocation of the allowance for
losses on loans among categories as of the dates indicated. Management believes
that any allocation of the allowance for losses on loans into categories lends
an appearance of precision which does not exist. The allowance is utilized as a
single unallocated allowance available for all loans. The following allocation
table should not be interpreted as an indication of the specific amounts or the
relative proportion of future charges to the allowance.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- -------------------- -------------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $ 228 17.1% $ 172 15.2% $ 189 25.2% $ 93 16.0% $ 50 17.5%
Multifamily 1,020 40.8 887 45.8 733 41.9 494 53.2 361 54.7
Commercial real estate 937 20.3 676 21.5 358 18.6 314 17.5 195 15.5
Construction and land 193 10.5 167 9.5 99 8.5 90 9.9 56 10.2
Consumer 1,182 7.9 512 6.3 340 5.8 124 3.4 53 2.1
Business 197 3.4 74 1.7 1 0.0 -- -- -- --
Unallocated 418 -- 277 -- 191 -- 124 -- 11 --
------- ------- ------- ------ ------- ------ ------- ------ ----- ------
Total $4,175 100.0% $2,765 100.0% $1,911 100.0% $1,239 100.0% $726 100.0%
====== ======= ======= ====== ======= ====== ======= ====== ===== ======
</TABLE>
18
<PAGE> 19
With the uncertainties that could adversely impact the overall quality of
Metropolitan's loan portfolio, management of Metropolitan considers an adequate
allowance for losses on loans essential. The unallocated allowance is considered
adequate to cover losses from the existing loans that have not demonstrated
problems such as late payments, financial difficulty of the borrower or
deterioration of collateral values. The risks associated with off-balance sheet
commitments are insignificant in the opinion of management of Metropolitan and
therefore, no allowance for such commitments is provided.
At December 31, 1996, management had allocated $241,000 of the allowance
for losses on loans to impaired loans with balances of $721,000. The remaining
$2.8 million of impaired loan balances did not require an allocation of the
allowance for losses on loans in the opinion of management. The adoption of SFAS
No. 114 had no impact on the comparability of the December 31, 1996 allowance
for losses on loans allocation to prior periods.
The following table provides an analysis of Metropolitan's allowance for
losses on loans for the periods indicated. In each period, the provision for
loan losses was based on an analysis of individual credits, prior and current
loss experience, overall growth in the portfolio and current economic
conditions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,765 $1,911 $1,239 $ 725 $ 495
Charge-offs:
One- to four-family 22 23 23 50 6
Multifamily 119 -- 64 100 --
Commercial real estate -- 27 -- 74 174
Construction and land -- -- -- -- --
Consumer 95 56 14 5 8
Business -- -- -- -- --
------ ----- ------ ------ -----
Total charge-offs 236 106 101 229 188
------ ----- ------ ------ -----
Recoveries:
One- to four-family -- 1 1 3 --
Multifamily -- -- 6 -- --
Commercial real estate -- -- -- -- --
Construction and land -- -- -- -- 51
Consumer 11 -- -- -- --
Business -- -- -- -- --
----- ----- ------ ------ -----
Total recoveries 11 1 7 3 51
----- ----- ------ ------ -----
Net charge-offs 225 105 94 226 137
Provision for loan losses 1,635 959 766 740 367
----- ------ ------ ------ -----
Balance at end of period $4,175 $2,765 $1,911 $1,239 $ 725
====== ====== ====== ====== =====
Net charge-offs to average
loans 0.04% 0.02% 0.03% 0.09% 0.07%
Provision for loan losses to
average loans 0.28% 0.21% 0.21% 0.29% 0.19%
Allowance for losses on loans
to total non-performing loans
at end of period 77.73% 83.60% 80.70% 40.02% 74.21%
Allowance for losses on loans
to total loans at end of period 0.64% 0.57% 0.45% 0.43% 0.32%
</TABLE>
19
<PAGE> 20
INVESTMENT PORTFOLIO
Metropolitan maintains its investment portfolio based on regulatory
requirements and restrictions which dictate the type of securities that can be
held. As a member of the Federal Home Loan Bank ("FHLB") System, the Bank is
required to hold a minimum amount of FHLB stock based upon asset size and mix.
As the Bank grows, this investment will increase.
The following table summarizes the amounts and the distribution of
Metropolitan's securities held as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Securities available for sale:
Mutual funds $ 2,009 $10,364 --
U.S. Treasury securities 6,065 12,442 $7,641
FNMA preferred stock 5,100
FHLB stock 3,989 3,569 2,311
-------- -------- -------
Total $17,163 $26,375 $9,952
======= ======= ======
Other interest-earning assets:
Interest-bearing deposits with banks 2,745 $4,788 $1,080
Term repurchase agreements 6,000 -- --
------- --------- --------
Total $8,745 $4,788 $1,080
====== ====== ======
</TABLE>
The following table sets forth the contractual maturities and
approximate weighted average yields of Metropolitan's securities available for
sale at December 31, 1996.
<TABLE>
<CAPTION>
DUE IN
-------------------------------
ONE YEAR ONE YEAR TO
OR LESS FIVE YEARS TOTAL
------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mutual Funds $2,009 -- $2,009
U.S. Treasury securities -- $6,065 6,065
FNMA preferred stock 5,100 -- 5,100
FHLB stock 3,989 -- 3,989
-------- ---------- --------
Total $11,098 $6,065 $17,163
======= ====== =======
Weighted average yield 6.48% 6.61% 6.53%
</TABLE>
MORTGAGE-BACKED SECURITIES PORTFOLIO
The following table sets forth Metropolitan's mortgage-backed
securities portfolio at the dates indicated. All securities are classified as
available for sale.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C>
FNMA pass-through certificates $19,775 $22,549 --
GNMA pass-through certificates 9,700 11,348 $11,274
FHLMC participation certificates 26,713 4,715 4,956
Sears Mortgage Corporation obligations 484 543 555
------- ------- -------
Total $56,672 $39,155 $16,785
======= ======= =======
</TABLE>
20
<PAGE> 21
The following table sets forth the contractual maturities and approximate
weighted average yields of Metropolitan's mortgage-backed securities at December
31, 1996.
<TABLE>
<CAPTION>
DUE IN
------------------------------------------
ONE TO FIVE TO OVER OUTSTANDING
FIVE YEARS TEN YEARS TEN YEARS BALANCE
---------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
FNMA pass-through certificates $1,150 $18,625 $19,775
GNMA pass-through certificates 158 9,542 9,700
FHLMC participation certificates $12,291 -- 14,422 26,713
Sears Mortgage Corporation
obligations -- -- 484 484
------- ------ ------- -------
Total available for sale $12,291 $1,308 $43,073 $56,672
======= ====== ======= =======
Weighted average yield 7.00% 6.06% 6.46% 6.57%
</TABLE>
SOURCES OF FUNDS
The Bank's primary sources of funds are deposits, amortization and
repayment of loan principal, borrowings, sales of mortgage loans, sales or
maturities of mortgage-backed securities, securities, and short-term
investments. Deposits are the principal source of Metropolitan's funds for
lending and investment purposes. The following paragraphs provide a brief
description of the types of accounts offered by Metropolitan:
Passbook and Statement Savings Accounts. Savings may be invested in
and withdrawn from regular passbook, tiered passbook and statement savings
accounts without restriction. Interest on tiered passbook accounts is compounded
monthly and credited monthly. Interest on regular passbook and statement savings
accounts is compounded quarterly and credited quarterly.
Checking Accounts. Metropolitan offers two interest-bearing checking
and one noninterest-bearing checking account. The non-interest checking requires
no minimum balance and has no monthly service fees. The rate paid on the
interest checking account is dependent upon the balance in the account. Monthly
service charges can be waived on personal interest-bearing checking accounts by
maintaining either a $1,000 minimum balance or greater than $5,000 minimum
balance in another deposit account or establishing a direct deposit
relationship. All accounts have no minimum maturity or penalty for early
withdrawal and no restrictions on the size and frequency of the withdrawals or
additional deposits. Metropolitan regularly reviews the interest rate paid on
the interest-bearing checking accounts and adjusts the rate based on cash flow
projections and market interest rates.
Individual Retirement Accounts ("IRA"). Metropolitan offers IRAs.
Funds may be invested in a passbook account or any certificate of deposit
offered by Metropolitan.
Certificates of Deposit. Metropolitan offers fixed rate, fixed term
certificates of deposit. Terms are from seven days to five years, and there are
no regulatory rate ceilings. Certificates of deposit require a penalty for
withdrawal prior to maturity dates. These accounts are the highest cost deposit
product offered by Metropolitan. Interest rates offered on certificates of
deposit are regularly reviewed and adjusted based on cash flow projections and
market interest rates.
21
<PAGE> 22
The following table sets forth information regarding trends in
Metropolitan's average deposits for the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1996 1995
--------------------------------- ------------------------------------
(DOLLARS IN THOUSANDS)
AVERAGE PERCENT RATE AVERAGE PERCENT RATE
AMOUNT OF TOTAL PAID AMOUNT OF TOTAL PAID
------ -------- ---- ------ -------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits(1) $31,248 5.5% $ 24,636 5.3%
Interest-bearing demand deposits 36,273 6.4 2.64% 37,695 8.1 2.57%
Savings deposits 169,866 30.2 4.79 118,475 25.5 4.76
Time deposits 325,960 57.9 5.83 283,186 61.1 5.98
------- ------ -------- -----
Total average deposits $563,347 100.0% 4.97 $463,992 100.0% 5.07
======== ===== ======== =====
<CAPTION>
December 31
------------------------------
1994
------------------------------
AVERAGE PERCENT RATE
AMOUNT OF TOTAL PAID
------ -------- ----
$18,388 4.8%
Noninterest-bearing demand deposits(1) 57,124 15.0 2.52%
Interest-bearing demand deposits 88,723 23.2 3.57
Savings deposits 217,706 57.0 4.74
Time deposits -------- -----
$381,941 100.0% 3.91
Total average deposits ======== =====
<FN>
(1) Includes principal and interest custodial accounts and taxes and insurance custodial accounts for loans
serviced for FHLMC, FNMA and private investors.
</TABLE>
22
<PAGE> 23
Deposits increased 23.5% to $622.1 million at December 31, 1996 consistent
with the overall growth of the Bank. The growth was primarily in time deposits
which increased 25.1% to $375.5 million. During the same period, the mix of
demand accounts and savings accounts remained unchanged.
The following table shows rate and maturity information for Metropolitan's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
2.00- 5.00- 7.00- PERCENT
4.99% 6.99% 8.99% TOTAL OF TOTAL
----- ----- ----- ----- --------
(DOLLARS IN THOUSANDS)
CERTIFICATE ACCOUNTS MATURING
IN QUARTER ENDING:
<S> <C> <C> <C> <C> <C>
March 31, 1997 $24,827 $ 80,217 $5,480 $ 110,524 29.7%
June 30, 1997 313 66,005 233 66,551 17.7
September 30, 1997 3 56,824 589 57,416 15.3
December 31, 1997 124 49,626 931 50,681 13.5
March 31, 1998 62 35,484 2,121 37,667 10.0
June 30, 1998 52 16,638 315 17,005 4.5
September 30, 1998 19 3,607 -- 3,626 1.0
December 31, 1998 18 5,478 55 5,551 1.5
March 31, 1999 57 322 475 854 0.0
June 30, 1999 22 2,457 45 2,524 1.0
September 30, 1999 -- 398 -- 398 0.0
December 31, 1999 -- 1,393 1,517 2,910 1.0
Thereafter -- 6,236 13,517 19,753 5.3
------- -------- ------- -------- ----
Total $25,497 $324,685 $25,278 $375,460 100.0%
======= ======== ======= ======== =====
Percent of total 6.8% 86.5% 6.7% 100.0%
===== ==== === =====
</TABLE>
The following table sets forth the remaining maturity for time
deposits of $100,000 or more at the date indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
1996
----
(IN THOUSANDS)
<S> <C>
Three months or less $ 13,822
Over three through six months 9,274
Over six through twelve months 16,268
Over twelve months 19,152
-------
Total $58,516
=======
</TABLE>
In addition to deposits, Metropolitan relies on borrowed funds. The
following describes Metropolitan's current borrowings:
Subordinated Note Offerings. In 1993 and early 1994, Metropolitan
issued subordinated notes with an aggregate principal balance of $4.9 million
through a private placement offering ("1993 Subordinated Notes"). The interest
rate on the 1993 Subordinated Notes is 10%, which is paid quarterly and
principal will be repaid when the notes mature on December 31, 2001.
Metropolitan may redeem the 1993 Subordinated Notes, in whole or in part, at any
time from time to time, paying the outstanding principal amount plus accrued
interest and a prepayment premium. The prepayment premium was 10% of the
principal amount prepaid if such prepayment was made during the first year
following the issuance of the 1993 Subordinated Notes and the prepayment premium
reduces 1% for each year the 1993 Subordinated Notes are outstanding. If the
1993 Subordinated Notes are prepaid more than seven years after issuance, the
prepayment premium is 3%. The 1993 Subordinated Notes may also be repurchased in
privately negotiated transactions. The 1993 Subordinated Notes are unsecured.
In December 1995, Metropolitan issued subordinated notes with an
aggregate principal balance of $14.0 million through a public offering ("1995
Subordinated Notes"). The interest rate on the notes is 9.625%, which is paid
monthly and principal will be
23
<PAGE> 24
repaid when the notes mature on January 1, 2005. The 1995 Subordinated Notes are
not redeemable, in whole or in part, by Metropolitan prior to December 1, 1998.
After December 1, 1998, the 1995 Subordinated Notes may be redeemed by
Metropolitan at a declining premium which begins at 3% of the prepaid principal
amount. After December 1, 2000, the 1995 Subordinated Notes may be prepaid at
par plus accrued interest. The 1995 Subordinated Notes may also be repurchased
in privately negotiated or open market transactions. The 1995 Subordinated Notes
are also unsecured.
Line of Credit. In October 1996, the Corporation amended an existing
line of credit agreement with the Huntington National Bank ("The Huntington Loan
Agreement"). The Huntington Loan Agreement is a revolving line of credit for the
first 24 month period and then it converts to a 36 month term note. The maximum
permitted borrowing amount is $4.0 million. The terms of the Huntington Loan
Agreement require interest only payments for 24 months, then quarterly principal
payments based on a 60-month amortization with a balloon payment due in May
2001. The interest rate during the first 24 months is tied to LIBOR or
Huntington National Bank prime at Metropolitan's option. After conversion to a
term loan in May 1998, the interest rate is prime. As collateral for the
Huntington Loan Agreement, Mr. Kaye, Chairman and Chief Executive Officer of
Metropolitan, has agreed to pledge a portion of his shares of Common Stock of
Metropolitan in an amount at least equal in value to 200% of any outstanding
balance. At December 31, 1996, there was no outstanding balance under the
Huntington Loan Agreement.
FHLB Advances. The FHLB makes funds available for housing finance to
eligible financial institutions like Metropolitan. The FHLB generally limits
advances to 25% of assets with a total borrowing limit of 40% of assets from all
borrowing sources. Advances are collateralized by any combination of the
following assets and collateralization rates: one- to four-family first mortgage
loans, not past due greater than 90 days, pledged on a blanket basis at 150% of
the advance amount, specifically identified mortgage loans at 125% of the
advance amount and various types of investment and mortgage-backed securities at
rates ranging from 101-110% of the advance amount. FHLB stock owned by the Bank
is pledged as additional collateral but is not available as primary collateral.
The aggregate balance of assets pledged as collateral for outstanding FHLB
advances at December 31, 1996 was $89,250,000.
Reverse Repurchase Agreements. From time to time the Bank borrows
funds by using its investment or mortgage-backed securities to issue reverse
repurchase agreements. This type of borrowing provides an alternative source of
funds to FHLB borrowings and at times, more favorable rates. The aggregate
balance of mortgage-backed securities pledged as collateral for reverse
repurchase agreements at December 31, 1996 was $24,714,000.
The following table sets forth the maximum month-end balance and
average balance of other borrowings during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994
--------------------- ------------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
MAXIMUM MONTH-END BALANCE:
FHLB advances $75,150 $51,000 $23,000
Term loan - 3,280 3,640
Qualifying subordinated debt - 1,200 1,600
1993 Subordinated Notes 4,874 4,874 4,874
1995 Subordinated Notes 14,000 14,000 -
Line of credit - 5,000 -
Reverse repos 23,500 9,000 -
AVERAGE BALANCE:
FHLB advances $50,546 $28,467 $3,914
Term Loan - 485 3,420
Qualifying Subordinated Debt - 923 1,220
1993 Subordinated Notes 4,874 4,874 4,874
1995 Subordinated Notes 14,000 690 -
Line of credit - 3,834 -
Reverse repos 4,480 7,591 -
</TABLE>
24
<PAGE> 25
The following table sets forth the end of period balances at the date indicated
and interest rates during the period then ended.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE:
FHLB advances $59,500 $28,000 $6,150
Term loan - - 3,280
Qualifying subordinated debt - - 1,200
1993 Subordinated Notes 4,874 4,874 4,874
1995 Subordinated Notes 14,000 14,000 -
Line of credit - - -
Reverse repos 23,500 - -
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances 5.43% 6.18% 5.20%
Term Loan - 8.79 7.20
Qualifying Subordinated Debt - 11.78 9.93
1993 Subordinated Notes 10.47 10.47 10.47
1995 Subordinated Notes 10.48 10.48 -
Line of credit - 8.67 -
Reverse repos 5.61 6.10 -
</TABLE>
COMPETITION
Metropolitan faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other savings institutions, commercial banks,
mortgage companies, credit unions, finance companies and insurance companies.
The Bank competes for loans principally on the basis of the interest rates and
loan fees it charges, the type of loans it originates and the quality of
services it provides to borrowers. Some of the Bank's competitors, however, have
higher lending limits and substantially greater financial resources than the
Bank.
The Bank attracts its deposits through its retail sales offices,
primarily from the communities in which those retail sales offices are located;
therefore, competition for those deposits is principally from other savings
institutions, commercial banks, credit unions, mutual funds and brokerage
companies located in the same communities. The Bank competes for these deposits
by offering a variety of deposit accounts at competitive rates, convenient
business hours, and convenient branch locations.
EMPLOYEES
At December 31, 1996, Metropolitan had a total of 255 employees,
including part-time employees. The Corporation's employees are not represented
by any collective bargaining group. Management considers its employee relations
to be excellent.
REGULATION AND SUPERVISION
INTRODUCTION
Metropolitan is registered as a savings and loan holding company
within the meaning of the Home Owners' Loan Act (the "HOLA"). As a savings and
loan holding company, Metropolitan is subject to the regulations, examination,
supervision, and reporting requirements of the Office of Thrift Supervision
("OTS"). The Bank, an Ohio-chartered savings and loan association, is a member
of the FHLB System, and its deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF"). The Bank is subject to examination and regulation by the OTS, the FDIC
and the
25
<PAGE> 26
Ohio Superintendent of Savings and Loan Associations and to regulations
regarding such matters as capital standards, mergers, establishment of branch
offices, subsidiary investments and activities, and general investment
authority. Such examination and regulation is intended primarily for the
protection of depositors.
The descriptions of the statutes and regulation which are applicable
to Metropolitan and the Bank and the effects thereof which are set forth below
and elsewhere in this document do not purport to be a complete description of
such statutes and regulations and their effects on Metropolitan or the Bank or
to identify every statute and regulation that may apply to Metropolitan or the
Bank.
METROPOLITAN
As a savings and loan holding company, Metropolitan is subject to
certain restrictions with respect to its activities and investments. Among other
things, Metropolitan is generally prohibited, either directly or indirectly,
from acquiring control of any other savings association or savings and loan
holding company, absent prior approval of the OTS, and from acquiring more than
5% of the voting stock of any savings association or savings and loan holding
company which is not a subsidiary of Metropolitan.
