<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
--------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission file number 000-21553
--------------------------------------------------------
METROPOLITAN FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
OHIO 34-1109469
- ---------------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
Incorporation of Organization) Identification No.)
6001 LANDERHAVEN DRIVE, MAYFIELD HEIGHTS, OHIO 44124
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(440) 646-1111
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of November 12, 1997, there were 3,525,635 shares of the Registrant's
Common Stock issued and outstanding.
1
<PAGE> 2
METROPOLITAN FINANCIAL CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition as of
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-27
PART II. OTHER INFORMATION 28
SIGNATURES 29
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
SEPT. 30, 1997 DEC. 31, 1996
-------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,455 $ 16,522
Securities available for sale (Note 3) 11,478 13,174
Mortgage-backed securities (Note 3) 154,012 56,672
Loans held for sale 5,243 8,973
Loans receivable, net (Note 4) 635,829 637,493
Federal Home Loan Bank stock, at cost 5,254 3,989
Accrued interest receivable 5,495 4,791
Premises and equipment, net 13,552 11,332
Real estate owned, net 1,999 177
Cost in excess of fair value of net
assets acquired 3,052 3,239
Cost of loan servicing rights (Note 5) 8,856 8,051
Prepaid expenses and other assets 6,347 4,663
---------- ----------
Total assets $ 865,572 $ 769,076
========== ==========
LIABILITIES
Deposits (Note 6) $ 686,816 $ 622,105
Other borrowings (Note 7) 131,443 101,874
Accrued interest payable 2,811 4,120
Official checks 3,490 3,882
Other liabilities 6,101 6,851
---------- ----------
Total liabilities 830,661 738,832
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares
authorized, 3,525,635 shares issued and outstanding
Additional paid-in capital 11,101 11,101
Retained earnings 22,460 18,467
Unrealized gain on securities available for sale, 1,350 676
net of tax ---------- ----------
Total shareholders' equity 34,911 30,244
---------- ----------
Total liabilities & shareholders' $ 865,572 $ 769,076
equity ========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 15,029 $ 13,427 $ 45,014 $ 36,750
Interest on mortgage-backed securities 2,178 700 4,307 1,965
Interest and dividends on other investments 333 268 834 951
----------- ----------- ----------- -----------
Total interest income 17,540 14,395 50,155 39,666
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 8,698 7,164 24,980 20,508
Interest on other borrowings 1,859 1,455 5,231 3,560
----------- ----------- ----------- -----------
Total interest expense 10,557 8,619 30,211 24,068
----------- ----------- ----------- -----------
NET INTEREST INCOME 6,983 5,776 19,944 15,598
Provision for loan losses 585 650 1,755 1,335
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 6,398 5,126 18,189 14,263
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Loan servicing income, net 350 307 954 940
Gain on sale of loans 128 105 340 141
Loan option income 141 114 264 520
Gain on sale of securities, net 89
Other operating income 500 453 1,381 1,141
----------- ----------- ----------- -----------
Total non-interest income 1,119 979 3,028 2,742
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and related personnel costs 2,666 2,263 7,899 6,335
Occupancy and equipment expense 813 645 2,254 1,770
Federal deposit insurance premiums 153 3,280 441 3,920
Data processing expense 81 155 350 450
Marketing expense 222 214 532 498
State franchise taxes 155 114 465 346
Amortization of intangibles 66 50 197 160
Other operating expenses 1,005 1,029 2,766 2,634
----------- ----------- ----------- -----------
Total non-interest expense 5,161 7,750 14,904 16,113
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,356 (1,645) 6,313 892
Provision for income taxes 867 (516) 2,320 440
----------- ----------- ----------- -----------
NET INCOME $ 1,489 $ (1,129) $ 3,993 $ 452
=========== =========== =========== ===========
Earnings per share $ 0.42 $ (0.35) $ 1.13 $ 0.14
=========== =========== =========== ===========
Weighted average shares outstanding 3,525,635 3,125,635 3,525,635 3,125,635
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C>
NET CASH (USED FOR) OPERATING ACTIVITIES $ (13,560) $ (1,647)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (5,077) (117,191)
Proceeds from sale of securities available for sale 11,430 127,459
Disbursement of loan proceeds (163,098) (195,109)
Purchases of loans (60,855) (44,071)
Purchases of mortgage-backed securities (10,574) (8,705)
Proceeds from loan principal repayments 136,367 109,246
Proceeds from sale of loans 1,950 4,915
Proceeds from mortgage-backed securities principal repayments and maturities 11,974 5,426
Proceeds from sale of real estate owned 79 41
Purchase of premises and equipment (3,025) (3,761)
Purchase of FHLB stock (1,012) (157)
Premium paid for credit card relationships (10)
Purchase of mortgage loan servicing rights (881) (828)
--------- ---------
Net cash used for investing activities (82,732) (122,735)
========= =========
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 64,656 81,006
Proceeds from borrowings 339,133 224,350
Repayment of borrowings (309,564) (180,800)
--------- ---------
Net cash provided by financing activities 94,225 124,556
========= =========
Net change in cash and cash equivalents (2,067) 174
Cash and cash equivalents at beginning of period 16,522 18,170
--------- ---------
Cash and cash equivalents at end of period $ 14,455 $ 18,344
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 31,520 $ 24,941
Income taxes 1,101 1,587
Transfer from loans receivable to other real estate 1,955 1,326
Loans securitized 98,359
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of Metropolitan Financial Corp.
