<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
------------------
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.[ ]
The aggregated market value of voting stock held by nonaffiliates of the
Registrant as of March 23, 1999 was $15,682,000.
As of March 23, 1999, there were 7,756,393 shares of the Registrant's Common
Stock issued and outstanding.
Documents incorporated by reference:
Portions of the 1998 Annual Report - Parts I and II
Portions of the Proxy Statement for the 1999 Annual Meeting - Part III
1
<PAGE> 2
METROPOLITAN FINANCIAL CORP.
1998 FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C>
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 34
Item 3. Legal Proceedings..................................................................... 34
Item 4. Submission of Matters to a Vote of Security Holders................................... 34
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters................. 36
Item 6. Selected Financial Data............................................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................... 36
Item 8. Financial Statements and Supplementary Data........................................... 37
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.. 37
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 38
Item 11. Executive Compensation................................................................ 38
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 38
Item 13. Certain Relationships and Related Transactions........................................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 38
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Metropolitan Financial Corp. ("Metropolitan") is a savings and loan
holding company that was incorporated in 1972. We are engaged in the principal
business of originating and purchasing mortgage and other loans through our
wholly-owned subsidiary, Metropolitan Bank & Trust Company ("the Bank"). The
Bank is an Ohio chartered stock savings association established in 1958. We
obtain funds for lending and other investment activities primarily from savings
deposits, wholesale borrowings, principal repayments on loans, and the sale of
loans. The activities of Metropolitan at the holding company level 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. Our executive office is located at 6001 Landerhaven
Drive, Mayfield Heights, Ohio 44124.
Robert M. Kaye of Rumson, New Jersey, is Metropolitan's current
majority shareholder. Mr. Kaye acquired Metropolitan in 1987 and remained sole
shareholder until the initial public offering of Metropolitan's Common Stock in
October 1996. Since the initial public offering, Mr. Kaye has owned 77.5% of
Metropolitan's outstanding Common Stock. Mr. Kaye has the ability to decide the
outcome of 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.
At December 31, 1998, we operated 17 full service retail offices in
Northeastern Ohio. As of December 31, 1998, we also maintained five residential
and multifamily/commercial real estate loan production offices. As a secondary
line of business, we service mortgage loans for various investors.
At December 31, 1998, we had total assets of $1.4 billion, total
deposits of $1.1 billion and shareholders' equity of $42.6 million. The Federal
Deposit Insurance Corporation insures the deposits of the Bank up to applicable
limits.
At December 31, 1998, we directly or indirectly owned the following
active and inactive subsidiaries:
ACTIVE SUBSIDIARIES INACTIVE SUBSIDIARIES
- ------------------- ---------------------
- - Metropolitan Bank and Trust Company - MetroCapital Corporation
- - Metropolitan Capital Trust I - Metropolitan Savings Service
Corporation
- - Kimberly Construction Company - Metropolitan Securities Corporation
The Bank changed its name from Metropolitan Savings Bank of Cleveland
to Metropolitan Bank & Trust Company in April 1998. We formed Metropolitan
Capital Trust I during 1998 to facilitate the issuance of cumulative trust
preferred securities. Kimberly Construction Company'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.
All required disclosures as part of Guide 3 are either included in
this document or Management's Discussion and Analysis of Financial Condition and
Results of Operations and Five Year Summary of Selected Data which are
incorporated by reference.
3
<PAGE> 4
LENDING ACTIVITIES
General. Our primary lending activity is the origination and purchase
of mortgage loans secured by multifamily and commercial real estate. We also
originate one- to four-family residential and construction loans, and to a
lesser extent, consumer and business loans.
Loan Portfolio Composition. The following information presents the
composition of our 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.
4
<PAGE> 5
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family $ 189,182 17.4% $146,685 19.2% $114,758 16.8%
Multifamily 337,412 31.1 194,450 25.4 276,544 40.3
Commercial 228,825 21.1 166,593 21.8 135,635 19.8
Construction and land 137,023 12.6 116,829 15.3 71,697 10.5
Held for sale 9,416 0.9 14,230 1.8 8,973 1.3
---------- ----- -------- ----- -------- -----
Total real estate loans 901,858 83.1 638,787 83.5 607,607 88.7
CONSUMER LOANS 96,115 8.8 68,590 9.0 54,180 7.9
CONSUMER HELD FOR SALE 5,601 0.5 -- -- -- --
BUSINESS AND OTHER LOANS 82,317 7.6 57,496 7.5 23,508 3.4
---------- ----- -------- ----- -------- -----
Total loans 1,085,891 100.0% 764,873 100.0% 685,295 100.0%
===== ===== =====
LESS:
Loans in process 46,001 46,833 31,758
Deferred fees, net 5,013 4,108 2,336
Discount (premium) on
loans, net (5,320) 425 560
Allowance for losses on
loans 6,909 5,622 4,175
---------- -------- --------
TOTAL LOANS
RECEIVABLE, NET $1,033,288 $707,885 $646,466
========== ======== ========
<CAPTION>
DECEMBER 31,
1995 1994
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family $ 76,259 15.0% $112,840 25.2%
Multifamily 231,459 45.8 187,928 41.9
Commercial 109,403 21.5 83,354 18.6
Construction and land 48,210 9.5 38,270 8.5
Held for sale 1,504 0.2 84 0.0
-------- ----- -------- -----
Total real estate loans 466,835 92.0 422,476 94.2
CONSUMER LOANS 32,214 6.3 25,946 5.8
CONSUMER HELD FOR SALE -- -- -- --
BUSINESS AND OTHER LOANS 8,703 1.7 171 0.0
-------- ----- -------- -----
Total loans 507,752 100.0% 448,593 100.0%
===== =====
LESS:
Loans in process 23,373 19,338
Deferred fees, net 1,220 1,480
Discount (premium) on
loans, net 544 837
Allowance for losses on
loans 2,765 1,911
-------- --------
TOTAL LOANS
RECEIVABLE, NET $479,850 $425,027
======== ========
</TABLE>
We had commitments to originate or purchase fixed and adjustable rate
loans of $69.8 million and $73.2 million, respectively, at December 31, 1998. In
addition, we had firm commitments to sell fixed rate loans of $24.0 million and
optional commitments to sell fixed rate loans of $6.6 million at December 31,
1998.
5
<PAGE> 6
The following table shows the composition of our 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.
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
---- ---- ----
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 $ 76,566 7.1% $ 59,058 7.7% $ 41,436 6.1%
Multifamily 194,521 17.9 60,136 7.9 88,529 12.9
Commercial 147,860 13.6 52,390 6.9 34,726 5.1
Construction and land 27,849 2.6 20,854 2.7 392 0.0
Held for sale 8,920 0.8 6,294 0.8 2,531 0.4
---------- ---- -------- ---- -------- ----
Total fixed rate real
estate loans 455,716 42.0 198,732 26.0 167,614 24.5
Consumer 93,689 8.6 61,307 8.0 46,725 6.8
Consumer held for sale 5,601 0.5 -- -- -- --
Business and other 25,526 2.4 19,575 2.6 5,650 0.8
---------- ---- -------- ---- -------- ----
Total fixed rate loans 580,532 53.5% 279,614 36.6% 219,989 32.1%
---------- ==== -------- ==== -------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 112,616 10.4% 87,627 11.5% 73,322 10.7%
Multifamily 142,891 13.2 134,314 17.6 188,015 27.5
Commercial 80,965 7.5 114,203 14.9 100,909 14.7
Construction and land 109,174 10.0 95,975 12.5 71,305 10.4
Held for sale 496 0.0 7,936 1.0 6,442 0.9
---------- ---- -------- ---- -------- ----
Total adjustable rate
real estate loans 446,142 41.1 440,055 57.5 439,993 64.2
Consumer 2,426 0.2 7,283 0.9 7,455 1.1
Business and other 56,791 5.2 37,921 5.0 17,858 2.6
---------- ---- -------- ---- -------- ----
Total adjustable rate
loans 505,359 46.5% 485,259 63.4% 465,306 67.9%
---------- ==== -------- ==== -------- ====
LESS:
Loans in process 46,001 46,833 31,758
Deferred fees, net 5,013 4,108 2,336
Discount (premium) on
loans, net (5,320) 425 560
Allowance for losses
on loans 6,909 5,622 4,175
---------- -------- --------
TOTAL LOANS
RECEIVABLE, NET $1,033,288 $707,885 $646,466
========== ======== ========
<CAPTION>
DECEMBER 31,
1995 1994
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIXED RATE LOANS:
Real estate:
One- to four-family $ 35,042 6.9% $ 46,418 10.4%
Multifamily 71,909 14.2 19,852 4.4
Commercial 17,615 3.5 7,948 1.8
Construction and land 39 0.0 -- --
Held for sale 1,504 0.3 84 0.0
-------- ---- -------- ----
Total fixed rate real
estate loans 126,109 24.9 74,302 16.6
Consumer 32,214 6.3 25,946 5.8
Consumer held for sale -- -- -- --
Business and other 2,744 0.5 20 0.0
-------- ---- -------- ----
Total fixed rate loans 161,067 31.7% 100,268 22.4%
-------- ==== -------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 41,217 8.1% 66,422 14.8%
Multifamily 159,550 31.4 168,076 37.5
Commercial 91,788 18.1 75,406 16.8
Construction and land 48,171 9.5 38,270 8.5
Held for sale -- -- -- --
-------- ---- -------- ----
Total adjustable rate
real estate loans 340,726 67.1 348,174 77.6
Consumer -- -- -- --
Business and other 5,959 1.2 151 0.0
-------- ---- -------- ----
Total adjustable rate
loans 346,685 68.3% 348,325 77.6%
-------- ==== -------- ====
LESS:
Loans in process 23,373 19,338
Deferred fees, net 1,220 1,480
Discount (premium) on
loans, net 544 837
Allowance for losses
on loans 2,765 1,911
-------- --------
TOTAL LOANS
RECEIVABLE, NET $479,850 $425,027
======== ========
</TABLE>
6
<PAGE> 7
The following table illustrates the contractual maturity of our loan
portfolio, including loans held for sale at December 31, 1998. The table shows
loans that have adjustable or renegotiable interest rates as maturing in the
period during which the contract is due. The table does not reflect the effects
of possible prepayments, enforcement of due-on-sale clauses, or amortization of
premium, discounts, or deferred loan fees. The table includes demand loans,
loans having no stated maturity and overdraft loans in the due in one year or
less category.