Similarly, OTS approval must be obtained prior to any person's acquiring
control of the Bank or Metropolitan. Control is conclusively presumed to exist
if, among other things, a person acquires more than 25% of any class of voting
stock of the institution or holding company or controls in any matter the
election of a majority of the directors of the institution or the holding
company. Control is rebuttably presumed to exist if, among other things, a
person acquires more than 10% of any class of voting stock (or 25% of any class
of stock) and is subject to any certain specified "control factors."
THE BANK
General. The OTS also has enforcement authority over all savings
associations. This enforcement authority includes the ability to impose
penalties for and to seek correction of violations of laws and regulations and
unsafe or unsound practices by assessing civil money penalties, issuing cease
and desist or removal and prohibition orders against an institution, its
directors, officers or employees and other persons, or initiating injunctive
actions.
As a lender and a financial institution, the Bank is subject to
various regulations promulgated by the Federal Reserve Board including, without
limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves),
Regulation E (Electronic Fund Transfers), Regulation F (Interbank Liabilities),
Regulation Z (Truth in Lending), Regulation CC (Availability of Funds), and
Regulation DD (Truth in Savings). As lenders of loans secured by real property,
and as owners of real property, financial institutions, including the Bank, are
subject to compliance with various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of the property.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.
Under the FDIC risk-based deposit insurance assessment system, all
insured depository institutions are placed into one of nine categories and
assessed insurance premiums based upon their level of capital and supervisory
evaluation. Under the system, institutions classified as well-capitalized and
requiring little supervision would pay the lowest premium while institutions
that are classified as undercapitalized and considered of substantial
supervisory concern would pay the highest premium. Risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment period.
With respect to the SAIF, the FDIC is authorized to increase
assessment rates, on a semi-annual basis, if it determines that the reserve
ratio of the SAIF will be less than the designated reserve ratio of 1.25% of
SAIF-insured deposits. In setting these increased assessments, the FDIC must
seek to restore the reserve ratio to that designated reserve level, or such
higher reserve ratio as established by the FDIC. In addition, the FDIC may
impose special assessments on SAIF members to repay amounts borrowed from the
United States Treasury or for any other reason deemed necessary by the FDIC.
26
<PAGE> 27
Similarly, with respect to deposits which are insured by the Bank
Insurance Fund ("BIF"), the FDIC is authorized to adjust the insurance premium
rates in order to maintain the reserve ratio of the BIF at 1.25% of BIF-insured
deposits. In setting the BIF assessment rates, the FDIC must maintain the
reserve ratio at that designated reserve level, or such higher reserve ratio as
established by the FDIC. BIF and SAIF assessment rates, however, have not
remained comparable. During fiscal 1996, BIF members generally paid lower
premiums than SAIF-insured institutions, placing SAIF-insured institutions whose
deposits are exclusively or primarily SAIF-insured at a competitive
disadvantage.
As a result of this disparity in insurance premium rates, on September
30, 1996 the President signed into law the Omnibus Bill which included
provisions designed to recapitalize the SAIF and to mitigate the BIF/SAIF
premium disparity. The Omnibus Bill required the FDIC to impose a special
assessment on SAIF-insured deposits held by institutions as of March 31, 1995 in
order that the SAIF achieve the designated reserve ratio. Accordingly, the FDIC
assessed and the Bank paid a $2.9 million special assessment from working
capital of the Bank.
Now that the SAIF has reached it required reserve ratio following the
one-time assessment, the FDIC has reduced the annual assessment rates for
SAIF-insured institutions. Effective January 1, 1997, the SAIF assessment rates
are identical to those for BIF-insured institutions.
The Omnibus Bill also requires the repayment of Financing Corporation
("FICO") bonds to be shared by both SAIF-and BIF-insured institutions. Prior to
the enactment of this legislation, only a portion of the SAIF assessment was
used to repay the $780 million in annual FICO interest payments. However, as of
January 1, 1997, BIF institutions are required to pay a portion of the FICO
interest payments, as well. For the first three years, the BIF assessment rates
for FICO payments are 20% of those for SAIF institutions. Thus, SAIF
institutions, such as the Bank, will continue to be subject to a greater burden
than BIF institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are 6.44 basis points on SAIF
deposits and 1.29 basis points on BIF deposits. However, after January 1, 2000,
assessments on BIF-insured institutions will be made on the same basis as
SAIF-insured institutions. It is estimated that the payments of such assessments
will be 2.43 basis points on deposits. It is important to note that these
assessments are only FICO interest payments and that further premiums could be
assessed in order to maintain the BIF and SAIF funds at the required 1.25%
reserve ratio.
In addition, the Omnibus Bill requires the merger of the BIF and SAIF
into a single insurance fund no later than January 1, 1999. In connection with
the merger of the BIF and the SAIF, SAIF-insured institutions could be forced to
convert to state bank charters or national bank charters. If such a proposal
became law, the Corporation would become a bank holding company and be subject
to regulation by the Federal Reserve Board, which imposes capital requirements
on bank holding companies. The Corporation is not currently subject to capital
requirements.
Regulatory Capital Requirements. The capital regulations of the OTS
issued thereunder (the "Capital Regulations") establish a "leverage limit," a
"tangible capital requirement" and a "risk-based capital requirement." In
addition, the OTS may establish, on a case by case basis, individual minimum
capital requirements for a savings association which vary from the requirements
that would otherwise apply under the Capital Regulations. The OTS has not
established such individual minimum capital requirements for the Bank.
A savings association which fails to meet one or more of the
applicable capital requirements is subject to various regulatory limitations and
sanctions, including a prohibition on growth and the issuance of a capital
directive by the OTS requiring the following: an increase in capital; reduction
of rates paid on savings accounts; cessation of or limitations on deposit-taking
and lending; limitations on operational expenditures; an increase in liquidity;
and such other actions deemed necessary or appropriate by the OTS. In addition,
a conservator or receiver may be appointed under certain circumstances.
The leverage limit currently requires a savings association to
maintain "core capital" of not less than 3% of adjusted total assets. The OTS
has taken the position, however, that the prompt corrective action regulatory
scheme (See"-Prompt Corrective Action") has effectively raised the leverage
ratio requirement for all but the most highly-rated institutions to 4% since an
institution is "undercapitalized" for such purpose if, among other things, its
leverage ratio is less than 4% (3% for MACRO 1 rated institutions).
The tangible capital requirement requires a savings association to
maintain "tangible capital" in an amount not less than 1.5% of adjusted total
assets.
The risk-based capital requirement generally provides that a savings
association must maintain total capital in an amount at least equal to 8.0% of
its risk-weighted assets. The risk-based capital regulations are similar to
those applicable to national banks. The regulations assign each asset and
certain off-balance sheet assets held by a savings association to one of four
risk-weighting categories, based upon the degree of credit risk associated with
the particular type of asset.
27
<PAGE> 28
Savings associations are required to incorporate interest rate risk in
their capital calculations for determining compliance with capital requirements.
Interest rate risk is measured by the decline in "net portfolio value" that
would result from a hypothetical 200 basis point increase or decrease in market
interest rates, whichever is lower, divided by the estimated economic value of
assets. An institution whose measured interest rate exposure exceeds 2% must
deduct an amount equal to one-half of the difference between its measured
interest rate risk and 2%, multiplied by the estimated economic value of its
total assets, from total capital in determining whether it meets its risk-based
capital requirement.
Banking regulators continue to indicate their desire to raise capital
requirements applicable to financial institutions beyond their current levels.
No prediction can be made as to whether and when higher capital requirements
would be imposed and, if so, to what levels and on what schedule.
Each bank regulatory agency and the OTS review each of their capital
standards every two years to determine whether those standards require
sufficient capital to facilitate prompt corrective action to prevent or minimize
loss to the deposit insurance funds. Each bank regulatory agency and the OTS
revise each of their risk-based capital standards to ensure that those standards
take adequate account of interest rate risk, concentration of credit risk and
the risk of non-traditional activities, and to reflect the actual performance
and expected risk of loss of multifamily mortgages.
At December 31, 1996, the Bank complied with each of the tangible
capital, the minimum leverage and the risk-based capital requirements. The
following table presents the Bank's regulatory capital position at December 31,
1996.
<TABLE>
<CAPTION>
Percent of
Regulatory
Amount Assets(1)
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $42,342 5.54 %
Tangible capital requirement 11,454 1.50
------- -----
Excess $30,888 4.04 %
======= ====
Core capital $42,592 5.58 %
Core capital requirement(2) 30,545 4.00
------- ----
Excess $12,047 1.58 %
======= ====
Risk-based capital $45,761 8.46 %
Risk-based capital requirement 43,274 8.00
------- ----
Excess $ 2,487 0.46 %
======= ====
<FN>
(1) Represents the percentage of adjusted total assets for tangible
and core capital purposes and the percentage of risk-weighted assets
for risk-based capital purposes.
(2) The "prompt corrective action" regulatory scheme (See "-Prompt
Corrective Action") has effectively raised the leverage requirement to
4% for all but the most highly-rated institutions since an institution
is considered "undercapitalized" for such purposes if, among other
things, it has a leverage ratio of under 4% (3% for MACRO 1 rated
institutions).
</TABLE>
Prompt Corrective Action. Banks and savings associations are
classified into one of five categories based upon capital adequacy, ranging from
"well-capitalized" to "critically undercapitalized" and require (subject to
certain exceptions) the appropriate federal banking agency to take prompt
corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized."
The federal banking agencies have issued a joint rule for this purpose
under which, in general, an institution is: "well capitalized" if it has total
risk-based capital of 10% or greater, Tier 1 risk-based capital of 6% or
greater, leverage ratio of 5% or greater, and is not subject to an order or
other supervisory directive to meet and maintain a specific capital level for
any capital measure; "adequately capitalized" if it has total risk-based capital
of 8% or greater, Tier 1 risk-based capital of 4% or greater, and leverage ratio
of 4% or greater (3% or greater if rated Composite 1 under the MACRO rating
system); "undercapitalized" if it has total risk-based capital of less than 8%,
Tier 1 risk-based capital of less than 4%, or a leverage ratio of less than 4%
(3% if rated
28
<PAGE> 29
Composite 1 under the MACRO rating system); "significantly undercapitalized" if
it has total risk-based capital of less than 6%, Tier 1 risk-based capital of
less than 3%, or a leverage ratio of less than 3%; and "critically
undercapitalized" if it has a ratio of tangible equity to total assets equal to
or less than 2%. Based on these requirements, the Bank is an "adequately
capitalized" institution.
The appropriate federal banking agency has the authority to
reclassify, a well-capitalized institution as adequately capitalized, and to
treat an adequately capitalized or undercapitalized institution as if it were in
the next lower capital category, if it is determined, after notice and an
opportunity for a hearing, to be in an unsafe or unsound condition or to have
received and not corrected a less-than-satisfactory rating for any of the
categories of asset quality, management, earnings or liquidity in its most
recent examination. As a result of such reclassification or determination, the
appropriate federal banking agency may require an adequately capitalized or
under-capitalized institution to comply with certain mandatory and discretionary
supervisory actions. A significantly undercapitalized savings association may
not be reclassified, however, as critically undercapitalized.
Restrictions on Dividends and Other Capital Distributions. Savings
association subsidiaries of holding companies generally are required to provide
their OTS District Director not less than thirty days' advance notice of any
proposed declaration of a dividend on the association's stock. Any dividend
declared within the notice period, or without giving the prescribed notice, is
invalid.
OTS regulations impose limitations upon certain "capital
distributions" by savings associations, including cash dividends, payments to
repurchase or otherwise acquire an association's shares, payments to
shareholders of another institution in a cash-out merger and other distributions
charged against capital. The regulation establishes a three-tiered system of
regulation, with the greatest flexibility being afforded to well-capitalized
associations.
An association that has capital immediately prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution that is at
least equal to its fully phased-in capital requirement is considered a Tier 1
institution ("Tier 1 Institution"). An association that has capital immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution that is at least equal to its minimum regulatory capital
requirement but less than its fully phased-in capital requirement, is considered
a Tier 2 institution ("Tier 2 Institution"). An association that does not meet
its minimum regulatory capital requirement immediately prior to, or on a pro
forma basis after giving effect to, a proposed capital distribution is
considered a Tier 3 institution ("Tier 3 Institution"). The OTS retains
discretion to treat a Tier 1 Institution as a Tier 2 or Tier 3 Institution if
the OTS determines that the institution is in need of more than normal
supervision and has provided the institution with notice to that effect.
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the higher
of: (i) 100% of its net income to date during the calendar year plus the amount
that would reduce the association's "surplus capital ratio" (the excess over its
fully phased-in capital requirement) to one-half of its surplus capital ratio at
the beginning of the calendar year or (ii) 75% of its net income over the most
recent four-quarter period. Any additional capital distributions would require
prior regulatory non-objection. A Tier 2 Institution may, after prior notice but
without the approval of the OTS, make capital distributions in accordance with
the following schedule: if the association's capital satisfies the risk-based
capital standard applicable to the association as of January 1, 1993, the
association may make distributions up to 75% of its net income over the most
recent four-quarter period, and, if the associations's capital satisfies the
risk-based capital standard applicable as of January 1, 1991, it may make
distributions up to 50% of its net income over the most recent four-quarter
period. A Tier 3 Institution is not authorized under the regulation to make any
capital distributions unless it receives prior written approval from the OTS or
in accordance with the express terms of an approved capital plan.
The OTS retains the authority to prohibit any capital distribution
otherwise authorized under the regulation if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulation also
states that the capital distribution limitations apply to direct and indirect
distributions to affiliates, including those occurring in connection with
corporate reorganizations.
Under the "prompt corrective action" provisions ( See "--Prompt
Corrective Action"), an FDIC-insured institution may not make a "capital
distribution" (which includes, among other things, cash dividends and stock
purchases) if, after making the distribution, the institution would be
"undercapitalized" for such purposes.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. In their current form, the proposed
regulations would not apply to the Bank as it is owned by a holding company.
Under the proposal, a savings association may make a capital distribution
without notice to the OTS provided that it has a MACRO 1 or 2 rating, is not in
troubled condition, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital
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<PAGE> 30
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings association
may not make a capital distribution without prior approval of the OTS and the
FDIC if it is undercapitalized before, or as a result of, such a distribution. A
savings association will be considered in troubled condition if it has a MACRO
rating of 4 or 5, is subject to an enforcement action relating to its safety and
soundness or financial viability, or has been informed in writing by the OTS
that it is in troubled condition. As under the current rule, the OTS may object
to a capital distribution if it would constitute an unsafe or unsound practice.
No assurance may be given as to whether or in what form the regulations may be
adopted.
Liquidity. Federal regulations currently require savings associations
to maintain, for each calendar month, an average daily balance of liquid assets
(including cash, certain time deposits, bankers' acceptances, and specified
United States Government, state or federal agency obligations) equal to at least
5% of the average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. This liquidity requirement may
be changed from time to time by the OTS to an amount within a range of 4% to 10%
of such accounts and borrowings depending upon economic conditions and the
deposit flows of savings associations. Federal regulations also require each
savings association to maintain, for each calendar month, an average daily
balance of short-term liquid assets (generally those having maturities of 12
months or less) equal to at least 1% of the average daily balance of its net
withdrawable accounts plus short-term borrowings during the preceding calendar
month. Monetary penalties may be imposed for failure to meet liquidity ratio
requirements. At December 31, 1996, the liquidity and short-term liquidity
ratios of the Bank were 5.52% and 2.71%, respectively, which exceeded the
applicable requirements.
Qualified Thrift Lender Test. Pursuant to the Qualified Thrift Lender
("QTL") test, a savings institution must invest at least 65% of its portfolio
assets in "qualified thrift investments" on a monthly average basis on a rolling
12-month "look-back" basis. Portfolio assets are an institution's total assets
less goodwill and other intangible assets, the institution's business property,
and a limited amount of the institution's liquid assets.
A savings association's failure to remain a QTL may result in: (i)
limitations on new investments and activities; (ii) imposition of branching
restrictions; (iii) loss of FHLB borrowing privileges; and (iv) limitations on
the payment of dividends. If a savings institution that is a subsidiary of a
savings and loan holding company fails to regain QTL status within one year of
its loss of such status, the holding company must register as and will be deemed
to be a bank holding company subject to, among other things, the business
activity restrictions of the Bank Holding Company Act.
The Bank's qualified thrift investments were in excess of 73.6% of its
portfolio assets as of December 31, 1996.
Ohio Regulation. As a savings and loan association organized under the
laws of the State of Ohio, the Bank is subject to regulation by the Ohio
Division of Financial Institutions (the "Division"). Regulation by the Division
affects the Bank's internal organization as well as its savings, mortgage
lending, and other investment activities. Periodic examinations by the Division
are usually conducted on a joint basis with the OTS. Ohio law requires that the
Bank maintain federal deposit insurance as a condition of doing business.
Under Ohio law and regulations, an Ohio association may invest in
loans and interests in loans, secured or unsecured, of any type or amount
for any purpose, subject to certain requirements including but not limited to:
loans secured by liens on income-producing real estate may not exceed 20% of an
association's assets; all loans for educational purposes may not exceed 5% of an
association's assets; consumer loans, commercial paper and corporate debt
securities may not exceed 20% of an association's assets; and loans for
commercial, corporate, business or agricultural purposes may not exceed 10% of
an association's assets (subject to certain exceptions). In addition, no
association may make loans for the acquisition and development of undeveloped or
partially developed land for primarily residential use to one borrower in excess
of 2% of assets of the association. The total investment in commercial paper or
corporate debt of any issuer cannot exceed 1% of an association's assets, with
certain exceptions.
Ohio law authorizes Ohio-chartered associations to, among other
things: (i) invest up to 15% of assets in the capital stock, obligations and
other securities of service corporations organized under the laws of Ohio, and
an additional 20% of net worth may be invested in loans to majority owned
service corporations; (ii) invest up to 10% of assets in corporate equity
securities, bonds, debentures, notes, or other evidence of indebtedness; (iii)
exceed limits otherwise applicable to certain types of investments (other than
investments in service corporations) by between 3% and 10% of assets, depending
upon the level of the institution's permanent stock, general reserves, surplus
and undivided profits; and (iv) invest up to 15% of assets in any loans or
investments not otherwise specifically authorized or prohibited, subject to
authorization by the institutions's board of directors.
An Ohio association may invest in such real property or interests
therein as its board of directors deems necessary or convenient for the conduct
of the business of the association, but the amount so invested may not exceed
the net worth of the association at the time the investment is made.
Additionally, an association may invest an amount equal to 10% of its assets in
any
30
<PAGE> 31
other real estate. This limitation does not apply, however, to real estate
acquired by foreclosure, conveyance in lieu of foreclosure or other legal
proceedings in relation to loan security interests.
Notwithstanding the above powers authorized under Ohio law and
regulation, a state-chartered savings association, such as the Bank, is subject
to certain limitations on its permitted activities and investments under federal
law which may restrict the ability of an Ohio-chartered association to engage in
activities and make investments otherwise authorized under Ohio law.
Ohio has adopted a statutory limitation on the acquisition of control
of an Ohio savings and loan association which requires the written approval of
the Division prior to the acquisition by any person or entity of a controlling
interest in an Ohio association. Control exists, for purposes of Ohio law, when
any person or entity, either directly or indirectly, or acting in concert with
one or more other persons or entities, owns, controls, holds with power to vote,
or holds proxies representing, 15% or more of the voting shares or rights of an
association, or controls in any manner the election or appointment of a majority
of the directors.
Under certain circumstances, interstate mergers and acquisitions
involving associations incorporated under Ohio law are permitted by Ohio law. A
savings and loan association or savings and loan holding company with its
principal place of business in another state may acquire a savings and loan
association or savings and loans holding company incorporated under Ohio law if
laws of such other state permit an Ohio savings and loan association or an Ohio
holding company reciprocal rights.
Ohio law requires prior written approval of the Ohio Superintendent of
a merger of an Ohio association with another savings and loan association or a
holding company affiliate.
FEDERAL AND STATE TAXATION
The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Corporation or the Bank.