("Metropolitan" or "Corporation") include the accounts of the Corporation and
the accounts of its wholly-owned subsidiaries, MetroCapital Corporation and
Metropolitan Savings Bank of Cleveland (the "Bank"), and its wholly-owned
subsidiaries, Kimberly Construction Company, Incorporated, and Metropolitan
Savings Service Corporation, and its wholly-owned subsidiary Metropolitan
Securities Corporation. All significant intercompany transactions have been
eliminated. In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting only of normal recurring
accruals) which the Corporation considers necessary for a fair presentation of
(a) the results of operations for the three and nine month periods ended
September 30, 1997 and 1996; (b) the financial condition at September 30, 1997
and December 31, 1996; and (c) the statement of cash flows for the nine month
periods ended September 30, 1997 and 1996. The results of operations for the
nine month period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for a full year. The annual report for Metropolitan
for the year ended December 31, 1996, contains consolidated financial statements
and related notes which should be read in conjunction with the accompanying
consolidated financial statements.
2. ACCOUNTING POLICIES
SECURITIES: Securities classified as held to maturity are those that management
has the positive intent and ability to hold to maturity. Securities held to
maturity are stated at cost, adjusted for amortization of premiums and accretion
of discounts.
Securities classified as available for sale are those that management intends to
sell or that could be sold for liquidity, investment management, or similar
reasons, even if there is not a present intention for such sale. Securities
available for sale are carried at fair value with unrealized gains and losses
included as a separate component of shareholders' equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the carrying amount of
securities sold adjusted for amortization of premium and accretion of discount,
using the specific identification method.
LOANS: Loans receivable 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. At
September 30, 1997 and December 31, 1996, management had the intent and the Bank
had the ability to hold all loans being held for investment purposes for the
foreseeable future. Gains and losses on the sale of loans are determined by the
identified loan method and are reflected in operations at the time of sale.
ALLOWANCE FOR LOSSES ON LOANS: An allowance for losses on loans is maintained
because some loans may not be repaid in full. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change
6
<PAGE> 7
over time. While management may periodically allocate portions of the allowance
for specific problem loans, the whole allowance is available for any loan
charge-offs that occur. A loan is charged off against the allowance by
management as a loss when deemed uncollectible, although collection efforts
continue and future recoveries may occur.
Loans which are 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. As allowed, management excludes all
consumer loans and residential single family loans with balances less than
$200,000 from classification as impaired.
A loan is classified as non-accrual when collectability is in doubt (this is
generally when the borrower is 90 days past due on contractual principal or
interest payments or when a determination is made to classify a loan as
impaired). When a loan is placed on non-accrual status, unpaid interest is
reversed. Income is subsequently recognized only to the extent that cash
payments are received. Loans are returned to accrual status when, in
management's judgment, the borrower has the ability and intent to make periodic
principal and interest payments (this generally requires that the loan be
brought current in accordance with its original contractual terms).
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.
3. SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities available for sale at September 30, 1997 and December 31,
1996 are as follows (In thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C>
Mutual funds $ 1,732 $ 1,732
FNMA Note 5,001 5 5,006
Municipal Revenue Bond 4,740 4,740
-------- ----- --------
Total investment securities 11,473 5 11,478
Mortgage-backed securities 151,905 2,185 (78) 154,012
-------- ----- --- --------
Total $163,378 2,190 (78) $165,490
======== ===== ==== =======
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 6,094 40 (69) $ 6,065
Mutual funds 2,009 2,009
FNMA Preferred Stock 5,000 100 5,100
------- ----- --- -------
Total investment securities 13,103 140 (69) 13,174
Mortgage-backed securities 55,719 954 (1) 56,672
------- ----- --- -------
Total $68,822 1,094 (70) $69,846
======= ======= ======= =======
</TABLE>
4. LOANS RECEIVABLE
The composition of the loan portfolio at September 30, 1997 and December 31,
1996 is as follows (In thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Real estate loans
Construction loans
Residential single family $ 94,665 $ 61,735
Commercial 11,100 9,825
Loans in process (47,452) (31,758)
--------- ---------
Construction loans, net 58,313 39,802
Permanent loans
Residential single family 129,565 114,758
Residential apartments 185,346 276,545
Commercial 160,489 135,635
Other 456 137
--------- ---------
Total real estate loans 534,169 566,877
Consumer loans 65,795 54,179
Business and other loans 45,728 23,508
--------- ---------
Total loans 645,692 644,564
Discounts on loans (1,187) (560)
Deferred loan fees (3,258) (2,336)
Allowance for losses on loans (5,418) (4,175)
--------- ---------
$ 635,829 $ 637,493
========= =========
</TABLE>
8
<PAGE> 9
Activity in the allowance for losses on loans for the periods ended September
30, 1997 and 1996 is as follows (In thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C>
Balance at the beginning of the period $ 4,175 $ 2,765
Provision for loan losses 1,755 1,335
Net charge-offs (512) (47)
------- -------
Balance at the end of the period $ 5,418 $ 4,053
======= =======
</TABLE>
Management analyzes loans on an individual basis and considers a loan to be
impaired when it is probable that all principal and interest amounts will not be
collected according to the terms of the contract. Information regarding impaired
loans at September 30, 1997 and December 31, 1996 is as follows (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Balance of impaired loans $ 351 $3,495
Less portion for which no allowance
for losses on loans is allocated 111 2,774
------ ------
Portion of impaired loans for which
an allowance for loan losses is
allocated $ 240 $ 721
====== ======
Portion of allowance for losses on
loans allocated to the impaired
loan balance $ 180 $ 241
====== ======
</TABLE>
Information regarding impaired loans is as follows for the nine months ended
September 30, 1997 and the year ended December 31, 1996 (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Average investment in impaired loans
during the period $1,152 $4,220
Interest income recognized during
impairment 17 48
Interest income recognized on a
cash basis during the period 17 48
</TABLE>
9
<PAGE> 10
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at September 30, 1997 and December 31, 1996 are summarized as
follows (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
<S> <C> <C>
Mortgage loans underlying pass-through
securities
FNMA $ 229,604 $ 134,568
Mortgage loan portfolios serviced for
FHLMC 668,028 713,290
FNMA 236,211 219,295
Other 34,202 35,362
---------- ----------
Total loans serviced for others $1,168,045 $1,102,515
========== ==========
</TABLE>
Custodial balances maintained in connection with the foregoing loan servicing
were approximately $18,355,000 and $12,895,000 at September 30, 1997 and
December 31, 1996, respectively.