<TABLE>
<CAPTION> DUE AFTER
ONE YEAR
DUE IN ONE THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
---------------- ---------------- ---------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------- ------ ---- -------- ---- ---------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE:
One- to four-family $ 1,921 9.16% $ 1,659 8.62% $195,018 7.17% $ 198,598 7.20%
Multifamily 50 8.00 2,923 8.11 334,439 8.15 337,412 8.15
Commercial 747 9.64 9,218 9.39 218,860 8.47 228,825 8.51
Construction and land 92,185 8.65 31,587 8.77 13,251 8.35 137,023 8.65
CONSUMER 8,551 13.69 16,273 9.81 76,892 10.86 101,716 10.93
BUSINESS 35,984 8.52 16,604 9.01 29,729 9.00 82,317 8.79
-------- ------- -------- ----------
Total $139,438 8.94% $78,264 9.08% $868,189 8.29% $1,085,891 8.43%
======== ======= ======== ==========
</TABLE>
The total amount of loans due after December 31, 1999 which have
predetermined interest rates is $548.5 million. The total amount of loans due
after that date which have floating or adjustable rates is $398.0 million.
7
<PAGE> 8
LOAN ORIGINATIONS AND PURCHASES
Our strategy in recent years has been to increase interest-earning
assets primarily by increasing the total loan portfolio if quality loans with
the necessary portfolio characteristics were available. We accomplished this by
increasing origination capacity and emphasizing purchases. The following table
presents our loan origination, purchase, sale and repayment activities for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to four-family $ 77,297 $ 28,017 $ 56,519
Multifamily 29,215 12,600 20,669
Commercial 9,350 29,304 14,667
Construction and land 73,125 77,062 60,566
Consumer 18,888 12,719 10,062
Business 8,606 27,058 18,536
--------- --------- ---------
Total adjustable rate 216,481 186,760 181,019
--------- --------- ---------
FIXED RATE:
Real Estate:
One- to four-family 223,846 53,712 44,795
Multifamily 75,626 9,490 15,759
Commercial 84,511 1,300 --
Construction and land 16,229 25,333 328
Consumer 66,941 17,598 17,242
Business 20,137 15,003 4,249
--------- --------- ---------
Total fixed rate 487,290 122,436 82,373
--------- --------- ---------
Total loans originated 703,771 309,196 263,392
--------- --------- ---------
PURCHASES BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to four-family -- 90 1,835
Multifamily 21,611 19,433 45,184
Commercial 36,458 22,541 16,905
Construction and land 1,365 347 --
Consumer -- -- 5,432
--------- --------- ---------
Total adjustable rate 59,434 42,411 69,356
--------- --------- ---------
FIXED RATE:
Real Estate:
One- to four-family 1,077 -- 1,125
Multifamily 118,434 23,195 22,971
Commercial 70,753 46,729 21,296
Construction and land 4,072 1,975 --
Consumer 23,622 16,900 12,224
--------- --------- ---------
Total fixed rate 217,958 88,799 57,616
--------- --------- ---------
Total loans purchased 277,392 131,210 126,972
--------- --------- ---------
SALES:
Real Estate:
One- to four-family (233,620) (34,887) (36,392)
Multifamily (6,117) (9,678) (11,539)
Commercial (30,055) (20,782) (7,808)
Construction and land (3,496) (600) --
Business (559) -- --
--------- --------- ---------
Total loan sales (273,847) (65,947) (55,739)
--------- --------- ---------
Loans securitized (100,995) (98,325) (14,458)
Principal repayments (285,303) (196,556) (142,624)
--------- --------- ---------
Total reductions (660,145) (360,828) (212,821)
--------- --------- ---------
Increase (decrease) in other items, net 4,385 (18,159) (10,927)
--------- --------- ---------
NET INCREASE $ 325,403 $ 61,419 $ 166,616
========= ========= =========
</TABLE>
8
<PAGE> 9
Multifamily Lending. We emphasize multifamily real estate loans. We
originate these loans from referrals by present customers of the Bank and
mortgage and real estate brokers. Through our existing referral network and
advertising efforts, we have become known for originating multifamily loans in
our primary multifamily lending markets of Ohio, Kentucky, Michigan,
Pennsylvania, and New Jersey. Although we operate full service retail sales
offices solely in Northeast Ohio, we have loan origination offices in Southern
Ohio, Western Pennsylvania, and Southeastern Michigan.
At December 31, 1998, our multifamily loans totaled $337.4 million,
with an average loan size of approximately $534,000. Of this amount, we
originated $123.7 million, or 36.6%. Currently, we emphasize the origination of
multifamily loans with principal amounts of $2.0 to $6.0 million and balloon
maturities of 10 years. Adjustable loans are adjustable on a one-, three- or
five-year schedule with amortization periods of 25 or 30 years. We base rate
adjustments 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, we have allocated more funds for
fixed rate programs. Typically, the loans have balloon maturities of 10 years.
The maximum loan to value ratio of multifamily residential loans is 75%.
We recognize that multifamily loans generally involve a higher degree
of risk than one- to four-family residential real estate loans. Multifamily
loans involve more risk because they typically involve larger loan balances to
single borrowers or groups of related borrowers. The payment experience on these
loans typically depends upon the successful operation of the related real estate
project and is subject to risks such as excessive vacancy rates or inadequate
rental income levels. In order to manage and reduce these risks, we use strict
underwriting standards in our multifamily residential lending process.
Apartment buildings, generally with less than 75 residential units,
typically secure loans originated in this area. Our underwriting process
includes a site evaluation, which considers factors such as location, access by
roadways, condition of the apartments, and amenities. One of our employees
visits each location before a loan approval is made. The underwriting process
involves an evaluation of the borrower, whether the borrower is an individual or
a group of individuals acting as a separate entity. We review the financial
statements of each of the individual borrowers and generally obtain personal
guarantees in an amount equal to the original principal amount of the loan.
Staff independent of the lending department reviews the financial statements of
individual guarantors. In addition, we complete an analysis of debt service
coverage of the property. Debt service coverage requirements are determined
based upon the individual characteristics of each loan. Typically, these
requirements range from a ratio of 1.15:1 to 1.30:1. For the multifamily loans,
the debt service coverage is calculated based on the maximum interest rate of
the loan.
At December 31, 1998, $213.8 million or 63.4% of our multifamily loan
portfolio was purchased. Prior to purchasing these loans, we use a similar
underwriting process with substantially the same standards as for our originated
loans. In some cases, when we consider the purchase of a portfolio with a
considerable number of moderate balance loans, we use an independent contract
inspector for property inspections. Real estate located in Ohio secures 37.5% of
our multifamily loan portfolio. Underlying real estate for the remaining loans
is primarily located in California, Michigan, Pennsylvania and New Jersey.
Commercial Real Estate Lending. At December 31, 1998, loans secured by
commercial real estate totaled $228.8 million or 21.1% of our total portfolio.
The average size of these loans was $618,000. Of this amount, we originated
$75.2 million or 32.9% and $153.6 million or 67.1% represented loans purchased
from a variety of sources, predominantly other financial institutions.