Savings associations such as the Bank are generally taxed in the same
manner as other corporations. For taxable years beginning prior to January 1,
1996, savings associations such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their supervision and
business operations ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying real property loans,"
which are generally loans secured by certain interests in real property, may
have been computed using an amount based on the Bank's actual loss experience,
or a percentage equal to 8% of the Bank's taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the
reserve for nonqualifying loans (the "percentage of taxable income method"). The
Bank's deduction with respect to nonqualifying loans was computed under the
experience method, which essentially allows a deduction based on the Bank's
actual loss experience over a period of several years. Each year the Bank
selected the most favorable way to calculate the deduction attributable to an
addition to the tax bad debt reserve.
Legislation enacted during 1996 repealed the existing reserve method
of accounting for bad debt reserves for tax years beginning after December 31,
1995. As a result, savings associations will no longer be able to calculate
their deduction for bad debts using the percentage of taxable income method.
Instead, savings associations will be required to compute their deduction based
on specific charge offs during the taxable year or, if the savings association
or its control group had assets of not more than $500 million, based on actual
loss experience over a period of years. This legislation also requires a savings
association (or its controlled group) with assets of more than $500 million to
recapture into income over a six-year period their post-1987 additions to their
bad debt tax reserves for qualifying real property loans and nonqualifying
loans, thereby generating additional tax liability. A savings association (or
its controlled group) with assets of not more than $500 million are required to
recapture their bad debt tax reserve to the extent it exceeds the greater of (i)
the applicable bad debt tax reserve as of the close of the last taxable year
beginning before January 1, 1988, or (ii) what the savings association's
applicable bad debt tax reserve would have been at the close of its last taxable
year beginning before January 1, 1996 under the experience method. At December
31, 1995, the Bank's post-1987 reserves totalled approximately $3.9 million. The
recapture may be suspended for up to two years if, during those years, the
savings association satisfies a residential loan requirement.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt reserve
deductions ratable over a multi-year period. At December 31, 1995, the Bank's
total bad debt reserve for tax purposes was approximately $6.8 million. Among
other things, the qualifying thrift definitional tests required the Bank to hold
at least 60% of its assets as "qualifying assets." Qualifying assets generally
include cash, obligations
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<PAGE> 32
of the United States or any agency or instrumentality thereof, certain
obligations of a state or political subdivision thereof, loan secured by
interests in improved residential real property or by savings accounts, student
loans and property used by the Bank in the conduct of its banking business.
Under current law, a savings association will not be required to recapture its
pre-1988 bad debt reserves if it ceases to meet the qualifying thrift
definitional tests.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to an alternative minimum
tax. An alternative minimum tax is imposed at a tax rate of 20% on alternative
minimum taxable income ("AMTI"), which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. Adjustments and preferences include depreciation deductions
in excess of those allowable for alternative minimum tax purposes, tax-exempt
interest on most private activity bonds issued after August 7, 1986 (reduced by
any related interest expense disallowed for regular tax purposes), and, for 1990
and succeeding years, 75% of the excess of adjusted current earnings ("ACE")
over AMTI. ACE equals pre-adjustment AMTI (i) increased or decreased by certain
ACE adjustments, which include tax-exempt interest on municipal bonds,
depreciation deductions in excess of those allowable for ACE purposes and, in
certain cases, the dividend received deduction, and (ii) determined without
regard to the ACE adjustment and the alternative tax net operating loss. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax, and alternative tax net operating losses can offset no more
than 90% of AMTI. The payment of alternative minimum tax will give rise to a
minimum tax credit which will be available with an indefinite carry forward
period to reduce federal income taxes in future years (but not below the level
of alternative minimum tax arising in each of the carry forward years). For
taxable years beginning after 1986 and before 1996, corporations, including
savings associations such as the Bank, are also subject to an environmental tax
equal to 0.12% of the excess of AMTI for the taxable year (determined without
regard to alternative tax net operating losses and the deduction for the
environmental tax) over $2 million.
Metropolitan, the Bank and other includable subsidiaries file
consolidated federal income tax returns on a December 31 calendar year basis
using the accrual method of accounting. Metropolitan, the Bank and other
includable subsidiaries have been audited by the Internal Revenue Service
through December 31, 1994.
The Bank is subject to the Ohio corporate franchise tax. As a
financial institution, the Bank computes its franchise tax based on its net
worth. Under this method, the Bank will compute its Ohio corporate franchise tax
by multiplying its net worth (as determined under generally accepted accounting
principles) as specifically adjusted pursuant to Ohio law, by the applicable tax
rate, which is currently 1.5%. As an Ohio-chartered savings and loan
association, the Bank also receives a credit against the franchise tax for a
portion of the state supervisory fees paid by it.
The Corporation is subject to an Ohio corporation franchise tax
payable in an amount equal to the greater of a specified percentage of net
income (currently 5.1% of the first $50,000 and 8.9% of the remainder, with an
additional add-on tax not to exceed $5,000) or a specified percentage of net
worth (currently approximately 0.6%, plus an add-on tax). In calculating net
income for this purpose, dividends from wholly-owned subsidiaries, such as the
Bank, would be excluded. In addition, in calculating net worth, the
Corporation's investment in the Bank would be excluded for this purpose.
ITEM 2. PROPERTIES
Metropolitan's corporate headquarters, which is leased under a
long-term lease agreement, is located at 6001 Landerhaven Drive, Mayfield
Heights, Ohio 44124. The Bank operates fourteen branch locations, eight of which
are leased under long-term lease agreements with various parties. The other six
branches, located in Cleveland, Willoughby Hills, Mayfield Heights, Macedonia,
Cleveland Heights and Aurora, are owned by Metropolitan. In addition,
Metropolitan owns land in Twinsburg, Auburn, Stow, and land and a building in
Hudson, planned sites for future full service retail offices. The Bank also
leases office space for its loan production offices in Detroit, Cincinnati,
North Olmsted, Pittsburgh, and Strongsville.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved in various legal proceedings incidental to
the conduct of its business. The Corporation does not expect that any such
proceedings will have a material adverse effect on the Corporation's financial
position or results of operations.
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<PAGE> 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the fourth quarter of the fiscal year covered by this Report,
the following actions were undertaken by the then sole shareholder of the
Corporation, Robert M. Kaye: 1) the authorization of a 3,125,635-for-one stock
split, the increase in the number of authorized shares of the Company to
10,000,000, and the creation of two classes of preferred stock, 2) the creation
of a classified Board of Directors with the number of directors between eight
and fourteen, and 3) the adoption of Amended and Restated Code of Regulations
containing defensive measures intended to prevent and discourage the acquisition
of the Company by a hostile party. These actions were undertaken October 22,
1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Metropolitan's Common Stock, no par value ("Common Stock"), the only
outstanding class of equity securities of Metropolitan is traded on the Nasdaq
National Market System. There are 10,000,000 shares of Common Stock authorized
and 3,525,635 shares issued and outstanding. The first day of trading in the
Corporation's Common Stock was October 29, 1996. Prior to this date no trading
occurred in the Corporation's Common Stock. During the fourth quarter of 1996
the price for the Corporation's Common Stock ranged from a high of $11 1/4 to a
low of $10 1/4.
Metropolitan paid no dividends during the past three years and has no
intention of paying dividends in the foreseeable future. In addition, the terms
of the 1993 Subordinated Notes, which mature December 31, 2001, prohibit the
Corporation from paying any cash dividend while the 1993 Subordinated Notes are
outstanding. The Indenture dated as of December 1, 1995 between the Corporation
and Boatmen's Trust Company covering the 1995 Subordinated Notes and the
Huntington Loan Agreement prohibit the Corporation from paying a dividend or
other distribution on its equity securities unless the Corporation's ratio of
tangible equity to total assets exceeds 7%.
The approximate numbers of record common shareholders at March 24,
1997 was 84. Robert M. Kaye, previously the sole shareholder controls 2,730,635
shares or 77.5% of the amount outstanding.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this item is set forth on pages 3 and 4 of
the Corporation's 1996 Annual Report to Shareholders which are incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information in response to this item is set forth on pages 5 through
18 of the Corporation's 1996 Annual Report to Shareholders which are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements together with the report thereon
of Crowe Chizek & Company L.L.P., dated February 28, 1997, appearing on pages
20 through 47 of the Corporation's 1996 Annual Report to Shareholders, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
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<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is set forth in the
section captioned Election of Directors and Executive Officers who are not
Directors contained in the Corporation's definitive Proxy Statement for the
Meeting of Shareholders to be held May 20, 1997 and is incorporated herein by
reference. The Corporation expects to file its proxy statement on or about April
10, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item is set forth in the
sections captioned Board Meetings and Committees, Director Compensation,
Executive Compensation and Other Information, Compensation Committee, Report on
Executive Compensation and Performance Graph contained in the Corporation's
definitive Proxy Statement for the 1997 Annual Meeting of Shareholders to be
held May 20, 1997, and is incorporated herein by reference. The Corporation
expects to file its proxy statement on or about April 10, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is set forth in the
sections captioned SECURITIES OWNERSHIP OF MANAGEMENT and SECURITIES OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS contained in the Corporation's definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders to be held May 20, 1997,
and is incorporated herein by reference. The Corporation expects to file its
proxy statement on or about April 10, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is set forth in the
sections captioned Compensation Committee Interlocks and Insider Participation,
and Certain Transactions contained in the Corporation's definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders to be held May 20, 1997
and is incorporated herein by reference. The Corporation expects to file its
proxy statement on or about April 10, 1997.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits, financial statements, and financial statement schedules.
----------------------------------------------------------------------
1. Financial statements Page No.*
----------------------- ---------
<S> <C>
Report of Independent Auditors 20
Consolidated Statements of Financial Condition 21
Consolidated Statements of Operations 22
Consolidated Statements of Shareholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 26
2. Financial Statement Schedules
--------------------------------
Parent Company Financial Statements 43
</TABLE>
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<PAGE> 35
* Incorporated by reference from the indicated page of the
Corporation's 1996 Annual Report to Shareholders filed as
Exhibit 13 to this Form 10-K.
3. Exhibits
--------
3.1 Amended and Restated Articles of
Incorporation of Metropolitan (filed as
Exhibit 2 to Metropolitan Form 8-A, filed
October 15, 1996 and incorporated herein by
reference).
3.2 Amended and Restated Code of Regulations of
Metropolitan (filed as Exhibit 3 to
Metropolitan's Form 8-A filed October 15,
1996 and incorporated herein by reference).
10 Commercial Real Estate Manager's Bonus Program **
13 1996 Annual Report to Shareholders
21 List of subsidiaries of Metropolitan (filed as
Exhibit 21 to Metropolitan's Form 10-K, filed March
28, 1996 and incorporated herein by reference).
24 Powers of Attorney.
27 Financial Data Schedule.
99.1 Specimen Subordinated Note relating to the
9 5/8% Subordinated Notes due January 1,
2005 (found at Sections 2.2 and 2.3 of the
Form of Indenture filed as Exhibit 4.1 to
Metropolitan's Amendment No. 1 to
Registration Statement on Form S-1, filed
November 13, 1995 and incorporated herein by
reference).
99.2 Form of Indenture entered into December 1,
1995 between the Corporation and Boatmen's
Trust Company (filed as Exhibit 4.1 to
Metropolitan's Amendment No. 1 to
Registration Statement on Form S-1, filed
November 13, 1995 and incorporated herein
by reference).
99.3 Specimen Subordinated Note relating to the
10% Subordinated Notes due December 31,
2001 filed as Exhibit 99.1 to
Metropolitan's Registration Statement on
Form S-1, filed October 20, 1995 and
incorporated herein by reference).
99.4 The Restated Loan Agreement by and between
the Huntington National Bank and the
Corporation dated as of October 16, 1996
(filed as Exhibit 99.4 to Metropolitan's
Amendment No. 1 to Registration Statement
on Form S-1, filed October 18, 1996 and
incorporated herein by reference).
** Indicates that the exhibit is a management contract
or a compensatory plan or arrangement.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
by Metropolitan during the quarter ended December 31, 1996.
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<PAGE> 36
SIGNATURES
Pursuant to the requirements of Sections 13 and 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
METROPOLITAN FINANCIAL CORP.
By: /s/ David G. Lodge
------------------------------
David G. Lodge,
President,
Assistant Secretary,
Assistant Treasurer, and Director
Date: March 31, 1997
--------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ David G. Lodge
------------------------------
David G. Lodge,
President,
Assistant Secretary,
Assistant Treasurer, and Director
(Principal Financial and Accounting
Officer)
Date: March 31, 1997
--------------------------------
Robert M. Kaye, Chairman of the Board and Director (Principal Executive
Officer); Malvin E. Bank, Secretary, Assistant Treasurer, and Director; David P.
Miller, Treasurer, Assistant Secretary and Director; Robert R. Broadbent,
Director; Marjorie M. Carlson, Director; Lois K. Goodman, Director; Marguerite
B. Humphrey, Director; Ralph D. Ketchum, Director.
By: /s/ David G. Lodge
-------------------------------
David G. Lodge
Attorney-in-Fact
Date: March 31, 1997
--------------------------------
36
<PAGE> 37
EXHIBIT INDEX
Exhibit
Number Description Numbered Page
------ ----------- -------------
3.1 Articles of Incorporation of Metropolitan,
(incorporated by reference to Exhibit 3.1 to
Metropolitan's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on
October 20, 1995 (Registration No.33-98380), as
amended).
3.2 Code of Regulations of Metropolitan (in-
corporated by reference to Exhibit 3.2
to Metropolitan's Registration Statement
on Form S-1 filed with the Securities and
Exchange Commission on October 20, 1995
(Registration No. 33-98380),
as amended).
10 Commercial Real Estate Manager's Bonus Program.
13 1996 Annual Report to Shareholders.
21 List of subsidiaries of Metropolitan.
24 Powers of Attorney.
27 Financial Data Schedule.
99.1 Specimen Subordinated Note relating to the 9 5/8%
Subordinated Notes due January 1, 2005 (found at
Sections 2.2 and 2.3 of the Form of Indenture filed
as Exhibit 4.1 to Metropolitan's Amendment No. 1 to
Registration Statement on Form S-1, filed November
13, 1995 and incorporated herein by reference).
99.2 Form of Indenture entered into December 1, 1995
between the Corporation and Boatmen's Trust Company
(filed as Exhibit 4.1 to Metropolitan's Amendment No.
1 to Registration Statement on Form S-1, filed
November 13, 1995 and incorporated herein by
reference).
99.3 Specimen Subordinated Note relating to the 10%
Subordinated Notes due December 31, 2001 filed as
Exhibit 99.1 to Metropolitan's Registration Statement
on Form S-1, filed October 20, 1995 and incorporated
herein by reference).
99.4 The Restated Loan Agreement by and between the
Huntington National Bank and the Corporation dated as
of October 16, 1996 (filed as Exhibit 99.4 to
Metropolitan's Amendment No. 1 to Registration
Statement on Form S-1, filed October 18, 1996 and
incorporated herein by reference).
<PAGE> 1
Exhibit 10
COMMERCIAL REAL ESTATE MANAGER'S BONUS PROGRAM
----------------------------------------------
Commencing in January, 1997, the Manager of the Commercial
Real Estate Lending Department will be eligible for bonuses on Commercial Real
Estate Loans that he procured in the prior twelve month period (January 1, 1996
through December 31, 1996).
Defined below and on Exhibit A is this new program, which will
be reviewed by Management at least every six months.
Details of Program
- ------------------
1) Bonuses will be calculated for every six-month period and the Manager
must "earn back" his salary for that time period in bonus dollars
before the bonus begins to accumulate.
2) The bonus for each six-month time period will be paid to the Manager
(included in regular paycheck) over a two-year period calculated at 20
percent (20%) every six months beginning in the month after the period
ends.
Example:
From July 1, 1996 to December 31, 1996, bonus earned was $5,000
Payment times: 1/97 7/97 1/98 7/98 1/99
Percent/Amount: 20%/$1,000 20%/$1,000 20%/$1,000 20%/$1,000 20%/$1,000
3) Half of the remaining bonus payments will be forfeited by the Manager
if the Manager leaves Metropolitan Savings Bank on HIS OWN BEHALF or is
terminated for cause. Cause is defined as dishonest or gross misconduct
but does not apply to bank restructures, change of ownership, layoffs
or change of company emphasis.
4) The Manager will be permitted a one percent (1%) delinquency rate for
loans sixty (60) days or greater past due that he has originated or
purchased since the inception of this program (his portfolio) as
calculated by Management.
Once the Manager's portfolio has a one percent (1%) delinquency rate,
the bonus payments will be stopped for any additional loan that goes
over sixty (60) days past due. If the Manager has a one percent (1%)
delinquency rate, and if any loan goes ninety (90) days past due or
greater, the Manager will be required to repay to Metropolitan Savings
Bank the entire bonus that has been paid to the Manager. The Manager
can repay this amount out of future bonus monies to be paid to him.
However, this amount must be repaid, should the Manager leave the
employ of Metropolitan Savings Bank for any reason.
5) The Manager will be allowed a maximum of three hundred dollars ($300)
per month for entertainment expenses, subject to proper documentation
of legitimate expenses and approval by the President. Amounts over
three hundred dollars ($300) per month will be approved at Management's
discretion.
6) Annual salary increases will still be in effect, however, more emphasis
will be placed on team projects and non-origination items.
<PAGE> 2
Metropolitan Savings Bank
-------------------------
Michael Di Asio's Bonus Program
-------------------------------
Regarding First Commercial Corporation (FCC)
--------------------------------------------
September 11, 1996
------------------
- - A bonus factor of .100 shall be multiplied by the fees produced for the
purposes of "warehousing" loans to be sold by FCC. This number shall be
labeled "Gross Bonus Dollars."
- - In January and July of each year, commencing in June, 1996, the Gross
Bonus Dollars shall be calculated for the previous six-month period and
subtracted from this number shall be Michael Di Asio's salary for the
same time period. This number shall be labeled "Net Bonus Dollars."
- - One-half of the Net Bonus Dollars shall be paid in the January or July,
following the six-month period in which the fees were generated.
- - The other half of the Net Bonus Dollars shall be paid in the January or
July, following the six-month period in which the loans which produced
the fees were sold. Consequently, these calculations must be made on a
loan-by-loan basis to allow for itemized payments.
- - If a loan is not sold within the initial option period (before any
purchase price increase) then that loan's commensurate Net Bonus
Dollars regarding the second payment shall be reduced by fifty percent
(50%).
- - Once this portfolio has a three percent (3%) delinquency rate, the
bonus payments will be stopped for any additional loan that goes over
sixty (60) days past due. If this portfolio has over a three percent
(3%) delinquency rate, and if any loan goes ninety (90) days past due
or greater, Michael Di Asio will be required to repay to Metropolitan
Savings Bank the entire bonus applicable to that loan that had been
paid to Michael Di Asio, and any future payment shall be stopped.
However, Michael Di Asio can repay this amount out of future bonus
monies to be paid to him, although, this amount must be repaid, should
Michael Di Asio leave the employ of Metropolitan Savings Bank for any
reason.
Approved:
/s/ David G. Lodge
-----------------------------
David G. Lodge
<PAGE> 3
EXHIBIT A
COMMERCIAL REAL ESTATE MANAGER'S BONUS PROGRAM
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APARTMENT LOANS
---------------
Loan term over 7 years Loan term under 7 years Referred by Management
<S> <C> <C> <C>
Originations: .0015 .001 .00025
Purchased: .0009 .0006 .00025
COMMERCIAL LOANS
----------------
Loan term over 7 years Loan term under 7 years Referred by Management
Originations: .00075 .0005 .00025
Purchased: .00085 .000375 .00025
</TABLE>
/s/ David G. Lodge
- --------------------------
David G. Lodge
<PAGE> 1
EXHIBIT 13
METROPOLITAN FINANCIAL CORP.
AND SUBSIDIARIES
ANNUAL REPORT
DECEMBER 31, 1996 AND 1995
<PAGE> 2
TO OUR SHAREHOLDERS
It is with great enthusiasm that we welcome you to the Metropolitan
Financial Corp. family. The year 1996 was important for Metropolitan in many
ways, however, the initial public offering of Common Shares, completed during
the fourth quarter, was the most significant. This action brought new capital
into Metropolitan which will be used to support future growth. Your confidence
in the management of Metropolitan is appreciated.
