<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
(Mark One)
[X] Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6001 Landerhaven Drive Mayfield Heights, Ohio 44124
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(440) 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.[X]
The aggregated market value of voting stock held by nonaffiliates of the
Registrant as of March 26, 1998 was $ 26,730,000.
As of March 26, 1998, there were 7,051,270 shares of the Registrant's Common
Stock issued and outstanding.
Documents incorporated by reference:
Portions of the 1997 Annual Report - Parts I and II Portions of the
Proxy Statement for the 1998 Annual Meeting - Part III
<PAGE> 2
METROPOLITAN FINANCIAL CORP.
1997 FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
<S> <C>
Item 1. Business....................................................................................... 3
Item 2. Properties....................................................................................
Item 3. Legal Proceedings.............................................................................
Item 4. Submission of Matters to a Vote of Security Holders...........................................
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.........................
Item 6. Selected Financial Data.......................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................
Item 8. Financial Statements and Supplementary Data................................................... 50
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure..........
PART III
Item 10. Directors and Executive Officers of the Registrant...........................................
Item 11. Executive Compensation........................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management................................
Item 13. Certain Relationships and Related Transactions................................................
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................
</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 and the
Bank.
The Bank is a state chartered stock savings association established in
1958. At December 31, 1997, the Bank operated fifteen full service retail
offices throughout Eastern Cuyahoga, Summit, Lake and Geauga Counties. As of
December 31, 1997, the Bank also maintained four residential and
multifamily/commercial real estate 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.
At December 31, 1997, Metropolitan had total assets of $925.0 million,
total deposits of $737.8 million and shareholders' equity of $36.7 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:
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 and commercial real estate. Metropolitan also
originates one- to four-family residential and construction 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,
------------------------------------------------------------------------------------
1997 1996 1995
------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family $146,685 19.2% $114,758 16.8% $ 76,259 15.0%
Multifamily 194,450 25.4 276,544 40.3 231,459 45.8
Commercial 166,593 21.8 135,635 19.8 109,403 21.5
Construction and land 116,829 15.3 71,697 10.5 48,210 9.5
Held for sale 14,230 1.8 8,973 1.3 1,504 0.2
------- ------ ------- ------ ------- -----
Total real estate loans 638,787 83.5 607,607 88.7 466,835 92.0
CONSUMER LOANS 68,590 9.0 54,180 7.9 32,214 6.3
BUSINESS AND OTHER LOANS 57,496 7.5 23,508 3.4 8,703 1.7
------- ------ ------- ------ ------- ------
Total loans 764,873 100.0% 685,295 100.0% 507,752 100.0%
====== ====== ======
LESS:
Loans in process 46,833 31,758 23,373
Deferred fees, premiums
and discounts, net 4,533 2,896 1,764
Allowance for losses on
loans 5,622 4,175 2, 765
-------- -------- --------
TOTAL LOANS RECEIVABLE, NET $707,885 $646,466 $479,850
======== ======== ========
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1994 1993
--------------------- ------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family $112,840 25.2% $ 39,510 12.7%
Multifamily 187,928 41.9 166,221 53.2
Commercial 83,354 18.6 54,819 17.5
Construction and land 38,270 8.5 30,894 9.9
Held for sale 84 0.0 10,391 3.3
------- ------ ------- ------
Total real estate loans 422,476 94.2 301,835 96.6
CONSUMER LOANS 25,946 5.8 10,687 3.4
BUSINESS AND OTHER LOANS 171 0.0 50 0.0
------- ------ ------- ------
Total loans 448,593 100.0% 312,572 100.0%
====== ======
LESS:
Loans in process 19,338 14,656
Deferred fees, premiums
and discounts, net 2,317 1,998
Allowance for losses on
loans 1,239
-------- --------
1,911
TOTAL LOANS RECEIVABLE, NET $425,027 $294,679
======== ========
</TABLE>
Metropolitan had commitments to originate or purchase fixed and variable
rate loans of $22.3 million and $49.4 million, respectively, at December 31,
1997. In addition, Metropolitan had firm commitments to sell fixed rate loans of
$2.2 million at December 31, 1997.
4
<PAGE> 5
The following table shows 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) by fixed and adjustable rates as of the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FIXED RATE LOANS:
Real estate:
One- to four-family $ 59,058 7.7% $ 41,436 6.1% $ 35,042 6.9%
Multifamily 60,136 7.9 88,529 12.9 71,909 14.2
Commercial 52,390 6.9 34,726 5.1 17,615 3.5
Construction and land 20,854 2.7 392 0.0 39 0.0
Held for sale 6,294 0.8 2,531 0.4 1,504 0.3
------- ---- ------- ---- ------- ----
Total fixed rate real estate loans 198,732 26.0 167,614 24.5 126,109 24.9
Consumer 61,307 8.0 46,725 6.8 32,214 6.3
Business and other 19,575 2.6 5,650 0.8 2,744 0.5
------- ---- ------- ---- ------- ----
Total fixed rate loans 279,614 36.6% 219,989 32.1% 161,067 31.7%
------- ==== ------- ==== ------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 87,627 11.5% 73,322 10.7% 41,217 8.1%
Multifamily 134,314 17.6 188,015 27.5 159,550 31.4
Commercial 114,203 14.9 100,909 14.7 91,788 18.1
Construction and land 95,975 12.5 71,305 10.4 48,171 9.5
Held for sale 7,936 1.0 6,442 0.9
------- ---- ------- ---- ------- ----
Total adjustable rate real estate
loans 440,055 57.5 439,993 64.2 340,726 67.1
Consumer 7,283 0.9 7,455 1.1
Business and other 37,921 5.0 17,858 2.6 5,959 1.2
------- ---- ------- ---- ------- ----
Total adjustable rate loans 485,259 63.4% 465,306 67.9% 346,685 68.3%
------- ==== ------- ==== ------- ====
LESS:
Loans in process 46,833 31,758 23,373
Deferred fees, premiums
and discounts, net 4,533 2,896 1,764
Allowance for losses on loans 5,622 4,175 2,765
TOTAL LOANS RECEIVABLE, NET $707,885 $646,466 $479,850
======= ======= =======
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1993
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
FIXED RATE LOANS:
Real estate:
One- to four-family $ 46,418 10.4% $ 20,448 6.5%
Multifamily 19,852 4.4 5,281 1.7
Commercial 7,948 1.8 8,325 2.7
Construction and land
Held for sale 84 0.0 10,391 3.3
------- ----- ------ -----
Total fixed rate real estate loans 74,302 16.6 44,445 14.2
Consumer 25,946 5.8 10,687 3.4
Business and other 20 0.0
------- ----- ------ -----
Total fixed rate loans 100,268 22.4% 55,132 17.6%
======= ==== ====== ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 66,422 14.8% 19,062 6.1%
Multifamily 168,076 37.5 160,940 51.5
Commercial 75,406 16.8 46,494 14.9
Construction and land 38,270 8.5 30,894 9.9
Held for sale
------- ----- ------ -----
Total adjustable rate real estate
loans 348,174 77.6 257,390 82.4
Consumer
Business and other 151 0.0 50 0.0
------- ----- ------ -----
Total adjustable rate loans 348,325 77.6% 257,440 82.4%
------- ===== ------ =====
LESS:
Loans in process 19,338 14,656
Deferred fees, premiums 1,998
and discounts, net 2,317
Allowance for losses on loans 1,911 1,239
TOTAL LOANS RECEIVABLE, NET $425,027 $294,679
======= =======
</TABLE>
5
<PAGE> 6
The following table illustrates the contractual maturity of Metropolitan's
loan portfolio, including loans held for sale at December 31, 1997. 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 YEAR OR LESS(1) DUE AFTER ONE YEAR DUE AFTER FIVE YEARS TOTAL
-------------------------- ------------------ -------------------- -----
THROUGH FIVE YEARS
------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
REAL ESTATE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to Four-family $ 248 7.94% $ 3,658 8.13% $147,332 7.41% $151,238 7.43%
Multifamily 23,410 8.97 49,291 8.85 121,749 8.36 194,450 8.56
Commercial 20,277 9.14 78,125 9.27 77,868 8.92 176,270 9.10
Construction and land 84,002 9.60 24,861 9.56 7,966 9.47 116,829 9.58
CONSUMER 8,560 13.76 20,568 9.77 39,462 11.09 68,590 11.03
BUSINESS 20,822 9.39 14,839 9.30 21,835 8.62 57,496 9.08
-------- -------- -------- -------- ----
Total $157,319 9.64% $191,342 $416,212 8.42% $764,873 8.88%
======== ======== ======== ========
(1) Includes demand loans, loans having no stated maturity and overdraft loans
of $0.6 million.
</TABLE>
The total amount of loans due after December 31, 1998 which have
predetermined interest rates is $228.1 million, while the total amount of loans
due after such date which have floating or adjustable rates is $379.5 million.
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. This was accomplished by increasing origination capacity and
emphasizing purchases. The following table sets forth loan origination,
purchase, sale and repayment activities of Metropolitan for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to four-family $ 28,017 $ 56,519 $ 22,503
Multifamily 12,600 20,669 24,542
Commercial 29,304 14,667 5,919
Construction and land 77,062 60,566 41,559
Consumer 12,719 10,062
Business 27,058 18,536 6,814
--------- --------- ---------
Total adjustable rate 186,760 181,019 101,337
--------- --------- ---------
FIXED RATE:
Real Estate:
One- to four-family 53,712 44,795 24,230
Multifamily 9,490 15,759 13,957
Commercial 1,300 4,400
Construction and land 25,333 328 37
Consumer 17,598 17,242 15,048
Business 15,003 4,249 2,915
--------- --------- ---------
Total fixed rate 122,436 82,373 60,587
--------- --------- ---------
Total loans originated 309,196 263,392 161,924
--------- --------- ---------
PURCHASES BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to four-family 90 1,835
Multifamily 19,433 45,184 3,694
Commercial 22,541 16,905 13,939
Construction and land 347
Consumer 5,342
Business
--------- --------- ---------
Total adjustable rate 42,411 69,356 17,633
--------- --------- ---------
FIXED RATE:
Real Estate:
One- to four-family 1,125 19,381
Multifamily 23,195 22,971 50,420
Commercial 46,729 21,296 15,879
Construction and land 1,975
Consumer 16,900 12,224 387
Business
--------- --------- ---------
Total fixed rate 88 ,799 57 ,616 86,067
--------- --------- ---------
Total loans purchased 131,210 126,972 103,700
--------- --------- ---------
SALES:
Real Estate:
One- to four-family (34,887) (36,392) (35,770)
Multifamily (9,678) (11,359) (27,094)
Commercial (20,782) (7,808) (1,835)
Construction and land (600)
--------- --------- ---------
Total loan sales (65,947) (55,739) (64,699)
--------- --------- ---------
Loans securitized (98,325) (14,476) (53,795)
Principal repayments (196,556) (142,606) (87,972)
--------- --------- ---------
Total reductions (360,828) (212,821) (206,466)
--------- --------- ---------
Increase (decrease) in other items, net (18,159) (10,927) (4,336)
--------- --------- ---------
NET INCREASE $ 61,419 $ 166,616 $ 54,822
========= ========= =========
</TABLE>
7
<PAGE> 8
Multifamily Residential Lending. Metropolitan places a major portfolio
lending effort 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, Kentucky, Michigan,
Pennsylvania, and 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, 1997, Metropolitan's multifamily loans totalled $194.5
million, with an average loan size of approximately $543,000. Of this amount,
$89.7 million or 46.1% were originated by Metropolitan. Currently, Metropolitan
emphasizes the origination of ARMs with principal amounts of $2.0 to $6.0
million and balloon maturities of 10 years. The loans are adjustable on a one-,
three- or five-year schedule with amortization periods 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 secured by 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 staff independent of the lending department. 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 typically range from a ratio of 1.15:1 to 1.30:1. In order to factor
in the adjustable rate of the multifamily loans, the debt service coverage is
calculated based on the maximum interest rate of the loan.
At December 31, 1997, $104.8 million or 53.9% 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. In some cases, when Metropolitan
considers the purchase of a portfolio with a considerable number of moderate
balance loans, an independent contract inspector may be utilized for property
inspections. Real estate located in Ohio secures 52.8% of Metropolitan's
multifamily residential loan portfolio. Underlying real estate for the remaining
loans is primarily located in California, Michigan, Pennsylvania and New Jersey.
Commercial Real Estate Lending. Although Metropolitan has always held
an 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, 1997, Metropolitan's loans secured by commercial real estate
totalled $166.6 million or 21.8% of Metropolitan's total portfolio, with an
average loan size of $677,000. Of this amount, $51.6 million or 31.0% was
originated by Metropolitan and $115.0 million or 69.0% represented loans
purchased from a variety of sources, predominantly other financial institutions.
The $115.0 million of purchased commercial real estate loans were acquired by
Metropolitan since 1992.
Loans secured by commercial real estate are purchased by Metropolitan
generally 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. In 1997,
Metropolitan began to introduce more geographic diversity into the portfolio
based on its desire to acquire seasoned loans. Management believes a certain
amount of geographic diversity is important to maintaining good asset quality.
Metropolitan recognizes that commercial real estate loans generally
involve a higher degree of risk than the financing of one- to four-family
residential real estate because these loans typically involve larger loan
balances to single borrowers or groups of related borrowers. The payment
experience on these loans is typically dependent upon the successful operation
of the related real estate project and is subject to certain risks including
excessive vacancy brought on by tenant turnover and inadequate rental income
levels. In addition,
8
<PAGE> 9
the profitability of the business operating in the property may affect the
borrower's ability to make timely payments. In order to manage and reduce these
risks, Metropolitan focuses its lending on existing properties with a record of
satisfactory performance and targets retail strip centers and office buildings
with multiple tenants.
Metropolitan originates commercial real estate loans secured by strip
shopping centers and small office buildings to a much lesser extent than it
purchases commercial real estate loans. Through customer referrals and real
estate brokers, Metropolitan lends on commercial real estate in Ohio,
Pennsylvania, Northern Kentucky, and Southeastern Michigan. These loans are ten
year balloon loans adjustable on a one-, three- or five-year schedule with
amortization of 25 years at a margin over the appropriate term U.S. Treasury
securities. The maximum loan to value ratio is 75%.