We purchase loans secured by commercial real estate generally when
these loans are secured by retail strip shopping centers or office buildings and
the loan yields and other terms meet our requirements. In 1997, we began to
introduce more geographic
9
<PAGE> 10
diversity into the portfolio based on our desire to acquire high credit quality
loans. We believe a certain amount of geographic diversity is important to
reduce the risk of loss due to regional economic downturns.
We recognize that commercial real estate loans generally involve a
higher degree of risk than the financing of one- to four-family residential real
estate. 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, 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, we focus our lending on existing properties with a record of satisfactory
performance and target retail strip centers and office buildings with multiple
tenants.
We purchase commercial real estate loans secured by strip shopping
centers and small office buildings to a much greater extent than we originate
commercial real estate loans. Through customer referrals and real estate
brokers, we lend on commercial real estate in many states, but predominantly in
Ohio, Pennsylvania, Northern Kentucky, Michigan and California. These loans are
typically ten year balloon loans with an amortization period of 25 years at a
margin over the appropriate term U.S. Treasury securities. The maximum loan to
value ratio is generally 75%.
The following table presents information as to the locations and types
of properties securing the multifamily and commercial real estate portfolio as
of December 31, 1998. We have loans in 41 states. Properties securing loans in
38 states are aggregated in the table because none of those states exceed 5.0%
of the outstanding principal balance of the total multifamily and commercial
real estate portfolio.
<TABLE>
<CAPTION>
NUMBER
OF LOANS PERCENT PRINCIPAL PERCENT
-------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Ohio
Apartments 160 16.0% $126,649 22.4%
Office buildings 31 3.1 14,836 2.6
Retail centers 16 1.6 8,698 1.5
Other 22 2.2 5,532 1.0
----- -------- -------- -----
Total 229 22.9 155,715 27.5
----- ----- -------- -----
California:
Apartments 226 22.5 100,783 17.8
Office buildings 43 4.3 15,760 2.8
Retail centers 66 6.6 30,712 5.5
Other 36 3.6 17,790 3.1
----- ----- -------- -----
Total 371 37.0 165,045 29.2
----- ----- -------- -----
Pennsylvania:
Apartments 47 4.7 25,995 4.6
Office buildings 7 0.7 19,363 3.4
Retail centers 5 0.5 13,170 2.3
Other 4 0.4 1,036 0.2
----- -------- -------- -----
Total 63 6.3 59,564 10.5
----- ----- -------- -----
Other states:
Apartments 199 19.8 83,985 14.8
Office Buildings 49 4.9 41,328 7.3
Retail centers 38 3.8 28,958 5.1
Other 53 5.3 31,642 5.6
----- ----- ------ -------- ------
Total 339 33.8 185,913 32.8
----- ----- -------- ------
1,002 100.0% $566,237 100.0%
===== ===== ======== ======
</TABLE>
10
<PAGE> 11
The following table presents aggregate information as to the type of
security as of December 31, 1998:
<TABLE>
<CAPTION>
AVERAGE
NUMBER BALANCE
OF LOANS PER LOAN PRINCIPAL PERCENT
-------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Apartments 632 $534 $337,412 59.6%
Office buildings 130 702 91,287 16.1
Retail centers 125 652 81,538 14.4
Other 115 487 56,000 9.9
----- -------- -----
Total 1,002 $565 $566,237 100.0%
===== ======== =====
</TABLE>
One- to Four-family Residential Lending. In 1998, we originated
approximately 20.1% of our one- to four-family residential loans through our
full service retail sales offices. We originated the remainder with commissioned
loan officers, correspondent lenders, or our telemarketing department
established in 1998. We maintain one- to four-family residential loan
origination offices in North Olmsted, Ohio and Bloomfield, Michigan. We have
focused our 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, 1998, the one- to four-family residential mortgages totaled
$189.2 million or 17.4% of our loan portfolio.
We emphasize the origination of conventional ARM loans for retention in
our loan portfolio and fixed rate loans suitable for sale in the secondary
market. In addition, we offer fixed rate end loan financing to borrowers
building homes with our approved construction loan builders. We retain only a
limited dollar amount of this fixed rate end loan financing in our portfolio. We
closely monitor the amount being originated and subsequently retained. Property
located in Northeastern Ohio secures substantially all of the one- to
four-family residential mortgage loan originated for retention in our portfolio.
At December 31, 1998, our fixed rate residential mortgage loan portfolio totaled
$76.6 million, or 7.1%, of our total loan portfolio.
We are presently originating three types of ARM products for our
portfolio. The first product is a one-year adjustable ARM. The interest rate is
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.
In addition, the adjustments are generally limited to a 2% maximum annual
interest rate adjustment and 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. In addition,
the adjustments are generally limited to a 2% maximum interest rate adjustment
per change and a maximum lifetime adjustment of 6%.
Our originated ARMs do not permit negative amortization of principal
and most of them are convertible into fixed rate mortgages. We typically sell
these loans in the secondary market if the option to convert to a fixed rate is
exercised. We originate ARMs with terms to maturity of up to 30 years. Borrowers
are qualified based upon secondary market requirements.
At December 31, 1998, $23.8 million, or 12.6% of our one- to
four-family residential loan portfolio was purchased. We use an underwriting
process with substantially the same standards as for our originated loans when
purchasing these loans.
Construction Lending and Land Development. We originate construction
loans on single family homes to local builders in our primary lending market and
to individual borrowers on owner-occupied properties. We also make 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. Our primary market
area for construction
11
<PAGE> 12
lending is in Northeastern Ohio, in the counties of Cuyahoga, Lake, Geauga,
Summit, Medina, Portage, and Lorain. We currently have one commissioned
construction loan originator in the high volume Columbus, Ohio construction
market to originate single family construction loans and improved lot loans.
The following table presents the number, amount, and type of properties
securing construction and land development loans at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL
LOANS BALANCE
----- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
RESIDENTIAL CONSTRUCTION LOANS:
Owner-occupied 74 $ 20,611
Builder presold 42 9,733
Builder model homes 129 26,810
Builder lines of credit 26 24,430
Lot loans 55 8,188
Development loans 28 18,650
--- --------
Total residential construction loans 354 108,422
NONRESIDENTIAL CONSTRUCTION LOANS:
Multifamily 3 3,956
Commercial 5 15,173
--- --------
Total nonresidential construction loans 8 19,129
LAND LOANS 5 8,152
--- --------
Total 367 $135,703
=== ========
</TABLE>
The risk of loss on a construction loan largely depends 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. We also review the
borrower's financial position and require a personal guarantee on all builder
loans. We base all loans upon the appraised value of the underlying collateral,
as completed. Qualified independent fee appraisers who have been approved by the
Board of Directors complete the appraisals.
We establish a maximum loan to value ratio for each type of loan based
upon the contract price, cost estimate or appraised value, whichever is less.
The maximum loan to value ratio by 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
- builder lines of credit--75% (development of land for cluster
or condominium projects which will be part of builder line of
credit).
All construction loans that we make to builders are for relatively
short terms (6 to 24 months) and are at 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, the loan portfolio.
We offer builders lines of credit to build single family homes.
Builders cannot use these lines for any other purpose. We secure all lines of
credit 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. The
number of homes built without contracts for sale or as model homes is limited by
the financial strength of the builder. We permit the use of lines of credit only
where a builder owns a specific
12
<PAGE> 13
number of lots in a development. We base draws upon the percentage of
completion. At all times, we retain enough funds to complete the home. We make
disbursements only after receipt of a property inspection and a mechanic's lien
update from the title company.
We also originate construction loans on multifamily and commercial real
estate projects where we intend to provide the financing once construction is
complete. We underwrite these loans in a manner similar to our originated and
purchased multifamily residential and commercial real estate loans described
above.
Consumer Lending. The underwriting standards we employ 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, 1998, secured
loans comprised $91.0 million or 89.5% of the $101.7 million consumer loan
portfolio. However, even in the case of secured loans, repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance due to the higher likelihood of damage, loss or
depreciation. In addition, consumer loan collections depends upon the borrower's
continuing financial stability. Thus, personal circumstances are more likely to
have an adverse affect on collection. Furthermore, the application of various
federal and state laws, including bankruptcy and insolvency laws, may limit the
amount recovered on such loans in the event of default.
In order to supplement the growth in the consumer loan portfolio, we
have been purchasing loans through correspondent lenders and bulk portfolios
offered for sale. At December 31, 1998, purchased consumer loans represented
$59.5 million, or 58.5% of the outstanding balance of consumer loans. Second
mortgages on one- to four-family homes, and first liens on automobiles, or
manufactured housing are the primary collateral types for these loans. In 1997,
we acquired two packages of subprime loans totaling $6.3 million. Subprime loans
are 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. In 1998, we acquired an
additional loan package of $5.0 million of subprime loans also secured by
manufactured housing. Total subprime loans were $10.2 million, or 9.6% of total
consumer loans at December 31, 1998.