RESULTS
Metropolitan earned $3.5 million, or $1.09 per common share, during the
year ended December 31, 1996, excluding the one-time assessment to recapitalize
the Savings Association Insurance Fund ("SAIF") which was mandated by
legislation. Net income including the SAIF assessment was $1.5 million, or $0.48
per common share. While this one-time assessment to recapitalize the SAIF
reduced income for our industry in 1996, it will be positive for the future
earnings potential of Metropolitan, since the rate paid for insurance of
deposits beginning in 1997 has been reduced significantly. In addition, the
disparity between rates paid for insurance of deposits among institutions
insured by the Federal Deposit Insurance Corporation has been eliminated and the
competitive advantage enjoyed by some institutions, which paid a much lower
rate, has been mitigated. Our return on average assets excluding the one-time
assessment to recapitalize the SAIF was 0.51% and our return on average equity
excluding the one-time assessment was 12.98%.
Metropolitan's total assets increased to $769.1 million at December 31,
1996, a 30.3% increase from $590.1 million reported at December 31, 1995. Growth
is something of a tradition at Metropolitan, where assets have grown at a rate
in excess of 20% per year in each of the last five years. This has been possible
only because quality assets with interest rate and term characteristics
consistent with our long-term goals were available. The majority of the growth
in 1996 was funded by retail deposits which increased $118.4 million, or 23.5%
to $622.1 million at December 31, 1996. It was continued growth at existing
locations as well as two new retail sales offices opened late in 1995 that made
this growth possible. In addition, we opened our newest retail sales office
during the summer of 1996.
ASSET QUALITY AND CAPITAL
Metropolitan's asset quality ratios continue to be strong. Net charge-offs
in 1996 were only 0.04% of average total loans and non-performing assets were
only 0.70% of total assets at December 31, 1996. These ratios reflect our
emphasis on conservative underwriting standards. At December 31, 1996, nearly
70% of Metropolitan's loan portfolio was comprised of one- to four-family
residential loans, construction and land loans for the construction and
development of one- to four-family residential houses, and multifamily loans.
These are areas in which Metropolitan has developed special expertise over a
long period of time.
As a result of its commitment to growth, Metropolitan has made a conscious
decision to maintain its regulatory capital at the "adequately capitalized"
level. We feel that our capital resources are best utilized to fund asset growth
and in turn increase the earnings capacity of the Corporation. Our current plan
is to reinvest the earnings of Metropolitan in continued growth, and therefore
we do not anticipate paying dividends in the foreseeable future.
1
<PAGE> 3
LOOKING AHEAD
We are continually evaluating how best to compete in the financial
marketplace of the future and continue to implement strategies which will insure
Metropolitan a prominent position in the financial marketplace of the future.
For example, Business lending and Trust Services were introduced in 1995 and in
1996 Metropolitan began to make annuities and mutual funds available to its
customers.
We are excited about our prospects for the future. We have a talented team
of banking professionals at Metropolitan dedicated to enhancing the value of the
Bank. The directors, officers and staff of Metropolitan look forward to 1997 and
thank-you and our customers for your past and future support.
Sincerely,
Robert M. Kaye
Chairman of the Board and
Chief Executive Officer
David G. Lodge
President and Chief Operating Officer
CORPORATION PROFILE
Metropolitan Financial Corp. is a savings and loan holding company, and
parent of Metropolitan Savings Bank of Cleveland (the "Bank"), an Ohio chartered
stock savings association headquartered in Mayfield Heights, Ohio. The Bank
currently operates fifteen retail sales offices located in Northeastern Ohio and
five loan origination offices located in Ohio, Michigan, and Pennsylvania. The
Bank's principal business is the origination and purchase of mortgage loans,
primarily secured by multifamily residential properties, and origination of
other loans. In addition to these activities, the Bank services a portfolio of
$1.1 billion of mortgage loans for various investors and operates a trust
services department to manage investment assets for individual and institutional
clients. At December 31, 1996, the Corporation had assets of $769.1 million,
deposits of $622.1 million, and shareholders' equity of $30.2 million.
2
<PAGE> 4
FIVE YEAR SUMMARY OF SELECTED DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................. $769,076 $590,095 $479,384 $372,390 $300,500
Loans receivable, net......................... 637,493 478,345 424,944 284,288 216,688
Loans held for sale........................... 8,973 1,504 84 10,391 5,082
Mortgage-backed securities.................... 56,672 39,156 16,785 13,412 23,322
Securities.................................... 13,173 22,806 7,641 10,168 19,740
Costs in excess of fair value of net assets
acquired.................................... 3,239 3,188 3,409 3,631 3,853
Cost of loan servicing rights................. 8,051 9,130 4,825 2,295 1,541
Deposits...................................... 622,105 503,742 436,198 332,549 269,159
Other borrowings.............................. 101,874 46,874 15,504 15,745 11,820
Shareholders' equity.......................... 30,244 25,466 20,280 17,750 13,111
SELECTED OPERATIONS DATA:
Total interest income......................... $ 54,452 $ 43,435 $ 31,639 $ 24,448 $ 22,100
Total interest expense........................ 33,116 26,816 15,992 11,215 12,285
-------- -------- -------- -------- --------
Net interest income....................... 21,336 16,619 15,647 13,233 9,815
Provision for loan losses..................... 1,636 959 766 740 367
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................. 19,700 15,660 14,881 12,493 9,448
Loan servicing income, net.................... 1,204 1,068 642 601 490
Gain on sales of loans and securities......... 336 833 86 1,712 719
Other non-interest income..................... 2,233 2,323 873 1,067 578
Non-interest expense.......................... (20,839) (14,187) (11,058) (8,274) (6,339)
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in accounting method... 2,634 5,697 5,424 7,599 4,896
Income tax expense............................ (1,095) (2,155) (1,987) (2,829) (1,773)
Cumulative effect on prior years of change in
accounting method........................... (300)
-------- -------- -------- -------- --------
Net income.................................... $ 1,539 $ 3,542 $ 3,437 $ 4,470 $ 3,123
======== ======== ======== ======== ========
</TABLE>
3
<PAGE> 5
FIVE YEAR SUMMARY OF SELECTED DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:(1)
Net income per share....................... $ 0.48 $ 1.13 $ 1.10 $ 1.43 $ 1.00
Book value per share....................... 8.58 8.15 6.49 5.68 4.19
Tangible book value per share.............. 7.68 7.04 5.26 4.32 2.71
PERFORMANCE RATIOS:
Return on average assets................... 0.23% 0.65% 0.82% 1.34% 1.13%
Return on average equity................... 5.75% 16.19% 17.83% 29.30% 27.01%
Interest rate spread....................... 3.07% 2.98% 3.71% 4.05% 3.86%
Net interest margin(2)..................... 3.34% 3.24% 3.94% 4.26% 3.88%
Average interest-earning assets to average
interest-bearing liabilities............. 105.39% 105.13% 105.53% 105.62% 100.33%
Non-interest expense to average assets..... 3.08% 2.61% 2.64% 2.49% 2.30%
Efficiency ratio(3)........................ 82.57% 68.28% 62.95% 49.42% 52.51%
ASSET QUALITY RATIOS:(4)
Non-performing loans to total loans........ 0.80% 0.68% 0.55% 1.08% 0.44%
Non-performing assets to total assets...... 0.70% 0.60% 0.51% 1.08% 0.40%
Allowance for losses on loans to total
loans.................................... 0.64% 0.57% 0.45% 0.43% 0.32%
Net charge-offs to average loans........... 0.04% 0.02% 0.03% 0.09% 0.07%
CAPITAL RATIOS:
Shareholders' equity to total assets(4).... 3.93% 4.32% 4.23% 4.77% 4.36%
Average shareholders' equity to average
assets................................... 3.96% 4.02% 4.60% 4.58% 4.18%
Tier 1 capital to total assets(5).......... 5.58% 5.77% 5.34% 5.81% 4.47%
Tier 1 capital to risk-weighted
assets(5)................................ 7.87% 8.20% 7.60% 8.33% 6.75%
OTHER DATA:
Loans serviced for others (000s)........... $1,102,514 $1,182,216 $739,425 $504,677 $396,703
Number of full service offices............. 14 13 11 9 8
Number of loan production offices.......... 5 5 4 1 --
</TABLE>
- ---------------
(1) Per share data has been calculated to reflect the 3,125,635-for-one stock
split which occurred in October 1996.
(2) Represents the ratio of net interest income to average interest-earning
assets.
(3) Equals non-interest expense less amortization of intangible assets divided
by net interest income plus non-interest income (excluding gains or losses
on securities transactions).
(4) Ratios are calculated on end of period balances except net charge-offs to
average loans.
(5) Ratios are for Metropolitan Savings Bank only.
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The reported results of Metropolitan Financial Corp. ("Metropolitan" or the
"Corporation") primarily reflect the operations of Metropolitan Savings Bank of
Cleveland (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, gains or losses from sales of loans and securities and 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 dollars and
rates, and the net interest margin. Net interest margin refers to net interest
income divided by total average 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 included in average loan balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable............... $574,502 $ 50,268 8.75% $458,423 $ 39,963 8.72% $361,627 $ 30,012 8.30%
Mortgage-backed securities
available for sale(1)........ 43,734 2,890 6.61 39,342 2,493 6.34 13,636 693 5.08
Other.......................... 20,417 1,294 6.34 14,610 979 6.70 22,261 934 4.20
-------- ------- -------- ------- -------- -------
Total interest-earning
assets....................... 638,653 54,452 8.53 512,375 43,435 8.48 397,524 31,639 7.96
------- ------- -------
Nonearning assets.............. 37,021 31,881 21,986
-------- -------- --------
Total assets................... $675,674 $544,256 $419,510
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits....................... $532,100 28,132 5.29 $439,286 23,522 5.35 $363,553 14,918 4.10
Other borrowings............... 73,899 4,984 6.74 48,066 3,294 6.85 13,146 1,074 8.17
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.................. 605,999 33,116 5.46 487,352 26,816 5.50 376,699 15,992 4.25
------- ------- -------
Noninterest-bearing
liabilities.................. 42,924 35,032 23,533
Shareholders' equity........... 26,751 21,872 19,278
-------- -------- --------
Total liabilities and
shareholders' equity......... $675,674 $544,256 $419,510
======== ======== ========
Net interest income and
interest rate spread......... $ 21,336 3.07 $ 16,619 2.98 $ 15,647 3.71
======= ======= =======
Net interest margin............ 3.34 3.24 3.94
Average interest-earning assets
to average interest-bearing
liabilities.................. 105.39% 105.13% 105.53%
</TABLE>
- ---------------
(1) The average balance of mortgage-backed securities and securities available
for sale are presented at historical cost.
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
5
<PAGE> 7
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>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------------------- --------------------------------
TOTAL CHANGE DUE CHANGE DUE TOTAL CHANGE DUE CHANGE DUE
CHANGE TO VOLUME TO RATE CHANGE TO VOLUME TO RATE
------- ---------- ---------- ------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Loans receivable.................. $10,305 $ 10,157 $ 148 $9,951 $7,966 $1,985
Mortgage-backed securities........ 397 287 110 1,800 1,306 494
Other............................. 315 365 (50) 45 (321) 366
------- ------- ----- ------ ------ ------
Total interest income............. 11,017 $ 10,809 $ 208 11,796 $8,951 $2,845
------- ======= ===== ------ ====== ======
INTEREST EXPENSE ON:
Deposits.......................... 4,610 $ 4,903 $ (293) 8,604 $3,108 $5,496
Other borrowings.................. 1,690 1,741 (51) 2,220 2,853 (633)
------- ------- ----- ------ ------ ------
Total interest expense............ 6,300 $ 6,644 $ (344) 10,824 $5,961 $4,863
------- ======= ===== ------ ====== ======
Increase in net interest income... $ 4,717 $ 972
======= ======
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income. Net income for 1996 was $3.5 million, or $1.09 per common
share, excluding the one-time assessment mandated by legislation to recapitalize
the Savings Association Insurance Fund ("SAIF"). Net income including the SAIF
assessment was $1.5 million, or $0.48 per common share, as compared to $3.5
million, or $1.13 per common share for 1995. The decrease was primarily a result
of the $1.9 million, or $0.61 per common share SAIF assessment.
Interest Income. Total interest income increased 25.4% to $54.5 million
for 1996 as compared to $43.4 million for 1995. This increase primarily resulted
from a 24.6% increase in average interest-earning assets between the years. The
average balance of loans increased $116.1 million, which was a result of
Metropolitan's strategy of increasing assets when quality loans with acceptable
portfolio characteristics are available. Metropolitan originated and purchased
$263.4 million and $126.9 million in loans in 1996, as compared to $161.9
million and $103.7 million, respectively, for 1995. The weighted average yield
on interest-earning assets increased to 8.53% during 1996 as compared to 8.48%
during 1995.
Metropolitan's net interest margin rose 10 basis points to 3.34% for 1996
as compared to 3.24% for 1995, as a result of a modest decline in interest rates
paid for funds and an increase in the yield earned on assets. Rates paid on
deposits and other borrowings decreased in response to lower market interest
rates. The rates earned on interest-earning assets increased slightly due to the
change in mix of interest-earning assets.
Interest Expense. Total interest expense increased 23.5% to $33.1 million
for 1996 as compared to $26.8 million for 1995. Interest expense increased due
to a higher average balance of interest-bearing liabilities outstanding which
was only partially offset by a lower cost of funds during 1996. The average
balance of interest-bearing liabilities increased $118.6 million in 1996 from
1995 in order to fund the growth of interest-earning assets discussed above.
Metropolitan's cost of funds decreased to 5.46% in 1996 as compared to
5.50% in 1995 generally due to the lower overall level of interest rates.
Metropolitan's increased use of wholesale borrowings, whose cost was lower than
the incremental cost of time deposits, permitted the overall cost of deposits to
decline despite the significant growth experienced during 1996.
6
<PAGE> 8
Provision for Loan Losses. The provision for loan losses increased 70.5%
to $1.6 million in 1996 as compared to $959,000 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) increased 34.8% to $650.6 million at December 31, 1996 from $482.6 million
at the same date a year earlier. The allowance for losses on loans at December
31, 1996 was $4.2 million, or 0.64% of total loans, as compared to $2.8 million,
or 0.57% of total loans, at the same date in 1995, while net charge-offs were
only $225,000, or 0.04% of average loans during 1996. 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, the status of impaired loans,
economic conditions affecting real estate markets, regulatory considerations and
other matters.
Non-Interest Income. Total non-interest income decreased 10.7% to $3.8
million in 1996 as compared to $4.5 million in 1995. The following table sets
forth Metropolitan's non-interest income for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loan servicing income, net....................... $1,204 $1,068 $ 642
Gain on sale of loans............................ 204 444 52
Gain on sale of securities....................... 133 389 34
Loan option income............................... 696 559 --
Loan credit discount income...................... -- 640 --
Other............................................ 1,536 1,124 872
------ ------ ------
Total............................................ $3,773 $4,224 $1,600
====== ====== ======
</TABLE>
Net loan servicing income increased 12.7% to $1.2 million in 1996 as
compared to $1.1 million in 1995. The increase in 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 as a result of
normal runoff to $1.1 billion at December 31, 1996 compared to $1.2 billion at
the same date a year earlier, the average balance of loans serviced during the
year was actually higher in 1996 as compared to 1995 resulting in increased
servicing income. Metropolitan remains committed to this 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.
Gain on sale of loans was $204,000 in 1996 as compared to $444,000 in 1995.
This income was dependent upon the amount of loans sold, secondary market
pricing, and the value allocated to mortgage servicing rights and these
variables were in turn directly affected by prevailing interest rates. The
proceeds of loans sold were $31.0 million during 1996 as compared to $59.8
million in 1995. The volume of loans sold was greater in 1995 as compared to
1996 due to a greater market demand for fixed rate loans in 1995. These loans
were sold in the secondary market in order to manage interest rate risk.
Gain on sale of securities was $133,000 in 1996 as compared to $389,000 in
1995. During 1996, Metropolitan sold mortgage backed securities available for
sale with a principal balance outstanding of $3.6 million at a gain of $133,000.
In 1995, $29.1 million of mortgage-backed securities available for sale were
sold at a net gain of $389,000. The decline in net gains is a result of the
reduced volume of sales which is consistent with availability. Metropolitan does
not actively purchase mortgage-backed securities for resale, however, the
existing portfolio of mortgage-backed securities available for sale is monitored
for opportunities to improve the yield, manage interest rate risk and increase
profits, and as a result, from time to time, certain mortgage-backed securities
have been sold.
Loan option income was $696,000 in 1996 as compared to $559,000 in 1995.
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. During 1996, Metropolitan purchased $16.7 million of loans and sold
nonrefundable options to purchase those same loans at a specified price within a
specified time period, as compared to $16.4 million of loans purchased for
options in 1995.
7
<PAGE> 9
Other income increased 36.7% to $1.5 million in 1996 as compared to $1.1
million in 1995. This increase was primarily due to increased fee income earned
on checking accounts due to the increased size and number of business checking
accounts, an increase in ATM fees due to increases in transaction fees and the
number of ATM transactions, an increase in credit card fees due to the increase
in the credit card portfolio and increased credit card transactions, and an
increase in miscellaneous fee income due to the increased size and number of
retail sales offices.
Non-Interest Expense. Total non-interest expense increased 46.9% to $20.8
million in 1996 as compared to $14.2 million in 1995. The following table sets
forth Metropolitan's non-interest expense for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Personnel related costs....................... $ 8,670 $ 6,819 $ 5,349
Occupancy costs............................... 2,465 2,135 1,488
Federal deposit insurance..................... 4,211 1,132 929
Data processing expense....................... 599 586 381
Marketing expense............................. 695 543 392
State franchise tax........................... 461 307 284
Amortization of intangibles................... 256 220 222
Other operating expenses...................... 3,482 2,445 2,013
------- ------- -------
Total......................................... $20,839 $14,187 $11,058
======= ======= =======
</TABLE>
Personnel related expenses increased $1.9 million, which represented 27.8%
of the increase in non-interest expense in 1996 as compared to 1995. The
increase was a result of having two additional full service retail sales offices
open in the 1996 period, the payment of incentives for loan and deposit
production, the addition to staff of several loan production officers, the full
effect of additions to staff in various departments late in 1995 and the effects
of merit increases.
Federal deposit insurance expense increased $3.1 million to $4.2 million
for 1996 as compared to $1.1 million for 1995 primarily as a result of the
one-time assessment to recapitalize the SAIF. This represents 46.3% of the
increase in non-interest expense in 1996 as compared to 1995. The SAIF
assessment was $2.9 million and represents 65.7 basis points of deposits held as
of March 31, 1995. The remaining increase represents an increase in insurance
premium paid and is a result of increased deposit levels.
Other operating expenses increased $1.0 million to $3.5 million for 1996 as
compared to $2.5 million for 1995, which represents 15.6% of the increase in
non-interest expense in 1996 as compared to 1995. The increase was primarily due
to increased credit card servicing costs as a result of the increased size of
the credit card portfolio, increased business development expenses incurred to
generate loan and deposit growth, an employee benefits consulting project aimed
at making Metropolitan's salary and benefit structure competitive with that of
its peers, and increases in other general and administrative expenses as a
result of the increased number of full service retail offices.
Provision for Income Taxes. The provision for income taxes decreased 49.2%
to $1.1 million in 1996 as compared to $2.2 million in 1995 due to the decline
in income before taxes. The effective tax rate was 41.1% for 1996 and 37.8% for
1995. The effective tax rate in 1996 was higher because expenses which are not
deductible for tax purposes, such as amortization of intangibles, have increased
in relationship to pre-tax income as a result of the unfavorable effect the
one-time assessment to recapitalize the SAIF had on pre-tax income.
As a result of legislation enacted during 1996, savings associations like
the Bank will no longer be able to calculate their deduction for bad debts using
the percentage of taxable income method. Instead, savings associations will
generally be required to compute their deduction based on specific charge offs
during the
8
<PAGE> 10
taxable year. While this change, effective for the tax year 1996, will effect
the timing of payments, it will not effect the comparability of results among
years.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994.