9
<PAGE> 10
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, 1997:
<TABLE>
<CAPTION>
NUMBER
OF LOANS PERCENT PRINCIPAL PERCENT
-------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Ohio:
Apartments 157 26.0% $102,668 28.4%
Office buildings 43 7.1 20,042 5.6
Retail centers 24 4.0 18,950 5.2
Other 32 5.3 9,994 2.8
--- ----- -------- -----
Total 256 42.4 151,654 42.0
--- ----- -------- -----
California:
Apartments 76 12.6 41,616 11.6
Office buildings 9 1.5 6,635 1.8
Retail centers 17 2.8 11,141 3.1
Other 10 1.6 5,874 1.6
--- ----- -------- -----
Total 112 18.5 65,266 18.1
--- ----- -------- -----
Pennsylvania:
Apartments 32 5.3 4,683 1.3
Office buildings 1 0.2 82
Retail centers 5 0.8 10,531 2.9
Other 5 0.8 1,540 0.4
--- ----- -------- -----
Total 43 7.1 16,836 4.6
--- ----- -------- -----
Michigan:
Apartments 3 0.5 6,227 1.7
Office buildings 6 1.0 6,844 1.9
Retail centers 7 1.2 9,291 2.6
Other 2 0.3 6,913 1.9
--- ----- -------- -----
Total 18 3.0 29,275 8.1
--- ----- -------- -----
Other states(1):
Apartments 90 14.9 39,256 10.9
Office buildings 25 4.1 22,988 6.4
Retail centers 23 3.8 20,292 5.6
Other 37 6.2 15,476 4.3
--- ----- -------- -----
Total 175 29.0 98,012 27.2
--- ----- -------- -----
604 100.0% $361,043 100.0%
=== ===== ======== =====
</TABLE>
(1) Properties securing loans in other states are located in 26 other states,
none of which exceed 5.0% of the outstanding principal balance of the total
multifamily and commercial real estate portfolio.
The following table presents aggregate information as to the type of
security as of December 31, 1997:
<TABLE>
<CAPTION>
AVERAGE
NUMBER BALANCE
OF LOANS PER LOAN PRINCIPAL PERCENT
-------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Apartments 358 $543 $194,450 53.9%
Office buildings 84 674 56,591 15.7
Retail centers 76 924 70,205 19.4
Other 86 463 39,797 11.0
---- -------- -----
Total 604 $598 $361,043 100.0%
==== ======== =====
</TABLE>
10
<PAGE> 11
One- to Four-family Residential Lending. In 1997, approximately 41.6%
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, 1997,
Metropolitan's one- to four-family residential mortgages totalled $146.7 million
or 19.2% 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 borrowers 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, 1997, Metropolitan's fixed rate
residential mortgage loan portfolio totalled $59.1 million, or 7.7% 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, 1997, $19.5 million, or 13.3% 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.
Construction Lending and Land Development. Metropolitan originates
construction loans on single family homes to local builders 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
Northeastern Ohio, primarily in the counties of Cuyahoga, Lake, Geauga, Summit,
Medina, Portage, and Lorain. 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.
11
<PAGE> 12
The following table presents the number, amount, and type of properties
securing Metropolitan's construction and land development loans at December 31,
1997:
<TABLE>
<CAPTION>
NUMBER OF LOANS PRINCIPAL BALANCE
--------------- -----------------
(Dollars in thousands)
RESIDENTIAL CONSTRUCTION LOANS:
<S> <C> <C>
Owner-occupied 33 $ 12,003
Builder presold 43 6,502
Builder spec/model 128 25,736
Allocated construction loans 28 24,579
Lot loans 46 5,284
Development loans 23 16,168
--- --------
Total residential construction loans 301 90,272
NONRESIDENTIAL CONSTRUCTION LOANS:
Multifamily 1 5,000
Commercial 2 10,200
--- --------
Total nonresidential construction loans 3 15,200
LAND LOANS 14 11,357
--- --------
Total 318 $116,829
=== ========
</TABLE>
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 independent 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 (6 to 24 months) and are made with an adjustable
rate of interest. Owner-occupied loans are generally fixed rate. These loans
increase the yield on, and the proportion of interest rate sensitive loans in,
Metropolitan's portfolio.
Allocated construction loans or lines of credit 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.
Metropolitan also originates construction loans on multifamily and
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 multifamily residential and
commercial real estate loans described above. The two commercial real estate
construction loans are rehabilitation projects with existing tenants ensuring
satisfactory cash flow.
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, 1997, $58.2
million or 84.9% of Metropolitan's $68.6 million consumer loan portfolio was
secured. However, even in the case of secured loans, repossessed collateral for
12
<PAGE> 13
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 in the event of default.
In order to supplement the growth in the consumer loan portfolio,
Metropolitan has been purchasing loans through correspondent lenders and bulk
portfolios offered for sale. At December 31, 1997, $22.8 million, or 33.3% of
the outstanding balance of consumer loans was purchased. These loans are
generally secured by second mortgages on one- to four-family homes, automobiles,
or manufactured housing. In 1997, Metropolitan acquired two packages of subprime
loans totalling $6.3 million (loans where the borrower's credit rating is below
an A grade). These loans require more intensive collection techniques; however,
the yield is significantly higher to cover these incremental costs.
At December 31, 1997, Metropolitan's credit card portfolio had an
outstanding balance of $7.3 million with $22.7 million in unused credit lines.
Of the outstanding balance, $2.6 million related to cards originated by
Metropolitan and $4.7 million related to credit card relationships purchased by
Metropolitan.
Business Lending. Metropolitan began offering business loans in 1994.
At December 31, 1997, Metropolitan had $57.5 million of business loans
outstanding, or 7.5% of Metropolitan's total loan portfolio, against available
lines on existing business loans totalling $73.0 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. These loans are generally adjustable interest rates at some margin over
the prime interest rate and some may be guaranteed by the Small Business
Administration.
The following table sets forth information regarding the number and
amount of Metropolitan's business loans as of December 31, 1997:
<TABLE>
<CAPTION>
TOTAL
NUMBER LOAN OUTSTANDING
OF LOANS COMMITMENT PRINCIPAL BALANCE
-------- ---------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
LOANS SECURED BY:
Accounts receivable, inventory and equipment 194 $39,025 $28,705
Second lien on real estate 36 6,977 5,805
First lien on real estate 35 23,064 19,915
Specific equipment and machinery 25 1,843 1,843
Titled vehicles 31 705 705
Stocks and bonds 5 227 77
Certificates of deposit 3 196 110
UNSECURED LOANS 18 1,011 336
--- ------- -------
Total 347 $73,048 $57,496
=== ======= =======
</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, as
well as creating mortgage-backed securities, with 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.
13
<PAGE> 14
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 one- to four-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.
During the third quarter of 1997, Metropolitan completed the
securitization of $93.0 million of multifamily loans with FNMA under a newly
developed program which uses insurance to provide the credit enhancement
necessary to achieve a AAA rating. The loans are serviced as mortgage-backed
securities for FNMA. Up to this point, Metropolitan has retained ownership of
the securities in that portfolio. 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.
Metropolitan also sells whole loans or participations in multifamily
and commercial real estate loans to private investors and retains the right to
service the loans. 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. During 1997, Metropolitan sold $9.9 million of multifamily and
commercial real estate participations. The Bank may seek out a participant when
a loan would otherwise exceed the loan-to-one borrower limit. Other loans have
been sold to manage geographic concentration or interest rate risk. In addition,
Metropolitan sells multifamily and commercial real estate loans that were
purchased under a loan option program. See "--Loan Option Income."
LOAN SERVICING ACTIVITIES
At December 31, 1997, Metropolitan's overall servicing portfolio was $1.6
billion. Of that amount, loans serviced for others totalled $1.2 billion. The
following table summarizes the portfolio by investor and source:
<TABLE>
<CAPTION>
ORIGINATED PURCHASED PORTFOLIO
SERVICING SERVICING SERVICING TOTAL
--------- --------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to Four-family:
Metropolitan portfolio $138,099 $ 138,099
FHLMC $178,751 $469,465 648,216
FNMA 55,974 321,013 376,987
Private investors 10,050 10,050
-------- -------- -------- ----------
Total One- to Four-family 234,725 800,528 138,099 1,173,352
-------- -------- -------- ----------
Multifamily and Commercial:
Metropolitan portfolio 303,961 303,961
FHLMC 4,925 3,676 8,601
FNMA 107,057 23,340 130,397
Private investors 13,339 2,705 16,044
-------- -------- -------- ----------
Total Multifamily and Commercial 125,321 29,721 303,961 459,003
-------- -------- -------- ----------
Total $360,046 $830,249 $442,060 $1,632,355
======== ======== ======== ==========
</TABLE>
Metropolitan generally services the loans that it originates. When
Metropolitan sells loans to an investor, such as FHLMC or FNMA, it generally
retains the servicing rights for the loans. Servicing fee income is generated
from the loans sold to investors. In order
14
<PAGE> 15
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, 1997, Metropolitan's purchased servicing portfolio
was $830.2 million and the related balance of purchased mortgage servicing
rights was $7.7 million.
Approximately 72.9% 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 at various
percentages 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 an 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, 1997, there were no loans held for sale in
connection with outstanding options and $320,000 has been recognized in income
in connection with these loan options during the year then ended.
BRIDGE LOAN ACTIVITY
During 1997, Metropolitan developed a program to underwrite and fund
bridge loans to take advantage of its underwriting capabilities and increase
net interest income. For these loans, Metropolitan assesses debt service
capacity and underlying collateral value as it would for multifamily or other
commercial real estate loans. Bridge loans have a shorter term to maturity
(generally 6 to 24 months) than the typical ten-year multifamily residential
and commercial real estate portfolio loans. Metropolitan collects a fee at
origination which is deferred and recognized in interest income over the term
of the loan. As a result of the comparatively short term to maturity of these
loans, the borrowers must refinance the underlying properties sooner than is
the case with longer term, permanent loans, which adds a potential element of
risk. In all cases, these loans are adequately secured by real property. During
1997, Metropolitan originated seven of these loans totalling $15.9 million and
recognized origination fees of $515,000 in net interest income.
LOAN DELINQUENCIES AND NONPERFORMING 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 collection efforts, repossession and sale of
consumer collateral are subject to various requirements under state and federal
consumer protection laws.
15
<PAGE> 16
The following table sets forth information concerning delinquent loans
at December 31, 1997, 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 OF PERCENT OF PERCENT OF
NUMBER AMOUNT LOAN CATEGORY NUMBER AMOUNT LOAN CATEGORY NUMBER AMOUNT LOAN CATEGORY
------ ------ ------------- ------ ------ ------------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
One- to four-family 6 $ 460 0.31% 5 $ 792 0.53% 11 $1,252 0.84%
Multifamily
Commercial 3 198 0.11 3 198 0.11
Construction and land
Consumer 83 821 1.20 324 1,946 2.84 407 2,767 4.04
Business 1 239 0.42 6 211 0.37 7 450 0.79
-- ------ --- ------ --- ------
Total 90 $1,520 0.20% 338 $3,147 0.41% 428 $4,667 0.61%
== ====== === ====== === ======
</TABLE>
16
<PAGE> 17
Nonperforming assets include all nonaccrual loans, loans past due
greater than 90 days still accruing and real estate owned. Interest is not
accrued on loans contractually past due 90 days or more as to interest or
principal payments 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 nonaccrual status, interest accruals are
discontinued and prior accruals are reversed. The classification of a loan on
nonaccrual 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 nonaccrual 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,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans
One-to four-family $ 792 $ 950 $ 293 $ 337 $ 475
Multifamily 871 2,138 1,585 549
Commercial real estate 198 2,032 391 150 691
Construction and land development 15 15 1,051
Consumer 1,562 802 266 153 53
Business 211 268
------ ------ ------ ------ ------
Total nonaccruing loans 2,763 4,923 3,103 2,240 2,819
Loans past due greater than 90
days still accruing 384 271 204 128 277
------ ------ ------ ------ ------
Total nonperforming loans 3,147 5,194 3,307 2,368 3,096
Real estate owned 2,037 177 258 53 941
------ ------ ------ ------ ------
Total nonperforming assets $5,184 $5,371 $3,565 $2,421 $4,037
====== ====== ====== ====== ======
Nonperforming loans to total loans 0.44% 0.80% 0.69% 0.55% 1.08%
Nonperforming assets to total
assets 0.56% 0.70% 0.60% 0.51% 1.08%
</TABLE>
For the years ended December 31, 1997 and 1996, gross interest income
which would have been recorded had the nonaccruing loans been current in
accordance with their original terms amounted to $151,000 and $439,000,
respectively. The amounts that were included in interest income on such loans
were $132,000 and $85,000 for the years ended 1997 and 1996, respectively.
Nonperforming assets were $5.2 million at December 31, 1997, a
decrease of $0.2 million from $5.4 million at December 31, 1996. During the same
period, total net loans receivable increased $64.1 million to $707.9 million at
December 31, 1997. Also during 1997, nonaccrual loans decreased $2.2 million to
$2.8 million, while at the same time, real estate owned increased $1.9 million
to $2.0 million. This reflects the progression of nonperforming loans at
December 31, 1996 to real estate owned during 1997. Two properties accounted for
the majority of this increase, a strip shopping center in the Philadelphia,
Pennsylvania area valued at $1.0 million and a commercial condominium warehouse
near Chicago, Illinois valued at $0.5 million. Metropolitan is actively
marketing both properties through local real estate agents and no losses are
expected. At December 31, 1997, all loans classified by management as impaired
were included in nonperforming loans.
Nonperforming consumer loans increased to $1.6 million in 1997 due in
part to the acquisition of subprime consumer loans. These loans are secured by
manufactured housing or are unsecured. The yield on this portfolio is
substantially higher to compensate for the increased costs of collection and the
cost to carry nonperforming loans. Management expects a higher level of
nonperforming consumer loans to continue due to this portfolio.
At December 31, 1997, Metropolitan had potential problem loans
totalling $4.9 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 development involving each loan
which, if not corrected, could result in the loan changing to nonaccrual status
and/or a loss
17
<PAGE> 18
being incurred. Metropolitan is in contact with these borrowers and monitors
their status closely. The largest loan in that category was a $4.0 million
participation in a $9.0 million loan secured by a water park in Southern
California. The loan was 30 days past due at December 31, 1997 and the borrower
is in the process of refinancing the loan and obtaining additional working
capital. If the borrower does not refinance this property with another lender,
then the borrower's ability to repay the loan will be contingent on the
operating success of the park during 1998, its first full year of operation.
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.
18
<PAGE> 19
The following table sets forth an allocation of the allowance for
losses on loans among categories as of the dates indicated based on Management's
estimate of possible losses that are currently anticipated based largely on past
loss experience. Since the factors influencing such estimates are subject to
change over time, management believes that any allocation of the allowance for
losses on loans into specific categories lends an appearance of precision which
does not exist. In practice, the allowance is utilized as a single unallocated
allowance available for all loans. The allowance can also be reallocated among
different loan categories if actual losses differ from expected losses and based
upon changes in management's expectation of future losses. The following
allocation table should not be interpreted as an indication of the actual
amounts or the relative proportion of future charges to the allowance.