At December 31, 1998, our credit card portfolio had an outstanding
balance of $7.3 million with $26.8 million in unused credit lines. Of the
outstanding balance, $2.6 million related to cards we originated and $4.7
million related to credit card relationships we purchased.
Business Lending. We began offering business loans in 1994. At December
31, 1998, we had $82.3 million of business loans outstanding against available
lines totaling $101.0 million. Our business lending activities encompass loans
with a variety of purposes and security, including loans to finance accounts
receivable, inventory and equipment. Generally, our business lending has been
limited to borrowers headquartered, or doing business in, our retail market
area. These loans are generally adjustable interest rates at some margin over
the prime interest rate and some are guaranteed by the Small Business
Administration.
13
<PAGE> 14
The following table sets forth information regarding the number and
amount of our business loans as of December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
NUMBER TOTAL LOAN PRINCIPAL
OF LOANS COMMITMENT BALANCE
-------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LOANS SECURED BY:
Accounts receivable, inventory and equipment 205 $38,060 $30,876
Second lien on real estate 67 23,835 17,865
First lien on real estate 35 28,292 27,979
Specific equipment and machinery 33 1,622 1,622
Titled vehicles 30 990 990
Stocks and bonds 5 1,492 1,367
Certificates of deposit 9 617 281
UNSECURED LOANS 18 2,602 1,337
--- ------- -------
Total 402 $97,510 $82,317
=== ======= =======
</TABLE>
Business loans differ from residential mortgage loans. Residential
mortgage loans generally are made on the basis of the borrower's ability to make
repayment from his or her employment and other income and are secured by real
property whose value is 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 substantially
depend 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. We work to reduce
this risk by carefully underwriting business loans.
SECONDARY MARKET ACTIVITIES
In addition to originating loans for our own portfolio, we participate
in secondary mortgage market activities by selling whole loans, as well as
creating mortgage-backed securities, with FannieMae and the FreddieMac.
Secondary market sales allow us 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 we choose not to hold in our own
portfolio. Our primary focus in mortgage banking operations is to sell fixed
rate one- to four-family residential mortgage loans.
The secondary market for mortgage loans is comprised of institutional
investors who purchase loans meeting certain underwriting specifications with
respect to loan-to-value ratios, maturities and yields. Subject to market
conditions, we tailor some of our real estate loan programs to meet the
specifications of FreddieMac and FannieMae, two of the largest institutional
investors. We generally 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 FreddieMac and FannieMae is without recourse to us.
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 our relationship with the
institutional investor. In the case of one- to four-family residential loans, we
periodically obtain formal commitments primarily with FreddieMac and FannieMae.
Pursuant to these commitments, FreddieMac or FannieMae is obligated to purchase
a specific dollar amount of whole loans over a specified period. The terms of
the commitments range from ten to sixty days. The pricing varies depending upon
the length of each commitment. We classify loans as held for sale while we are
negotiating the sale of specific loans which meet selected criteria to a
specific investor or after a sale is negotiated but before it is settled.
14
<PAGE> 15
During the third quarter of 1997, we completed the securitization of
$93.0 million of multifamily loans with FannieMae under a newly developed
program. This program uses insurance to provide the credit enhancement necessary
to achieve a triple A rating. We are servicing the loans as mortgage-backed
securities for FannieMae. To date, we have retained ownership of the securities
in that portfolio. During the fourth quarter of 1998, we completed the
securitization of $101.0 million of commercial real estate loans with a private
issuer in a non-rated structure. Similar to the 1997 FannieMae transaction, we
used an insurance policy to assume all credit risk. In addition to decreasing
loans receivable and increasing mortgage-backed securities, the securitizations
have had several other benefits, including the following:
- improvement in the credit risk profile of the Bank's balance
sheet by converting whole loans into mortgage-backed
securities guaranteed by others;
- reduction of the required level of risk-based capital; and
- addition of high quality collateral which can be pledged for
borrowings in the secondary market to fund future loan growth.
We also sell whole loans or participations in multifamily and
commercial real estate loans to private investors and retain the right to
service the loans. We make the majority of our sales of multifamily and
commercial real estate loans under individually negotiated whole loan or
participation sales agreements. These sales are for individual loans or for a
package of loans. During 1998, we sold $12.9 million of multifamily and
commercial real estate participations. The Bank may seek a participant when a
loan would otherwise exceed the loan-to-one borrower limit. We have sold other
loans to manage geographic concentration or interest rate risk. In addition, we
sell multifamily and commercial real estate loans that are purchased under a
loan option program. See "--Loan Option Income."
LOAN SERVICING ACTIVITIES
At December 31, 1998, the overall servicing portfolio was $2.1 billion.
Of that amount, loans serviced for others totaled $1.5 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 $ -- $ -- $186,481 $ 186,481
FreddieMac 319,082 469,645 -- 788,727
FannieMae 57,998 428,159 -- 486,157
Private investors 3,469 7,837 -- 11,306
-------- -------- -------- ----------
Total One- to Four-family 380,549 905,641 186,481 1,472,671
-------- -------- -------- ----------
Multifamily and Commercial:
Metropolitan portfolio -- -- 430,978 430,978
FreddieMac 3,323 1,608 -- 4,931
FannieMae 78,454 22,865 -- 101,319
Private investors 77,473 25,806 -- 103,279
-------- -------- -------- ----------
Total Multifamily and
Commercial 159,250 50,279 430,978 640,507
-------- -------- -------- ----------
Total $539,799 $955,920 $617,459 $2,113,178
======== ======== ======== ==========
</TABLE>
Generally, we service the loans we originate. When we sell loans to an
investor, such as FreddieMac or FannieMae, we generally retain the servicing
rights for the loans. We receive fee income for servicing these sold loans at
various percentages based upon the unpaid principal balances of the loans
serviced. We collect and retain service fees out of monthly mortgage payments.
To further increase our servicing fee income, the Bank has aggressively pursued
purchases of servicing portfolios from other originating institutions. These
purchased servicing portfolios are primarily FreddieMac and FannieMae single
family loans that are geographically
15
<PAGE> 16
located within the eastern half of the nation. At December 31, 1998, the unpaid
principal balance of our purchased servicing portfolio was $955.9 million. The
related balance of purchased mortgage servicing rights was $9.9 million.
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.
LOAN OPTION INCOME
During 1995, we developed a program to purchase loans and sell loan
options in order to take advantage of our underwriting capabilities, increase
net interest income and increase noninterest income. In these transactions, we
purchase loans and sell nonrefundable options to a third party to purchase these
same loans at a specified price within a specified period. Prior to purchasing
the loans that will be subject to the options, the Bank uses an underwriting
process with substantially the same standards as in its origination process. In
the event the option is not exercised, we would sell the underlying loans or
transfer them to the Bank's portfolio at their fair value at the date of the
transfer. We negotiate a nonrefundable option fee 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, we have entered into these option
transactions with one loan broker. At December 31, 1998, there were $5.6 million
in loans held for sale in connection with outstanding options. We have
recognized $388,000 in income in connection with loan options during 1998.
BRIDGE LOAN ACTIVITY
During 1997, we developed a program to underwrite and originate bridge
loans to take advantage of our underwriting capabilities and to increase
interest income. A bridge loan is a short term financing arrangement provided to
a borrower until they secure more permanent financing or sell the property. For
these loans we assess the debt service capacity and underlying collateral value
as we would for other multifamily or commercial real estate loans. We collect 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. This adds a potential element of
risk. In all cases, these loans are adequately secured by real property. During
1998, we originated three of these loans totaling $5.4 million and recognized
origination fees of $449,000 in net interest income. During the two years, we
funded ten loans totaling $21.2 million. We are no longer actively marketing
this program.
LOAN DELINQUENCIES AND NONPERFORMING ASSETS
When a borrower fails to make a required payment on a loan, we begin
work to cure the delinquency by contacting the borrower. In the case of real
estate loans, we send a late notice 15 days after the due date. If the
delinquency is not cured within 30 days of the due date, we contact the borrower
by telephone. We make additional written and verbal contacts with the borrower
between 30 and 90 days after the due date. If the delinquency continues for a
period of 90 days, we usually bring an action to foreclose on the property. If
we foreclose on the property, we sell the property at public auction where we
may be the acquirer. Delinquent consumer loans are handled in a similar manner,
except that we make our initial contact when the payment is 10 days past due. We
bring an action to collect any loan payment that is delinquent for more than 30
days. Our procedures for collection efforts, repossession, and sale of consumer
collateral must comply with various requirements under state and federal
consumer protection laws. In the case of business loans, we monitor payment
activity on a weekly basis. We make telephone contact with any borrower who has
not made their payment by its due date. If a delay in payment
16
<PAGE> 17
continues, we meet with the borrower. The borrowers' cash flow situation is
evaluated and a repayment plan instituted. In some situations, we exercise our
rights to collateral or assignment of receivables in order to liquidate the
debt.