Net Income. Net income for 1995 was $3.5 million, or $1.13 per common
share, as compared to $3.4 million for 1994, or $1.10 per common share, a 3.1%
increase. Net interest income and non-interest income increased 6.2% and 163.9%,
respectively, in 1995, as compared to 1994; however, in 1995 the provision for
loan losses and non-interest expense increased 25.2% and 28.3%, respectively.
Interest Income. Total interest income increased 37.3% to $43.4 million in
1995 as compared to $31.6 million in 1994. This increase primarily resulted from
a 28.9% increase in average interest-earning assets between the two periods. The
average balance of loans increased $96.8 million 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. Metropolitan
originated $161.9 million and purchased $103.7 million in loans in 1995, as
compared to $186.5 million and $74.1 million, respectively, for 1994. In
addition, as a result of the generally higher interest rate environment, the
weighted average yield on interest-earning assets increased to 8.48% during 1995
as compared to 7.96% during 1994.
Metropolitan's net interest margin declined 70 basis points to 3.24% for
1995 as compared to 3.94% for 1994, largely as a result of market-driven
increases in interest rates and the interest sensitivity of the Bank's balance
sheet. Rates paid on deposits increased in response to higher market interest
rates and in order to fund the significant growth in loans, resulting in
increased cost of funds. The rate earned on interest-earning assets increased
more slowly during the period because (i) the portfolio of fixed rate loans
increased from 22.4% of the portfolio at December 31, 1994 to 31.7% of the
portfolio at December 31, 1995, and (ii) increases in rates of adjustable rate
mortgages generally lag the market due to contractual timing of adjustments
(i.e., monthly, annually).
Interest Expense. Total interest expense increased 67.7% to $26.8 million
for 1995 as compared to $16.0 million for 1994. Interest expense increased due
to a higher average balance of interest-bearing liabilities outstanding and due
to a higher cost of funds during 1995 as compared to 1994. In accordance with
Metropolitan's strategy of funding the increase in interest-earning assets
primarily with time and core deposits, the average balance of deposit accounts
increased $75.7 million, or 20.8%, from December 31, 1994 to December 31, 1995.
Metropolitan's cost of funds increased to 5.50% in 1995 as compared to
4.25% in 1994, due to the higher level of market interest rates and
Metropolitan's pursuit of higher deposit growth in order to fund the significant
growth in loans.
Provision for Loan Losses. The provision for loan losses increased 25.2% to
$959,000 in 1995 as compared to $766,000 in 1994. 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)
increased 13.0% to $482.6 million at December 31, 1995 from $426.9 million at
the same date in 1994. The allowance for losses on loans at December 31, 1995
was $2.8 million, or 0.57% of total loans, as compared to $1.9 million, or 0.45%
of total loans, at the same date in 1994. 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, the status of impaired loans, economic
conditions affecting real estate markets, regulatory considerations, and other
matters.
Non-Interest Income. Total non-interest income increased 163.9% to $4.2
million in 1995 as compared to $1.6 million in 1994. Net loan servicing income
increased 66.4% to $1.1 million in 1995 as compared to $642,000 in 1994 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. In that
regard, the portfolio of loans serviced for others was increased to $1.2 billion
at December 31, 1995 from $739.4 million at December 31, 1994.
9
<PAGE> 11
Gain on sale of loans was $444,000 in 1995 as compared to $52,000 in 1994.
This income was dependent upon both the amount of loans sold and secondary
market pricing, and these variables in turn were directly affected by prevailing
interest rates. The proceeds from sale of loans increased 17.4% to $59.8 million
during 1995 as compared to $51.0 million in the same period in 1994. The pricing
achieved in the 1995 period was more favorable due to the general stability of
interest rates even at higher levels. In addition, during 1995 the gain on sale
of loans was favorably effected by the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights," which requires lenders who sell originated loans and retain the
servicing rights to recognize the rights to service mortgage loans for others as
separate assets. Modest gains on loan sales during the last half of 1994
partially offset losses which were incurred in the early months of 1994 as
interest rates were increasing sharply.
Gain on sale of securities was $389,000 in 1995 as compared to $34,000 in
1994. During 1995, Metropolitan elected to securitize certain of its one- to
four-family loans into mortgage-backed securities guaranteed by the Federal
National Mortgage Association ("FNMA"), in order to reduce the risk-based
capital requirements, to reduce credit risk by acquiring the investor guarantee,
and to create collateral that is a more efficient source of funds in the market
place. These securities were classified as held-to-maturity upon securitization.
On November 15, 1995, the Financial Accounting Standard Board ("FASB") issued a
special report entitled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities.-- Questions
and Answers" ("Special Report"). The Special Report primarily provided
additional guidance for implementation of SFAS No. 115, based upon inquiries
made to the FASB since the statement was issued in May 1993. The Special Report
allowed an enterprise to reassess the appropriateness of the classifications of
all securities held at that time. In light of the guidance provided in the
Special Report, Metropolitan reclassified all the FNMA securities created
through securitization of the Bank originated one-to four-family loans to
available-for-sale. In addition $29.1 million of those securities, representing
the greatest degree of interest rate risk, were sold at a gain of $389,000.
Loan option income was $559,000 in 1995. This represented a new source of
non-interest income for the Bank in 1995. In these option transactions
Metropolitan purchased loans and sold nonrefundable options to a third party to
purchase these same loans at a specified price within a specified time period.
The third party was a loan broker and the option fee was negotiated based on the
principal amount of loans involved. These option transactions provided the loan
broker a period of time to find a buyer who was willing to pay a higher price
for the loans.
Loan credit discount income was $640,000 in 1995. Since 1993, Metropolitan
has purchased multifamily and commercial real estate loans in the secondary
market. These loans are often purchased at a discount based on a comparison of
loan rates to market interest rates. The discount attributable to interest rate
is accreted to interest income over the life of the loan. From time to time,
however, Metropolitan purchases loans at a discount due to Metropolitan's
assessment of credit risk and the value of underlying collateral. These
collateral discounts are not recognized in income over the life of the loan.
When these loans payoff, if Metropolitan receives the full contractual principal
due, any discount related to management's initial assessment of the deficiency
in collateral values is recognized as non-interest income.
Non-Interest Expense. Total non-interest expense increased 28.3% to $14.2
million in 1995 as compared to $11.1 million in 1994. Personnel related expenses
increased $1.5 million, which represented 47.0% of the increase in non-interest
expense in 1995 as compared to 1994. The increase was primarily a result of
having three additional full service retail sales offices open in 1995. In
addition, during 1995 Metropolitan staffed a business lending department, a
trust department and a facilities maintenance department, none of which existed
during 1994. Occupancy costs increased $647,000 which represented 20.7% of the
increase in 1995 over 1994, 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 such as loan servicing, loan
processing, business development, check processing and ATM expenses, increased
$432,000 which represented 13.8% of the increase in 1995 over 1994, as a result
of the overall increase in business levels, including an increase in loans,
deposits and servicing.
10
<PAGE> 12
Provision for Income Taxes. The provision for income taxes was $2.2 million
in 1995 as compared to $2.0 million in 1994. The effective tax rate was 37.8%
for 1995 and 36.6% for 1994. The higher effective tax rate in the 1995 period
was largely due to premium payments for a key man life insurance policy, which
are not deductible for income tax purposes.
ASSET QUALITY
Non-Performing Assets. 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 collectibility of the unpaid interest. Interest determined to be
uncollectible is reversed from interest income and future interest income is
recorded only if the loan principal and interest due is considered collectible
and is less than the estimated fair value of the underlying collateral.
The table below sets forth the amounts and categories of Metropolitan's
non-performing assets as of the dates indicated. At December 31, 1996, all loans
classified by management as impaired were also classified as non-performing.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans....................................... $4,923 $3,103 $2,240
Loans past due greater than 90 days, still accruing..... 271 204 128
------ ------ ------
Total non-performing loans.............................. 5,194 3,307 2,368
Real estate owned....................................... 177 258 53
------ ------ ------
Total non-performing assets............................. $5,371 $3,565 $2,421
====== ====== ======
Non-performing loans to total loans..................... 0.80% 0.69% 0.55%
Non-performing assets to total assets................... 0.70% 0.60% 0.51%
</TABLE>
Non-performing assets were $5.4 million at December 31, 1996, an increase
of $1.8 million from the same date a year earlier, primarily due to two retail
strip shopping centers and one multifamily property. During the same time
period, total net loans receivable increased $166.6 million to $646.5 million at
December 31, 1996. One retail strip shopping center was sold to a third party at
sheriff's sale subsequent to year-end and Metropolitan recovered its full
investment. Based upon current appraisals, no loss is anticipated on the other
retail strip shopping center and a specific allowance for loss of $236,000 has
been recorded on the multifamily property.
Non-performing assets were $3.6 million at December 31, 1995, an increase
of $1.1 million from the same date a year earlier. The increase is primarily
reflected in the multifamily and consumer loan categories. During the same time
period total net loans receivable increased $54.8 million to $479.9 million at
December 31, 1995.
Allowance for Losses on Loans. The provision for loan losses and allowance
for losses on loans is based on an analysis of individual loans, prior loss
experience, growth in the loan portfolio, changes in the mix of the loan
portfolio and other factors including current economic conditions. See Note 1 of
Notes to Consolidated
11
<PAGE> 13
Financial Statements. The following table sets forth an analysis of
Metropolitan's allowance for losses on loans at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD.......................... $2,765 $1,911 $1,239
CHARGE-OFFS:
One- to four-family..................................... 22 23 23
Multifamily............................................. 119 -- 64
Commercial real estate.................................. -- 27 --
Construction and land................................... -- -- --
Consumer................................................ 95 56 14
Business................................................ -- -- --
----- ----- -----
Total charge-offs....................................... 236 106 101
----- ----- -----
RECOVERIES:
One- to four-family..................................... -- 1 1
Multifamily............................................. -- -- 6
Commercial real estate.................................. -- -- --
Construction and land................................... -- -- --
Consumer................................................ 11 -- --
Business................................................ -- -- --
----- ----- -----
Total recoveries........................................ 11 1 7
----- ----- -----
Net charge-offs......................................... 225 105 94
Provision for loan losses............................... 1,635 959 766
----- ----- -----
BALANCE AT END OF PERIOD................................ $4,175 $2,765 $1,911
===== ===== =====
Net charge-offs to average loans........................ 0.04% 0.02% 0.03%
Provision for loan losses to average loans.............. 0.28% 0.21% 0.21%
Allowance for losses on loans to total non-performing
loans at end of period................................ 77.73% 83.61% 80.70%
Allowance for losses on loans to total loans at end of
period................................................ 0.64% 0.57% 0.45%
</TABLE>
The allowance for losses on loans as a percentage of total loans was 0.64%
at December 31, 1996 as compared to 0.57% at December 31, 1995 and 0.45% at
December 31, 1994. In each period, the provision for loan losses and allowance
for losses on loans were based on an analysis of individual credits, prior and
current loss experience, overall growth in the portfolio and current economic
conditions. Based on such analysis, Metropolitan increased the allowance for
losses on loans in excess of net charge-offs by $1.4 million and $854,000 at
December 31, 1996 and 1995, respectively.
COMPARISON OF DECEMBER 31, 1996 AND DECEMBER 31, 1995 FINANCIAL CONDITION
Total assets amounted to $769.1 million at December 31, 1996, as compared
to $590.1 million at December 31, 1995, an increase of $179.0 million, or 30.3%.
The increase in assets was funded with deposit growth of $118.4 million, an
increase in Federal Home Loan Bank ("FHLB") advances and other borrowings of
$55.0 million, and an increase in shareholders' equity of $4.8 million.
Securities decreased by $9.6 million, or 42.2%, to $13.2 million.
Securities available for sale are maintained by Metropolitan primarily to meet
the liquidity maintenance requirement of the 1995 Subordinated Notes and the
5.0% regulatory liquidity requirement. See "-- Liquidity and Capital Resources."
During 1996, the Bank shifted a significant portion of its liquidity portfolio
out of U.S. Treasury Securities into certain mortgage-backed securities which
qualify for liquidity to improve the overall yield on the liquidity portfolio.
12
<PAGE> 14
Mortgage-backed securities increased $17.5 million to $56.7 million at
December 31, 1996. The increase was primarily due to the securitization of $14.6
million of Bank originated one- to four-family loans into FHLMC mortgage-backed
securities. In addition, certain mortgage-backed securities which qualify for
regulatory liquidity were added during 1996.
Loans held for sale increased $7.5 million to $9.0 million at December 31,
1996, primarily as a result of the increased balance of loans for which
Metropolitan has issued a written loan option. These loans totalled $6.4 million
at December 31, 1996 as compared to $458,000 at the same date a year earlier.
Subsequent to year end the option for $3.3 million of that amount was exercised
and that loan has been sold.
Loans receivable increased $159.1 million, or 33.3% to $637.5 million. 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 mix of loan types did not change
significantly from 1995 to 1996. The following increases by loan category were
experienced: one- to four-family loans -- $38.5 million; multifamily
loans--$45.1 million; commercial real estate loans -- $26.2 million; consumer
loans--$22.0 million; construction and land loans (net of loans in
process) -- $15.1 million; and business loans -- $14.8 million.
Premises and equipment increased $3.8 million, or 51.1%, to $11.3 million.
This increase was directly a result of retail sales office expansion. Land and a
building were acquired and are undergoing renovations in Hudson for an office
which is expected to open in April 1997. Land was also acquired in Stow for
construction of a future retail sales office.
Deposits totalled $622.1 million at December 31, 1996, an increase of
$118.4 million, or 23.5%, over the balance at December 31, 1995. The increase
resulted from management's marketing efforts and growth at newer retail sales
offices.
Other borrowings increased $55.0 million to $101.9 million at December 31,
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 during
1996, management chose to fund a large portion of the loan growth discussed
above with wholesale funds. FHLB advances were the predominant source of
borrowings.
Shareholders' equity increased $4.8 million, or 18.8%, to $30.2 million,
due largely to the net proceeds from issuance of 400,000 shares of Common Stock
by the Corporation in an Initial Public Offering which was completed on October
29, 1996.
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
December 1996 was 5.52%. 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
13
<PAGE> 15
payments on its existing debt. At December 31, 1996, the Corporation, excluding
the Bank, had cash and readily convertible investments of $2.2 million.
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>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided (used) by operating
activities................................... $ (3,849) $ 8,204 $ 15,553
Net cash used for investing activities......... (174,379) (100,340) (146,949)
Net cash provided by financing activities...... 176,580 98,740 103,234
-------- -------- --------
Net change in cash and cash equivalents........ (1,648) 6,604 (28,162)
Cash and cash equivalents at beginning of
period....................................... 18,170 11,566 39,728
-------- -------- --------
Cash and cash equivalents at end of period..... $ 16,522 $ 18,170 $ 11,566
======== ======== ========
</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 1994, 1995
and 1996, net cash was used in investing activities, primarily to fund and
purchase new loans.
At December 31, 1996, $58.5 million, or 9.4%, of Metropolitan's deposits
were in the form of certificates of deposit of $100,000 and over. If a large
number of these certificates of deposits matured at approximately the same time
and were not renewed there could be an adverse effect on Metropolitan's
liquidity. Metropolitan monitors maturities to attempt to minimize the potential
adverse effect on liquidity.
When evaluating sources of funds Metropolitan considers the cost of various
alternatives such as local retail deposits, FHLB advances and other wholesale
borrowings. One option considered and utilized in the past has been the
acceptance of out-of-state time deposits from individuals and entities,
predominantly credit unions. These deposits typically have balances of $90,000
to $100,000 and have a term of one year or more. They are not accepted through
brokers. At December 31, 1996, approximately $61.5 million of time deposits, or
9.9% of Metropolitan's total deposits, were held by these individuals and
entities. Of that amount, $6.6 million were in the form of certificates of
deposit of $100,000 and over. If Metropolitan were unable to replace these
deposits upon maturity, it could have an adverse effect on Metropolitan's
liquidity.
Metropolitan has access to wholesale borrowings based on the availability
of eligible collateral. The FHLB makes funds available for housing finance based
upon the blanket or specific pledge of certain one- to four-family loans and
various types of investment and mortgage-backed securities. The Bank had
borrowing capacity at the FHLB under its blanket pledge agreement of
approximately $77.0 million at December 31, 1996, of which $59.5 million was
utilized. The financial market makes funds available through reverse repurchase
agreements by accepting various investment and mortgage-backed securities as
collateral. The Bank had borrowing capacity for reverse repurchase agreements of
approximately $40.0 million at December 31, 1996, of which $23.5 million was
utilized.
Capital. The Office of Thrift Supervision ("OTS") imposes capital
requirements on savings associations. Savings associations are required to meet
three minimum capital standards: (i) a leverage requirement, (ii) a tangible
capital requirement, and (iii) a risk-based capital requirement. Such standards
must be no less stringent than those applicable to national banks. In addition,
the OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis.
14
<PAGE> 16
The OTS leverage requirement expressly requires that core capital be
maintained in an amount not less than 3% of adjusted total assets. The OTS has
taken the position, however, that the Prompt Corrective Action regulatory scheme
has effectively raised the leverage ratio requirement for all but the most
highly rated savings associations to 4%. Core capital is defined to include
shareholders' equity less intangibles other than qualifying supervisory goodwill
and certain qualifying intangibles, less investments in subsidiaries engaged in
activities not permissible for national banks.
Under the tangible capital requirement, tangible capital (defined as core
capital less all intangible assets) must be maintained in an amount equal to at
least 1.5% of adjusted total assets. Adjusted total assets, for the purpose of
the tangible capital ratio, include total assets less all intangible assets
except qualifying purchased mortgage servicing rights.
The risk-based capital requirement is calculated based on the risk weight
assigned to on-balance sheet assets and off-balance sheet commitments, which
ranges from 0% to 100% of the book value of the asset and is based upon the risk
inherent in the asset. The risk weights assigned by the OTS for principal
categories of assets are (i) 0% for cash and securities issued by the U.S.
Government or unconditionally backed by the full faith and credit of the U.S.
Government; (ii) 20% for securities (other than equity securities) issued by
U.S. Government sponsored agencies and mortgage-backed securities issued by, or
fully guaranteed as to principal and interest by, the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent one-
to four-family first lien mortgage loans not more than 90 days delinquent and
having a loan to value ratio of not more that 80% at origination unless insured
to such ratio by an insurer approved by FNMA or FHLMC, certain qualifying
multifamily first lien mortgage loans and residential construction loans; and
(iv) 100% for all other loans and investments, including consumer loans,
commercial loans, repossessed assets and loans more than 90 days delinquent. The
risk-based requirement mandates total capital of 8.0% of risk-weighted assets.
Total capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and maturing
capital instruments that do not qualify as core capital and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital.
The Bank's regulatory capital ratios at December 31, 1996 were in excess of
the capital requirements specified by OTS regulations as shown by the following
table:
<TABLE>
<CAPTION>
TANGIBLE RISK-BASED
CAPITAL CORE CAPITAL CAPITAL
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CAPITAL AMOUNT:
Actual................................. $42,342 5.54% $42,592 5.58% $45,761 8.46%
Required............................... 11,454 1.50 30,545 4.00 43,274 8.00
------- ------- -------
Excess................................. $30,888 4.04% $12,047 1.58% $ 2,487 0.46%
======= ======= =======
</TABLE>
The Corporation maintains a $4.0 million line of credit with the Huntington
National Bank which it could access to make future contributions to capital of
the Bank. At December 31, 1996, there was no outstanding balance under the line
of credit.
There are currently no regulatory capital requirements applicable to the
Corporation. Future capital of the Corporation is expected to come from retained
earnings, however, Metropolitan could issue additional debt or equity securities
in a public or private placement transaction to supplement retained earnings or
to make future contributions to capital of 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.
15
<PAGE> 17
The steps being taken by the Bank to manage interest rate risk include: (i)
continuing to focus on originating and purchasing adjustable rate assets for
portfolio; (ii) the sale of fixed rate one- to four-family loans with servicing
retained; (iii) focusing on shortening the term of fixed rate lending by
increasing the percent of the fixed rate loan portfolio represented by consumer
loans; (iv) increasing business lending which will generally result in loans
with 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.