<TABLE>
<CAPTION>
1997 1996 1995 1994
---- ---- --- ----
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
EACH EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family $ 237 19.8% $ 228 17.1% $ 172 15.2% $ 189 25.2%
Multifamily 482 25.4 1,020 40.8 887 45.8 733 41.9
Commercial real
estate 1,400 23.0 937 20.3 676 21.5 358 18.6
Construction and
land 353 15.3 193 10.5 167 9.5 99 8.5
Consumer 2,132 9.0 1,182 7.9 512 6.3 340 5.8
Business 456 7.5 197 3.4 74 1.7 1
Unallocated 562 418 277 191
-------- ----- ------------ ----- -------- ----- -------- -----
Total $ 5,622 100.0% $ 4,175 100.0% $ 2,765 100.0% $ 1,911 100.0%
======== ===== ============ ===== ======== ===== ======== =====
<CAPTION>
1993
----
PERCENT OF
EACH
CATEGORY TO
AMOUNT TOTAL LOANS
------ -----------
<S> <C> <C>
One-to four-family $ 93 16.0%
Multifamily 494
53.2
Commercial real
estate 314
17.5
Construction and
land 90
9.9
Consumer 124
3.4
Business
Unallocated 124
-------- -----
Total $ 1,239 100.0%
======== =====
</TABLE>
19
<PAGE> 20
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.
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,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD
$4,175 $2,765 $1,911 $1,239 $ 725
Charge-offs:
One- to four-family 32 22 23 23 50
Multifamily 494 119 64 100
Commercial real estate 27 74
Construction and land
Consumer 363 95 56 14 5
Business 10
------ ------ ------ ------ ------
Total charge-offs 899 236 106 101 229
------ ------ ------ ------ ------
Recoveries:
One- to four-family 1 1 3
Multifamily 6
Commercial real estate
Construction and land
Consumer 6 11
Business
------ ------ ------ ------ ------
Total recoveries 6 11 1 7 3
------ ------ ------ ------ ------
Net charge-offs 893 225 105 94 226
Provision for loan losses 2,340 1,635 959 766 740
------ ------ ------ ------ ------
BALANCE AT END OF PERIOD $5,622 $4,175 $2,765 $1,911 $1,239
====== ====== ====== ====== ======
Net charge-offs to average
loans 0.13% 0.04% 0.02% 0.03% 0.09%
Provision for loan losses to
average loans 0.35% 0.28% 0.21% 0.21% 0.29%
Allowance for losses on loans
to total non-performing loans 178.60% 77.73% 83.61% 80.70% 40.02%
at end of period
Allowance for losses on loans
to total loans at end of period 0.79% 0.64% 0.57% 0.45% 0.43%
</TABLE>
20
<PAGE> 21
INVESTMENT PORTFOLIO
Metropolitan maintains its investment portfolio in accordance with
policies adopted by the Board of Directors that consider the regulatory
requirements and restrictions which dictate the type of securities that 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, management anticipates 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,
----------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
SECURITIES :
<S> <C> <C> <C>
Mutual funds $ 1,706 $ 2,009 $10,364
Tax-exempt bond 4,740
U.S. Treasury securities 6,065 12,442
FNMA preferred stock 5,100
FHLB stock 5,350 3,989 3,569
------ ------ ------
Total $11,796 $17,163 $26,375
======= ======= =======
OTHER INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks $1,961 $2,745 $4,788
Term repurchase agreements 6,397 6,000
------ ------ ------
Total $8,358 $8,745 $4,788
====== ====== ======
</TABLE>
The following table sets forth the contractual maturities and
approximate weighted average yields of Metropolitan's securities at December 31,
1997.
<TABLE>
<CAPTION>
DUE IN
----------------------------------------------------
ONE YEAR OR LESS MORE THAN TEN YEARS TOTAL
(Dollars in thousands)
<S> <C> <C> <C>
Mutual Funds $1,706 $1,706
Tax-exempt bond $4,740 4,740
FHLB stock 5,350 5,350
------ ------ -------
Total $7,056 $4,740 $11,796
====== ====== =======
Weighted average yield 6.86% 7.75% 7.22%
</TABLE>
MORTGAGE-BACKED SECURITIES PORTFOLIO
The following table sets forth Metropolitan's mortgage-backed
securities portfolio at the dates indicated. All mortgage-backed securities are
classified as available for sale.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FNMA pass-through certificates $97,146 $19,775 $22,549
GNMA pass-through certificates 8,037 9,700 11,348
FHLMC participation certificates 37,714 26,713 4,715
Other 270 484 543
-------- ------- -------
Total $143,167 $56,672 $39,155
======== ======= =======
</TABLE>
21
<PAGE> 22
The following table sets forth the contractual maturities and approximate
weighted average yields of Metropolitan's mortgage-backed securities at December
31, 1997.
<TABLE>
<CAPTION>
DUE IN
---------------------------------------------------------
ONE YEAR TO
FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS TOTAL
(Dollars in thousands)
<S> <C> <C> <C> <C>
FNMA pass-through certificates $ 9,880 $78,420 $ 8,846 $ 97,146
GNMA pass-through certificates 108 7 7,922 8,037
FHLMC participation certificates 19,274 18,440 37,714
Other 270 270
Total available for sale $29,262 $78,427 $35,478 $143,167
Weighted average yield 7.00% 7.30% 7.09% 7.18%
</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 for consumers. 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.
In connection with loan servicing activities, Metropolitan maintains
custodial checking accounts for principal and interest payments collected for
investors monthly and for tax and insurance escrow balances. This remains a
recurring but relatively short-term source of funds for the Bank given the level
of loans serviced for others.
Metropolitan offers a commercial checking account that is noninterest
bearing and is assessed monthly service charges based upon transaction activity
levels.
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 generally bear the highest
interest rates of any 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.
Metropolitan has from time to time accepted certificates of deposit from
out-of-state 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, 1997,
approximately $57.7 million of certificates of deposits, or 12.1% of
Metropolitan's certificate of deposit accounts, were held by these individuals
and entities.
Individual Retirement Accounts ("IRA"). Metropolitan offers IRAs. Funds may
be invested in a passbook account or any certificate of deposit offered by
Metropolitan.
22
<PAGE> 23
The following table sets forth information regarding trends in
Metropolitan's average deposits for the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1997 1996
----------------------------------- -------------------------------------
(Dollars in thousands)
Average Percent of Average Percent of
Amount Total Rate Paid Amount Total Rate Paid
------ ----- --------- ------ ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits(1) $ 38,837 5.8% $ 31,248 5.5%
Interest bearing deposits:
Demand deposits 39,965 5.9 2.66% 36,273 6.4 2.64%
Savings deposits 170,362 25.2 4.56% 169,866 30.2 4.79%
Time deposits 426,450 63.1 5.93% 325,960 57.9 5.83%
------- ------ ------- ------
Total interest-bearing deposits 636,777 94.2 5.36% 532,099 94.5 4.97%
------- ------ ------- ------
Total average deposits $675,614 100.0% $563,347 100.0%
======= ===== ======= =====
<CAPTION>
DECEMBER 31,
--------------------------------------
1995
--------------------------------------
Average Percent of
Amount Total Rate Paid
------ ----- ---------
<S> <C> <C> <C>
Noninterest-bearing demand deposits(1) $ 24,636 5.3%
Interest bearing deposits:
Demand deposits 37,695 8.1 2.57%
Savings deposits 118,475 25.5 4.76%
Time deposits 283,186 61.1 5.98%
------- ------
Total interest-bearing deposits 439,356 94.7 5.07%
------- ------
Total average deposits $463,992 100.0%
======= =====
</TABLE>
(1) Includes principal and interest custodial accounts and taxes and insurance
custodial accounts for loans serviced for FHLMC, FNMA and private
investors.
23
<PAGE> 24
Deposits increased 18.6% to $737.8 million at December 31, 1997 consistent
with the overall growth of the Bank. The growth was primarily in time deposits
which increased 27.3% to $478.0 million. During the same period, the Bank
experienced overall growth in other types of savings accounts.
The following table shows rate and maturity information for Metropolitan's
certificates of deposit as of December 31, 1997.
<TABLE>
<CAPTION>
2.00-4.99% 5.00-6.99% 7.00-8.99% TOTAL PERCENT OF TOTAL
---------- ---------- ---------- ----- ----------------
(Dollars in thousands)
CERTIFICATE ACCOUNTS MATURING IN
QUARTER ENDING:
<S> <C> <C> <C> <C> <C>
March 31, 1998 $4,910 $105,548 $ 1,650 $112,108 23.5%
June 30, 1998 138 100,797 335 101,270 21.2
September 30, 1998 11 52,568 52,579 11.0
December 31, 1998 17 49,763 50 49,830 10.4
March 31, 1999 54 65,906 478 66,438 13.9
June 30, 1999 21 35,829 71 35,921 7.5
September 30, 1999 4,679 4,679 1.0
December 31, 1999 23,678 1,552 25,230 5.3
March 31, 2000 1,999 4,996 6,995 1.5
June 30, 2000 4,512 27 4,539 0.9
September 30, 2000 803 7,916 8,719 1.8
December 31, 2000 2,312 1,121 3,433 0.7
Thereafter 5,402 882 6,284 1.3
------ -------- ------- -------- -----
Total $5,151 $453,796 $19,078 $478,025 100.0%
====== ======== ======= ======== =====
Percent of total 1.1% 94.9% 4.0% 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, 1997
-----------------
(Dollars in thousands)
<S> <C>
Three months or less $18,142
Over three through six months 16,197
Over six through twelve months 18,210
Over twelve months 34,335
-------
Total $86,884
=======
</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 by 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 repaid
24
<PAGE> 25
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, 1997, the outstanding balance under the Huntington Loan
Agreement was $1.5 million.
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 FHLB advances at
December 31, 1997 was $147.0 million.
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, 1997 was $77.8 million.
The following table sets forth the maximum month-end balance of
borrowings during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
---------------- --------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MAXIMUM MONTH-END BALANCE:
FHLB advances $73,700 $75,150 $51,000
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 14,000
Line of credit 4,000 5,000
Reverse repurchase agreements 74,496 23,500 9,000
</TABLE>
25
<PAGE> 26
The following table sets forth the average balance during the periods indicated,
end of period balances at the date indicated, and interest rates during the
period then ended.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
---------------- --------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
AVERAGE BALANCE:
FHLB advances $59,325 $50,546 $28,467
Term Loan 485
Qualifying Subordinated Debt 923
1993 subordinated notes 4,874 4,874 4,874
1995 subordinated notes 14,000 14,000 690
Line of credit 114 3,834
Reverse repurchase agreements 38,843 4,480 7,591
ENDING BALANCE:
FHLB advances $41,000 $59,500 $28,000
Term loan
Qualifying subordinated debt
1993 subordinated notes 4,874 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 1,500
Reverse repurchase agreements 74,496 23,500
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances 5.65% 5.43% 6.18%
Term Loan 8.79
Qualifying Subordinated Debt 11.78
1993 subordinated notes 10.47 10.47 10.47
1995 subordinated notes 10.48 10.48 10.48
Line of credit 8.98 8.67
Reverse repurchase agreements 5.73 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.
26
<PAGE> 27
EMPLOYEES
At December 31, 1997, Metropolitan had a total of 281 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.
ADDITIONAL INFORMATION INCORPORATED BY REFERENCE
Additional information required by Guide 3 is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Five Year Summary of Selected Data of the Annual Report.
REGULATION AND SUPERVISION
INTRODUCTION
Metropolitan is 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 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, without 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 manner 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
27
<PAGE> 28
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.
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 Deposit Insurance Funds Act of 1996
(the "Funds Act") which included provisions designed to recapitalize the SAIF
and to mitigate the BIF/SAIF premium disparity. The Funds Act 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 Funds Act 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 for 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 Funds Act requires the merger of the BIF and SAIF
into a single insurance fund no later than January 1, 1999 if there are no
savings associations at that date. 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.
28
<PAGE> 29
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.
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.
29
<PAGE> 30
At December 31, 1997, the Bank complied with each of the tangible
capital, the core capital and the risk-based capital requirements. The following
table presents the Bank's regulatory capital position at December 31, 1997.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT REGULATORY ASSETS(1)
------ -------------------
(Dollars in thousands)
<S> <C> <C>
Tangible capital $49,901 5.43%
Tangible capital requirement 13,777 1.50
------- ----
Excess $36,124 3.93%
======= ====
Core capital $50,215 5.47%
Core capital requirement(2) 36,738 4.00
------- ----
Excess $13,477 1.47%
======= ====
Risk-based capital $54,343 8.39%
Risk-based capital requirement 51,836 8.00
------- ----
Excess $ 2,507 0.39%
======= ====
</TABLE>
(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).
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 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 Regional Director not less than thirty days' advance notice of any
proposed declaration of a dividend on the association's stock. Any dividend
declared within the notice period, or without giving the prescribed notice, is
invalid.
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
30
<PAGE> 31
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 association'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 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
4% of the ending or average daily balance of deposit accounts with maturities
less than a year 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. Monetary
penalties may be imposed for failure to meet liquidity ratio requirements. At
December 31, 1997, the liquidity ratio of the Bank was 14.6%, which exceeded the
applicable requirement.
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
31
<PAGE> 32
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 and capital regulations of the Bank Holding Company Act.
The Bank's qualified thrift investments were in excess of 69.2% of its
portfolio assets as of December 31, 1997.
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 institution'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 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.
32
<PAGE> 33
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. 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. 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 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
33
<PAGE> 34
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 fifteen branch locations, seven of which
are leased under long-term lease agreements with various parties. The other
eight branches, located in Cleveland, Euclid, Willoughby Hills, Mayfield
Heights, Macedonia, Cleveland Heights, Hudson, and Aurora, are owned by
Metropolitan. In addition, Metropolitan owns land in Twinsburg, Auburn, Stow,
and Medina, and land and a building in Willoughby, as planned sites for future
full service retail offices. The Bank also leases office space for its loan
production offices in Detroit, Cincinnati, North Olmsted, and Pittsburgh.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the shareholders of the
Corporation during the fourth quarter of the fiscal year covered by this
Report, through the solicitation of proxies or otherwise.