The following table sets forth information concerning delinquent loans
at December 31, 1998, in dollar amounts and as a percentage of each category of
the loan portfolio. The amounts presented represent the total remaining
principal balances of the related loans, rather than the actual payment amounts
that are overdue.
<TABLE>
<CAPTION>
60-89 DAYS 90 DAYS AND OVER TOTAL DELINQUENT LOANS
---------- ---------------- ----------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------ -------- ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE
One- to four-family 1 $ 104 0.05% 7 $ 512 0.26% 8 $ 616 0.31%
Multifamily -- -- -- -- -- -- -- -- --
Commercial 1 142 0.06 6 6,123 2.68 7 6,265 2.74
Construction and land -- -- -- 4 1,824 1.33 4 1,824 1.33
CONSUMER 58 669 0.66 365 2,498 2.46 423 3,167 3.11
BUSINESS 4 863 1.05 14 1,734 2.11 18 2,597 3.15
-- ------ --- ------- --- -------
Total 64 $1,778 0.16% 396 $12,691 1.17% 460 $14,469 1.33%
== ====== === ======= === =======
</TABLE>
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. In addition, interest is not accrued on loans as to which
payment of principal and interest in full is not expected unless in our judgment
the loan is well secured, and we expect no loss in principal or interest.
When a loan reaches nonaccrual status, we discontinue interest accruals
and reverse prior accruals. The classification of a loan on nonaccrual status
does not necessarily indicate that the principal is uncollectible in whole or in
part. We consider both the adequacy of the collateral and the other resources of
the borrower in determining the steps to take to collect nonaccrual loans. The
final determination as to these steps is made on a case-by-case basis.
Alternatives we consider 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,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans
One-to four-family $ 512 $ 792 $ 950 $ 293 $ 337
Multifamily -- -- 871 2,138 1,585
Commercial real estate 6,123 198 2,032 391 150
Construction and land
development 1,824 -- -- 15 15
Consumer 2,038 1,562 802 266 153
Business 1,734 211 268 -- --
------- ------ ------ ------ ------
Total nonaccruing loans 12,231 2,763 4,923 3,103 2,240
Loans past due greater
than 90
days still accruing 460 384 271 204 128
------- ------ ------ ------ ------
Total nonperforming loans 12,691 3,147 5,194 3,307 2,368
Real estate owned 5,534 2,037 177 258 53
------- ------ ------ ------ ------
Total nonperforming
assets $18,225 $5,184 $5,371 $3,565 $2,421
======= ====== ====== ====== ======
Nonperforming loans to
total loans 1.23% 0.44% 0.80% 0.69% 0.55%
Nonperforming assets
to total assets 1.34% 0.56% 0.70% 0.60% 0.51%
</TABLE>
17
<PAGE> 18
For the years ended December 31, 1998 and 1997, gross interest income
which would have been recorded had the nonaccruing loans been current in
accordance with their original terms amounted to $788,000 and $151,000,
respectively. The amounts that were included in interest income on these loans
were $291,000 and $132,000 for the years ended 1998 and 1997, respectively.
Nonperforming assets were $18.2 million at December 31, 1998, an
increase of $13.0 million from $5.2 million at December 31, 1997. During the
same period, total net loans receivable increased $325.4 million to $1.0 billion
at December 31, 1998. The nonaccrual loan component of nonperforming assets
increased $9.5 million to $12.2 million while real estate owned increased $3.5
million to $5.5 million. Nonperforming loans showed significant increases in
four areas: commercial real estate; construction and land development; business
loans; and consumer loans. Real estate owned increased due to two properties
acquired in December.
The $5.9 million increase in nonperforming commercial real estate is
attributable to three loans including a $4.0 million loan financing a waterpark
in Southern California. This loan and one other are bridge loans, a program we
are no longer actively marketing. Based on appraisals and other current
estimates of value, we do not anticipate losses on these three loans. The $1.8
million increase in nonperforming construction and land development loans is
related to two borrowers. The largest is a $1.3 million land development loan
for residential lots that has experienced slower than anticipated lot
absorption. The remaining loans are model home construction loans. Based on
appraised values and current market research, we do not anticipate losses on
these two relationships.
The $1.5 million increase in nonperforming business loans is consistent
with the growth in business loans. We introduced this product in 1995. From 1996
to 1997, this loan category grew $34.0 million to $57.5 million. In 1998, this
loan category grew another $24.8 million to $82.3 million. Total nonperforming
business loans are $1.7 million, or 2.1% of that loan category. Unlike the real
estate lending which comprises 80% of our loan portfolio, business loans often
depend on the successful operation of a business and depreciable collateral.
Therefore, we expect nonperforming loans and losses to be higher for business
loans than for real estate loans. Management currently estimates probable losses
on these five loans at $900,000. We have allocated a portion of the allowance
for loan losses to this estimate until the actual loss is determined and
charged-off. We are aggressively pursuing collection of all nonperforming loans
including those described above.
Nonperforming consumer loans have increased to $2.5 million at December
31, 1998 and represent 2.5% of the consumer portfolio. This increase is
primarily attributable to subprime lending. We began suprime lending in 1997.
These loans typically carry higher delinquency rates than other consumer loans
and provide a greater yield to compensate for the related increase in costs.
These loans account for $240,000, or 29.7% of consumer loan charge-offs in 1998.
The aggregate balance of the subprime portfolio at December 31, 1998 was $10.2
million or less than one percent of total loans. All consumer loans that are
delinquent 120 days or more are 100% covered by loan insurance or a portion of
the allowance for loan losses equal to the estimated loss has been allocated to
that loan.
In December 1998, we acquired title to a motel in Northeast Ohio and a
marina in California through foreclosure. We adjusted the carrying value of
these properties to their estimated fair value of $3.4 million and $1.3 million,
respectively, at the time of acquisition. We are actively pursuing the sale of
both properties. We anticipate no further losses.
At December 31, 1998, we had potential problem loans totaling $3.1
million which were classified by management as substandard and were not included
in the table above. Seven loans secured by multifamily and commercial real
estate are $1.8 million of this amount. Although these loans were current or not
seriously delinquent, there is some unfavorable development involving each loan.
If not corrected, the unfavorable development could result in the loan changing
to nonaccrual status or a loss being incurred. We are in contact with these
borrowers, and we monitor their status closely.
18
<PAGE> 19
ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS
We maintain an allowance for losses on loans because some loans may not
be repaid in full. We maintain the allowance at a level we consider 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 we may
periodically allocate portions of the allowance for specific problem loans, the
whole allowance is available for any loan charge-offs that occur. We charge a
loan against the allowance as a loss when, in our opinion, it is uncollectible.
Despite the charge-off, we continue collection efforts. As a result, future
recoveries may occur.
The following table sets forth an allocation of the allowance for
losses on loans among categories as of December 31 of the years indicated based
on our estimate of probable losses that were currently anticipated based largely
on past loss experience. Since the factors influencing such estimates are
subject to change over time, we believe that any allocation of the allowance for
losses on loans into specific categories lends an appearance of precision which
does not exist. In practice, we use the allowance 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 our 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>
DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family $ 304 18.3% $ 237 19.8% $ 228 17.1% $ 172 15.2% $ 189 25.2%
Multifamily 648 31.1 482 25.4 1,020 40.8 887 45.8 733 41.9
Commercial real estate 1,019 21.1 1,400 23.0 937 20.3 676 21.5 358 18.6
Construction and land 237 12.6 353 15.3 193 10.5 167 9.5 99 8.5
Consumer 2,335 9.3 2,132 9.0 1,182 7.9 512 6.3 340 5.8
Business 1,675 7.6 456 7.5 197 3.4 74 1.7 1 --
Unallocated 691 -- 562 -- 418 -- 277 -- 191 --
------ ----- ------ ----- ------ ------ ------ ----- ------ -----
Total $6,909 100.0% $5,622 100.0% $4,175 100.0% $2,765 100.0% $1,911 100.0%
====== ===== ====== ===== ====== ====== ====== ===== ====== =====
</TABLE>
With the uncertainties that could adversely affect the overall quality
of the loan portfolio, we consider an adequate allowance for losses on loans
essential. We consider the unallocated allowance 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. In
our opinion the risks associated with off-balance sheet commitments are
insignificant. Therefore, we have not provided an allowance for these
commitments.