The following is an analysis of the changes in cost of loan servicing rights for
the nine month periods ended September 30, 1997 and 1996 (In thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C>
Balance at the beginning of the period $ 8,051 $ 9,130
Acquired or originated 2,232 618
Amortization (1,427) (1,055)
------- -------
Balance at the end of the period $ 8,856 $ 8,693
======= =======
</TABLE>
6. DEPOSITS
Deposits consist of the following (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Noninterest-bearing checking accounts $ 40,306 $ 30,851
Interest-bearing checking accounts 39,771 39,364
Passbook savings and statement savings 166,515 176,430
Certificates of Deposit 440,224 375,460
-------- --------
$686,816 $622,105
======== ========
</TABLE>
10
<PAGE> 11
At September 30, 1997, scheduled maturities of certificates of deposit are as
follows (In thousands):
<TABLE>
<CAPTION>
Year Weighted Average
Ended Amount Interest Rate
----- ------ -------------
<S> <C> <C>
1997 $ 90,801 5.63%
1998 270,796 5.94
1999 55,660 6.17
2000 18,204 7.11
2001 3,524 5.77
Thereafter 1,239 5.98
--------
$440,224 5.95
======== ====
</TABLE>
7. OTHER BORROWINGS
Other borrowings consisted of the following at September 30, 1997 and December
31, 1996 (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Federal Home Loan Bank Advances
(6.1% and 5.5% at September 30, 1997
and December 31, 1996, respectively) $ 69,700 $ 59,500
Reverse repurchase agreements (5.7% and
5.7% at September 30, 1997 and December 31,
1996, respectively) 42,869 23,500
Subordinated debt maturing December 31,
2001 (10% fixed rate) 4,874 4,874
Subordinated debt maturing January 1,
2005 (9.625% fixed rate) 14,000 14,000
-------- --------
Total $131,443 $101,874
======== ========
</TABLE>
Federal Home Loan Bank ("FHLB") advances are collateralized by FHLB
stock and residential first mortgage loans with an aggregate carrying value of
$104,550,000 and $89,250,000 at September 30, 1997 and December 31, 1996,
respectively.
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<PAGE> 12
At September 30, 1997, scheduled payments on FHLB advances and reverse
repurchase agreements are as follows (In thousands):
<TABLE>
<CAPTION>
Year Weighted Average
Ended Amount Interest Rate
----- ------ -------------
<S> <C> <C>
1997 $ 50,569 6.24%
1998 15,000 5.40
1999 23,000 5.64
2001 3,000 6.15
Thereafter 21,000 5.85
-------- ----
$112,569 5.93
======== ====
</TABLE>
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank can be a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial commitments include commitments to make loans. The Bank's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to make loans is represented by the contractual
amount of these instruments. The Bank follows the same credit policy to make
such commitments as is followed for those loans recorded in the financial
statements.
As of September 30, 1997, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $21,754,000
and $47,367,000, respectively. Metropolitan's commitments to originate and
purchase loans are for loans with rates ranging from 6.125% to 16% and
commitment periods up to one year. In addition, the Bank has firm commitments to
sell loans totaling $10,268,000 and optional commitments to sell loans totaling
$644,000.
At September 30, 1997 and December 31, 1996, the Bank had outstanding options
which gave the holder the option to purchase certain loans at a specified price
within a specified time period. The Bank collected a non-refundable fee on each
option which is recognized as income at the time the transaction is complete. At
September 30, 1997, loans with a carrying value of $644,000 were held for sale
in connection with outstanding purchase options. At December 31, 1996, loans
with a carrying value of $6,410,000 were held for sale in connection with
outstanding purchase options. The options may be exercised at the carrying value
for an initial period. The option price escalates after the initial period until
the option expires.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of the
Bank. Metropolitan's results of operations are dependent on a variety of
factors, including the general interest rate environment, competitive conditions
in the industry, governmental policies and regulations and conditions in the
markets for financial assets. Like most financial institutions, the primary
contributor to Metropolitan's income is net interest income, the difference
between the interest Metropolitan earns on interest-earning assets, such as
loans and securities, and the interest Metropolitan pays on interest-bearing
liabilities, such as deposits and borrowings. Metropolitan's operations are also
affected by non-interest income, such as loan servicing fees and gains or losses
from sales of loans and securities. From time to time, Metropolitan engages in
certain transactions aimed at increasing its non-interest income such as loan
option income. Metropolitan's principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, occupancy costs, federal
deposit insurance premiums, and other general and administrative expenses.
Average Balances and Yields. The following table presents, for the periods
indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates, and the net interest margin. Net interest margin refers to net interest
income divided by total interest-earning assets and is influenced by the level
and relative mix of interest-earning assets and interest-bearing liabilities.
All average balances are daily average balances. Non-accruing loans are
considered in average loan balances. The average balances of mortgage-backed
securities are presented at historical cost.