34
<PAGE> 35
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
35
<PAGE> 1
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 noninterest income, such as loan servicing fees,
service charges on deposit accounts, 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, 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. Nonaccruing loans are
considered in average loan balances. The average balance of mortgage-backed
securities and securities are presented at historical cost.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable............... $673,809 $61,230 9.09% $574,502 $50,268 8.75% $458,423 $39,963 8.72%
Mortgage-backed securities
available for sale........... 101,160 6,947 6.87 43,734 2,890 6.61 39,342 2,493 6.34
Other.......................... 18,923 1,169 6.18 20,417 1,294 6.34 14,610 979 6.70
-------- ------- -------- ------- -------- -------
Total interest-earning
assets....................... 793,892 69,346 8.73 638,653 54,452 8.53 512,375 43,435 8.48
------- ------- -------
Nonearning assets.............. 44,727 37,021 31,881
-------- -------- --------
Total assets................... $838,619 $675,674 $544,256
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits....................... $636,777 34,120 5.36 $532,100 28,132 5.29 $439,286 23,522 5.35
Borrowings..................... 117,150 7,583 6.47 73,899 4,984 6.74 48,066 3,294 6.85
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.................. 753,927 41,703 5.53 605,999 33,116 5.46 487,352 26,816 5.50
------- ---- ------- ---- ------- ----
Noninterest-bearing
liabilities.................. 51,674 42,924 35,032
Shareholders' equity........... 33,018 26,751 21,872
-------- -------- --------
Total liabilities and
shareholders' equity......... $838,619 $675,674 $544,256
======== ======== ========
Net interest income and
interest rate spread......... $27,643 3.20% $21,336 3.07% $16,619 2.98%
======= ==== ======= ==== ======= ====
Net interest margin............ 3.48% 3.34% 3.24%
Average interest-earning assets
to average interest-bearing
liabilities.................. 105.30% 105.39% 105.13%
</TABLE>
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
36
<PAGE> 2
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,
---------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
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................. $10,962 $ 8,962 $2,000 $10,305 $10,157 $ 148
Mortgage-backed securities....... 4,057 3,940 117 397 287 110
Other............................ (125) (93) (32) 315 365 (50)
------- ------- ------ ------- ------- ------
Total interest income............ 14,894 $12,809 $2,085 11,017 $10,809 $ 208
------- ======= ====== ------- ======= ======
INTEREST EXPENSE ON:
Deposits......................... 5,988 $ 5,603 $ 385 4,610 $ 4,903 $ (293)
Borrowings....................... 2,599 2,792 (193) 1,690 1,741 (51)
------- ------- ------ ------- ------- ------
Total interest expense........... 8,587 $ 8,395 $ 192 6,300 $ 6,644 $ (344)
------- ======= ====== ------- ======= ======
Increase in net interest
income......................... $ 6,307 $ 4,717
======= =======
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Income. Net income for 1997 was $5.8 million, or $0.82 per common
share, an increase of $4.3 million from 1996. Net income for 1996 was $1.5
million, or $0.24 per common share. The increase was primarily a result of the
increase in net interest income and the $1.9 million after tax Savings
Association Insurance Fund ("SAIF") assessment in 1996 which was not repeated in
1997. Excluding the one-time SAIF assessment, net income for 1996 was $3.5
million, or $0.54 per common share.
Interest Income. Total interest income increased 27.4% to $69.3 million
for 1997 as compared to $54.5 million for 1996. The increase was due to a 24.3%
increase in average interest-earning assets between the years and a 187.2%
increase in prepayment penalties to $1.1 million in 1997 from $0.4 million in
1996. Average earning assets increased as a result of Metropolitan's strategy of
increasing assets as long as assets with acceptable portfolio characteristics
are available. Prepayment penalties on multifamily and commercial real estate
loans increased when payoffs increased in response to declining interest rates
during the second half of 1997. The weighted average yield on interest-earning
assets increased to 8.73% during 1997 as compared to 8.53% during 1996. The
increase in prepayment penalties accounted for 9 basis points of the 20 basis
point increase. The remainder was primarily due to the increase in the weighted
average rate on loans receivable which went up due to increases in consumer and
business loans relative to real estate loans.
Interest Expense. Total interest expense increased 25.9% to $41.7 million
for 1997 as compared to $33.1 million for 1996. Interest expense increased
primarily because the average balance of interest-bearing liabilities increased
24.4%. The average balance of interest-bearing liabilities grew at this rate in
order to fund the growth of interest-earning assets discussed above.
Metropolitan's cost of funds increased to 5.53% in 1997 as compared to 5.46% in
1996 because the rates on new borrowings and new deposits were higher than the
weighted average rate of interest-bearing liabilities for 1996.
Net Interest Margin. Metropolitan's net interest margin rose 14 basis
points to 3.48% for 1997 compared to 3.34% for 1996. While overall interest
rates on loans and deposits declined during 1997, Metropolitan experienced
increases in yields on interest-earning assets due to prepayment penalties and
changes in asset mix and experienced increased liability costs due to an effort
to lengthen liability maturities to reduce the risk of declining net interest
income from rising rates. The increased yields in 1997 more than offset the
increased cost of liabilities.
37
<PAGE> 3
Provision for Loan Losses. The provision for loan losses increased 43.1%
to $2.3 million in 1997 as compared to $1.6 million in 1996. 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 9.5% to $707.9 million at December 31, 1997 from $646.5 million
at the same date a year earlier. The allowance for losses on loans at December
31, 1997 was $5.6 million, or 0.79% of total loans, as compared to $4.2 million,
or 0.64% of total loans, at the same date in 1996. Management's estimate of the
adequacy of the allowance for losses on loans is based upon an analysis of
factors such as historical loan loss experience, the status of impaired loans,
economic conditions affecting real estate markets, and regulatory
considerations.
Noninterest Income. Total noninterest income increased 9.8% to $4.1
million in 1997 as compared to $3.8 million in 1996. Net loan servicing income
increased 7.4% to $1.3 million in 1997 as compared to $1.2 million in 1996. The
increase in net loan servicing fees was a result of Metropolitan's strategy of
increasing non-credit based fee income. The portfolio of loans serviced for
others increased to $1.2 billion at December 31, 1997 compared to $1.1 billion
at the same date a year earlier as a result of securitization of $93.0 million
of multifamily loans with the Federal National Mortgage Association ("FNMA")
during the third quarter of 1997. Purchases of loan servicing rights and
origination of loan servicing on one- to four-family mortgages during 1997
approximately offset payoffs and amortization of existing loans serviced.
Metropolitan remains committed to this line of business and will only acquire
the rights to service portfolios where the loan characteristics and pricing are
consistent with management's long-term profitability objectives.
Service charges on deposit accounts increased 26.7% to $716,000 in 1997 as
compared to $565,000 in 1996. The primary reason for the increase was the
overall growth in deposit accounts and greater fee income derived from various
accounts due to increased business levels.
Gain on sale of loans was $488,000 in 1997 as compared to $203,000 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 were in turn directly affected by prevailing interest rates. As such,
the primary reason for the increase in these gains was the sale of residential
fixed rate loans into a favorable market during the year. The proceeds of loans
sold were $65.5 million during 1997 as compared to $55.5 million in 1996.
Gain on sale of securities was $92,000 in 1997 as compared to $134,000 in
1996. During 1997, Metropolitan sold securities with a principal balance
outstanding of $16.6 million including FNMA preferred stock, a FNMA note, and
U.S. Treasury Notes. In 1996, $3.6 million of mortgage-backed securities were
sold at a gain of $134,000. Metropolitan does not actively purchase
mortgage-backed securities for resale; however, the existing portfolio of
mortgage-backed securities is monitored for opportunities to improve the yield,
manage interest rate risk, and increase profits, and as a result, certain
mortgage-backed securities have been sold.
Loan option income was $320,000 in 1997 as compared to $696,000 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. During 1997, Metropolitan purchased $10.6 million of loans and sold
nonrefundable options to purchase those same loans at a specified price within a
specified time period, as compared to $16.7 million of loans purchased for
options in 1996.
Other income increased 26.7% to $1.2 million in 1997 as compared to $1.0
million in 1996. This increase was primarily due to increased fee income earned
on investment services, rental income at retail sales office locations, and fee
income from credit cards.
Noninterest Expense. Total noninterest expense decreased 3.3% to $20.1
million in 1997 as compared to $20.8 million in 1996. Noninterest expense in
1996 included a $2.9 million one-time assessment to recapitalize the SAIF.
Increases in other expense categories in 1997 as compared to 1996 related
primarily to growth in assets, the increase in retail sales offices and
personnel.
Personnel related expenses increased $2.0 million in 1997, or 23.1%, from
1996. The increase was the result of increased staffing due to the growth of the
Bank, the payment of incentives for loan and deposit production, the addition to
staff for loan production, and the effects of merit increases. To the extent
that the number of retail sales offices continues to grow and loan production
increases, management anticipates increases in personnel costs will continue in
the near future.
38
<PAGE> 4
Occupancy and equipment expense increased 23.5% to $3.0 million in 1997 as
compared to $2.5 million in 1996. These increases were generally the result of
additional full service retail offices, remodeling of certain other retail sales
offices, and expanded space at the corporate headquarters. At the present time,
two new retail sales offices are planned for 1998 and additional sites are under
consideration for 1999.
Federal deposit insurance expense decreased $3.6 million to $0.6 million
for 1997 as compared to $4.2 million for 1996 primarily as a result of the
one-time assessment to recapitalize the SAIF in 1996. The one-time SAIF
assessment was $2.9 million and represented 65.7 basis points of deposits held
as of March 31, 1995. The remaining decrease was attributable to a decline in
insurance premiums paid made possible by the previously mentioned SAIF
recapitalization.
Data processing expense decreased 26.3% to $441,000 in 1997 from $599,000
in 1996. The primary reason for the decrease was a discount on processing fees
from the Bank's primary data services provider in mid-1997. This discount on
fees will extend until mid-1998 when fees will be returned to their normal range
prior to the discount.
Other operating expenses increased $0.4 million to $3.9 million for 1997 as
compared to $3.5 million for 1996. The increase was primarily due to increased
credit card servicing costs as a result of the increased size of the credit card
portfolio, increased depreciation on newly acquired computer technology, and
increased legal fees related to delinquent loans.
Provision for Income Taxes. The provision for income taxes increased to
$3.5 million in 1997 as compared to $1.1 million in 1996 due to the increase in
income before taxes. The effective tax rate was 37.6% for 1997 and 41.6% for
1996. The effective tax rate in 1997 was significantly lower because expenses
which are not deductible for tax purposes, such as amortization of intangibles,
were less significant in relationship to pre-tax income compared to 1996 as a
result of the unfavorable effect the one-time assessment to recapitalize the
SAIF had on pre-tax income in 1996. This more than offset the fact that
Metropolitan incurred significant state income tax and was subject to a higher
federal tax rate in 1997.
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 taxable year. While this change, effective for the tax year 1996,
will affect the timing of payments, it will not affect the comparability of
results among years.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income. Net income for 1996 was $3.5 million, or $0.54 per common
share, excluding the one-time assessment mandated by legislation to recapitalize
the SAIF. Net income including the SAIF assessment was $1.5 million, or $0.24
per common share as compared to $3.5 million, or $0.57 per common share for
1995. The decrease was primarily a result of the $1.9 million after tax, or
$0.30 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 $263.4 million
and purchased $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.
Net Interest Margin. 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 rate earned on interest-earning assets
increased slightly due to the change in mix of interest-earning assets.
39
<PAGE> 5
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
compared to 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.
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 34.0% to $650.9 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
factors such as historical loan loss experience, the status of impaired loans,
economic conditions affecting real estate markets, and regulatory
considerations.
Noninterest Income. Total non-interest income decreased 10.7% to $3.8
million in 1996 as compared to $4.2 million in 1995. 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 due to 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 opposed to 1995.
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 $203,000 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 $55.5 million during 1996 as compared to $59.8
million in 1995. The volume of loans sold was greater in 1995 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 $134,000 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 were sold at a gain of
$389,000. The decline in net gains was a result of the reduced volume of sales
which was consistent with availability. Metropolitan does not actively purchase
mortgage-backed securities for resale; however, the existing portfolio of
mortgage-backed securities is monitored for opportunities to improve the yield,
manage interest rate risk and increase profits, and as a result 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 were 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 $16.2 million of loans purchased for
options in 1995.
Loan credit discount income decreased to $0 in 1996 from $640,000 in 1995.
Since 1993, Metropolitan has purchased multifamily and commercial real estate
loans, often at a discount due to Metropolitan's assessment of credit risk and
the value of the underlying collateral. These collateral discounts are not
recognized in income over the life of the loan. When the loans paid off,
Metropolitan received the full contractual principal due, and any
40
<PAGE> 6
discount related to management's initial estimate of deficiency in collateral
values was recognized as noninterest income. Metropolitan had no loan credit
discount income in 1996 and does not expect this source of noninterest income to
be recurring.
Other income increased 41.6% to $1.0 million in 1996 as compared to $0.7
million in 1995. This increase was primarily due to an increase in automated
teller machine ("ATM") fees due to increases in transactions fees and the number
of ATM transactions, an increase in credit 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.
Noninterest Expense. Total non-interest expense increased 46.9% to $20.8
million in 1996 as compared to $14.2 million in 1995. Personnel related expenses
increased $1.9 million, or 27.1% in 1996 as compared to 1995. The increase was
attributable to 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. The SAIF assessment was $2.9
million and represented 65.7 basis points of deposits held as of March 31, 1995.
The remaining increase was attributable to an increase in insurance premiums
paid and was 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 represented a 42.4% increase 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 41.6% 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.
ASSET QUALITY
Nonperforming 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 nonperforming when
payments are 90 days or more past due or when the loan review analysis indicates
that repossession of the collateral may be necessary to satisfy the loan. In
addition, Metropolitan considers loans to be impaired when, in management's
opinion, it is probable that the borrower will be unable to meet the contractual
terms of the loan. When loans are classified as nonperforming, an assessment is
made as to the 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.
41
<PAGE> 7
The table below sets forth the amounts and categories of Metropolitan's
nonperforming assets as of the dates indicated. At December 31, 1997, all loans
classified by management as impaired were also classified as nonperforming.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans......................................... $2,763 $4,923 $3,103
Loans past due greater than 90 days, still accruing...... 384 271 204
------ ------ ------
Total nonperforming loans................................ 3,147 5,194 3,307
Real estate owned........................................ 2,037 177 258
------ ------ ------
Total nonperforming assets............................... $5,184 $5,371 $3,565
====== ====== ======
Nonperforming loans to total loans....................... 0.44% 0.80% 0.69%
Nonperforming assets to total assets..................... 0.56% 0.70% 0.60%
</TABLE>
Real estate owned increased $1.9 million to $2.0 million at December 31,
1997 from a year earlier while total nonperforming assets declined $0.2 million
over the same period. This reflects the progression of nonperforming loans at
December 31, 1996 to real estate owned during 1997. Two properties accounted for
the majority of this increase, a strip shopping center in the Philadelphia,
Pennsylvania area valued at $1.0 million and a commercial condominium warehouse
near Chicago, Illinois valued at $0.5 million. Metropolitan is actively
marketing both properties through local real estate agents and no losses are
expected.
In addition to the nonperforming assets included in the table above,
Metropolitan identifies potential problem loans which are still performing but
have a weakness which causes Metropolitan to classify those loans as substandard
for regulatory purposes. There was $4.9 million of loans in this category at
December 31, 1997. The largest loan in that category was a $4.0 million
participation in a $9.0 million loan secured by a water park in Southern
California. The loan was 30 days past due at December 31, 1997 and the borrower
is in the process of refinancing the loan and obtaining more working capital. If
the borrower does not refinance this property with another lender, then the
borrower's ability to repay the loan will be contingent on the operating success
of the park during 1998, its first full year of operation.