19
<PAGE> 20
The following table provides an analysis of the allowance for losses on
loans for the periods indicated. In each period, we base the provision for loan
losses on an analysis of individual credits, prior and current loss experience,
overall growth in the portfolio, and current economic conditions.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING
OF PERIOD $5,622 $4,175 $2,765 $1,911 $1,239
Charge-offs:
One- to four-family 5 32 22 23 23
Multifamily 39 494 119 -- 64
Commercial real estate -- -- -- 27 --
Construction and land -- -- -- -- --
Consumer 809 363 95 56 14
Business 565 10 -- -- --
------ ------ ------ ------ ------
Total charge-offs 1,418 899 236 106 101
------ ------ ------ ------ ------
Recoveries:
One-to four-family 25 -- -- 1 1
Multifamily 13 -- -- -- 6
Commercial real estate -- -- -- -- --
Construction and land -- -- -- -- --
Consumer 17 6 11 -- --
Business -- -- -- -- --
------ ------ ------ ------ ------
Total recoveries 55 6 11 1 7
------ ------ ------ ------ ------
Net charge-offs 1,363 893 225 105 94
Provision for loan losses 2,650 2,340 1,635 959 766
------ ------ ------ ------ ------
BALANCE AT END OF PERIOD $6,909 $5,622 $4,175 $2,765 $1,911
====== ====== ====== ====== ======
Net charge-offs to
average loans 0.16% 0.13% 0.04% 0.02% 0.03%
Provision for loan
losses to average loans 0.31% 0.35% 0.28% 0.21% 0.21%
Allowance for losses on
loans to total
nonperforming loans
at end of period 54.44% 178.60% 80.38% 83.61% 80.70%
Allowance for losses on
loans to total loans
at end of period 0.66% 0.79% 0.64% 0.57% 0.45%
</TABLE>
INVESTMENT PORTFOLIO
We maintain our 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 we can hold. As a member
of the Federal Home Loan Bank System, the Bank is required to hold a minimum
amount of Federal Home Loan Bank stock based upon asset size and mix. As the
Bank grows, management anticipates this investment will increase.
20
<PAGE> 21
The following table summarizes the amounts and the distribution of
securities held as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES:
Mutual funds $ 2,059 $ 1,706 $ 2,009
Tax-exempt bond 14,817 4,740 --
Revenue bond 1,400 -- --
FannieMae medium term note 9,884 -- 6,065
FreddieMac preferred stock 7,500 -- --
FannieMae preferred stock -- -- 5,100
Federal Home Loan Bank stock 6,054 5,350 3,989
------- ------- -------
Total $41,714 $11,796 $17,163
======= ======= =======
OTHER INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks $ 9,275 $ 1,961 $ 2,745
Term repurchase agreements -- 6,397 6,000
------- ------- -------
Total $ 9,275 $ 8,358 $ 8,745
======= ======= =======
</TABLE>
The following table sets forth the contractual maturities and approximate
weighted average yields of debt securities at December 31, 1998.
<TABLE>
<CAPTION>
DUE IN
----------------------
ONE YEAR FIVE TO MORE THAN
OF LESS TEN YEARS TEN YEARS TOTAL
-------- ---------------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mutual funds $ 2,059 $ -- $ -- $ 2,059
Tax-exempt bond -- -- 14,817 14,817
Revenue bond -- -- 1,400 1,400
FannieMae medium term note -- 9,884 -- 9,884
------- ------- ------- -------
Total $ 2,059 $ 9,884 $16,217 $28,160
======= ======= ======= =======
Weighted average yield 5.06% 5.89% 7.07% 6.51%
</TABLE>
MORTGAGE-BACKED SECURITIES PORTFOLIO
Mortgage-backed securities offer higher rates than treasury or agency
securities with similar maturities because the timing of the repayment of
principal can vary based on the level of prepayments. However, they offer lower
yields than similar loans because the risk of loss of principal is often
guaranteed by the issuing entity or through mortgage insurance. We acquire
mortgage-backed securities through purchases and securitization of loans from
our own portfolio. As rates declined during 1998 we experienced an increase in
prepayments on mortgage-backed securities over the level experienced in 1997
and 1996. We classify all mortgage-backed securities as available for sale.
The following table sets forth the mortgage-backed securities portfolio
at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FannieMae pass-through certificates $ 61,705 $ 97,146 $19,775
GNMA pass-through certificates 5,870 8,037 9,700
FreddieMac participation certificates 13,149 37,714 26,713
BPA Commercial Capital L.L.C.
mortgage-backed security 100,995 -- --
FreddieMac Collateralized Mortgage
Obligation 8,494 -- --
FannieMae Collateralized Mortgage
Obligation 7,868 -- --
Other 214 270 484
-------- -------- -------
Total $198,295 $143,167 $56,672
======== ======== =======
</TABLE>
21
<PAGE> 22
The following table sets forth the contractual maturities and
approximate weighted average yields of mortgage-backed securities at December
31, 1998.
<TABLE>
<CAPTION>
DUE IN
------
ONE FIVE
YEAR TO TO TEN OVER
FIVE YEARS YEARS TEN YEARS TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FannieMae pass-through
certificates $6,743 $53,757 $ 1,205 $ 61,705
GNMA pass-through certificates 81 -- 5,789 5,870
FreddieMac participation
certificates -- -- 13,149 13,149
BPA Commercial Capital L.L.C.
Mortgage-backed security -- -- 100,995 100,995
FreddieMac Collateralized
Mortgage Obligation -- -- 8,494 8,494
FannieMae Collateralized
Mortgage Obligation -- -- 7,868 7,868
Other -- 214 214
------- -------- -------- --------
Total mortgage-backed securities $6,824 $53,757 $137,714 $198,295
====== ======= ======== ========
Weighted average yield 7.41% 7.27% 7.26% 7.27%
</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 funds for lending and
investment purposes. The following paragraphs provide a brief description of the
types of accounts offered:
Passbook and Statement Savings Accounts. Consumers may invest savings
in and withdraw savings from regular passbook, tiered passbook and statement
savings accounts without restriction. We compound interest on tiered passbook
accounts monthly and credit the account monthly. We compound interest on regular
passbook and statement savings accounts quarterly and credit the account
quarterly.
Checking Accounts. We offer two interest-bearing checking and one
noninterest-bearing checking account for consumers. The noninterest checking
requires no minimum balance and has no monthly service fees. The rate paid on
the interest checking account depends upon the balance in the account. We can
waive monthly service charges on personal interest-bearing checking accounts if
the consumer maintains either a $1,000 minimum balance or a greater than $5,000
minimum balance in another deposit account or establish 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. We review the interest rate paid on the interest-bearing
checking accounts regularly and adjust the rate based on cash flow projections
and market interest rates.
In connection with loan servicing activities, we maintain 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 given the level of loans serviced for
others.
We also offer a commercial checking account. This account is
noninterest bearing and is assessed monthly service charges based upon
transaction activity levels.
Certificates of Deposit. We offer fixed rate, fixed term certificates
of deposit. Terms are from seven days to five years. 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. We review interest rates offered on certificates of
deposit regularly and adjust them based on cash flow projections and market
interest rates.
22
<PAGE> 23
From time to time, we have accepted certificates of deposit from
out-of-state individuals and entities, predominantly financial institutions.
These deposits typically have balances of $90,000 to $100,000 and have a term of
one year or more. We do not accept these deposits through brokers. At December
31, 1998, these individuals and entities held approximately $166.3 million of
certificates of deposits, or 15.8% of total deposits.
Individual Retirement Accounts ("IRA"). We also offer IRAs. Customers
may invest funds in a passbook account or any certificate of deposit we
currently offer.
The following table provides information regarding trends in average
deposits for the periods indicated. The noninterest bearing demand deposit
category includes principal and interest custodial accounts and taxes and
insurance custodial accounts for loans serviced for FreddieMac, FannieMae and
private investors.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997 1996
---- ---- ----
PERCENT PERCENT PERCENT
AVERAGE OF RATE AVERAGE OF RATE AVERAGE OF RATE
AMOUNT TOTAL PAID AMOUNT TOTAL PAID AMOUNT TOTAL PAID
------ ----- ---- ------ ----- ---- ------ ----- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 51,385 6.1% $ 38,837 5.8% $ 31,248 5.5%
Interest bearing deposits:
Demand deposits 45,980 5.5 2.75% 39,965 5.9 2.66% 36,273 6.4 2.64%
Savings deposits 184,907 21.9 4.54 170,362 25.2 4.56 169,866 30.2 4.79
Time deposits 560,010 66.5 5.87 426,450 63.1 5.93 325,960 57.9 5.83
-------- ----- -------- ----- -------- -----
Total interest-bearing
deposits 790,897 93.9 5.38 636,777 94.2 5.36 532,099 94.5 4.97
-------- ----- -------- ----- -------- -----
Total average deposits $842,282 100.0% $675,614 100.0% $563,347 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Deposits increased 42.5% to $1.1 billion at December 31, 1998 from a
year earlier. This increase was consistent with the overall growth of the Bank.
The increase was primarily due to a 50.8% increase in time deposits to $720.8
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
certificates of deposit as of December 31, 1998.