13
<PAGE> 14
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
------------------------------------ -------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 651,525 $ 15,029 9.23% $603,789 $ 13,427 8.90%
Mortgage-backed securities
available for sale 125,345 2,178 6.95 41,601 700 6.73
Other 19,340 333 6.89 16,857 268 6.36
-------- -------- -------- --------
Total interest-earning
assets 796,210 17,540 8.81 662,247 14,395 8.69
------ ------
Nonearning assets 46,105 40,366
-------- --------
Total assets $ 842,315 $702,613
======= =======
Interest-bearing liabilities:
Deposits $ 642,115 8,698 5.37 $540,225 7,164 5.28
Other borrowings 113,665 1,859 6.49 87,320 1,455 6.63
-------- ------- -------- -------
Total interest-bearing
liabilities 755,780 10,557 5.60 627,545 8,619 5.46
------ -------
Noninterest-bearing
liabilities 52,833 49,416
Shareholders' equity 33,702 25,652
-------- --------
Total liabilities and
shareholders' equity $ 842,315 $702,613
======= =======
Net interest income $ 6,983 $ 5,776
====== ======
Interest rate spread 3.21% 3.23%
Net interest margin 3.51% 3.49%
Average interest-earning
assets to average
interest-bearing
liabilities 105.35% 105.53%
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
------------------------------------- ---------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 666,093 $ 45,014 9.01% $560,161 $ 36,750 8.75%
Mortgage-backed securities
available for sale 85,354 4,307 6.73 39,401 1,965 6.65
Other 18,649 834 5.96 20,099 951 6.31
-------- -------- -------- --------
Total interest-earning
assets 770,096 50,155 8.68 619,661 39,666 8.53
------ ------
Nonearning assets 43,061 37,976
-------- --------
Total assets $ 813,157 $657,637
======= =======
Interest-bearing liabilities:
Deposits $ 625,202 24,980 5.34 $518,191 20,508 5.29
Other borrowings 107,489 5,231 6.51 70,252 3,560 6.77
------- ------- -------- -------
Total interest-bearing
liabilities 732,691 30,211 5.51 588,443 24,068 5.46
------ ------
Noninterest-bearing
liabilities 48,359 43,316
Shareholders' equity 32,107 25,878
-------- --------
Total liabilities and
shareholders' equity $ 813,157 $657,637
======= =======
Net interest income $19,944 $ 15,598
====== =======
Interest rate spread 3.17% 3.07%
Net interest margin 3.45% 3.36%
Average interest-earning
assets to average
interest-bearing
liabilities 105.11% 105.31%
</TABLE>
15
<PAGE> 16
Rate and Volume Variances. Net interest income is affected by changes in the
level of interest-earning assets and interest-bearing liabilities and changes in
yields earned on assets and rates paid on liabilities. The following table sets
forth, for the periods indicated, a summary of the changes in interest earned
and interest paid resulting from changes in average asset and liability balances
and changes in average rates. Changes attributable to the combined impact of
volume and rate have been allocated proportionately to change due to volume and
change due to rate.
<TABLE>
<CAPTION>
Three Months ended September 30,
1997 vs. 1996
INCREASE (DECREASE)
--------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ----
(In thousands)
<S> <C> <C> <C>
INTEREST INCOME ON:
Loans receivable $1,602 $1,088 $ 514
Mortgage-backed securities 1,478 1,454 24
Other 65 42 23
------ ------ ------
Total interest income 3,145 $2,584 $ 561
------ ====== ======
INTEREST EXPENSE ON:
Deposits 1,534 $1,371 $ 163
Other borrowings 404 446 (42)
------ ------ ------
Total interest expense 1,938 $1,817 $ 121
------ ====== ======
Increase in net interest income $1,207
======
<CAPTION>
Nine Months ended September 30,
1997 vs. 1996
INCREASE (DECREASE)
--------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ----
(In thousands)
<S> <C> <C> <C>
INTEREST INCOME ON:
Loans receivable $8,264 $7,130 $1,134
Mortgage-backed securities 2,342 2,319 23
Other (117) (67) (50)
------ ------ ------
Total interest income 10,489 $9,382 $1,107
------ ====== ======
INTEREST EXPENSE ON:
Deposits 4,472 $4,256 $ 216
Other borrowings 1,671 1,803 (132)
------ ------ ------
Total interest expense 6,143 $6,059 $ 84
------ ====== ======
Increase in net interest income $4,346
======
</TABLE>
16
<PAGE> 17
RESULTS OF OPERATIONS
Net Income. Net income increased $2.6 million to $1.5 million for the three
months ended September 30, 1997 as compared to a $1.1 million loss for the third
quarter, 1996. Net interest income and non-interest income increased $1.2
million and $140,000 respectively for the three months ended September 30, 1997
over the prior year period and the provision for loan losses decreased $65,000
from the same prior year period. Noninterest expense decreased $2.6 million to
$5.2 million for the quarter from $7.8 million from the prior year quarter
primarily as a result of the special assessment on Savings Association Insurance
Fund ("SAIF") deposits imposed by the Federal Deposit Insurance Corporation in
the third quarter, 1996, which resulted in an assessment to Metropolitan of a
one-time fee of $2.8 million, or $1.9 million after tax, which was recorded in
the third quarter, 1996. This one-time special assessment, imposed as a result
of the enactment into law of the Omnibus Budget Reconciliation Bill on September
30, 1996, was designed to recapitalize the SAIF, to mitigate the Bank Insurance
Fund premium disparity, and ultimately, to reduce the annual assessment rates
for SAIF-insured institutions upon recapitalization of the SAIF.
Net income for the nine month period ending September 30, 1997 increased to $4.0
million from $0.5 million for the prior year period. This increase was the
result of increases in net interest income of $4.3 million and non-interest
income of $286,000. Noninterest expense declined $1.2 million from the prior
year period primarily as a result of the previously mentioned SAIF assessment.
These increases were partially offset by increases in provision for loan losses
of $420,000.
Metropolitan's net interest margin increased two basis points to 3.51% for the
three month period ended September 30, 1997 as compared to 3.49% for the same
period in 1996, primarily because the increased yield of interest earning assets
exceeded the increased cost of interest-bearing liabilities. For the nine month
period ending September 30, 1997, net interest margin increased nine basis
points to 3.45% from 3.36%, largely as a result of the increased yield on
interest earning assets exceeding the increased cost of interest-bearing
liabilities.