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
42
<PAGE> 8
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,
--------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD........................... $4,175 $2,765 $1,911
CHARGE-OFFS:
One- to four-family...................................... 32 22 23
Multifamily.............................................. 494 119 --
Commercial real estate................................... -- -- 27
Construction and land.................................... -- -- --
Consumer................................................. 363 95 56
Business................................................. 10 -- --
------ ------ ------
Total charge-offs........................................ 899 236 106
------ ------ ------
RECOVERIES:
One- to four-family...................................... -- -- 1
Multifamily.............................................. -- -- --
Commercial real estate................................... -- -- --
Construction and land.................................... -- -- --
Consumer................................................. 6 11 --
Business................................................. -- -- --
------ ------ ------
Total recoveries......................................... 6 11 1
------ ------ ------
Net charge-offs.......................................... 893 225 105
Provision for loan losses................................ 2,340 1,635 959
------ ------ ------
BALANCE AT END OF PERIOD................................. $5,622 $4,175 $2,765
====== ====== ======
Net charge-offs to average loans......................... 0.13% 0.04% 0.02%
Provision for loan losses to average loans............... 0.35% 0.28% 0.21%
Allowance for losses on loans to total non-performing
loans at end of period................................. 178.60% 77.73% 83.61%
Allowance for losses on loans to total loans at end of
period................................................. 0.79% 0.64% 0.57%
</TABLE>
The allowance for losses on loans as a percentage of total loans was 0.79%
at December 31, 1997 as compared to 0.64% at December 31, 1996 and 0.57% at
December 31, 1995. In each period, the provision for loan losses and allowance
for losses on loans were based on an analysis of individual loans, prior and
current loss experience, overall growth in the portfolio and current economic
conditions. Charge-offs increased during 1997 to $0.9 million compared to $0.2
million in 1996 and $0.1 million in 1995. This increase was the result of
overall growth in the loan portfolio, an expansion of consumer loan activity
into higher risk loans and the fact that multifamily loans carry larger average
balances than single-family loans so that a small number of multifamily loans
charged off can result in a significant write-off in dollars. Based on this
activity, Metropolitan increased the provision for losses on loans which
resulted in an increase in the allowance for losses on loans of $1.4 million in
both 1997 and 1996.
COMPARISON OF DECEMBER 31, 1997 AND DECEMBER 31, 1996 FINANCIAL CONDITION
Total assets amounted to $925.0 million at December 31, 1997, as compared
to $769.1 million at December 31, 1996, an increase of $155.9 million, or 20.3%.
The increase in assets was funded primarily with
43
<PAGE> 9
deposit growth of $115.7 million, an increase in Federal Home Loan Bank of
Cincinnati ("FHLB") advances and other borrowings of $34.0 million, and an
increase in shareholders' equity of $6.4 million.
Securities decreased by $6.8 million, or 51.1%, to $6.4 million. Securities
available for sale are maintained by Metropolitan to meet the liquidity
maintenance requirement of the subordinated notes maturing January 1, 2005
("1995 Subordinated Notes") and as a way to enhance earnings by improving the
return on idle cash, or taking advantage of changes in the level of interest
rates to generate gains or maintain profitable yields. See "Liquidity and
Capital Resources." During 1997, the Bank sold U.S. Treasury notes, FNMA
preferred stock, and a FNMA note. Some of these proceeds were reinvested in
mortgage-backed securities at a higher yield.
Mortgage-backed securities increased $86.5 million to $143.2 million at
December 31, 1997. The increase was primarily due to the securitization of $93.0
million of multifamily loans with FNMA 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 one- to four-family
mortgage loans, also with FHLMC.
Loans held for sale increased $5.3 million to $14.2 million at December 31,
1997, primarily as a result of the increased balance of commercial real estate
loans for which Metropolitan had pending sales. From time to time, Metropolitan
sells multifamily or commercial real estate loans in order to reduce interest
rate risk, maintain an appropriate balance of the different types of loans in
the loan portfolio or to free up capital for other types of growth. When sales
are planned, the loans involved are reclassified to held for sale. These pending
sales were completed in January, 1998 for a gain.
Loans receivable increased $56.2 million, or 8.8% to $693.7 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 following increases by loan category were
experienced: one- to four-family loans -- $31.9 million; commercial real estate
loans -- $30.9 million; consumer loans -- $14.4 million; construction and land
loans (net of loans in process) -- $29.6 million; and business loans -- $34.0
million. Multifamily loans decreased $82.1 million as a result of the
multifamily loan securitization of $93.0 million discussed above.
Premises and equipment increased $2.6 million, or 22.9%, to $13.9 million.
This increase was primarily the result of a retail sales office opening in 1997
and the purchase of computer hardware and software used in the retail sales
office network.
Deposits totaled $737.8 million at December 31, 1997, an increase of $115.7
million, or 18.6%, over the balance at December 31, 1996. The increase resulted
from management's marketing efforts, growth at new retail sales office, and
paying competitive rates to increase certificate of deposit balances.
Borrowings increased $34.0 million to $135.9 million at December 31, 1997,
as compared to $101.9 million at December 31, 1996. Based on the lower cost of
wholesale funds as compared to comparable maturity retail deposits and the
increased availability of collateral after the multifamily loan securitization,
management chose to fund a portion of the loan growth discussed above with
wholesale funds. Reverse repurchase agreements were the predominant source of
the increased borrowings.
Shareholders' equity increased $6.4 million, or 21.2%, to $36.7 million,
due largely to the retention of net income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to Metropolitan's ability to
generate adequate amounts of cash to meet its needs, for funding loan
originations, loan purchases, deposit withdrawals, maturities of borrowings and
operating expenses. Metropolitan's primary sources of internally generated funds
are principal repayments and payoffs of loans, cash flows from operations and
proceeds from sales of assets. External sources of funds include increases in
deposits, borrowings and the public sale or private placement of debt or equity
issues by the Corporation.
In addition to debt or equity issues, the Corporation's primary source of
funds is dividends from the Bank, which are subject to restrictions imposed by
federal bank regulatory agencies. At December 31, 1997 the
44
<PAGE> 10
Corporation had liquid assets of $2.1 million and had $2.5 million available to
borrow on a line of credit of $4.0 million with the Huntington National Bank.
Currently the Corporation's primary use of funds is for interest payments on its
existing debt. The covenants associated with the 1995 Subordinated Notes require
the Corporation to maintain liquid assets sufficient to pay six months interest,
or approximately $675,000. Funds could also be used to fund additional capital
contributions to the Bank, other operating expenses, purchase investment
securities or the acquisition of other assets.
Sources of funds for the Bank such as loan repayments and deposits flows
are greatly influenced by prevailing interest rates, economic conditions and
competition. Other sources of funds such as borrowings and maturities of
securities are more reliable or predictable. The Bank currently has a $50
million Cash Management Line of Credit with the FHLB which is available to meet
liquidity needs. There was no outstanding balance on that line as of December
31, 1997. Metropolitan regularly reviews cash flow needed to fund its operations
and believes that the aforementioned resources are adequate for its foreseeable
requirements.
At December 31, 1997, $86.9 million, or 18.2%, of Metropolitan's
certificates of deposits were in the form of accounts 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 any 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, 1997, approximately $57.7 million of certificates of
deposits, or 12.1% of Metropolitan's accounts, were held by these individuals
and entities. If Metropolitan were unable to replace these deposits upon
maturity, there could be an adverse effect on Metropolitan's liquidity.
Metropolitan monitors maturities to attempt to minimize any potential adverse
effect on liquidity.
Historically, the Bank has been subject to a regulatory liquidity
requirement. In November 1997 liquidity regulations were significantly changed.
These new regulations require that the Bank maintain liquid assets equal to at
least 4% of the liquidity base on a monthly basis. Liquid assets generally
include all unpledged cash in banks, investment securities maturing within five
years and securities issued by the Government National Mortgage Association
("GNMA"), FNMA, or FHLMC regardless of maturity. The liquidity base includes
amounts due banks and deposits and borrowings maturing in less than one year.
The Bank's liquidity ratio for December 1997 was 14.6%. This ratio is
substantially above the minimum because the new regulations are less restrictive
than the old regulations and because Metropolitan added significantly to its
portfolio of mortgage-backed securities with the $93.0 million multifamily loan
securitization during the third quarter of 1997.
Capital. Total shareholders' equity of the Corporation at December 31,
1997 was $36.7 million, an increase of $6.4 million or 21.2% from equity of
$30.2 million at December 31, 1996. The increase was due to net income of $5.8
million and an increase in unrealized gains on securities available for sale,
net of tax, of $0.6 million. No dividends were paid in 1997, 1996 or 1995. Terms
of the subordinated notes maturing December 31, 2001 ("1993 Subordinated Notes")
prohibit the payment of dividends until those notes are paid off. The terms of
the 1995 Subordinated Notes prohibit the payment of dividends unless total
equity divided by total assets is greater than 7%. The Corporation raised $3.3
million in additional capital in 1996 through an initial public offering of
common stock. Sources of future capital for the Corporation could include, but
would not be limited to, earnings of the Corporation or additional offerings of
equity securities.
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 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
45
<PAGE> 11
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, except a limited amount of qualifying
purchased mortgage servicing rights ("PMSR") 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 PMSRs.
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, FNMA or 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, 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....................... $49,901 5.43% $50,215 5.47% $54,343 8.39%
Required..................... 13,777 1.50 36,738 4.00 51,836 8.00
------- ---- ------- ---- ------- ----
Excess....................... $36,124 3.93% $13,477 1.47% $ 2,507 0.39%
======= ==== ======= ==== ======= ====
</TABLE>
The Bank's primary sources of capital are the earnings of the Bank and
additional capital investments from the Corporation. The Corporation follows the
strategy of contributing additional capital to the Bank as growth occurs to
maintain risk based capital at "well capitalized" or "adequately capitalized"
levels as defined by OTS regulations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Metropolitan, like other financial institutions, is subject to direct and
indirect market risk. Direct market risk exists from changes in interest rates.
To the extent that interest-bearing assets and interest-bearing liabilities
mature at different intervals, changes in market interest rates can result in
increases or decreases in net interest income. This is also known as interest
rate risk. Indirect market risk exists to the extent that Metropolitan has a
concentration of loans secured by similar assets and the market for those assets
deteriorates. Metropolitan manages that risk of decline in the value of a class
of collateral by maintaining diversity by type of collateral, geographic area,
industry for corporate borrowers, and by size of loan. In addition, Metropolitan
always gives consideration to the credit worthiness of the borrower in addition
to depending on the value of the collateral when underwriting loans. Direct
exposure to interest rate risk is more significant than indirect market risk and
Metropolitan has created a system for monitoring this risk which includes
periodic quantitative analysis.
46
<PAGE> 12
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 Bank, like many financial
institutions, currently has exposure to declines in net interest income from
rising interest rates. The steps being taken by the Bank to reduce interest rate
risk from rising interest rates include: (i) focusing 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, 1997 and 1996, is an analysis of the
Bank'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, 1997 DECEMBER 31, 1996
---------------------- ----------------------
PERCENTAGE PERCENTAGE
CHANGES IN INTEREST RATE BOARD LIMIT CHANGE IN CHANGE IN CHANGE IN CHANGE IN
(BASIS POINTS) PERCENTAGE CHANGE NPV NPV NPV NPV
- ------------------------ ----------------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400 (65)% $(27,474) (36)% $(26,596) (44)%
+300 (45) (20,131) (27) (19,790) (33)
+200 (25) (12,743) (17) (12,853) (21)
+100 (15) (5,829) (8) (6,302) (10)
-100 (15) 5,631 7 6,294 10
-200 (25) 13,381 18 14,644 24
-300 (45) 25,415 33 26,402 44
-400 (65) 40,157 53 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 rates earned on assets because
deposits generally have shorter periods to maturity. In addition, the fixed rate
assets in the loan portfolio will only reprice as the loans are repaid and new
loans at market 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, 1997 and 1996, the Bank was within the Board-established limits
for various changes in interest rates, and the Bank's sensitivity to rising
interest rates has decreased from 1996 to 1997. The modest improvement in
interest rate sensitivity, from 1996 to 1997, was a result of: (i) slightly
lower overall interest rates; (ii) a shortening of the average term of fixed
rate assets; and (iii) a lengthening of the average term of time deposits and
borrowings.
The principal strategy used by Metropolitan to mitigate the risk of decline
in net interest income from increases in interest rates has been to build a
portfolio of adjustable rate interest-earning assets. At December 31, 1997,
63.4% 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, 1997, Metropolitan had only 7.7% of its total loans comprised of
fixed rate residential one- to four-family loans. Within the remaining fixed
rate portfolio, Metropolitan has focused on short-term loan types. Fixed rate
multifamily and commercial real estate loans comprised 14.7% of total loans at
December 31,
47
<PAGE> 13
1997, and had a weighted average contractual term to maturity of approximately
five years. Fixed rate consumer loans, with a weighted average contractual term
of maturity of approximately eight years, comprised 8.0% of total loans at
December 31, 1997. These are contractual terms to maturity and, for various
reasons, consumers often repay loans before their contractual maturity, thereby
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. Finally, the NPV approach is a measure of how long
term value changes with changes in interest rates and assumes no responses by
management to changes in rates. Changes in interest rates may affect near-term
net interest income to a greater or lesser extent than those changes affect NPV.
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.
YEAR 2000
The year 2000 issue refers to computer programs being written using two
digits rather than four to define an applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have a
two-digit field to define the year may recognize a date using "00" as the year
1900 rather than the year 2000. This faulty recognition could result in a system
failure, disruption of operations, or inaccurate information or calculations.
Similar to other companies, Metropolitan faces the challenge of ensuring that
all computer-related functions will work properly in the year 2000 and beyond.
As a result, Metropolitan has addressed this issue by forming a task force to
plan for and implement any changes necessary to ensure year 2000 compliance. The
task force has identified four major areas where it will concentrate its
efforts: (i) the service bureau that services the majority of Metropolitan's
customer accounts; (ii) the various software vendors whose software is used by
Metropolitan; (iii) critical vendors Metropolitan uses that are dependent upon
data processing; and (iv) major loan customers to ensure that their revenues
will continue uninterrupted. A time line has been established and the task force
and its subcommittees will progress through assessment planning, implementation
and testing during 1998. Metropolitan believes the plans currently in place will
be adequate to provide quality service to customers without interruption. In
management's opinion, any related incremental costs will not have a material
impact on the financial condition, operations, or cash flows of the Corporation.
RECENT ACCOUNTING DEVELOPMENTS
In December 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 127, Deferral of the
Effective Date of Certain Provisions of SFAS No. 125. This statement defers
provisions of SFAS No. 125 related repurchase agreements, securities lending and
other similar transactions for one year. Metropolitan adopted these provisions
prospectively as of January 1, 1998. The adoption of this statement will not
have a material impact on the financial position or results of operations of the
Bank or the Corporation.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting certain changes in equity
that are not included in net income but are a component of comprehensive income.
The change in unrealized gains or losses on securities available for sale is an
example of a component of comprehensive income that would be relevant to
Metropolitan. This statement will be effective for Metropolitan beginning with
interim financial statements in 1998. This statement will result in additional
disclosures but will have no impact on the financial position or results of
operations of the Corporation.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement requires disclosure of
financial and descriptive information about operating segments of a business in
annual and interim financial reports to shareholders. This statement will be
effective for the 1998
48
<PAGE> 14
annual report but will not be required or included in 1998 interim financial
reports. This statement may require additional disclosures but will not have any
impact on the financial position or results of operations of the Bank or the
Corporation.