As part of its effort to monitor and manage interest rate risk, the Bank
uses the Net Portfolio Value ("NPV") methodology adopted by the OTS as part of
OTS capital regulations. Generally, NPV is the discounted present value of the
difference between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing and other liabilities. The application
of the methodology attempts to quantify interest rate risk as the change in NPV
which would result from theoretical instantaneous and sustained parallel shifts
of 100 basis points in market interest rates.
Presented below, as of December 31, 1996 and 1995, is an analysis of
Metropolitan's interest rate risk measured by the NPV methodology. 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>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
CHANGES IN INTEREST RATE BOARD LIMIT CHANGE PERCENTAGE CHANGE CHANGE PERCENTAGE CHANGE
(BASIS POINTS) PERCENTAGE CHANGE IN NPV IN NPV IN NPV IN NPV
- ------------------------ ----------------- -------- ----------------- -------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400 (75)% $(26,596) (44)% $(13,476) (27)%
+300 (50) (19,790) (33) (9,576) (19)
+200 (25) (12,853) (21) (5,946) (12)
+100 (10) (6,302) (10) (2,778) (6)
-100 (10) 6,294 10 4,197 9
-200 (25) 14,644 24 9,481 19
-300 (50) 26,402 44 17,571 36
-400 (75) 40,742 68 27,856 57
</TABLE>
As illustrated in the table, Metropolitan's NPV is unfavorably affected in
the rising rate scenarios. This occurs principally because the interest paid on
deposits would increase more rapidly than rates earned on assets because
deposits generally have shorter periods to repricing. In addition, the fixed
rate assets in the loan 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.
At December 31, 1996 and 1995, the Bank was within the Board established limits
for various changes in interest rates, however, the Bank's sensitivity to rising
interest rates has increased from 1995 to 1996. The increased sensitivity, which
management monitors closely, was a result of: (i) the use of time deposits with
12 to 24 month terms to fund asset growth; (ii) the increase in one to
four-family residential ARMs in the loan portfolio which are fixed for three or
five years before they become annual adjustable rate loans (i.e., the 5/1 and
3/1 ARM programs); and (iii) the slight increase in the level of fixed rate
loans in the portfolio.
The principal strategy used by Metropolitan to manage interest rate risk
has been to build a portfolio of adjustable rate interest-earning assets. At
December 31, 1996, 67.9% of the total loan portfolio had adjustable rates. In
order to remain competitive in the mortgage loan market and meet customer needs,
Metropolitan also offers a variety of fixed rate products. Metropolitan has
managed its investment in fixed rate loans in several ways in order to minimize
interest rate risk. It has long been Metropolitan's policy to sell the majority
of its fixed rate one- to four-family loan production in the secondary market.
At December 31, 1996, Metropolitan had only 6.1% of its total loans comprised of
fixed rate residential one- to four-family loans. The fixed rate residential
loans held in the loan portfolio typically have maturities of 15 years. Within
the remaining fixed rate portfolio, Metropolitan has focused on short-term loan
types. Fixed rate multifamily and commercial real estate loans comprised 18.0%
of total loans at December 31, 1996, and had a weighted average contractual term
to maturity of approximately six years. Fixed rate consumer loans, with a
weighted average contractual term of maturity of approximately seven years,
comprised 6.8% of total loans at
16
<PAGE> 18
December 31, 1996. These are contractual terms to maturity and very often, for
various reasons, consumers repay loans before their contractual maturity
shortening the effective term to maturity.
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
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.
ACCOUNTING DEVELOPMENTS
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No.
128 simplifies the calculation of earnings per share ("EPS") by replacing
primary EPS with basic EPS. Basic EPS includes no dilution and is computed by
dividing net income by weighted-average shares outstanding. The Corporation
expects SFAS No. 128 to have no effect on its earnings per share calculation,
other than changing terminology.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on a financial
components approach that focuses on control. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996 applied prospectively. SFAS No. 125 supersedes
SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 125 expands
the requirements of SFAS No. 122 by introducing the concept of adequate
compensation into the determination of the value of servicing assets. Management
does not anticipate that the adoption of SFAS No. 125 will effect comparability
of results among years.
In May 1995, the 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
December 31, 1996, the value of these originated servicing rights on the balance
sheet was $764,000. The fair value of such rights was in excess of that amount.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement was amended in October 1994 by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." SFAS No. 114 requires that impaired loans be measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or at the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends certain accounting and disclosure requirements
set forth in SFAS No. 114. The provisions of these statements were adopted
effective 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 loan losses to
such loans. If these allocations cause the allowance for loan losses to require
an increase, such increase is reported as bad debt expense. Based on the
analysis prepared, no bad debt expense was recorded by Metropolitan in
connection with adopting this standard. As allowed, management excludes all
consumer loan and residential single family loans with balances less than
$200,000 from possible classification as impaired.
Effective January 1, 1994, Metropolitan adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires the classification of debt and equity securities as held to
maturity, trading or available for sale upon their acquisition. Securities
classified as
17
<PAGE> 19
trading would be carried at market value with the unrealized holding gain or
loss recorded in the statement of operations. Securities available for sale are
carried at their estimated market value with the unrealized holding gain or loss
reflected as a separate component of shareholders' equity. The cumulative effect
on Metropolitan's shareholder's equity at January 1, 1994, of adopting SFAS No.
115, is included as a separate component of shareholder's equity in the
consolidated statement of financial condition and represents the after-tax
effect of adjusting securities available for sale to fair value. Securities
classified as held to maturity are carried at amortized cost unless there is a
permanent impairment in value.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes included herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in relative purchasing power
of money over time due to inflation. The impact of inflation is reflected in the
increased cost of Metropolitan's operations.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are influenced by changes in the inflation
rate, they do not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as changes in monetary and fiscal policies.
Metropolitan's ability to match the interest rate sensitivity of its financial
assets to the interest sensitivity of its financial liabilities in its
asset/liability management may tend to minimize the effect of changes in
interest on its financial performance.
18
<PAGE> 20
REPORT OF MANAGEMENT
The Management of Metropolitan Financial Corp. is responsible for the
preparation, accuracy and fair presentation of the financial statements and
related information in the Annual Report.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded. These controls include written
policies and procedures which establish and maintain effective internal controls
through proper delegation of authority and division of responsibility, proper
recording of transactions and fair presentation of financial results in
accordance with generally accepted accounting principles. These systems of
controls are reviewed by our internal auditors and independent auditors who have
free access to the Audit Committee.
Management assessed the Corporation's internal control structure and
believes that the system provides reasonable assurances that financial
transactions are recorded properly, and that the Corporation is in compliance
with federal and state laws and regulations as well as safety and soundness laws
and regulations.
/s/ ROBERT M. KAYE
-----------------------
Robert M. Kaye
Chairman and Chief Executive Officer
Metropolitan Financial Corp.
/s/ DAVID G. LODGE
-----------------------
David G. Lodge
President and Chief Operating
Officer
Metropolitan Financial Corp.
/s/ PATRICK W. BEVACK
-----------------------
Patrick W. Bevack
Executive Vice President and Chief
Financial Officer
Metropolitan Savings Bank of
Cleveland
19
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Metropolitan Financial Corp.
Mayfield Heights, Ohio
We have audited the accompanying consolidated statements of financial
condition of Metropolitan Financial Corp. as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metropolitan
Financial Corp. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Corporation changed
its method of accounting for mortgage servicing rights and impaired loans in
1995 and for certain investment securities in 1994 to comply with new accounting
guidance.
/s/ CROWE, CHIZEK AND COMPANY LLP
CROWE, CHIZEK AND COMPANY LLP
Cleveland, Ohio
February 28, 1997
20
<PAGE> 22
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 13)............................. $ 10,522,577 $ 18,170,473
Federal funds and other cash investments........................ 6,000,000
------------ ------------
Cash and cash equivalents..................................... 16,522,577 18,170,473
Securities available for sale (Note 2).......................... 13,173,458 22,806,178
Mortgage-backed securities (Notes 2 and 9)...................... 56,672,294 39,155,500
Loans held for sale............................................. 8,972,946 1,504,348
Loans receivable, net (Notes 3 and 9)........................... 637,492,935 478,345,398
Federal Home Loan Bank stock, at cost (Note 9).................. 3,988,600 3,568,700
Accrued interest receivable (Note 4)............................ 4,790,661 3,707,742
Premises and equipment, net (Note 5)............................ 11,332,239 7,499,939
Real estate owned, net (Note 6)................................. 177,300 257,593
Cost in excess of fair value of net assets acquired............. 3,238,839 3,188,412
Cost of loan servicing rights (Note 7).......................... 8,050,837 9,129,558
Prepaid expenses and other assets............................... 4,663,157 2,761,156
------------ ------------
Total assets.................................................. $769,075,843 $590,094,997
============ ============
LIABILITIES
Deposits (Note 8)............................................... $622,104,517 $503,742,420
Other borrowings (Note 9)....................................... 101,873,673 46,873,673
Accrued interest payable........................................ 4,120,163 4,551,061
Official checks................................................. 3,882,671 2,778,632
Other liabilities............................................... 6,850,450 6,682,796
------------ ------------
Total liabilities............................................. 738,831,474 564,628,582
------------ ------------
Commitments (Notes 10 and 13)
SHAREHOLDERS' EQUITY (Note 14)
Common stock, no par value, 10,000,000 shares authorized,
3,525,635 shares issued and outstanding....................... 100
Additional paid-in capital...................................... 11,101,383 7,801,283
Retained earnings............................................... 18,466,986 16,928,083
Unrealized gain on securities available for sale, net of tax.... 676,000 736,949
------------ ------------
Total shareholders' equity.................................... 30,244,369 25,466,415
------------ ------------
Total liabilities and shareholders' equity................. $769,075,843 $590,094,997
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................ $50,267,618 $39,963,189 $30,012,666
Interest on mortgage-backed securities............ 2,890,437 2,492,744 692,673
Interest and dividends on other investments....... 1,293,828 979,566 933,594
----------- ----------- -----------
Total interest income........................ 54,451,883 43,435,499 31,638,933
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits.............................. 28,131,837 23,521,751 14,917,447
Interest on other borrowings...................... 4,984,212 3,294,520 1,074,344
----------- ----------- -----------
Total interest expense....................... 33,116,049 26,816,271 15,991,791
----------- ----------- -----------
NET INTEREST INCOME................................. 21,335,834 16,619,228 15,647,142
Provision for loan losses (Note 3).................. 1,635,541 958,573 765,664
----------- ----------- -----------
Net interest income after provision for loan
losses............................................ 19,700,293 15,660,655 14,881,478
----------- ----------- -----------
Non-interest income
Loan servicing income, net........................ 1,203,779 1,067,767 641,625
Gain on sale of loans............................. 202,621 444,313 52,443
Net gain on sale of securities.................... 133,706 388,581 34,204
Loan option income (Note 13)...................... 695,798 559,256
Loan credit discount income (Note 3).............. 640,262
Other operating income............................ 1,536,711 1,123,536 872,132
----------- ----------- -----------
Total non-interest income.................... 3,772,615 4,223,715 1,600,404
----------- ----------- -----------
Non-interest expense
Salaries and related personnel costs.............. 8,669,705 6,819,383 5,348,509
Occupancy and equipment expense................... 2,464,926 2,134,862 1,487,558
Federal deposit insurance premiums (Note 18)...... 4,211,869 1,132,125 928,969
Data processing expense........................... 599,150 586,260 381,431
Marketing expense................................. 694,898 542,838 392,481
State franchise taxes............................. 461,127 306,518 283,503
Amortization of intangibles....................... 255,720 220,115 221,996
Other operating expenses.......................... 3,481,610 2,445,150 2,013,503
----------- ----------- -----------
Total non-interest expense................... 20,839,005 14,187,251 11,057,950
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.......................... $ 2,633,903 $ 5,697,119 $ 5,423,932
Provision for income taxes (Note 11)................ 1,095,000 2,154,700 1,987,143
----------- ----------- -----------
NET INCOME.......................................... $ 1,538,903 $ 3,542,419 $ 3,436,789
=========== =========== ===========
Earnings per share (Note 1)......................... $ 0.48 $ 1.13 $ 1.10
=========== =========== ===========
Weighted average shares (Note 1).................... 3,192,302 3,125,635 3,125,635
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN/(LOSS)
ADDITIONAL ON SECURITIES TOTAL
COMMON PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
STOCK CAPITAL EARNINGS FOR SALE EQUITY
------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994............. $ 100 $ 7,801,283 $ 9,948,875 $17,750,258
Unrealized gain on securities
available for sale upon adoption of
SFAS No. 115 on January 1, 1994
(Note 1)........................... $ 16,255 16,255
Net income........................... 3,436,789 3,436,789
Change in unrealized gain/(loss) on
securities available for sale, net
of tax............................. (923,325) (923,325)
------ ----------- ----------- ------------- -----------
Balance, December 31, 1994........... 100 7,801,283 13,385,664 (907,070) 20,279,977
Net income........................... 3,542,419 3,542,419
Change in unrealized gain/(loss) on
securities available for sale, net
of tax............................. 1,644,019 1,644,019
------ ----------- ----------- ------------- -----------
Balance, December 31, 1995........... 100 7,801,283 16,928,083 736,949 25,466,415
Net income........................... 1,538,903 1,538,903
Issuance of 400,000 shares of common
stock, net of costs................ 3,300,000 3,300,000
Change in stated value of common
stock.............................. (100) 100
Change in unrealized gain/(loss) on
securities available for sale, net
of tax............................. (60,949) (60,949)
------ ----------- ----------- ------------ -----------
Balance, December 31, 1996........... $ 0 $11,101,383 $18,466,986 $ 676,000 $30,244,369
====== =========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 1,538,903 $ 3,542,419 $ 3,436,789
Adjustments to reconcile net income to net cash
provided by operating activities
Net amortization and depreciation........... 3,022,358 2,036,614 1,737,049
Gain on sale of securities.................. (133,706) (388,581) (34,204)
Provision for loan and REO losses........... 1,677,541 958,573 765,664
Deferred taxes.............................. (183,303) (9,326) (121,000)
Loans originated for sale................... (35,235,545) (45,327,774) (41,059,540)
Loans purchased for sale.................... (16,675,331) (16,210,821)
Proceeds from sale of loans................. 43,410,896 59,830,616 50,965,820
Repayments on loans held for sale........... 809,737
Gain on sale of real estate owned........... 113,428 3,307 28,887
FHLB stock dividend......................... (264,100) (216,200) (126,900)
Changes in other assets..................... (2,980,967) (2,603,437) (1,634,617)
Changes in other liabilities................ 1,051,575 6,588,239 1,594,937
------------- ------------- -------------
Net cash provided by (used for)
operating activities................. (3,848,514) 8,203,629 15,552,885
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls and repayments of
securities available for sale.................. 6,051,195 2,000,000 2,000,000
Purchases of securities available for sale....... (13,336,840) (23,464,948)
Proceeds from sale of mutual fund................ 16,690,055 7,000,000
Disbursement of loan proceeds.................... (218,376,200) (117,432,139) (143,508,572)
Purchases of loans............................... (110,565,748) (86,134,911) (71,704,818)
Proceeds from loan and principal repayments...... 140,245,124 96,163,166 73,780,215
Purchase of mortgage-backed securities available
for sale....................................... (13,570,050) (6,078,881)
Proceeds from mortgage-backed security principal
repayments and maturities...................... 7,189,624 3,525,478 706,239
Proceeds from sale of mortgage-backed securities
available for sale............................. 3,636,772 29,142,705 1,245,585
Proceeds from loan sales......................... 12,106,490
Proceeds from sales of real estate owned and
premises and equipment......................... 1,250,813 102,678 1,308,418
Purchase of premises and equipment............... (4,506,250) (4,869,739) (1,135,060)
Purchase of FHLB stock........................... (155,800) (1,041,300) (45,800)
Purchase of mortgage loan servicing rights....... (732,261) (5,329,415) (3,516,570)
Premium paid for credit card relationships....... (306,146)
------------- ------------- -------------
Net cash used for investing activities...... (174,379,222) (100,338,425) (146,949,244)
------------- ------------- -------------
</TABLE>
(Continued)
24
<PAGE> 26
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts................... $ 118,279,840 $ 67,369,745 $ 103,475,533
Proceeds from borrowings......................... 371,850,000 340,700,000 118,718,388
Repayment of borrowings.......................... (316,850,000) (309,330,000) (118,960,000)
Proceeds from issuance of stock.................. 3,300,000
------------- ------------- -------------
Net cash provided by financing activities... 176,579,840 98,739,745 103,233,921
------------- ------------- -------------
Net change in cash and cash equivalents.......... (1,647,896) 6,604,949 (28,162,438)
Cash and cash equivalents at beginning of year... 18,170,473 11,565,524 39,727,962
------------- ------------- -------------
Cash and cash equivalents at end of year......... $ 16,522,577 $ 18,170,473 $ 11,565,524
============= ============= =============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest............................... 33,546,947 23,979,013 15,156,138
Income taxes........................... 1,587,000 2,749,000 1,751,200
Transfer from loans receivable to other real
estate.................................... 1,325,948 326,709 442,689
Securities classified as available for sale
upon adoption of SFAS No. 115............. 23,584,000
Loans securitized........................... 14,458,129 53,795,086
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is an
Ohio corporation organized for the operation of a savings and loan holding
company. The accounting policies of the Corporation conform to generally
accepted accounting principles and prevailing practices within the banking and
thrift industry. A summary of the more significant accounting policies follows:
CONSOLIDATION POLICY: The Corporation and its subsidiaries, MetroCapital
Corporation and Metropolitan Savings Bank (the "Bank"), and its wholly-owned
subsidiaries, Kimberly Construction Company Incorporated and Metropolitan
Savings Service Corporation and its wholly-owned subsidiary Metropolitan
Securities Corporation are included in the accompanying consolidated financial
statements. All significant intercompany balances have been eliminated.
INDUSTRY SEGMENT INFORMATION: Metropolitan Financial Corp. is a savings and
loan holding company engaged in the business of originating nonresidential real
estate loans in Ohio, Central and Northern New Jersey, Michigan, Kentucky and
Western Pennsylvania and residential real estate loans in Northeast Ohio. The
majority of the Corporation's income is derived from commercial and retail
lending activities.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS: In preparing
financial statements, management must make estimates and assumptions. These
estimates and assumptions affect the amounts reported for assets, liabilities,
revenues and expenses as well as affecting the disclosures provided. Future
results could differ from current estimates. Areas involving the use of
management's estimates and assumptions primarily include the allowance for
losses on loans, the valuation of loan servicing rights, the value of loans held
for sale, fair value of certain securities, the carrying value and amortization
of intangibles, the determination and carrying value of impaired loans, and the
fair value of financial instruments. Estimates that are more susceptible to
change in the near term include the allowance for losses on loans, the valuation
of servicing rights, the value of loans held for sale and the fair value of
securities.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and
off-balance sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
STATEMENT OF CASH FLOWS: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from depository institutions,
interest bearing deposits, investments purchased with an initial maturity of
three months or less, overnight repurchase agreements and federal funds sold.
Generally, federal funds and overnight repurchase agreements are sold for
one-day periods. The Corporation reports net cash flows for deposit transactions
and deposits made with other financial institutions.
SECURITIES: Effective January 1, 1994, the Corporation adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." This
accounting guidance requires the Corporation to classify debt and marketable
equity securities as held to maturity, trading or available for sale. The
cumulative effect on shareholders' equity at January 1, 1994, of adopting SFAS
No. 115, is included as a separate component of shareholders' equity in the
consolidated statement of financial condition and represents the after tax
effect of adjusting securities available for sale to fair value. Prior to the
adoption of SFAS No. 115, the Corporation classified securities as held for
sale.
26
<PAGE> 28
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
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 a 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 adjusted
carrying amount of securities sold, using the specific identification method.
LOANS: Loans held for investment 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 cost or market. For multifamily loans held for sale, the Bank enters into a
sales agreement concurrent with loan origination. As such, these loans are
recorded at cost, which approximates market. At December 31, 1996 and 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: 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.