<TABLE>
<CAPTION>
PERCENT OF
2.00-4.99% 5.00-5.99% 6.00-6.99% 7.00-8.99% TOTAL TOTAL
--------- --------- --------- --------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS
MATURING IN QUARTER ENDING:
March 31, 1999 $ 35,159 $ 99,440 $ 68,790 $ 355 $203,744 28.3%
June 30, 1999 13,833 106,047 33,787 78 153,745 21.3
September 30, 1999 834 53,522 8,521 -- 62,877 8.7
December 31, 1999 4,573 80,689 25,509 1,472 112,243 15.6
March 31, 2000 656 39,042 21,761 5,262 66,721 9.3
June 30, 2000 341 13,370 8,504 29 22,244 3.1
September 30, 2000 5 16,583 2,351 8,436 27,375 3.8
December 31, 2000 -- 26,786 2,167 1,222 30,175 4.2
March 31, 2001 -- 13,914 2,351 134 16,399 2.3
June 30, 2001 -- 6,753 637 -- 7,390 1.0
September 30, 2001 -- 2,768 220 -- 2,988 0.4
December 31, 2001 -- 2,378 28 -- 2,406 0.3
Thereafter -- 8,102 3,966 396 12,464 1.7
------- -------- -------- ------- -------- -----
Total $55,401 $469,394 $178,592 $17,384 $720,771 100.0%
======= ======== ======== ======= ======== =====
Percent of total 7.7% 65.1% 24.8% 2.4%
</TABLE>
23
<PAGE> 24
The following table shows the remaining maturity for time deposits of
$100,000 or more as of December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Three months or less $ 34,994
Over three through six months 24,130
Over six through twelve months 32,889
Over twelve months 37,417
--------
Total $129,430
========
</TABLE>
In addition to deposits, we rely on borrowed funds. The discussion
below describes our current borrowings.
Subordinated Note Offering. In December 1995, we issued subordinated
notes with an aggregate principal balance of $14.0 million through a public
offering. The interest rate on the notes is 9.625%. We pay interest monthly.
These subordinated notes are unsecured.
Line of Credit. We have a commercial line of credit agreement with a
commercial bank. The maximum borrowing under the line is $12.0 million. We
modified the agreement during 1998 to increase the borrowing limit from $4.0
million. The line matures May 30, 1999, but we can renew the line annually as
agreed by both parties. The interest rate on the line of credit is tied to LIBOR
or prime at our option. As collateral for the loan, our largest shareholder,
Robert Kaye, 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, 1998, the outstanding balance under this agreement was
$8.0 million.
Federal Home Loan Bank Advances. The Federal Home Loan Bank makes funds
available for housing finance to eligible financial institutions like the Bank.
The Federal Home Loan Bank generally limits advances to 50% of assets from all
borrowing sources. We collateralize advances 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 residential mortgage loans at 125% of
the advance amount and various types of investment and mortgage-backed
securities at rates ranging from 101% to 110% of the advance amount. We pledge
Federal Home Loan Bank stock owned by the Bank as additional collateral, but
this stock is not available as primary collateral. The aggregate balance of
assets pledged as collateral for Federal Home Loan Bank advances at December 31,
1998 was $184.0 million. All of these were one- to four-family loans pledged
under the blanket pledge agreement.
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 Federal Home Loan Bank borrowings and at times, more favorable rates.
The aggregate balance of mortgage-backed securities pledged as collateral for
reverse repurchase agreements at December 31, 1998 was $87.7 million.
24
<PAGE> 25
The following table shows the maximum month-end balance, the average
balance, and the ending balance of borrowings during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MAXIMUM MONTH-END BALANCE:
FHLB advances $119,000 $73,700 $75,150
1993 subordinated notes 4,874 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 8,000 4,000 --
Reverse repurchase agreements 97,983 74,496 23,500
AVERAGE BALANCE:
FHLB advances $ 65,714 $59,325 $50,546
1993 subordinated notes 1,999 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 2,147 114 --
Reverse repurchase agreements 70,368 38,843 4,480
ENDING BALANCE:
FHLB advances $111,236 $41,000 $59,500
1993 subordinated notes -- 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 8,000 1,500 --
Reverse repurchase agreements 82,250 74,496 23,500
</TABLE>
The following table provides the interest rates of borrowings during
the periods indicated.
<TABLE>
<S> <C> <C> <C>
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances 5.68% 5.65% 5.43%
1993 subordinated notes 10.47 10.47 10.47
1995 subordinated notes 10.48 10.48 10.48
Line of credit 8.49 8.98 --
Reverse repurchase agreements 5.66 5.73 5.61
</TABLE>
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN METROPOLITAN'S JUNIOR SUBORDINATED
DEBENTURES
During 1998, Metropolitan's wholly owned subsidiary, Metropolitan
Capital Trust I, issued 2,775,000 shares ($10 liquidation amount per security)
of 8.60% cumulative trust preferred securities. Metropolitan Capital Trust I
invested the total proceeds from the sale of the 8.60% cumulative trust
preferred securities in the 8.60% guaranteed preferred beneficial interests in
junior subordinated debentures of Metropolitan. These debentures mature on June
30, 2028. We are amortizing total issuance costs of $1.4 million on a
straight-line basis over the life of the junior subordinated debentures. The
8.60% cumulative trust preferred securities are listed on the Nasdaq Stock
Market's National Market under the symbol "METFP." At December 31, 1998, the
outstanding balance of the junior subordinated debentures was $27.8 million. The
average balance outstanding during 1998 was $18.6 million. The weighted average
rate was 8.79%.
25
<PAGE> 26
COMPETITION
The Bank 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, convenient branch locations, and high quality service.
EMPLOYEES
At December 31, 1998, we had a total of 354 employees, including
part-time and seasonal employees. Our 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 a savings and loan holding company within the meaning
of the Home Owners' Loan Act. As a savings and loan holding company, we are
subject to the regulations, examination, supervision, and reporting requirements
of the Office of Thrift Supervision. The Bank, an Ohio-chartered savings and
loan association, is a member of the Federal Home Loan Bank System. Its deposits
are insured by the Federal Deposit Insurance Corporation through the Savings
Association Insurance Fund. The Bank is subject to examination and regulation by
the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and
the Ohio Division of Financial Institutions. The Bank must comply with
regulations regarding matters such as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. The purpose of this examination and regulation is primarily to
protect depositors.
The descriptions of the statutes and regulations which are applicable
to Metropolitan and the Bank and the effects of the statutes and regulations are
summarized below and elsewhere in this prospectus. This summary does not purport
to be a complete description of the statutes and regulations and their effects
on Metropolitan or the Bank. In addition, this summary does not identify every
statute and regulation that may apply to Metropolitan or the Bank.
METROPOLITAN
As a savings and loan holding company, we are subject to restrictions
relating to our activities and investments. Among other things, we are 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 Office
26
<PAGE> 27
of Thrift Supervision, 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.
Similarly, a person must obtain Office of Thrift Supervision approval
prior to that 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 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."
This presumption is rebuttable.
THE BANK
General. The Office of Thrift Supervision 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. This authority includes the power
to assess civil money penalties, issue cease and desist or removal and
prohibition orders against an institution, its directors, officers or employees
and other persons, or initiate injunctive actions.
As a lender and a financial institution, the Bank is subject to various
regulations promulgated by the Federal Reserve Board including, without
limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves),
Regulation E (Electronic Fund Transfers), Regulation F (Interbank Liabilities),
Regulation Z (Truth in Lending), Regulation CC (Availability of Funds), and
Regulation DD (Truth in Savings). As lenders of loans secured by real property,
and as owners of real property, financial institutions, including the Bank, are
subject to compliance with various statutes and regulations applicable to
property owners generally. These statutes and regulations include statutes and
regulations relating to the environmental condition of the property.
Insurance of Accounts and Regulation by the Federal Deposit Insurance
Corporation. The Bank is a member of the Savings Association Insurance Fund,
which is administered by the Federal Deposit Insurance Corporation. The Federal
Deposit Insurance Corporation insures deposits up to applicable limits and the
full faith and credit of the United States Government back such insurance. As
insurer, the Federal Deposit Insurance Corporation imposes deposit insurance
premiums and conducts examinations of and requires reporting by Federal Deposit
Insurance Corporation-insured institutions. It also may prohibit any Federal
Deposit Insurance Corporation-insured institution from engaging in any activity
the Federal Deposit Insurance Corporation determines by regulation or order to
pose a serious risk to the Federal Deposit Insurance Corporation. The Federal
Deposit Insurance Corporation also has the authority to initiate enforcement
actions against savings associations, after giving the Office of Thrift
Supervision an opportunity to take such action. It 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 Federal Deposit Insurance Corporation 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.
Institutions classified as undercapitalized and requiring substantial
supervision would pay the highest premium. The Federal Deposit Insurance
Corporation makes a risk classification of all insured institutions for each
semi-annual assessment period. Effective January 1, 1997, the Savings
Association Insurance Fund assessment rates are identical to those for Bank
Insurance Fund insured institutions.