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 rates on its financial performance.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts
are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "expects,"
"believes," and similar expressions as they relate to Metropolitan or its
management are intended to identify such forward looking statements.
Metropolitan's actual results, performance or achievements may materially differ
from those expressed or implied in the forward looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry, changes
in law, governmental policies and regulations, and rapidly changing technology
affecting financial services.
49
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Crowe, Chizek and Company LETTERHEAD
REPORT OF INDEPENDENT AUDITORS
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, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
CROWE, CHIZEK AND COMPANY LLP
Cleveland, Ohio
February 20, 1998
50
<PAGE> 16
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 12)........................... $ 14,152,785 $ 7,777,868
Interest-bearing deposits in other banks.................... 1,961,183 2,744,709
Securities purchased under resale agreements................ 6,396,720 6,000,000
------------ ------------
Cash and cash equivalents................................. 22,510,688 16,522,577
Securities available for sale (Note 2)...................... 1,705,879 13,173,458
Securities held to maturity (Note 2)........................ 4,740,000
Mortgage-backed securities available for sale (Notes 2 and
8)........................................................ 143,166,654 56,672,294
Loans held for sale......................................... 14,230,130 8,972,946
Loans receivable, net (Notes 3 and 8)....................... 693,654,608 637,492,935
Federal Home Loan Bank stock, at cost (Note 8).............. 5,349,700 3,988,600
Accrued interest receivable................................. 5,752,161 4,790,661
Premises and equipment, net (Note 4)........................ 13,927,911 11,332,239
Real estate owned, net (Note 5)............................. 2,037,465 177,300
Intangible assets........................................... 2,986,539 3,238,839
Loan servicing rights (Note 6).............................. 9,223,974 8,050,837
Prepaid expenses and other assets........................... 5,698,912 4,663,157
------------ ------------
Total assets........................................... $924,984,621 $769,075,843
============ ============
LIABILITIES
Noninterest-bearing deposits (Notes 6 and 7)................ $ 46,234,027 $ 30,850,882
Interest-bearing deposits (Note 7).......................... 691,547,834 591,253,635
Borrowings (Note 8)......................................... 135,869,673 101,873,673
Accrued interest payable.................................... 3,272,815 4,120,163
Other liabilities........................................... 11,399,016 10,733,121
------------ ------------
Total liabilities......................................... 888,323,365 738,831,474
------------ ------------
Commitments (Notes 4 and 12)
SHAREHOLDERS' EQUITY (Note 13)
Common stock, no par value, 20,000,000 shares authorized,
7,051,270 shares issued and outstanding
Additional paid-in capital.................................. 11,101,383 11,101,383
Retained earnings........................................... 24,269,873 18,466,986
Unrealized gain on securities available for sale, net of
tax....................................................... 1,290,000 676,000
------------ ------------
Total shareholders' equity................................ 36,661,256 30,244,369
------------ ------------
Total liabilities and shareholders' equity............. $924,984,621 $769,075,843
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 17
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................ $61,230,083 $50,267,618 $39,963,189
Interest on mortgage-backed securities............ 6,946,824 2,890,437 2,492,744
Interest and dividends on other investments....... 1,169,208 1,293,828 979,566
----------- ----------- -----------
Total interest income.......................... 69,346,115 54,451,883 43,435,499
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits.............................. 34,120,452 28,131,837 23,521,751
Interest on borrowings............................ 7,582,855 4,984,212 3,294,520
----------- ----------- -----------
Total interest expense......................... 41,703,307 33,116,049 26,816,271
----------- ----------- -----------
NET INTEREST INCOME................................. 27,642,808 21,335,834 16,619,228
Provision for loan losses (Note 3).................. 2,340,000 1,635,541 958,573
----------- ----------- -----------
Net interest income after provision for loan
losses............................................ 25,302,808 19,700,293 15,660,655
----------- ----------- -----------
NONINTEREST INCOME
Loan servicing income, net........................ 1,292,719 1,203,779 1,067,767
Service charges on deposit accounts............... 715,657 564,654 426,175
Net gain on sale of loans......................... 488,104 202,621 444,313
Net gain on sale of securities.................... 92,338 133,706 388,581
Loan option income................................ 320,464 695,798 559,256
Loan credit discount income....................... 640,262
Other operating income............................ 1,231,524 972,057 697,361
----------- ----------- -----------
Total noninterest income....................... 4,140,806 3,772,615 4,223,715
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and related personnel costs.............. 10,671,192 8,669,705 6,819,383
Occupancy and equipment expense................... 3,044,220 2,464,926 2,134,862
Federal deposit insurance premiums (Note 17)...... 595,268 4,211,869 1,132,125
Marketing expense................................. 685,954 694,898 542,838
State franchise taxes............................. 542,577 461,127 306,518
Data processing expense........................... 441,335 599,150 586,260
Amortization of intangibles....................... 262,659 255,720 220,115
Other operating expenses.......................... 3,905,522 3,481,610 2,445,150
----------- ----------- -----------
Total noninterest expense...................... 20,148,727 20,839,005 14,187,251
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.......................... 9,294,887 2,633,903 5,697,119
Provision for income taxes (Note 9)................. 3,492,000 1,095,000 2,154,700
----------- ----------- -----------
NET INCOME.......................................... $ 5,802,887 $ 1,538,903 $ 3,542,419
=========== =========== ===========
Basic earnings per share (Note 1)................... $ 0.82 $ 0.24 $ 0.57
=========== =========== ===========
Diluted earnings per share (Note 1)................. $ 0.82 $ 0.24 $ 0.57
=========== =========== ===========
Weighted average shares for basic earnings per
share............................................. 7,051,270 6,384,604 6,251,270
Effect of dilutive stock options.................... 11,726 0 0
----------- ----------- -----------
Weighted average shares for diluted earnings per
share............................................. 7,062,996 6,384,604 6,251,270
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE> 18
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN/
(LOSS) ON
ADDITIONAL SECURITIES TOTAL
COMMON PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
STOCK CAPITAL EARNINGS FOR SALE EQUITY
------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995............. $ 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
Net income........................... 5,802,887 5,802,887
Change in unrealized gain/(loss) on
securities available for sale, net
of tax............................. 614,000 614,000
----- ----------- ----------- ---------- -----------
Balance, December 31, 1997........... $ 0 $11,101,383 $24,269,873 $1,290,000 $36,661,256
===== =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE> 19
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 5,802,887 $ 1,538,903 $ 3,542,419
Adjustments to reconcile net income to net cash
provided by operating activities
Net amortization and depreciation......... 4,533,303 3,022,358 2,036,614
Net gain on sale of securities............ (92,338) (133,706) (388,581)
Provision for loan and REO losses......... 2,340,000 1,677,541 973,573
Deferred tax provision.................... (1,131,325) (183,303) (9,326)
Loans originated for sale................. (36,731,553) (35,235,545) (45,327,774)
Loans purchased for sale.................. (10,654,255) (16,675,331) (16,210,821)
Proceeds from sale of loans............... 51,402,212 43,410,896 59,830,616
Repayments on loans held for sale......... 39,180 809,737
Net loss on sale of premises, equipment
and real estate owned.................. 104,608 113,428 3,307
FHLB stock dividend....................... (348,800) (264,100) (216,200)
Changes in other assets................... (865,930) (2,980,967) (2,618,437)
Changes in other liabilities.............. (561,078) 1,051,576 6,588,239
------------- ------------- -------------
Net cash provided by (used in)
operating activities................. 13,836,911 (3,848,513) 8,203,629
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds.................. (288,659,170) (218,376,200) (117,432,139)
Purchases of:
Loans....................................... (103,062,046) (110,565,748) (86,134,911)
Mortgage-backed securities.................. (6,364,379) (13,570,050)
Securities available for sale............... (5,101,096) (13,336,840) (23,464,948)
Securities held to maturity................. (4,740,000)
Mortgage loan servicing rights.............. (2,055,908) (732,262) (5,329,415)
FHLB stock.................................. (1,012,300) (155,800) (1,041,300)
Premises and equipment...................... (3,713,528) (4,506,250) (4,869,739)
Proceeds from maturities and repayments of:
Loans....................................... 208,024,684 140,245,124 96,163,166
Mortgage-backed securities.................. 18,111,121 7,189,624 3,525,478
Securities available for sale............... 6,051,195 2,000,000
Proceeds from sale of:
Loans....................................... 14,088,337 12,106,490
Mortgage-backed securities.................. 3,636,772 29,142,705
Securities available for sale............... 16,582,643 16,690,055 7,000,000
Premises, equipment and real estate owned... 551,043 1,250,813 102,678
Additional investment in real estate owned..... (88,481)
Premium paid for credit card relationships..... (10,359) (306,146)
------------- ------------- -------------
Net cash used for investing activities...... (157,449,439) (174,379,223) (100,338,425)
------------- ------------- -------------
</TABLE>
(Continued)
54
<PAGE> 20
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts................. $ 115,604,639 $ 118,279,840 $ 67,369,745
Proceeds from borrowings....................... 115,219,000 101,500,000 60,000,000
Repayment of borrowings........................ (76,223,000) (53,000,000) (22,480,000)
Net activity on lines of credit................ (5,000,000) 6,500,000 (6,150,000)
Proceeds from issuance of stock................ 3,300,000
------------- ------------- -------------
Net cash provided by financing activities... 149,600,639 176,579,840 98,739,745
------------- ------------- -------------
Net change in cash and cash equivalents.......... 5,988,111 (1,647,896) 6,604,949
Cash and cash equivalents at beginning of year... 16,522,577 18,170,473 11,565,524
------------- ------------- -------------
Cash and cash equivalents at end of year......... $ 22,510,688 $ 16,522,577 $ 18,170,473
============= ============= =============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest.................................... $ 42,550,655 $ 33,546,947 $ 23,979,013
Income taxes................................ 4,871,000 1,587,000 2,749,000
Transfer from loans receivable to other real
estate...................................... 2,282,807 1,325,948 326,709
Transfer from loans receivable to loans held
for sale.................................... 9,678,044
Loans securitized.............................. 98,324,696 14,458,129 53,795,086
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE> 21
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is an
Ohio corporation organized for operation as 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 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 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 and purchasing
multifamily and nonresidential real estate loans primarily in Ohio, New Jersey,
Michigan, California, Kentucky and Pennsylvania and one-to-four family
residential real estate loans primarily 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 in Note 15. 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 do 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: The Corporation classifies debt and mortgage-backed securities
as held to maturity or available for sale. The Corporation classifies marketable
equity securities as available for sale.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts.
Securities classified as available for sale are those that management
intends to sell or that could be sold for liquidity, investment management, or
similar reasons, even if there is not a present intention for such a sale.
56
<PAGE> 22
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
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: All loans are held for investment unless specifically designated as
held for sale. When the Bank originates or purchases loans, it makes a
determination whether or not to classify loans as held for sale. The Bank
re-evaluates its intention to hold or sell loans at each balance sheet date
based on the current environment and, if appropriate, reclassifies loans as held
for sale. Sales of loans are dependent upon various factors including interest
rate movements, deposit flows, the availability and attractiveness of other
sources of funds, loan demand by borrowers, and liquidity and capital
requirements.
Loans held for investment are stated at the principal amount outstanding
adjusted for amortization of premiums and accretion of discounts using the
interest method. At December 31, 1997 and 1996, management had the intent and
the Bank had the ability to hold all loans being held for investment for the
foreseeable future.
Loans held for sale are recorded at the lower of cost or market. When the
Bank purchases real estate loans and simultaneously writes an option giving the
holder the right to purchase those loans, those loans are designated as held for
sale. Gains and losses on the sale of loans are determined by the identified
loan method and are reflected in operations at the time of the settlement of the
sale.
ALLOWANCE FOR LOSSES ON LOANS: Because some loans may not be repaid in
full, an allowance for losses on loans is maintained. Increases to the allowance
are recorded by a provision for loan losses charged to expense. Estimating the
risk of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loans, the whole allowance is available for any loan charge-offs that
occur. A loan is charged off against the allowance by management as a loss when
deemed uncollectible, although collection efforts continue and future recoveries
may occur.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by allocating a
portion of the allowance for losses on loans to such loans. If these allocations
require an increase in the allowance for losses on loans, such increase is
reported as a provision for loan losses. Management excludes all consumer loans
and residential single family loans with balances less than $200,000 from its
review for impairment. All impaired loans are placed on nonaccrual 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 allowance account through a charge to income.
Expenses to carry real estate owned 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.
57
<PAGE> 23
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
Long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If
impaired, the assets are recorded at fair value based on discounted cash flows.
INTANGIBLE ASSETS: Intangible assets resulting from the acquisition of the
Bank are 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 the Bank's
shareholders' equity in calculating tangible capital for regulatory purposes.
LOAN SERVICING RIGHTS: Effective January 1, 1995, the Corporation adopted
Statement of Financial Accounting Standards (SFAS) No. 122 "Accounting for
Mortgage Servicing Rights." This statement requires lenders who sell or
securitize originated loans and retain servicing rights to recognize as separate
assets the rights to service mortgage loans for others. Effective January 1,
1997, SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" superseded SFAS No. 122 and was adopted by
the Corporation. SFAS No. 125 provided new guidance on the determination of the
value of mortgage servicing rights and when to recognize the sale of loans
without changing the concept of assigning value to mortgage servicing rights
when a loan is sold or securitized and the servicing is retained. Both
statements were adopted prospectively.
Purchased mortgage servicing rights are initially valued at cost. When
loans are sold or securitized and servicing rights are retained, those rights
are valued by allocating the book value of the loans between the loans or
securities and the servicing rights based on the relative fair value of each.
Servicing rights that have been capitalized are amortized in proportion to and
over the period of estimated servicing income. Servicing rights are assessed for
impairment periodically by estimating the future net servicing income of the
portfolio based on management's estimate of remaining loan lives. 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. 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.
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 those items are recognized for income
tax purposes. A valuation allowance, if needed, reduces deferred tax assets to
the amount expected to be realized.
STOCK OPTIONS: As of January 1, 1996, Metropolitan adopted SFAS No. 123,
"Accounting for Stock-based Compensation," which encourages a fair-value based
accounting method for stock based compensation arrangements. Metropolitan has
elected to disclose pro forma net income and earnings per share amounts as
58
<PAGE> 24
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
permitted by this statement. For the periods presented, no expense has been
recognized as the market price of the common shares exceeds the price on the
grant date.
TRUST DEPARTMENT ASSETS AND INCOME: Property held by the Corporation 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 Corporation.
EARNINGS PER SHARE: The accounting standard for computing earnings per
share was revised for 1997, and all earnings per share data previously reported
have been restated to follow the new standard.