Interest Income. Total interest income increased 21.8% and 26.5% to $17.5
million and $50.2 million in the three and nine month periods ended September
30, 1997, respectively, as compared to $14.4 million and $39.7 million in the
same periods in 1996. This increase primarily resulted from a 20.2% and 24.3%
increase in average interest-earning assets in the three and nine month periods
ended September 30, 1997. While the average balance of earning assets has
increased steadily, the composition has changed as a result of the completion in
the third quarter of 1997 of the securitization of $92.9 million of multifamily
loans with the Federal National Mortgage Association ("FNMA") under a newly
developed program which uses insurance to provide the credit enhancement
necessary to achieve a AAA rating. In addition to resulting in a decrease in
loans receivable and a related increase in mortgage-backed securities, the
securitization has had several other benefits to Metropolitan, including the
following: i) improvement in the credit risk profile of the Bank's balance sheet
by converting whole loans into mortgage-backed securities guaranteed by FNMA,
ii) reduction of the required level of risk-based capital, and iii) addition of
high quality collateral which can be pledged for borrowings in the secondary
market to fund future loan growth.
17
<PAGE> 18
Interest Expense. Total interest expense increased 22.5% and 25.5% to $10.6
million and $30.2 million for the three and nine month periods ended September
30, 1997, respectively, as compared to $8.6 million and $24.1 million for the
same periods in 1996. Interest expense increased due to a higher average balance
of interest-bearing liabilities outstanding for the three and nine month periods
ending September 30, 1997 compared to the same periods in 1996. In accordance
with Metropolitan's strategy to fund its growth in assets primarily with
deposits, the average balance of deposit accounts increased $101.9 million, or
18.9%, during the three months ended September 30, 1997 compared to 1996, and
increased $107.0 million, or 20.7%, during the nine months ended September 30,
1997 compared to 1996. In addition, when rates and terms are more favorable than
retail rates, Metropolitan has utilized wholesale borrowings to fund a portion
of its growth. Accordingly, other borrowings have increased $26.3 million, or
25.1%, during the three months ended September 30, 1997 and $29.6 million, or
29.0%, during the nine months ended September 30, 1997.
Due to an increase in the market interest rates paid for deposits and the
changing mix of other borrowings, Metropolitan's cost of funds increased to
5.60% for the third quarter and 5.51% for the nine months ended September 30,
1997 as compared to 5.46% for both periods in 1996.
Provision for Loan Losses. The provision for loan losses decreased $65,000 for
the third quarter, 1997, as compared to the third quarter, 1996. For the nine
month period ended September 30, 1997, the provision for loan losses increased
$420,000 compared to the same period in 1996. While net charge-offs to average
loans for the nine months ended September 30, 1997 were only 0.10%, management
increased the provision for loan losses due to continued loan growth.
Non-performing loans as a percentage of total loans declined to 0.47% at
September 30, 1997, as compared to 0.80% at December 31, 1996. The allowance for
losses on loans at September 30, 1997 was $5.4 million or 0.84% of total loans,
as compared to $4.2 million, or 0.64% of total loans, at December 31, 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, an
analysis of impaired loans, economic conditions affecting real estate markets,
regulatory considerations, and other matters.
Non-Interest Income. Total non-interest income increased 14.3% and 10.4% to $1.1
million and $3.0 million in the three and nine months ended September 30, 1997
as compared to $979,000 and $2.7 million in the same periods in 1996. The
following table sets forth Metropolitan's non-interest income for the periods
indicated (In thousands):
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loan servicing income, net $ 350 $ 307 $ 954 $ 940
Gain on sale of loans 128 105 340 141
Loan option income 141 114 264 520
Gain on sale of securities,net 89
Other operating income 500 453 1,381 1,141
------ ------ ------ ------
Total $1,119 $ 979 $3,028 $2,742
====== ====== ====== ======
</TABLE>
18
<PAGE> 19
Net loan servicing income increased 14.0% to $350,000 in the three month period
ended September 30, 1997 and 1.5% to $954,000 for the nine month period ended
September 30, 1997 as compared to the same periods in 1996. The primary reasons
for this increase are the income from servicing the FNMA loans securitized in
the third quarter, 1997 and the continued acquisition of servicing portfolios to
replace normal runoff experienced in the portfolio. Metropolitan remains
committed to this line of business and continues to evaluate new acquisitions.
Metropolitan will only acquire the rights to service portfolios where the loan
characteristics and pricing are consistent with management's long-term
profitability objectives.
Gain on sale of loans was $128,000 and $340,000 in the three and nine month
periods ended September 30, 1997, as compared to $105,000 and $141,000 during
the same periods in 1996. This income was dependent upon the amount of loans
sold, secondary market pricing, and the value allocated to mortgage servicing
rights, and these variables in turn were directly affected by prevailing
interest rates. As such, the primary reason for the gain in the third quarter,
1997 was the sale of residential fixed rate loans into a favorable rate market
during the quarter.
Loan option income was $141,000 and $264,000 in the three and nine month periods
ended September 30, 1997, respectively, as compared to $114,000 and $520,000 in
each of the same periods in 1996. This income was dependent upon the amount of
loans for which options were written and the price negotiated, both of which are
affected by market conditions. In these transactions, Metropolitan purchased
loans and sold nonrefundable options to a third party to purchase these same
loans at a later date. At the time the transaction is complete, Metropolitan
recognizes a non-refundable fee in income.
Net gain on sale of securities in the nine months ended September 30, 1997 was
$89,000. This gain was the result of the sale of $5.0 million of Federal
National Mortgage Association ("FNMA") preferred stock and the sale of $6.0
million of U.S. Treasury Notes from the liquidity portfolio.
Other noninterest income increased $47,000 and $240,000 in the three and the
nine month periods ended September 30, 1997, compared to the same periods in the
previous year. This increase was primarily due to increased fee income earned on
investment services, rental income at retail sales office locations, and various
fee income from consumer checking, commercial checking, and credit cards due to
increased business levels.