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 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 its review for impairment.
SFAS No. 118 was adopted January 1, 1995. Under this standard a creditor is
allowed to use existing methods for income recognition on an impaired loan. All
impaired loans for purposes of SFAS No. 114 are placed on non-accrual status.
REAL ESTATE OWNED: Real estate owned is comprised of properties acquired
through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.
These properties are recorded at fair value, less estimated selling costs. Any
reduction from carrying value of the related loan to fair value at the time of
acquisition is accounted for as a loan loss. Any subsequent reduction in fair
value is reflected in a valuation
27
<PAGE> 29
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
allowance account through a charge to income. Expenses to carry other real
estate are charged to operations as incurred.
PREMISES AND EQUIPMENT: Premises and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets for
financial reporting purposes. For tax purposes, depreciation on certain assets
is computed using accelerated methods. Maintenance and repairs are charged to
expense as incurred and improvements are capitalized.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED: The cost in excess of
fair value of the net assets acquired resulting from the acquisition of the Bank
is being amortized to expense on a straight-line basis over a period of 25 years
beginning in July 1987. This amount is a reduction from shareholders' equity in
calculating tangible capital for regulatory purposes.
LOAN SERVICING RIGHTS: The cost of loan servicing rights acquired is
amortized in proportion to, and over the period of, estimated net servicing
revenues. The cost of loan servicing rights purchased and the amortization
thereon is periodically evaluated in relation to estimated future net servicing
revenues. The Bank evaluates the carrying value of the servicing portfolio by
estimating the future net servicing income of the portfolio based on
management's best estimate of remaining loan lives.
Effective January 1, 1995, the Corporation adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights." SFAS No. 122 requires lenders who
sell or securitize originated loans and retain the servicing rights to recognize
as separate assets the rights to service mortgage loans for others. SFAS No. 122
also requires that capitalized mortgage servicing rights be assessed for
impairment based on the fair value of those rights. For purposes of measuring
impairment, management stratifies loans by loan type, interest rate and
investor.
INTEREST INCOME ON LOANS: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. Management reviews loans delinquent
90 days or more to determine if interest accrual should be discontinued based on
the estimated fair market value of the collateral. Under SFAS No. 114, as
amended by SFAS No. 118, the carrying values of impaired loans are periodically
adjusted to reflect cash payments, revised estimates of future cash flows and
increases in the present value of expected cash flows due to the passage of
time. Cash payments representing interest income are reported as such and other
cash payments are reported as reductions in carrying value. Increases or
decreases in carrying value due to changes in estimates of future payments or
the passage of time are reported as reductions or increases in the provision for
loan losses.
LOAN FEES AND COSTS: Origination and commitment fees received for loans,
net of direct origination costs, are deferred and amortized to interest income
over the contractual life of the loan using the level yield method. The net
amount deferred is reported in the consolidated statements of financial
condition as a reduction of loans.
LOAN OPTION INCOME: The Bank purchases real estate loans for sale and
simultaneously writes an option giving the holder the option to purchase those
loans at a specified price within a specified time period. At the time the
transaction is complete the Bank recognizes a non-refundable fee in income.
INCOME TAXES: The Corporation and its subsidiaries are included in the
consolidated federal income tax return of the Corporation. Income taxes are
provided on a consolidated basis and allocated to each entity based on its
proportionate share of consolidated income. Deferred income taxes are provided
on items of income or expense that are recognized for financial reporting
purposes in periods different than when such items are recognized for income tax
purposes.
28
<PAGE> 30
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
CONCENTRATION OF CREDIT RISK: The Bank originates and purchases commercial
real estate loans, residential real estate loans, consumer loans and business
loans. At December 31, 1996, real estate loans secured by multifamily apartments
approximated 41% of the Bank's total loan portfolio. The remainder of the
portfolio was comprised of one- to four-family residential loans (17%),
commercial real estate (21%), residential construction and land acquisition and
development loans (10%), consumer loans (8%) and business loans (3%).
Additionally, approximately 62% of the Bank's total real estate loans are
secured by real estate in the State of Ohio, approximately 8% in the State of
California, approximately 7% in the State of Michigan, and approximately 6% in
the State of Pennsylvania. At December 31, 1995, real estate loans secured by
residential apartments approximated 46% of the Bank's total loan portfolio. The
remainder of the portfolio was comprised of one- to four-family residential
loans (15%), commercial real estate (21%), residential construction and land
acquisition and development loans (10%), consumer loans (6%), and business loans
(2%). Additionally, at December 31, 1995, approximately 63% of the Bank's total
real estate loans were secured by real estate in the State of Ohio,
approximately 12% in the State of Michigan, and approximately 8% in each of the
States of New Jersey and California.
TRUST DEPARTMENT ASSETS AND INCOME: Property held by the Bank in a
fiduciary or other capacity for its trust customers is not included in the
accompanying consolidated financial statements since such items are not assets
of the Bank.
EARNINGS PER SHARE: In connection with the initial public offering of stock
completed in October, 1996, the Board of Directors approved a 3,125,635-for-one
stock split, effected in the form of a stock dividend during October 1996. All
per share information has been retroactively adjusted to reflect the effect of
the stock dividend.
FINANCIAL STATEMENT PRESENTATION: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1996
presentation.
NOTE 2 -- SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities.......... $ 6,093,443 $ 40,176 $ (69,244) $ 6,064,375
Mutual funds...................... 2,009,083 2,009,083
FNMA preferred stock.............. 5,000,000 100,000 5,100,000
----------- ---------- ----------- -----------
Total investment securities..... 13,102,526 140,176 (69,244) 13,173,458
Mortgage-backed securities........ 55,719,015 954,642 (1,363) 56,672,294
----------- ---------- ----------- -----------
Totals.......................... $68,821,541 $1,094,818 $ (70,607) $69,845,752
=========== ========== =========== ===========
</TABLE>
29
<PAGE> 31
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities.......... $12,195,274 $ 277,102 $ (29,896) $12,442,480
Mutual funds...................... 10,363,698 10,363,698
----------- ---------- ----------- -----------
Total investment securities..... 22,558,972 277,102 (29,896) 22,806,178
Mortgage-backed securities........ 38,286,116 869,384 39,155,500
----------- ---------- ----------- -----------
Totals.......................... $60,845,088 $1,146,486 $ (29,896) $61,961,678
=========== ========== =========== ===========
</TABLE>
The amortized cost and fair value of debt securities available for sale at
December 31, 1996, by contractual maturity are shown below. Actual maturities
could differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due after one year through five years...................... $ 6,093,443 $ 6,064,375
Mortgage-backed securities................................. 55,719,015 56,672,294
----------- -----------
Total debt securities available for sale................. $61,812,458 $62,736,669
=========== ===========
</TABLE>
Proceeds from the sale of mortgage-backed securities available for sale
were $3,636,772 in 1996, $29,142,705 in 1995 and $1,245,585 in 1994. Gross gains
realized on those sales were $133,706 in 1996, $475,587 in 1995 and $37,593 in
1994. Gross losses of $87,006 and $3,389 were realized realized in 1995 and
1994, respectively. Proceeds from the sale of mutual funds were $16,690,055 in
1996 and $7,000,000 in 1995. No gain or loss was realized in 1996 or 1995.
Certain securities with a carrying value of $24,714,428 and a market value
of $25,114,156 at December 31, 1996, were pledged to secure reverse repurchase
agreements.
On November 17, 1995, the Corporation transferred securities with an
amortized cost of $51,345,071 previously classified as held to maturity to
available for sale. The unrealized gain on the securities transferred totaled
$771,664. On November 17, 1995, the Corporation's equity increased $509,298 as a
result of the transfer.
30
<PAGE> 32
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 3 -- LOANS RECEIVABLE
The composition of the loan portfolio at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
ORIGINATED PURCHASED TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Real estate loans
Construction loans
Residential single family............. $ 47,999,248 $ 47,999,248
Commercial............................ 9,825,000 9,825,000
Land.................................. 13,735,638 13,735,638
Loans in process...................... (31,758,069) (31,758,069)
------------ ------------ ------------
Construction loans, net............. 39,801,817 39,801,817
Permanent loans
Residential single family............. 91,358,204 $ 23,399,646 114,757,850
Multifamily........................... 165,202,852 111,341,902 276,544,754
Commercial............................ 43,006,141 92,629,301 135,635,442
Other................................. 137,538 137,538
------------ ------------ ------------
Total real estate loans............. 339,506,552 227,370,849 566,877,401
Consumer loans............................. 38,601,020 15,577,578 54,178,598
Business loans and other loans............. 23,507,560 23,507,560
------------ ------------ ------------
Total loans.............................. $401,615,132 $242,948,427 644,563,559
============ ============
Discount on loans, net..................... (559,593)
Deferred loan fees, net.................... (2,336,016)
Allowance for losses on loans.............. (4,175,015)
------------
$637,492,935
============
</TABLE>
31
<PAGE> 33
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1995
--------------------------------------------
ORIGINATED PURCHASED TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Real estate loans
Construction loans
Residential single family............. $ 37,118,087 $ 37,118,087
Commercial............................ 440,000 440,000
Land.................................. 10,613,217 10,613,217
Loans in process...................... (23,373,232) (23,373,232)
------------ ------------
Construction loans, net............. 24,798,072 24,798,072
Permanent loans
Residential single family............. 47,821,816 $ 28,437,082 76,258,898
Multi family.......................... 118,441,339 113,017,691 231,459,030
Commercial............................ 24,303,645 85,098,474 109,402,119
Other................................. 36,415 2,394 38,809
------------ ------------ ------------
Total real estate loans............. 215,401,287 226,555,641 441,956,928
Consumer loans............................. 27,243,050 4,970,535 32,213,585
Business loans and other loans............. 8,703,794 8,703,794
------------ ------------ ------------
Total loans.............................. $251,348,131 $231,526,176 482,874,307
============ ============
Discount on loans, net..................... (543,770)
Deferred loan fees, net.................... (1,220,475)
Allowance for losses on loans.............. (2,764,664)
------------
$478,345,398
============
</TABLE>
Loans with adjustable rates, included above, totaled $465,306,000 and
$346,685,000 at December 31, 1996 and 1995, respectively.
During 1995, the Bank received payoffs on loans originally purchased at
discounts. The purchase discounts recorded were attributable to collectibility
concerns and at payoff, the unamortized discounts totaling $640,262 were
recorded as income.
Activity in the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year............. $2,764,664 $1,910,714 $1,239,147
Provision for loan losses................ 1,635,541 958,573 765,664
Net charge-offs.......................... (225,190) (104,623) (94,097)
---------- ---------- ----------
$4,175,015 $2,764,664 $1,910,714
========== ========== ==========
</TABLE>
Effective January 1, 1995, the Bank adopted the provisions of SFAS Nos.
114, "Accounting by Creditors for Impairment of a Loan" and 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No.
114 specifies that allowances for losses on impaired loans be determined using
the present value of estimated future cash flows of the loan, discounted using
the loan's effective interest rate. 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 loan contract. Loans
which are past due two payments or less and that management feels are probable
of being paid current within 90 days are not
32
<PAGE> 34
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
considered to be impaired loans. SFAS No. 118 allows a creditor to use existing
methods for income recognition on an impaired loan.
Information regarding impaired loans are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Balance of impaired loans............................ $3,495,006 $3,569,074
Less portion for which no allowance for losses on
loans is allocated................................. 2,773,777 3,569,074
---------- ----------
Portion of impaired loan balance for which an
allowance for losses on loans is allocated......... $ 721,229 $ 0
========== ==========
Portion of allowance for losses on loans allocated to
the impaired loan balance.......................... $ 241,269 $ 0
========== ==========
</TABLE>
Information regarding impaired loans is as follows for the year ended
December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Average investment in impaired loans during the
year............................................... $4,220,286 $2,144,138
========== ==========
Interest income recognized during impairment......... $ 48,146 $ 35,884
========== ==========
Interest income recognized on cash basis during the
year............................................... $ 48,146 $ 35,884
========== ==========
</TABLE>
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with Metropolitan's and the Bank's directors,
officers, shareholders and associates on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the time for
comparable transactions with other persons, and that do not involve more than
the normal risk of collectibility or present other unfavorable terms. Loans to
related parties totaled $1,372,000 at December 31, 1996.
NOTE 4 -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Loans receivable..................................... $4,194,756 $3,210,849
Mortgage-backed securities........................... 385,240 204,658
Other................................................ 210,665 292,235
---------- ----------
$4,790,661 $3,707,742
========== ==========
</TABLE>
33
<PAGE> 35
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 5 -- PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land............................................... $ 2,969,274 $ 2,223,354
Office buildings................................... 3,684,536 1,617,812
Leasehold improvements............................. 2,329,573 2,239,329
Furniture, fixtures and equipment.................. 4,899,961 3,684,568
Construction in progress........................... 678,209 351,979
----------- -----------
Total............................................ 14,561,553 10,117,042
Accumulated depreciation........................... 3,229,314 2,617,103
----------- -----------
$11,332,239 $ 7,499,939
=========== ===========
</TABLE>
Depreciation expense was $683,718, $519,533, and $369,946 for the years
ended December 31, 1996, 1995 and 1994, respectively.
NOTE 6 -- REAL ESTATE OWNED
Activity in the allowance for loss on real estate owned is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Balance at beginning of year....................... $ 15,000 $ 0
Provision for loss................................. 42,000 15,000
----------- -----------
$ 57,000 $ 15,000
=========== ===========
</TABLE>
NOTE 7 -- 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 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Mortgage loans underlying pass-through
securities
FNMA........................................ $ 134,568,302 $ 112,657,048
Mortgage loan portfolios serviced for
FHLMC....................................... 713,289,564 781,402,395
FNMA........................................ 219,294,951 224,544,952
Other....................................... 35,361,907 63,611,413
-------------- --------------
$1,102,514,724 $1,182,215,808
============== ==============
</TABLE>
Custodial balances maintained in connection with the foregoing loan
servicing were approximately $12,895,000, $14,198,000 and $5,600,000 at December
31, 1996, 1995 and 1994, respectively.
34
<PAGE> 36
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
Following is an analysis of the changes in loan servicing rights acquired
for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Balance at beginning of year.................. $ 8,587,831 $ 4,824,586
Additions..................................... 732,261 5,329,415
Amortization.................................. (2,033,689) (1,566,170)
-------------- --------------
Balance at end of year........................ $ 7,286,403 $ 8,587,831
============== ==============
</TABLE>
Following is an analysis of the changes in loan servicing rights originated
for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Balance at beginning of year.................. $ 541,727 $ 0
Additions..................................... 333,507 558,940
Amortization.................................. (110,800) (17,213)
-------------- --------------
Balance at end of year........................ $ 764,434 $ 541,727
============== ==============
</TABLE>
NOTE 8 -- DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1996 1995
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing checking accounts........... $ 30,850,882 5% $ 27,036,735 5%
Interest-bearing checking accounts -- 2.00% to
3.20%......................................... 39,363,322 6 36,097,363 7
Passbook savings and statement savings -- 2.75%
to 5.46%...................................... 176,430,162 29 140,573,065 28
Certificates of deposit......................... 375,460,151 60 300,035,257 60
------------ --- ------------ ---
$622,104,517 100% $503,742,420 100%
============ === ============ ===
</TABLE>
At December 31, 1996, scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
YEAR WEIGHTED AVERAGE
ENDED AMOUNT INTEREST RATE
------ ------------ ----------------
<S> <C> <C>
1997........................................... $285,171,989 5.68%
1998........................................... 63,849,303 6.04%
1999........................................... 6,685,905 6.51%
2000........................................... 15,349,546 7.27%
2001........................................... 4,024,603 5.91%
Thereafter..................................... 378,805 6.35%
------------
$375,460,151 5.82%
============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $58,516,000 and $41,930,000 at December 31, 1996
and 1995, respectively.
Related party deposits totaled $2,164,000 at December 31, 1996.
35
<PAGE> 37
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 9 -- OTHER BORROWINGS
Other borrowings consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
Federal Home Loan Bank advances (5.5% and 5.7% at December 31,
1996 and 1995, respectively).................................... $ 59,500,000 $28,000,000
Reverse repurchase agreements (5.6% at December 31, 1996)......... 23,500,000
Subordinated debt maturing December 31, 2001 (10% fixed rate)..... 4,873,673 4,873,673
Subordinated debt maturing January 1, 2005 (9.625% fixed rate).... 14,000,000 14,000,000
------------ -----------
$101,873,673 $46,873,673
============ ===========
</TABLE>
Federal Home Loan Bank advances are collateralized by FHLB stock, first
mortgage loans, and mortgage-backed securities with an aggregate carrying value
of $89,250,000 and $42,000,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996, scheduled payments on Federal Home Loan Bank advances
and reverse repurchase agreements are as follows:
<TABLE>
<CAPTION>
YEAR WEIGHTED AVERAGE
ENDED AMOUNT INTEREST RATE
------ ----------- ----------------
<S> <C> <C>
1997............................................ $65,000,000 5.52%
1998............................................ 15,000,000 5.40%
2001............................................ 3,000,000 6.15%
------------
$83,000,000 5.52%
============
</TABLE>
In 1993 and early 1994, the Corporation issued subordinated notes totaling
$4,873,673. Interest on the notes is paid quarterly and principal will be repaid
when the notes mature December 31, 2001. Total issuance costs of approximately
$185,000 were incurred and will be amortized on a straight line basis over the
life of the notes. The notes are unsecured.
On February 22, 1995, the Corporation entered into an agreement for a
$5,000,000 variable rate 18-month revolving credit converting to a 30-month
variable rate term note. The terms of the loan required interest only payments
for eighteen months, then quarterly principal payments based on an 84-month
amortization with a balloon payment at maturity. The loan, which was guaranteed
by the Corporation's sole shareholder at the time, Robert M. Kaye, and
collateralized by stock of the Corporation and the Bank, was paid in full during
1995. In May, 1996, the Corporation renegotiated certain terms of this
agreement. The maximum borrowing was decreased to $4,000,000, the revolving term
was extended to May, 1998, at which time any then outstanding balance converts
to a term loan with quarterly principal payments based on a 60-month
amortization with a balloon payment due at maturity in May, 2001. As collateral
for the loan, the 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. At December 31, 1996, there were no borrowings outstanding
under this agreement.
In December 1995, the Corporation issued subordinated notes totaling
$14,000,000. Interest on the notes is paid quarterly and principal will be
repaid when the notes mature January 1, 2005. Total issuance costs of
approximately $1,170,000 will be amortized on a straight line basis over the
life of the notes. The notes are unsecured.
36
<PAGE> 38
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
The following tables set forth certain information about other borrowings
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
MAXIMUM MONTH-END BALANCES:
FHLB advances...................................... $75,150,000 $51,000,000
Term loan.......................................... 3,280,000
Qualifying subordinated debt....................... 1,200,000
1993 subordinated notes............................ 4,873,673 4,873,673
1995 subordinated notes............................ 14,000,000 14,000,000
Line of credit..................................... 5,000,000
Reverse repos...................................... 23,500,000 9,000,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
AVERAGE BALANCES:
FHLB advances...................................... $50,545,916 $28,466,663
Term loan.......................................... 485,260
Qualifying subordinated debt....................... 923,077
1993 subordinated notes............................ 4,873,673 4,873,673
1995 subordinated notes............................ 14,000,000 690,411
Line of credit..................................... 3,833,644
Reverse repos...................................... 4,479,839 7,590,659
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances...................................... 5.43% 6.18%
Term loan.......................................... 8.79
Qualifying subordinated debt....................... 11.78
1993 subordinated notes............................ 10.47 10.47
1995 subordinated notes............................ 10.48 10.48
Line of credit..................................... 8.67
Reverse repos...................................... 5.61
</TABLE>
NOTE 10 -- LEASE COMMITMENTS
The Bank leases certain of its branches under lease agreements whose lease
terms are renewable periodically. Rent expense for the years ended December 31,
1996, 1995 and 1994 was $874,164, $839,849 and $539,636, respectively.