Basic and diluted earnings per share are computed based on weighted average
shares outstanding during the period. Basic earnings per share has been computed
by dividing net income by the weighted average shares outstanding. Diluted
earnings per share has been computed by dividing net income by the diluted
weighted average shares outstanding. Diluted weighted average shares were
calculated assuming the exercise of stock options less the treasury shares
assumed to be purchased from the proceeds using the average market price of the
Corporation's stock. All per share information has been retroactively adjusted
to reflect the effect of the stock dividends and stock splits.
FINANCIAL STATEMENT PRESENTATION: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1997
presentation.
NOTE 2 -- SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values of
investment securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Mutual funds................. $ 1,705,879 $ 1,705,879
Mortgage-backed securities... 141,148,819 $2,077,015 $(59,180) 143,166,654
------------ ---------- -------- ------------
142,854,698 2,077,015 (59,180) 144,872,533
HELD TO MATURITY
Tax-exempt municipal bond.... 4,740,000 4,740,000
------------ ---------- -------- ------------
$147,594,698 $2,077,015 $(59,180) $149,612,533
============ ========== ======== ============
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
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
------------ ---------- -------- ------------
$ 68,821,541 $1,094,818 $(70,607) $ 69,845,752
============ ========== ======== ============
</TABLE>
59
<PAGE> 25
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
The amortized cost and fair value of debt securities at December 31, 1997,
by contractual maturity are shown below. Expected maturities will 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>
Securities held to maturity due after ten years......... $ 4,740,000 $ 4,740,000
Mortgage-backed securities available for sale........... 141,148,819 143,166,654
------------ ------------
Total debt securities................................. $145,888,819 $147,906,654
============ ============
</TABLE>
Proceeds from the sale of mortgage-backed securities available for sale
were $3,636,772 in 1996 and $29,142,705 in 1995. Proceeds from the sale of
securities available for sale were $16,582,643 in 1997, $16,690,055 in 1996, and
$7,000,000 in 1995. Gross gains realized on those sales were $102,955 in 1997,
$133,706 in 1996 and $475,587 in 1995. Gross losses of $10,617 and $87,006 were
realized in 1997 and 1995, respectively.
Certain securities with a carrying value of $76,606,671 and a market value
of $77,760,890 at December 31, 1997, were pledged to secure reverse repurchase
agreements. Other securities with carrying values of $107,047 and $2,196,169 and
market values of $114,166 and $2,214,834 were pledged to the State of Ohio to
enable Metropolitan to engage in trust activities and the Federal Reserve Bank
to enable Metropolitan to receive treasury, tax and loan payments, respectively.
60
<PAGE> 26
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 3 -- LOANS RECEIVABLE
The composition of the loan portfolio at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------
ORIGINATED PURCHASED TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Real estate loans
Construction loans
Residential single family........... $ 67,985,876 $ 67,985,876
Commercial.......................... 19,200,000 19,200,000
Land................................ 29,076,961 29,076,961
Loans in process.................... (46,833,171) (46,833,171)
------------ ------------
Construction loans, net........... 69,429,666 69,429,666
Permanent loans
Residential single family........... 127,227,343 $ 19,458,082 146,685,425
Multifamily......................... 89,689,810 104,759,993 194,449,803
Commercial.......................... 51,605,536 114,987,215 166,592,751
Other............................... 565,795 565,795
------------ ------------ ------------
Total real estate loans........... 338,518,150 239,205,290 577,723,440
Consumer loans........................... 45,758,041 22,832,076 68,590,117
Business loans and other loans........... 57,496,142 57,496,142
------------ ------------ ------------
Total loans............................ $441,772,333 $262,037,366 703,809,699
============ ============
Discount on loans, net................... (425,466)
Deferred loan fees, net.................. (4,107,746)
Allowance for losses on loans............ (5,621,879)
------------
$693,654,608
============
</TABLE>
61
<PAGE> 27
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
<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>
Loans with adjustable rates, included above, totaled $485,259,000 and
$465,306,000 at December 31, 1997 and 1996, respectively.
Metropolitan's real estate loans are secured by property in the following
states:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Ohio......................................... 60% 62%
California................................... 11 8
Michigan..................................... 5 7
Pennsylvania................................. 5 6
Other........................................ 19 17
--- ---
100% 100%
=== ===
</TABLE>
Activity in the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year................... $4,175,015 $2,764,664 $1,910,714
Provision for loan losses...................... 2,340,000 1,635,541 958,573
Net charge-offs................................ (893,136) (225,190) (104,623)
---------- ---------- ----------
Balance at end of year......................... $5,621,879 $4,175,015 $2,764,664
========== ========== ==========
</TABLE>
62
<PAGE> 28
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
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 based on current information and
events. Loans which are past due two payments or less and that management feels
are probable of being paid current within 90 days are not considered to be
impaired loans.
Information regarding impaired loans is as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Balance of impaired loans................................... $516,498 $3,495,006
Less portion for which no allowance for losses on loans is
allocated................................................. 516,498 2,773,777
-------- ----------
Portion of impaired loan balance for which an allowance for
losses on loans is allocated.............................. $ 0 $ 721,229
======== ==========
Portion of allowance for losses on loans allocated to the
impaired loan balance..................................... $ 0 $ 241,269
======== ==========
</TABLE>
Information regarding impaired loans is as follows for the year ended
December 31:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Average investment in impaired loans during the year........ $944,283 $4,220,286
======== ==========
Interest income recognized during impairment................ $ 16,691 $ 48,146
======== ==========
Interest income recognized on cash basis during the year.... $ 16,691 $ 48,146
======== ==========
</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, significant 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 such related parties totaled $1,296,000 and $1,372,000 at December 31,
1997 and 1996, respectively.
NOTE 4 -- PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land...................................................... $ 2,752,946 $ 2,969,274
Office buildings.......................................... 5,334,323 3,684,536
Leasehold improvements.................................... 2,783,785 2,329,573
Furniture, fixtures and equipment......................... 6,389,966 4,899,961
Construction in progress.................................. 458,515 678,209
----------- -----------
Total................................................... 17,719,535 14,561,553
Accumulated depreciation.................................. 3,791,624 3,229,314
----------- -----------
$13,927,911 $11,332,239
=========== ===========
</TABLE>
Depreciation expense was $978,193, $683,718, and $519,533 for the years
ended December 31, 1997, 1996 and 1995, respectively.
63
<PAGE> 29
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
The Bank leases certain of its branches and corporate headquarters space
under lease agreements whose lease terms are renewable periodically. Rent
expense for the years ended December 31, 1997, 1996 and 1995 was $923,395,
$874,164, and $839,849, respectively.
The future minimum annual rental commitments as of December 31, 1997 for
all noncancelable leases are as follows:
<TABLE>
<S> <C>
1998............................................. $ 960,133
1999............................................. 917,775
2000............................................. 914,973
2001............................................. 172,702
2002............................................. 118,424
Thereafter....................................... 344,161
----------
$3,428,168
==========
</TABLE>
NOTE 5 -- REAL ESTATE OWNED
Activity in the allowance for loss on real estate owned is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Balance at beginning of year......................... $57,000 $15,000 $ 0
Provision for loss................................... 0 42,000 15,000
Charge-offs.......................................... (57,000) 0 0
------- ------- --------
Balance at end of year............................... $ 0 $57,000 $ 15,000
======= ======= ========
</TABLE>
NOTE 6 -- 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,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Mortgage loan portfolios serviced for
FHLMC.............................................. $ 656,816,894 $ 713,289,564
FNMA............................................... 507,345,160 353,863,253
Other.............................................. 26,023,287 35,361,907
-------------- --------------
$1,190,185,341 $1,102,514,724
============== ==============
</TABLE>
Custodial balances maintained in noninterest-bearing deposit accounts with
the Bank in connection with the foregoing loan servicing were approximately
$18,894,000 and $12,895,000 at December 31, 1997 and 1996, respectively.
64
<PAGE> 30
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
Following is an analysis of the changes in loan servicing rights acquired
for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Balance at beginning of year.............................. $ 7,286,403 $ 8,587,831
Additions................................................. 2,055,908 732,262
Amortization.............................................. (1,682,793) (2,033,690)
----------- -----------
Balance at end of year.................................... $ 7,659,518 $ 7,286,403
=========== ===========
</TABLE>
Following is an analysis of the changes in loan servicing rights originated for
the year ended December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Balance at beginning of year................................ $ 764,434 $ 541,727
Additions................................................... 1,157,451 333,507
Amortization................................................ (357,429) (110,800)
---------- ---------
Balance at end of year...................................... $1,564,456 $ 764,434
========== =========
</TABLE>
The Corporation did not have a valuation allowance associated with loan
servicing rights at any time during the years ended December 31, 1997, 1996, and
1995.
NOTE 7 -- DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing deposits......... $ 46,234,027 6% $ 30,850,882 5%
============ ============
Interest-bearing checking accounts --
2.08% to 3.20%..................... $ 43,080,404 6 $ 39,363,322 6
Passbook savings and statement
savings -- 2.72% to 5.46%.......... 170,442,615 23 176,430,162 29
Certificates of deposit.............. 478,024,815 65 375,460,151 60
------------ --- ------------ ---
Total interest-bearing
deposits...................... $691,547,834 94 $591,253,635 95
============ --- ============ ---
$737,781,861 100% $622,104,517 100%
============ === ============ ===
</TABLE>
65
<PAGE> 31
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
At December 31, 1997, scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
YEAR WEIGHTED AVERAGE
ENDED AMOUNT INTEREST RATE
----- ------------ ----------------
<S> <C> <C>
1998.................................. $334,571,633 5.82%
1999.................................. 115,282,966 6.16%
2000.................................. 22,906,179 6.93%
2001.................................. 3,185,158 5.91%
2002.................................. 1,783,722 6.05%
Thereafter............................ 295,157 6.95%
------------
$478,024,815 5.96%
============
</TABLE>
The aggregate amount of certificates of deposit with balances of $100,000
or more was approximately $86,884,000 and $58,516,000 at December 31, 1997 and
1996, respectively. The Bank also accepts out-of-state time deposits from
individuals and entities, predominantly credit unions. At December 31, 1997,
approximately $57.7 million of time deposits, or 12.1% of Metropolitan's time
deposits, were held by these entities. At December 31, 1996, approximately $61.5
million of time deposits, or 16.4% of Metropolitan's time deposits, were held by
these entities.
Related party deposits totaled $1,116,000 and $2,164,000 at December 31,
1997 and 1996, respectively.
NOTE 8 -- BORROWINGS
Borrowings consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Federal Home Loan Bank advances (5.7% and 5.5% at
December 31, 1997 and 1996, respectively)............. $ 41,000,000 $ 59,500,000
Reverse repurchase agreements (5.7% and 5.6% at December
31, 1997 and 1996, respectively)...................... 74,496,000 23,500,000
Commercial bank line of credit (8.5% at December 31,
1997 -- variable rate)................................ 1,500,000
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
------------ ------------
$135,869,673 $101,873,673
============ ============
</TABLE>
66
<PAGE> 32
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
At December 31, 1997, scheduled payments on borrowings are as follows:
<TABLE>
<CAPTION>
YEAR WEIGHTED AVERAGE
ENDED AMOUNT INTEREST RATE
----- ------------ ----------------
<S> <C> <C>
1998.................................. $ 42,417,556 5.64%
1999.................................. 23,367,566 5.70%
2000.................................. 402,764 9.25%
2001.................................. 8,431,787 8.85%
2002.................................. 47,250,000 5.77%
Thereafter............................ 14,000,000 10.48%
------------
$135,869,673 6.40%
============
</TABLE>
Federal Home Loan Bank advances are collateralized by FHLB stock and
one-to-four family first mortgage loans with an aggregate carrying value of
approximately $147,000,000 and $89,250,000 at December 31, 1997 and 1996,
respectively. In addition, Metropolitan also has a $50,000,000 cash management
line with the Federal Home Loan Bank which at December 31, 1997 was unused.
The Corporation has a commercial line of credit agreement with the
Huntington National Bank. The maximum borrowing under the line is $4,000,000.
The line has a revolving term until 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, 1997, the outstanding balance
under this agreement was $1,500,000.
In 1993 and early 1994, the Corporation issued subordinated notes ("1993
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 are being
amortized on a straight line basis over the life of the notes. The notes are
unsecured. The notes may be redeemed prior to maturity by paying a prepayment
premium. The prepayment premium is 6% through October 25, 1998 and decreases by
1% during each year following that date.
During 1995, the Corporation issued subordinated notes ("1995 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 are being amortized on a straight line basis
over the life of the notes. The notes are unsecured. The notes may not be
redeemed prior to December 1, 1998. From that date through November 30, 1999,
the notes may be redeemed by paying a 3.0% premium. From December 1, 1999
through November 30, 2000, the notes may be redeemed by paying a 1.5% premium.
Thereafter, the notes may be redeemed at par.
67
<PAGE> 33
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
The following tables set forth certain information about borrowings during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
MAXIMUM MONTH-END BALANCES:
FHLB advances............................................. $73,700,000 $75,150,000
1993 subordinated notes................................... 4,873,673 4,873,673
1995 subordinated notes................................... 14,000,000 14,000,000
Commercial bank line of credit............................ 4,000,000
Reverse repurchase agreements............................. 74,496,000 23,500,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
AVERAGE BALANCE:
FHLB advances............................................. $59,324,587 $50,545,916
1993 subordinated notes................................... 4,873,673 4,873,673
1995 subordinated notes................................... 14,000,000 14,000,000
Commercial bank line of credit............................ 113,699
Reverse repurchase agreements............................. 38,843,324 4,479,839
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1996
----- -----
<S> <C> <C>
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances............................................... 5.65% 5.43%
1993 subordinated notes..................................... 10.47 10.47
1995 subordinated notes..................................... 10.48 10.48
Commercial bank line of credit.............................. 8.98
Reverse repurchase agreements............................... 5.73 5.61
</TABLE>
NOTE 9 -- INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Current tax provision:
Federal expense............................. $ 4,478,325 $1,278,303 $2,164,026
State expense............................... 145,000
----------- ---------- ----------
Total current expense.................... 4,623,325 1,278,303 2,164,026
Deferred federal benefit...................... (1,131,325) (183,303) (9,326)
----------- ---------- ----------
$ 3,492,000 $1,095,000 $2,154,700
=========== ========== ==========
</TABLE>
68
<PAGE> 34
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
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,
-----------------------
1997 1996
---------- ---------
<S> <C> <C>
Deferred tax assets
Deferred loan fees........................................ $ 124,872 $ 196,538
Loan servicing rights..................................... 426,811 377,977
Bad debt deduction........................................ 1,051,179 99,990
Other..................................................... 19,859 17,530
---------- ---------
1,622,721 692,035
---------- ---------
Deferred tax liabilities
Debt issuance costs....................................... (359,542)
Employment contract....................................... (100,891) (104,768)
Depreciation expense...................................... (95,103) (59,370)
Stock dividends on FHLB stock............................. (290,287) (163,526)
Other..................................................... (1,162) (876)
---------- ---------
(487,443) (688,082)
---------- ---------
Net deferred tax asset................................. $1,135,278 $ 3,953
========== =========
</TABLE>
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,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate................................. 35% 34% 34%
Income taxes at statutory rate................. $3,253,210 $ 895,527 $1,937,020
Officer's life premium......................... 9,610 30,441 55,185
Amortization of purchased intangibles.......... 92,051 97,962 134,414
Tax exempt income.............................. (64,286)
Current state expense.......................... 94,250
Utilization of capital loss carryforward....... (35,000)
Business expense limitation.................... 62,684 67,368 41,753
Other.......................................... 79,481 3,702 (13,672)
---------- ---------- ----------
Provision for income taxes................... $3,492,000 $1,095,000 $2,154,700
========== ========== ==========
</TABLE>
Taxes attributable to security's gains and (losses) totaled $(2,682),
$45,460 and $121,548 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Prior to January 1, 1996, the Bank was able to use the
percentage-of-taxable income method of computing its tax bad debt deduction if
it was more favorable than the specific charge-off method. During 1996,
legislation was passed which removed the option of using the percentage of
taxable income method of computing the tax bad debt deduction. The change was
retroactive to 1988 with the additional tax due over a six year period beginning
in 1996, 1997, or 1998 based on the current level of loan activity. The changes
to the tax liability
69
<PAGE> 35
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
related to 1995 and prior years did not result in any additional tax expense in
1996 because deferred taxes had been provided on the benefit of the percentage
of taxable income method of computing the bad debt deduction in each of those
years.