19
<PAGE> 20
Non-Interest Expense. Total non-interest expense decreased to $5.2 million and
$14.9 million in the three and nine month periods ended September 30, 1997,
respectively, as compared to $7.8 million and $16.1 million for the same periods
in 1996. The following table sets forth Metropolitan's non-interest expense for
the periods indicated (In thousands):
<TABLE>
<CAPTION>
Three Months ended September 30, Nine Months ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries and related personnel costs $ 2,666 $ 2,263 $ 7,899 $ 6,335
Occupancy and equipment expense 813 645 2,254 1,770
Federal deposit insurance premiums 153 3,280 441 3,920
Data processing expense 81 155 350 450
Marketing expense 222 214 532 498
State franchise taxes 155 114 465 346
Amortization of intangibles 66 50 197 160
Other operating expenses 1,005 1,029 2,766 2,634
------- ------ ------- -------
Total $ 5,161 $7,750 $14,904 $16,113
======= ====== ======= =======
</TABLE>
Personnel related expenses increased $403,000 and $1.6 million in the three and
nine month periods ended September 30, 1997 as compared to the same periods in
1996. These increases were primarily a result of having two additional full
service retail sales offices open in the 1997 periods, incentive payments for
loan production, and the addition to staff in various departments.
Occupancy costs increased $168,000 and $484,000 in the three and nine month
periods ended September 30, 1997, respectively, over the same periods in 1996.
These increases were generally the result of additional full service retail
sales offices, remodeling of certain other retail sales offices, and expanded
space at the corporate headquarters office.
Federal deposit insurance premium expense decreased $3.1 million and $3.5
million in the three and nine month periods ending September 30, 1997 as
compared to the same periods in 1996. These declines in expense were the result
of the one-time SAIF assessment charge incurred in the third quarter, 1996, and
a reduction in assessment rates made possible by the recapitalization of the
Savings Association Insurance Fund.
Data processing expense decreased $74,000 and $100,000 in the three and nine
month periods ending September 30, 1997 as compared to the same periods in 1996.
These decreases were the result of the renegotiation of the contract with the
data processing servicer.
Other operating expenses, which include miscellaneous general and administrative
costs such as loan servicing, loan processing costs, business development, check
processing and ATM expenses, decreased $24,000 for the three month period ending
September 30, 1997 as compared to the same period in 1996 and increased
$132,000, in
20
<PAGE> 21
the nine month period ended September 30, 1997, respectively, over the same
period in 1996. This increase was generally the result of increases in legal and
accounting fees, credit card fees, and depreciation.
Provision for Income Taxes. The provision for income taxes increased $1.4
million and $1.9 million for the three and nine month periods ended September
30, 1997, respectively as compared to the same periods in 1996. The primary
reason for the increase in the provision was the increased level of income over
the prior year. The effective tax rate was 36.7% for the nine month period ended
September 30, 1997 as compared to 49.3% for the same period in 1996. The
effective tax rate was lower in the 1997 period because permanent differences,
such as those which are not deductible for tax purposes such as amortization of
intangibles, have decreased in relationship to pre-tax income as a result of the
unfavorable effect of the one-time assessment to recapitalize the SAIF had on
pre-tax income in 1996.
ASSET QUALITY
Metropolitan's goal is to maintain the above average asset quality of its loan
portfolio through conservative lending policies and prudent underwriting.
Detailed reviews of the loan portfolio are undertaken regularly to identify
potential problem loans or trends early and to provide for adequate estimates of
potential losses. In performing these reviews, Metropolitan's management
considers, among other things, current economic conditions, portfolio
characteristics, delinquency trends, and historical loss experiences.
Metropolitan normally considers loans to be non-performing when payments are 90
days or more past due or when the loan review analysis indicates that
repossession of the collateral may be necessary to satisfy the loan. In
addition, Metropolitan considers loans to be impaired when, in management's
opinion, it is probable that the borrower will be unable to meet the contractual
terms of the loan. When loans are classified as non-performing, an assessment is
made as to the collectability of the unpaid interest. Interest determined to be
uncollectible is reversed from interest income and future interest income is
recorded only if the loan principal and interest due is considered collectible
and is less than the estimated fair value of the underlying collateral.
The table below provides information concerning Metropolitan's non-performing
assets and the allowance for losses on loans as of the dates indicated. All
loans classified by management as impaired were also classified as
non-performing.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans $ 2,660 $ 4,923
Loans past due greater than
90 days or impaired, still accruing 360 271
--------- ---------
Total non-performing loans 3,020 5,194
Real estate owned 1,999 177
--------- ---------
Total non-performing assets $ 5,019 $ 5,371
========= =========
Allowance for losses on loans $ 5,418 $ 4,175
========= =========
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
Non-performing loans to total loans 0.47% 0.80%
Non-performing assets to total assets 0.58% 0.70%
Net charge-offs to average loans 0.10%(1) 0.04%
Provision for loan losses to
average loans 0.35%(1) 0.28%
Allowance for losses on loans to
total non-performing loans at
end of period 179.40% 77.73%
Allowance for losses on loans to
total loans at end of period 0.84% 0.64%
<FN>
(1) Annualized for comparative purposes.
</TABLE>
Non-performing assets at September 30, 1997 decreased $0.4 million, or 6.6% to
$5.0 million as compared to $5.4 million at December 31, 1996. The primary
reason for this decline was the charge-off of a multifamily loan which was
partially offset by increases in consumer loan delinquencies.
Non-performing loans include $351,000 and $3.5 million of loans at September 30,
1997 and December 31, 1996, respectively, considered by management to be
impaired. The circumstances and trends associated with these loans have been
included in management's consideration of the adequacy of the allowance for
losses on loans.