37
<PAGE> 39
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
The future minimum annual rental commitments as of December 31, 1996 for
all noncancelable leases are as follows:
<TABLE>
<S> <C>
1997............................................................. $ 944,456
1998............................................................. 918,797
1999............................................................. 848,846
2000............................................................. 840,573
2001............................................................. 186,302
Thereafter....................................................... 477,085
----------
$4,216,059
==========
</TABLE>
NOTE 11 -- INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current expense.......................... $1,278,303 $2,164,026 $2,108,143
Deferred benefit......................... (183,303) (9,326) (121,000)
---------- ---------- ----------
$1,095,000 $2,154,700 $1,987,143
========== ========== ==========
</TABLE>
Deferred income taxes are provided for temporary differences. The
components of the Corporation's net deferred tax asset (liability) consist of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets
Deferred loan fees............................. $ 196,538 $ 283,118 $ 186,971
Loan servicing rights.......................... 377,977 159,129 6,801
Bad debt deduction............................. 99,990
Other.......................................... 17,530 2,576 4,181
---------- ---------- ----------
692,035 444,823 197,953
---------- ---------- ----------
Deferred tax liabilities
Debt issuance costs............................ (359,542) (373,738)
Bad debt deduction............................. (54,465) (116,557)
Employment contract............................ (104,768) (102,605) (108,823)
Depreciation expense........................... (59,370) (25,666) (25,960)
Stock dividends on FHLB stock.................. (163,526) (67,699)
Other.......................................... (876) (135,289)
---------- ---------- ----------
(688,082) (624,173) (386,629)
---------- ---------- ----------
Net deferred tax asset (liability).......... $ 3,953 $ (179,350) $ (188,676)
========== ========== ==========
</TABLE>
38
<PAGE> 40
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
A reconciliation from income taxes at the statutory rate to the effective
provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate................................... 34% 34% 34%
Income taxes at statutory rate................... $ 895,527 $1,937,020 $1,844,137
Officer's life premium........................... 30,441 55,185 27,833
Amortization of purchased intangibles............ 97,962 134,414 135,028
Tax exempt income................................ (43,248)
Business expense limitation...................... 67,368
Other............................................ 3,702 28,081 23,393
---------- ---------- ----------
Provision for income taxes..................... $1,095,000 $2,154,700 $1,987,143
========== ========== ==========
</TABLE>
Taxes attributable to security's gains totaled $45,460, $121,548 and
$10,699 for the years ended December 31, 1996, 1995 and 1994, respectively.
Savings associations such as the Bank are generally taxed in the same
manner as other corporations. For taxable years beginning prior to January 1,
1996, savings associations such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their supervision and
business operations ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying real property loans,"
which are generally loans secured by certain interests in real property, may
have been computed using an amount based on the Bank's actual loss experience,
or a percentage equal to 8% of the Bank's taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the
reserve for nonqualifying loans (the "percentage of taxable income method"). The
Bank's deduction with respect to nonqualifying loans was computed under the
experience method, which essentially allows a deduction based on the Bank's
actual loss experience over a period of several years. Each year the Bank
selected the most favorable way to calculate the deduction attributable to an
addition to the tax bad debt reserve.
Legislation enacted during 1996 repealed the existing reserve method of
accounting for bad reserves for tax years beginning after December 31, 1995. As
a result, savings associations will no longer be able to calculate their
deduction for bad debts using the percentage of taxable income method. Instead,
savings associations will generally be required to compute their deduction based
on specific charge offs during the taxable year. This legislation also requires
a savings association (or its controlled group) with assets of more than $500
million to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves for qualifying real property loans and
nonqualifying loans, thereby generating additional tax liability. At December
31, 1995, the Bank's post-1987 reserves totaled approximately $3.9 million. The
recapture may be suspended for up to two years if, during those years, the
savings association satisfies a residential loan requirement.
NOTE 12 -- SALARY DEFERRAL -- 401(K) PLAN
The Corporation maintains a 401(k) plan covering substantially all
employees who have attained the age of 21 and have completed one year of service
with the Corporation. This is a salary deferral plan, which calls for matching
contributions by the Corporation based on a percentage (50%) of each
participant's voluntary contribution (limited to a maximum of eight percent (8%)
of a covered employee's annual compensation). In addition to the Corporation's
required matching contribution, a contribution to the plan may be made at the
39
<PAGE> 41
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
discretion of the Board of Directors. Employee voluntary contributions are
vested at all times, whereas employer contributions vest 20% per year through
year five at which time employer contributions are fully vested. The
Corporation's matching contributions were $126,599, $96,902 and $81,214 for the
years ended December 31, 1996, 1995 and 1994, respectively. No discretionary
contributions have been made by the Corporation for the periods presented.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
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 instruments
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 those
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 December 31, 1996, the Bank had fixed and variable rate commitments
to originate and/or purchase loans (at market rates) of approximately
$23,164,000 and $47,543,000, respectively. In addition, the Bank has firm
commitments to sell loans totaling $2,120,000 and optional commitments to sell
loans totaling $6,410,000 at December 31, 1996. Metropolitan's commitments to
originate and purchase loans are for loans at rates ranging from 7% to 16% and
commitment periods up to one year.
During 1996 and 1995, the Corporation purchased approximately $16,675,000
and $16,400,000 of mortgage loans and sold non-refundable options to a third
party to purchase these same loans at a later date. The Corporation recognized a
gain of $695,798 and $559,256 on the sale of these options during the years
ended December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995,
loans with a carrying value of $6,409,841 and $458,146, respectively, were held
for sale in connection with outstanding purchase options.
RESERVE REQUIREMENTS: The Bank is required to maintain $2,736,000 of cash
on hand or on deposit with the Federal Reserve to meet regulatory reserve
requirements at December 31, 1996. These funds do not earn interest.
NOTE 14 -- RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
Prior to 1996, the Bank was permitted, under the Internal Revenue Code, to
determine taxable income after deducting a provision for bad debts in excess of
such provision recorded in the financial statements. Accordingly, retained
earnings at December 31, 1996 and 1995, includes approximately $2,883,000 for
which no provision for federal income taxes has been made. If this portion of
retained earnings is used in the future for any purpose other than to absorb bad
debts, it will be added to future taxable income.
The Bank is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings and other factors, and
the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval
40
<PAGE> 42
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and plans for
capital restoration are required. The minimum requirements are:
<TABLE>
<CAPTION>
CAPITAL TO RISK-
WEIGHTED ASSETS
---------------- TIER 1 CAPITAL TO
TOTAL TIER 1 ADJUSTED TOTAL ASSETS
----- ------ ---------------------
<S> <C> <C> <C>
Well capitalized........................... 10% 6% 5%
Adequately capitalized..................... 8% 4% 4%
Undercapitalized........................... 6% 3% 3%
</TABLE>
At year end, the Bank's actual capital levels (in thousands) and minimum
required levels were:
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
CAPITALIZED UNDER
MINIMUM REQUIRED PROMPT CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES REGULATIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1996
Total capital (to risk weighted
assets)...................... $45,761 8.46% $43,274 8.0% $54,093 10.0%
Tier 1 (core) capital (to risk
weighted assets)............. $42,592 7.87% $21,637 4.0% $32,456 6.0%
Tier 1 (core) capital (to
adjusted total assets)....... $42,592 5.58% $30,545 4.0% $38,181 5.0%
Tangible capital (to adjusted
total assets)................ $42,342 5.54% $11,454 1.5% N/A
1995
Total capital (to risk weighted
assets)...................... $35,530 8.64% $32,892 8.0% $41,115 10.0%
Tier 1 (core) capital (to risk
weighted assets)............. $33,057 8.04% $16,446 4.0% $24,669 6.0%
Tier 1 (core) capital (to
adjusted total assets)....... $33,057 5.66% $23,361 4.0% $29,201 5.0%
Tangible capital (to adjusted
total assets)................ $32,705 5.61% $ 8,747 1.5% N/A
</TABLE>
The Bank at year-end 1996 was categorized as adequately capitalized.
A savings association which fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
OTS requiring the following: an increase in capital; reduction of rates paid on
savings accounts; cessation of or limitations on deposit-taking and lending;
limitations on operational expenditures; an increase in liquidity; and such
other actions deemed necessary or appropriate by the OTS. In addition, a
conservator or receiver may be appointed under certain circumstances.
The appropriate federal banking agency has the authority to reclassify a
well-capitalized institution as adequately capitalized, and to treat an
adequately capitalized or undercapitalized institution as if it were in the next
lower capital category, if it is determined, after notice and an opportunity for
a hearing, to be in an unsafe or unsound condition or to have received and not
corrected a less-than-satisfactory rating for any of the categories of asset
quality, management, earnings or liquidity in its most recent examination. As a
result of
41
<PAGE> 43
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
such classification or determination, the appropriate federal banking agency may
require an adequately capitalized or under-capitalized institution to comply
with certain mandatory and discretionary supervisory actions. A significantly
undercapitalized savings association may not be reclassified, however, as
critically undercapitalized.
NOTE 15 -- RELATED PARTY TRANSACTIONS
In the years ended December 31, 1996, 1995 and 1994 the Corporation
expensed $96,000 per year for management fees relating to services provided by
an affiliate.
Certain directors and executive offices of the Corporation and its
subsidiaries hold an interest in the subordinated debt maturing December 31,
2001. The aggregate interest in the subordinated debt held by related parties
totaled $1,065,284 at December 31, 1996 and 1995. In addition, the Corporation's
401(k) salary deferral plan held a $400,000 interest in the subordinated debt at
December 31, 1996 and 1995.
NOTE 16 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Corporation disclose the estimated fair values of its
financial instruments. The following table shows those values and the related
carrying values. Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and equivalents............. $ 16,522,577 $ 16,522,577 $ 18,170,473 $ 18,170,473
Securities....................... 13,173,458 13,173,458 22,806,178 22,806,178
Mortgage-backed securities....... 56,672,294 56,672,294 39,155,500 39,155,500
Loans, net....................... 646,465,881 658,869,077 479,849,746 483,330,240
Federal Home Loan Bank stock..... 3,988,600 3,988,600 3,568,700 3,568,700
Loan servicing rights............ 8,050,837 8,830,101 9,129,558 9,294,631
Accrued interest receivable...... 4,790,661 4,790,661 3,707,742 3,707,742
Demand and savings deposits...... (246,644,366) (246,644,366) (203,707,163) (203,707,163)
Time deposits.................... (375,460,151) (376,934,368) (300,035,257) (302,230,363)
Other borrowings................. (101,873,673) (99,724,946) (46,873,673) (46,983,664)
Official check float account..... (3,882,671) (3,882,671) (2,778,632) (2,778,632)
Accrued interest payable......... (4,120,163) (4,120,163) (4,551,061) (4,551,061)
</TABLE>
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that were the Corporation to
have disposed of such items at December 31, 1996, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1996 should not necessarily be considered to apply at subsequent dates.
For purposes of the above disclosures of estimated fair value, the
following assumptions were used. The estimated fair value for cash and
equivalents, the official check float account, accrued interest receivable and
accrued interest payable is considered to approximate cost due to the short term
nature of these instruments. The estimated fair value for securities and
mortgage-backed securities is based on quoted market values for the individual
securities or for equivalent securities. Loans were segregated into three main
groups: those with adjustable rates, those with fixed rates which are held for
sale and those with fixed rates held for investment. For the loans held for
sale, the carrying value was considered a reasonable estimate of fair value. The
fixed and
42
<PAGE> 44
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
adjustable rate loans held for investment were further divided between those
secured by one- to four-family real estate and those secured by multifamily and
commercial real estate. For these loans, estimated fair value was determined
using a discounted cash flow analysis. The estimated fair value of Federal Home
Loan Bank stock is considered to approximate cost since it may be redeemed at
par under certain circumstances. Loan servicing rights includes loan servicing
rights acquired and loan servicing rights originated after the adoption of SFAS
No. 122. The estimated fair value of the servicing rights is based on a
discounted cash flow analysis. The estimated fair value of demand and savings
deposits, which have no stated maturity, is equal to the amount payable. The
estimated fair value for certificates of deposit, Federal Home Loan Bank
advances and the subordinated debt is based on estimates of the rate the
Corporation would pay on such deposits, advances and debt, applied for the time
period until maturity using a discounted cash flow analysis. The estimated fair
value of commitments is not material.
Other assets and liabilities of the Corporation that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill and similar items.
43
<PAGE> 45
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 17 -- CONDENSED FINANCIAL INFORMATION
Below is condensed financial information of Metropolitan Financial Corp.
(parent company only). In this information, the parent's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of the
subsidiaries since acquisition. This information should be read in conjunction
with the consolidated financial statements.
PARENT COMPANY ONLY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash....................................................... $ 180,112 $ 4,790,234
Securities available for sale.............................. 2,009,083 1,102,243
Loans receivable, net...................................... 50,000 50,000
Investment in Metropolitan Savings Bank.................... 46,387,728 37,549,253
Cost in excess of fair value of net assets acquired........ 54,090 57,580
Prepaid expenses and other assets.......................... 1,194,532 1,253,500
----------- -----------
$49,875,545 $44,802,810
=========== ===========
LIABILITIES
Other borrowings........................................... $18,873,673 $18,873,673
Other liabilities.......................................... 757,503 462,722
----------- -----------
19,631,176 19,336,395
----------- -----------
SHAREHOLDERS' EQUITY
Common stock............................................... 100
Additional paid-in capital................................. 11,101,383 7,801,283
Retained earnings.......................................... 18,466,986 16,928,083
Unrealized gain on securities available for sale, net of
tax...................................................... 676,000 736,949
----------- -----------
30,244,369 25,466,415
----------- -----------
$49,875,545 $44,802,810
=========== ===========
</TABLE>
44
<PAGE> 46
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
PARENT COMPANY ONLY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest on loans and securities................. $ 97,909 $ 7,211 $ 4,191
Interest on other borrowings..................... 1,982,259 958,804 745,810
---------- ---------- ----------
Net interest expense............................. (1,884,350) (951,593) (741,619)
Non-interest income
Equity in net income of Metropolitan Savings
Bank........................................ 2,995,199 4,408,900 4,070,421
Other operating income......................... 3,723 47,859 18,226
---------- ---------- ----------
2,998,922 4,456,759 4,088,647
---------- ---------- ----------
Non-interest expense
Amortization of intangibles.................... 3,490 3,490 3,490
State franchise taxes.......................... 24,672 4,833 1,794
Other operating expenses....................... 249,507 315,424 186,955
---------- ---------- ----------
277,669 323,747 192,239
---------- ---------- ----------
Income before income taxes....................... 836,903 3,181,419 3,154,789
Federal income tax benefit.................. (702,000) (361,000) (282,000)
---------- ---------- ----------
Net income....................................... $1,538,903 $3,542,419 $3,436,789
========== ========== ==========
</TABLE>
45
<PAGE> 47
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................... $ 1,538,903 $ 3,542,419 $ 3,436,789
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in net income of Metropolitan
Savings Bank........................... (2,995,199) (4,408,900) (4,070,421)
Dividends received from Metropolitan
Savings Bank........................... 1,400,000 850,000 375,000
Amortization............................. 3,490 3,490 3,490
Change in other assets and liabilities... 349,524 (908,474) (154,990)
----------- ----------- -----------
Net cash from operating
activities........................ 296,718 (921,465) (410,132)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities........ 7,428,600
Purchase of securities available for
sale................................... (8,335,440) (1,102,243)
Capital contributions to subsidiary
bank................................... (7,300,000) (4,520,000)
----------- ----------- -----------
Net cash from investing
activities........................ (8,206,840) (5,622,243)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings................. 19,000,000 1,368,388
Repayment of borrowings.................. (8,280,000) (360,000)
Proceeds from issuance of stock.......... 3,300,000
----------- ----------- -----------
Net cash from financing activities....... 3,300,000 10,720,000 1,008,388
----------- ----------- -----------
Net change in cash and cash
equivalents......................... (4,610,122) 4,176,292 598,256
Cash and cash equivalents at beginning of
year........................................ 4,790,234 613,942 15,686
----------- ----------- -----------
Cash and cash equivalents at end of year...... $ 180,112 $ 4,790,234 $ 613,942
=========== =========== ===========
</TABLE>
NOTE 18 -- FEDERAL DEPOSIT INSURANCE PREMIUMS
On September 30, 1996, the President signed into law the Omnibus Bill which
required the Federal Deposit Insurance Corporation to impose a special
assessment on Savings Association Insurance Fund ("SAIF") insured deposits in
order to recapitalize the SAIF and provide an opportunity to mitigate the
premium disparity between SAIF and Bank Insurance Fund ("BIF") insured deposits.
The assessment of 65.7 basis points on deposits as of March 31, 1995 resulted in
the Bank paying $2,927,800.
46
<PAGE> 48
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1996, 1995 AND 1994
NOTE 19 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Interest income.................. $12,184 $12,804 $ 14,008 $15,456
Net interest income.............. 4,551 4,988 5,389 6,408
Provision for loan losses........ 307 379 650 300
Net income (loss)................ 716 865 (1,129) 1,087
Earnings (loss) per share........ $ .22 $ .27 $ (.35) $ .34
1995
Interest income.................. $ 9,810 $10,557 $ 11,404 $11,356
Net interest income.............. 4,052 3,928 4,186 4,145
Provision for loan losses........ 240 239 240 240
Net income....................... 632 1,047 716 1,147
Earnings per share............... $ .20 $ .33 $ .23 $ .37
</TABLE>
47
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/Malvin E. Bank
-----------------------------------
<PAGE> 2
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/Robert R. Broadbent
-----------------------------------
<PAGE> 3
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/Marjorie M. Carlson
-----------------------------------
<PAGE> 4
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/Lois K. Goodman
--------------------------
<PAGE> 5
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/Marguerite B. Humphrey
-----------------------------------
<PAGE> 6
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/James A. Karman
-----------------------------------
<PAGE> 7
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/Robert M. Kaye
-----------------------------------
<PAGE> 8
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/Ralph D. Ketchum
-----------------------------------
<PAGE> 9
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/David G. Lodge
-----------------------------------
<PAGE> 10
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer
and director of Metropolitan Financial Corp., an Ohio corporation, which
anticipates filing with the Securities and Exchange Commission, Washington,
D.C., under the provisions of the Securities Act of 1934, as amended, an Annual
Report on Form 10-K, hereby constitutes and appoints Robert M. Kaye, David G.
Lodge, and Patrick W. Bevack, and each of them, as attorney for the undersigned,
with full power of substitution and resubstitution, for and in the name, place,
and stead of the undersigned, to sign and file the Annual Report on Form 10-K
and any and all amendments, supplements and exhibits thereto, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises, hereby ratifying and approving the
acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereunto set his or
her hand as of March 25, 1997.
/s/David P. Miller
-----------------------------------
<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 INCOME, CONSOLIDATED STATEMENTS OF CASH FLOWS, AND THE
ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,778
<INT-BEARING-DEPOSITS> 2,745
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,846
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 650,641
<ALLOWANCE> 4,175
<TOTAL-ASSETS> 769,076
<DEPOSITS> 622,105
<SHORT-TERM> 65,000
<LIABILITIES-OTHER> 14,853
<LONG-TERM> 36,874
0
0
<COMMON> 0
<OTHER-SE> 30,244
<TOTAL-LIABILITIES-AND-EQUITY> 769,076
<INTEREST-LOAN> 50,268
<INTEREST-INVEST> 4,184
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 54,452
<INTEREST-DEPOSIT> 28,132
<INTEREST-EXPENSE> 33,116
<INTEREST-INCOME-NET> 21,336
<LOAN-LOSSES> 1,635
<SECURITIES-GAINS> 134
<EXPENSE-OTHER> 20,839
<INCOME-PRETAX> 2,634
<INCOME-PRE-EXTRAORDINARY> 1,539
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,539
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
<YIELD-ACTUAL> 3.34
<LOANS-NON> 4,923
<LOANS-PAST> 271
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,351
<ALLOWANCE-OPEN> 2,765
<CHARGE-OFFS> 236
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 4,175
<ALLOWANCE-DOMESTIC> 4,175
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