NOTE 10 -- 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
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 $166,895, $126,599 and $96,902 for the
years ended December 31, 1997, 1996 and 1995, respectively. No discretionary
contributions have been made by the Corporation for the periods presented.
NOTE 11 -- STOCK OPTION PLAN
On October 28, 1997, the Board of Directors of Metropolitan adopted,
subject to the approval of Metropolitan's shareholders, the Metropolitan
Financial Corp. 1997 Stock Option Plan for key employees and officers of the
Corporation. The Plan is intended to encourage their continued employment with
Metropolitan and to provide them with additional incentives to promote the
development and long-term financial success of Metropolitan.
Subject to adjustment under certain circumstances, the maximum number of
Common Shares that may be issued under the plan is 650,000, which reflects an
adjustment for the 2-for-1 stock split completed in December, 1997. The Plan
provides for the grant of options, which may qualify as either incentive stock
options or nonqualified options. Grants of options will be made by the
Compensation and Organization Committee of the Board of Directors.
The exercise price of an option, whether an incentive stock option or a
nonqualified option, will not be less than the fair market value of the Common
Shares on the date of grant. On October 28, 1997, the Compensation and
Organization Committee of the Board of Directors approved grants of 80,000
incentive stock options and 320,000 nonqualified options.
An option may be exercised in one or more installments at the time or times
provided in the option instrument. Generally, options granted to employees will
become exercisable with respect to one-half of the Common Shares covered by the
option on the third anniversary, and one-fourth of the Common Shares covered by
the option on the fourth and fifth anniversaries of the date of grant. Options
granted under the Plan will expire no later than ten years after grant in the
case of an incentive stock option and ten years and one month after grant in the
case of a nonqualified option.
70
<PAGE> 36
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
A summary of option activity is presented below:
STOCK OPTION ACTIVITY:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
----------------------- ---------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
------ ------------ ------- ---------------
<S> <C> <C> <C> <C>
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 0 0
Granted............................ 80,000 $ 10.13 320,000 $10.13 - $11.14
Exercised.......................... 0 0
Forfeited.......................... 0 0
------ ------- ---------------
Outstanding at end of year......... 80,000 $ 10.13 320,000 $10.13 - $11.14
====== =======
Closing stock price on date of
grant............................ $ 10.13 $ 10.13
Assumptions used:
Expected option life............. 10 years 5 years
Risk-free interest rate.......... 5.97% 5.75%
Expected stock price
volatility.................... 33.00% 33.00%
Expected dividends............... 0 0
Estimated fair value of options
granted:
Granted at $10.13................ $ 4.55 $ 2.53
Granted at $11.14................ $ 1.77
PRO FORMA DISCLOSURES:
For purposes of providing the required disclosures under SFAS No. 123,
"Accounting for Stock Based Compensation," the Black Scholes option pricing
model was used to estimate the value of these options. The Black Scholes model
was developed to estimate the fair value of equity options. Had compensation
costs been determined in accordance with SFAS No. 123, net income and earnings
per share would be affected as summarized in the schedule below (In thousands,
except per share data):
Net income -- as reported........... $5,803
Net income -- pro forma............. 5,614
Basic and diluted earnings per
share -- as reported.............. $ 0.82
Basic and diluted earnings per
share -- pro forma................ 0.79
</TABLE>
NOTE 12-- 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, 1997, the Bank had fixed and variable rate commitments
to originate and/or purchase loans (at market rates) of approximately
$22,343,000 and $49,443,000, respectively. In addition, the Bank had
71
<PAGE> 37
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
firm commitments to sell fixed rate loans totaling $2,210,000 at December 31,
1997. Metropolitan's commitments to originate and purchase loans are for loans
at rates ranging from 6.5% to 16% and commitment periods up to one year.
During 1997 and 1996, the Corporation purchased approximately $12,816,000
and $16,675,000 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 $320,464, $695,798, and $559,256 on the sale of these options during the
years ended December 31, 1997, 1996, and 1995, respectively. At December 31,
1997, all options had been exercised and there were no loans held for sale in
connection with outstanding purchase options. At December 31, 1996, loans with a
carrying value of $6,409,841 were held for sale in connection with outstanding
purchase options.
RESERVE REQUIREMENTS. The Bank is required to maintain $2,955,000 of cash
on hand or on deposit with the Federal Reserve to meet regulatory reserve
requirements at December 31, 1997. These funds do not earn interest.
LIQUIDITY REQUIREMENT. The Corporation is required to maintain cash or
short-term investments equal to six months interest on the 1995 subordinated
notes or approximately $675,000 as a condition of the indenture agreement
related to the 1995 subordinated notes.
NOTE 13 -- RESTRICTIONS ON RETAINED EARNINGS AND CAPITAL REQUIREMENTS
In connection with the initial public offering of stock completed in
October, 1996, the Board of Directors approved a 3,125,635-for-1 stock split,
effected in the form of a stock dividend during October 1996. In addition, the
Board of Directors approved a 2-for-1 stock split in the fourth quarter, 1997,
increasing the number of shares outstanding to 7,051,270.
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, 1997 and 1996, 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 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
TOTAL TIER 1 TO ADJUSTED TOTAL ASSETS
--------- ---------- ------------------------
<S> <C> <C> <C>
Well capitalized..................................... 10% 6% 5%
Adequately capitalized............................... 8% 4% 4%
Undercapitalized..................................... 6% 3% 3%
</TABLE>
72
<PAGE> 38
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
At year end, the Bank's actual capital levels (in thousands) and minimum
required levels were:
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
---------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
1997
Total capital (to risk weighted
assets)........................... $54,343 8.39% $51,836 8.0% $64,796 10.0%
Tier 1 (core) capital (to risk
weighted assets).................. $50,215 7.75% $25,918 4.0% $38,877 6.0%
Tier 1 (core) capital (to adjusted
total assets)..................... $50,215 5.47% $36,738 4.0% $45,923 5.0%
Tangible capital (to adjusted total
assets)........................... $49,901 5.43% $13,777 1.5% N/A
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
</TABLE>
The Bank at year-end 1997 was categorized as adequately capitalized. At
December 31, 1997, the most restrictive regulatory constraint on the payment of
dividends from the Bank to the holding company and the retention of the
adequately capitalized status was the total capital (to risk weighted capital)
ratio. Management is not aware of any event or circumstances after December 31,
1997 that would change the capital category.
A savings association which fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
Office of Thrift Supervision ("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 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.
73
<PAGE> 39
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
The terms of the 1993 subordinated notes prohibit the Corporation from
paying any cash dividends on common stock until those notes are paid off. The
terms of the 1995 subordinated notes and related indenture agreement along with
the Huntington National Bank line of credit prohibit the Corporation from paying
cash dividends unless the Corporation's ratio of tangible equity to total assets
exceeds 7.0%.
NOTE 14 -- RELATED PARTY TRANSACTIONS
In the years ended December 31, 1997, 1996 and 1995 the Corporation
expensed $96,000 per year for management fees relating to services provided by
an affiliate.
Certain directors and executive officers of the Corporation and its
subsidiaries hold an interest in the 1993 subordinated notes. The aggregate
interest in the subordinated debt held by related parties totaled $1,265,284 at
December 31, 1997 and 1996. In addition, the Corporation's 401(k) salary
deferral plan held a $400,000 interest in the subordinated debt at December 31,
1997 and 1996.
NOTE 15 -- 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, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and equivalents.......... $ 22,510,688 $ 22,510,688 $ 16,522,577 $ 16,522,577
Securities.................... 6,445,879 6,445,879 13,173,458 13,173,458
Mortgage-backed securities.... 143,166,654 143,166,654 56,672,294 56,672,294
Loans, net.................... 707,884,738 732,123,284 646,465,881 658,869,077
Federal Home Loan Bank stock.. 5,349,700 5,349,700 3,988,600 3,988,600
Loan servicing rights......... 9,223,974 11,707,000 8,050,837 8,830,101
Accrued interest receivable... 5,752,161 5,752,161 4,790,661 4,790,661
Demand and savings deposits... (260,223,821) (260,223,821) (246,644,366) (246,644,366)
Time deposits................. (478,024,815) (478,415,186) (375,460,151) (376,934,368)
Borrowings.................... (135,869,673) (135,692,553) (101,873,673) (99,724,946)
Accrued interest payable...... (3,272,815) (3,272,815) (4,120,163) (4,120,163)
</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, 1997, the estimated fair values
would necessarily have been realized at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1997 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, 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 fair value was
estimated based on quoted market price. The fixed and 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
74
<PAGE> 40
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
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. The carrying amount of 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 an independent appraisal in 1997 and a discounted cash flow
analysis in 1996. 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 materially different than the nominal value.
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 trained work force, customer goodwill and
similar items.
75
<PAGE> 41
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 16 -- 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,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 349,563 $ 180,112
Securities available for sale............................... 1,705,879 2,009,083
Loans receivable............................................ 50,000 50,000
Investment in Metropolitan Savings Bank..................... 54,234,523 46,383,503
Intangible assets........................................... 50,601 54,090
Prepaid expenses and other assets........................... 1,198,148 1,198,757
----------- -----------
Total assets...................................... $57,588,714 $49,875,545
=========== ===========
LIABILITIES
Borrowings.................................................. $20,373,673 $18,873,673
Other liabilities........................................... 553,785 757,503
----------- -----------
Total liabilities......................................... 20,927,458 19,631,176
----------- -----------
SHAREHOLDERS' EQUITY
Common stock................................................
Additional paid-in capital.................................. 11,101,383 11,101,383
Retained earnings........................................... 24,269,873 18,466,986
Unrealized gain on securities available for sale, net of
tax....................................................... 1,290,000 676,000
----------- -----------
Total shareholders' equity................................ 36,661,256 30,244,369
----------- -----------
Total liabilities and shareholders' equity........ $57,588,714 $49,875,545
=========== ===========
</TABLE>
76
<PAGE> 42
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
PARENT COMPANY ONLY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest on loans and securities......................... $ 107,505 $ 97,909 $ 7,211
Interest on borrowings................................... 1,997,341 1,982,259 958,804
---------- ---------- ----------
Net interest expense..................................... (1,889,836) (1,884,350) (951,593)
Noninterest income
Dividends from Metropolitan Savings Bank............... 1,500,000 1,400,000 850,000
Other operating income................................. 3,647 1,541 89,845
---------- ---------- ----------
Total noninterest income 1,503,647 1,401,541 939,845
---------- ---------- ----------
Noninterest expense
Amortization of intangibles............................ 3,490 3,490 3,490
State franchise taxes.................................. 21,111 24,672 4,833
Other operating expenses............................... 246,244 249,507 315,424
---------- ---------- ----------
Total noninterest expense 270,845 277,669 323,747
---------- ---------- ----------
Income before income taxes............................... (657,034) (760,478) (335,495)
Federal income tax benefit.......................... (723,000) (702,000) (361,000)
---------- ---------- ----------
Net income before equity in undistributed net income of
Metropolitan Savings Bank.............................. 65,966 (58,478) 25,505
Equity in undistributed net income of Metropolitan
Savings Bank........................................... 5,736,921 1,597,381 3,516,914
---------- ---------- ----------
Net income............................................... $5,802,887 $1,538,903 $3,542,419
========== ========== ==========
</TABLE>
77
<PAGE> 43
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $5,802,887 $1,538,903 $3,542,419
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Metropolitan
Savings Bank...................................... (5,736,921) (1,597,381) (3,516,914)
Amortization......................................... 3,490 3,490 3,490
Change in other assets and liabilities............... (203,209) 351,706 (950,460)
---------- ---------- ----------
Net cash from operating activities................ (133,753) 296,718 (921,465)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities.................... 400,000 7,428,600
Purchase of securities available for sale............ (96,796) (8,335,440) (1,102,243)
Capital contributions to Metropolitan Savings Bank... (1,500,000) (7,300,000) (4,520,000)
---------- ---------- ----------
Net cash from investing activities................ (1,196,796) (8,206,840) (5,622,243)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings............................. 19,000,000
Repayment of borrowings.............................. (8,280,000)
Net activity on lines of credit...................... 1,500,000
Proceeds from issuance of stock...................... 3,300,000
---------- ---------- ----------
Net cash from financing activities................... 1,500,000 3,300,000 10,720,000
---------- ---------- ----------
Net change in cash and cash equivalents........... 169,451 (4,610,122) 4,176,292
Cash and cash equivalents at beginning of year......... 180,112 4,790,234 613,942
---------- ---------- ----------
Cash and cash equivalents at end of year............... $ 349,563 $ 180,112 $4,790,234
========== ========== ==========
</TABLE>
NOTE 17 -- FEDERAL DEPOSIT INSURANCE PREMIUMS
On September 30, 1996, legislation was enacted 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 insured deposits. The assessment of 65.7 basis
points on deposits as of March 31, 1995 resulted in the Bank paying $2,927,800,
which was expensed September 30, 1996.
78
<PAGE> 44
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1997, 1996, AND 1995
NOTE 18 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED:
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Interest income.................................. $16,123 $16,492 $17,540 $19,192
Net interest income.............................. 6,438 6,523 6,983 7,699
Provision for loan losses........................ 585 585 585 585
Net income....................................... 1,211 1,293 1,489 1,810
Basic earnings per share......................... $ 0.17 $ 0.18 $ 0 .21 $ 0.26
Diluted earnings per share....................... $ 0.17 $ 0.18 $ 0 .21 $ 0.23
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
Basic earnings (loss) per share.................. $ 0.11 $ 0.14 $ (0.18) $ 0.17
Diluted earnings (loss) per share................ $ 0.11 $ 0.14 $ (0.18) $ 0.17
</TABLE>
79