FINANCIAL CONDITION
Total assets amounted to $865.6 million at September 30, 1997, as compared to
$769.1 million at December 31, 1996, an increase of $96.5 million, or 12.5%. The
increase in assets was funded primarily with deposit growth of $64.7 million and
borrowings of $29.6 million.
Mortgage-backed securities increased $97.3 million to $154.0 million compared to
December 31, 1996. The increase was primarily due to the multifamily
securitization with FNMA of $92.9 million in the third quarter, the purchase of
$10.4 million of Federal Home Loan Mortgage Corporation ("FHLMC") securities,
and the securitization of $5.4 million of originated single family mortgage
loans, also with FHLMC.
Loans receivable, including loans held for sale, decreased $5.4 million, or 0.8%
to $641.1 million at September 30, 1997. This decrease was the net effect of the
$92.9 million multifamily securitization substantially offset by loan
originations and purchases. Otherwise, the overall loan balance would have
increased similar to the prior two quarters of 1997. This increase is consistent
with Metropolitan's overall strategy of increasing assets while adhering to
prudent underwriting standards and preserving its adequately capitalized status.
Real estate owned increased from $177,000 to $2.0 million from December 31, 1996
to September 30, 1997. This increase was the result of the foreclosures of one
retail strip shopping center and one office condominium complex during the nine
month period ended September 30, 1997.
22
<PAGE> 23
Prepaid expenses and other assets increased $1.7 million, or 36.1%, from
December 31, 1996 to September 30, 1997. This increase was primarily the result
of a $1.0 million limited partnership investment in mortgage servicing, a
$257,000 increase in prepaid expenses, and a $540,000 increase in prepaid
insurance pertaining to the multifamily securitization with FNMA.
Deposits totaled $686.8 million at September 30, 1997, an increase of $64.7
million, or 10.4%, over the balance at December 31, 1996. The increase resulted
from management's marketing efforts, continued growth at newer retail sales
offices, and increased custodial checking balances.
Other borrowings increased $29.6 million, or 29.0% from December 31, 1996 to
September 30, 1997. The increase was the result of increased use of FHLB
advances and Reverse Repurchase Agreements at advantageous rates to fund asset
growth.
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 September, 1997
was 7.56%. 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 current level of liquidity is substantially
higher than the minimum because several of the securities in the $92.9 million
multifamily securitization qualify as liquid assets even though the underlying
loans did not prior to the securitization.
The Corporation's primary source of funds currently is dividends from the Bank,
which are subject to restrictions imposed by federal bank regulatory agencies.
The Corporation's primary use of funds is for interest payments on its existing
debt. At September 30, 1997, the Corporation, excluding the Bank, had cash and
readily convertible investments of $2.0 million.
23
<PAGE> 24
Metropolitan's liquidity, represented by cash equivalents, is a result of its
operating, investing, and financing activities. These activities are summarized
as follows (In thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Net cash provided (used for) by
operating activities $ (13,560) $ (1,647)
Net cash used for investing
activities (82,732) (122,735)
Net cash provided by
financing activities 94,225 124,556
--------- ---------
Net change in cash and
cash equivalents (2,067) 174
Cash and cash equivalents
at beginning of period 16,522 18,170
--------- ---------
Cash and cash equivalents
at end of period $ 14,455 $ 18,344
========= =========
</TABLE>
Cash used by operating activities is determined largely by changes in the level
of loans held for sale. The level of loans held for sale depends on the level of
loan originations and the time until an investor funds the purchase of the loan
from the Bank.
Cash provided from investing activities consists primarily of principal payments
on loans and mortgage-backed securities. The level of these payments increases
and decreases depending on the size of the loan and mortgage-backed securities
portfolios and the general trend and level of interest rates, which influences
the level of refinancings and mortgage repayments. During the nine months ended
September 30, 1997 and 1996, net cash was used in investing activities,
primarily to fund and purchase new loans.
Cash provided from financing activities consists primarily of increased deposits
but also includes wholesale borrowings like FHLB advances and reverse repurchase
agreements.
At September 30, 1997, $76.9 million, or 11.2%, 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.
Metropolitan's total deposits also have increased due to the acceptance of
out-of-state time deposits from individuals and entities, predominantly credit
unions. Of the total certificate of deposit balance, $70.0 million, or 10.2% of
Metropolitan's total deposits were held by these individuals and entities. Of
that amount, $8.5 million were in the form of certificates of deposit of
$100,000 and over. These deposits typically have balances of $90,000 to
$100,000, a term of one year or more, and are not accepted through brokers.
24
<PAGE> 25
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 $89.0 million at September 30, 1997, of which $69.7 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 $117.0 million at September 30, 1997, of which $42.9 was utilized.
Capital. The Office of Thrift Supervision ("OTS") imposes capital requirements
on savings associations. Savings associations are required to meet three minimum
capital standards: (i) a leverage requirement, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. Such standards must be
no less stringent than those applicable to national banks. In addition, the OTS
is authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The Bank's regulatory capital ratios at September 30, 1997 were in excess of the
capital requirements specified by OTS regulations as shown by the following
table:
<TABLE>
<CAPTION>
Tangible Capital Core Capital Risk-based Capital
---------------- ------------ ------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital amount
Actual $46,504 5.42% $46,851 5.46% $50,858 8.63%
Required 12,862 1.50 34,313 4.00 47,146 8.00
------- ------- -------
Excess $33,642 3.92% $12,538 1.46% $ 3,712 0.63%
======= ======= =======
</TABLE>
Metropolitan anticipates that under the current regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future. The
Corporation maintains a $4.0 million line of credit with the Huntington National
Bank which it could access to make future contributions to the capital of the
Bank. At September 30, 1997, there was no outstanding balance under the line of
credit. However, events beyond the control of the Bank, such as increased
interest rates or a downturn in the economy, could adversely affect future
earnings and consequently, the ability of the Bank to meet its future capital
requirements.
ASSET/LIABILITY MANAGEMENT
Metropolitan, like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. The Bank's Asset and Liability Committee, which
includes representatives of senior management, monitors the level and relative
mix of its interest-earning assets and interest-bearing liabilities. The
principal strategy used by Metropolitan to manage interest rate risk has been to
build a portfolio of adjustable rate interest-earning assets.
25
<PAGE> 26
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 result in loans with
generally adjustable rates and shorter terms; (v) increasing the loan servicing
portfolio; (vi) emphasizing transaction account deposit products which are less
susceptible to repricing in a rising interest rate environment; (vii)
maintaining competitive pricing on longer term certificates of deposit; and
(viii) utilizing term advances and other borrowings rather than short-term
funds.
Presented below, as of September 30, 1997 and December 31, 1996, is an analysis
of Metropolitan's interest rate risk measured using Net Portfolio Value ("NPV")
methodology. Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning assets and outgoing cash flows
on interest-bearing and other liabilities. The table also contains the policy
limits set by the Board of Directors of the Bank established with consideration
of the dollar impact of various rate changes and the Bank's capital position.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
Changes in
Interest Rate Board Limit Change in % Change Change in % Change
(Basis Points) % Change NPV In NPV NPV In NPV
- -------------- ----------- --------- -------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 (65)% $(31,137) (49)% $(26,596) (44)%
+300 (45) (23,056) (36) (19,790) (33)
+200 (25) (14,861) (23) (12,853) (21)
+100 (15) (7,026) (11) (6,302) (10)
-100 (15) 5,893 9 6,294 10
-200 (25) 12,809 20 14,644 24
-300 (45) 21,999 34 26,402 44
-400 (65) 33,100 52 40,742 68
</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 interest rates earned on assets
because deposits generally have shorter periods to repricing. In addition, the
fixed rate assets in portfolio will only reprice as the loans are repaid and new
loans at higher rates are made. Furthermore, even for the adjustable rate
assets, repricing may lag behind the rate change due to contractual time frames.
At September 30, 1997 and December 31, 1996, the Bank was within the Board
established limits for various changes in interest rates and the Bank's level of
sensitivity to rising rates is relatively unchanged.
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
26
<PAGE> 27
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 June, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The purpose of reporting comprehensive income is to report
a measure of all changes in equity that result from recognized transactions and
other economic events of the period other than transactions with owners. This
Statement is effective for fiscal years beginning after December 15, 1997. The
Corporation expects SFAS No. 130 to have no effect on its financial position
other than changes in financial presentation classifications.
Also in June, 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
presentation of information about operating segments in financial statements
including interim financial statements to shareholders. Under SFAS No. 131,
financial information is to be reported on the basis that it is used internally
for evaluating segment performance and asset allocation. This Statement is
effective for fiscal years beginning after December 15, 1997. Similar to SFAS
No. 130, the Corporation expects SFAS No. 131 to have no effect on its financial
position other than changes in financial presentation classifications.
In March 1997, 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. SFAS No. 128 is effective for
financial statements for both interim and annual reports ending after December
15, 1997. The Corporation expects SFAS No. 128 to have no effect on its earnings
per share calculation, other than changing terminology.
Effective January 1, 1997, Metropolitan adopted the provisions of 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 extinguishments 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 extinguishments
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 the servicing
assets. Adoption of SFAS No. 125 has not materially effected the comparability
of results among years.
27
<PAGE> 28
PART II. OTHER INFORMATION
Items 1-5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of
Metropolitan Financial Corp. (filed as Exhibit 2 to
Metropolitan's Form 8-A filed October 15, 1996 and
incorporated herein by reference).
3.2 Amended and Restated Code of Regulations of Metropolitan
Financial Corp. (filed as Exhibit 3 to Metropolitan's Form
8-A filed October 15, 1996 and incorporated herein by
reference).
27 Financial Data Schedule(1)
b. Reports on Form 8-K - No reports on Form 8-K were filed by
Metropolitan during the first nine months of 1997.
(1) Filed only in electronic format pursuant to item 601(b)(27)
of Regulation S-K.
28
<PAGE> 29
METROPOLITAN FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROPOLITAN FINANCIAL CORP.
By: /s/ David G. Lodge
----------------------------
David G. Lodge,
President (principal financial
and accounting officer)
Date: November 14, 1997
29
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM METROPOLITAN FINANCIAL CORP. SEPTEMBER
30, 1997 FORM 10-Q, INCLUDING THE CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED
STATEMENTS OF OPERATIONS, CONSOLIDATED STATEMENTS OF
CASH FLOWS AND THE ACCOMPANYING NOTES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,906
<INT-BEARING-DEPOSITS> 2,549
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 165,490
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 646,490
<ALLOWANCE> 5,418
<TOTAL-ASSETS> 865,572
<DEPOSITS> 686,816
<SHORT-TERM> 65,569
<LIABILITIES-OTHER> 12,402
<LONG-TERM> 65,874
0
0
<COMMON> 0
<OTHER-SE> 34,911
<TOTAL-LIABILITIES-AND-EQUITY> 865,572
<INTEREST-LOAN> 45,014
<INTEREST-INVEST> 5,141
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 50,155
<INTEREST-DEPOSIT> 24,980
<INTEREST-EXPENSE> 30,211
<INTEREST-INCOME-NET> 19,944
<LOAN-LOSSES> 1,755
<SECURITIES-GAINS> 89
<EXPENSE-OTHER> 14,904
<INCOME-PRETAX> 6,313
<INCOME-PRE-EXTRAORDINARY> 6,313
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,993
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 3.45
<LOANS-NON> 2,660
<LOANS-PAST> 360
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,361
<ALLOWANCE-OPEN> 4,175
<CHARGE-OFFS> 517
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 5,418
<ALLOWANCE-DOMESTIC> 5,418
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