In addition to its authority to assess risk-based premiums for deposit
insurance, the Federal Deposit Insurance Corporation has assessment authority to
collect funds from Federal Deposit Insurance Corporation-insured institutions
sufficient to pay interest on Financing Corporation bonds. The Deposit Insurance
Funds Act of 1996 authorized the Financing Corporation to assess both Bank
Insurance
27
<PAGE> 28
Fund- and Savings Association Insurance Fund-insured deposits. It also required
the Bank Insurance Fund rate to equal one-fifth the Savings Association
Insurance Fund rate through 1999, or until the insurance funds were merged,
whichever occurs first. After that time, Bank Insurance Fund- and Savings
Association Insurance Fund-insured deposits will be assessed the same rate.
Thus, Savings Association Insurance Fund institutions, such as the Bank, will
continue to be subject to a greater burden than Bank Insurance Fund institutions
through 1999.
In addition, the Deposit Insurance Funds Act of 1996 required the
merger of the Bank Insurance Fund and Savings Association Insurance Fund into a
single insurance by January 1, 1999 assuming certain pre-conditions. Those
pre-conditions were not met and a timetable for merger of the Bank Insurance
Fund and Savings Association Insurance Fund has not been established. In
connection with the merger of the Bank Insurance Fund and the Savings
Association Insurance Fund, Savings Association Insurance Fund-insured
institutions could be forced to convert to state bank charters or national bank
charters. If that proposal became law, Metropolitan would become a bank holding
company. As a result, Metropolitan would be subject to regulation by the Federal
Reserve Board. That regulation imposes capital requirements on bank holding
companies.
Regulatory Capital Requirements. The capital regulations of the Office
of Thrift Supervision establish a "leverage limit," a "tangible capital
requirement," and a "risk-based capital requirement." In addition, the Office of
Thrift Supervision 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 Office of Thrift
Supervision has not established an 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
Office of Thrift Supervision. A capital directive could include 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
Office of Thrift Supervision.
In addition, a conservator or receiver may be appointed under these
circumstances.
The leverage limit currently requires a savings association to maintain
"core capital" of not less than 3% of adjusted total assets. The Office of
Thrift Supervision has taken the position, however, that the prompt corrective
action regulation has effectively raised the leverage ratio requirement for all
but the most highly-rated institutions. The leverage ratio has in effect
increased to 4% since an institution is "undercapitalized" if, among other
things, its leverage ratio is less than 4%.
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
28
<PAGE> 29
categories, based upon the degree of credit risk associated with the particular
type of asset.
Each bank regulatory agency and the Office of Thrift Supervision review
each of their capital standards every two years. The purpose of this review is
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 Office of Thrift Supervision 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.
At December 31, 1998, 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,
1998.
<TABLE>
<CAPTION>
PERCENT
OF ASSETS
AS DEFINED
FOR EACH
AMOUNT CAPITAL TEST
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible capital $84,935 6.26%
Tangible capital requirement 20,361 1.50
------- ------
Excess $64,574 4.76%
======= =====
Core capital $85,113 6.27%
Core capital requirement 54,296 4.00
------- ------
Excess $30,817 2.27%
======= =====
Risk-based capital $89,086 8.22%
Risk-based capital requirement 86,731 8.00
------- ------
Excess $ 2,355 0.22%
======= =====
</TABLE>
The Bank is also subject to the capital adequacy requirements under the
Federal Deposit Insurance Corporation Investment Act of 1991. The additional
capital adequacy ratio imposed under Federal Deposit Insurance Corporation
Investment Act is the Tier 1 capital to risk adjusted assets ratio. This ratio
must be at least 6.0% for a "well capitalized" institution. At December 31,
1998, the Tier 1 risk-based capital ratio of the Bank was 7.85%.
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." Generally, the regulations
require 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 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 CAMELS 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 CAMELS rating system);
29
<PAGE> 30
- "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. In addition, the
agency may treat an adequately capitalized or undercapitalized institution as if
it were in the next lower capital category, if the agency determines, after
notice and an opportunity for a hearing, that the institution is in an unsafe or
unsound condition or that the institution has 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 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 Office of Thrift Supervision 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. In some circumstances, an association may be
required to provide their Office of Thrift Supervision regional director with an
application for a proposed declaration of a dividend on the association's stock.
The Office of Thrift Supervision regulations impose limitations upon
certain "capital distributions" by savings associations. These distributions
include cash dividends, payments to repurchase or otherwise acquire an
association's shares, payments to shareholders of another institution in a
cash-out merger, and other distributions charged against capital.
An application is required if:
- the proposed capital distribution for a calendar year exceeds
an association's net income for that year to date plus its
retained net income for the preceding two years;
- the association would not be at least adequately capitalized
following the distribution;
or
- the proposed capital distribution would violate a prohibition
contained in any statute or regulation, or an agreement
between the association and the Office of Thrift Supervision.
A notice is required if the association is not required to file an
application as described above, but:
- the association would not be well capitalized following the
distribution;
- the proposed capital distribution will reduce or retire any
part of common or preferred stock or any part of debt
instruments included in capital; or
- the association is a subsidiary of a savings and loan holding
company.
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<PAGE> 31
The Office of Thrift Supervision retains the authority to prohibit any
capital distribution otherwise authorized under the regulation if the Office of
Thrift Supervision 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, a Federal Deposit
Insurance Corporation-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.
Liquidity. Federal regulations currently require savings associations
to maintain, for each calendar month, an average daily balance of liquid assets
equal to at least 4% of the ending or average daily balance of deposit accounts
with maturities less than a year and short-term borrowings with maturities less
than a year. Liquid assets include cash, certain time deposits, bankers'
acceptances, and specified United States Government, state or federal agency
obligations. From time to time, the Office of Thrift Supervision may change this
liquidity requirement 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. The Office of Thrift Supervision may impose monetary
penalties for failure to meet liquidity ratio requirements. At December 31,
1998, the liquidity ratio of the Bank was 5.04%. This ratio exceeded the
applicable requirement.
Qualified Thrift Lender Test. Pursuant to the Qualified Thrift Lender
test, a savings institution must invest at least 65% of its portfolio assets in
qualified thrift investments on a monthly average basis on a rolling 12-month
look-back basis. Portfolio assets are an institution's total assets less
goodwill and other intangible assets, the institution's business property, and a
limited amount of the institution's liquid assets.
A savings association's failure to remain a Qualified Thrift Lender may
result in: a) limitations on new investments and activities; b) imposition of
branching restrictions; c) loss of Federal Home Loan Bank borrowing privileges;
and d) limitations on the payment of dividends. If a savings institution that is
a subsidiary of a savings and loan holding company fails to regain Qualified
Thrift Lending 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. As a
result, it will be subject to, among other things, the business activity
restrictions and capital regulations of the Bank Holding Company Act.
The qualified thrift investments of the Bank were in excess of 67.2% of
its portfolio assets as of December 31, 1998.
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. Regulation by the Ohio Division of Financial
Institutions affects the internal organization of the Bank as well as its
savings, mortgage lending, and other investment activities. Periodic
examinations by the Ohio Division of Financial Institutions are usually
conducted on a joint basis with the Office of Thrift Supervision. Ohio law
requires the Bank to 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 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;
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<PAGE> 32
- 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:
- 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;
- invest up to 10% of assets in corporate equity securities,
bonds, debentures, notes, or other evidence of indebtedness;
- 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
- 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 real property as its board of
directors deems necessary or convenient for the conduct of the business of the
association. However, the amount 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 limitations on its permitted activities and investments under federal law.
These limitations 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. For purposes of Ohio law, control exists 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 that other state permit an Ohio savings and loan association or an Ohio
holding company reciprocal rights.
Ohio law requires prior written approval of the Ohio Division of
Financial Institution of a merger of an Ohio association with another savings
and loan association or a holding company affiliate.
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<PAGE> 33
FEDERAL AND STATE TAXATION
The following discussion of tax matters is only a summary and does not
purport to be a comprehensive description of the tax rules applicable to
Metropolitan 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 were permitted to establish a reserve for bad debts and to
make annual additions to it, which additions may, within specified formula
limits, be deducted in arriving at taxable income. The Bank's bad debt deduction
for qualifying real property loans, which are generally loans secured by
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 Bank's bad debt
deduction for nonqualifying loans was computed under the experience method,
which essentially allows a deduction based on the actual loss experience of the
Bank 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 may no longer calculate their deduction
for bad debts using the percentage of taxable income method. Instead, savings
associations like the Bank with more than $500 million in assets must compute
their deduction for bad debts based on specific charge-offs during the taxable
year. This legislation also requires a savings association (or its controlled
group) with assets of more than $500 million to recapture into income over a
six-year period their post-1987 additions to their bad debt tax reserves for
qualifying real property loans and nonqualifying loans, thereby generating
additional tax liability. However, we recognized this liability in 1988 and
later years by recording a deferred tax liability from post-1987 additions to
the tax bad debt reserves. The recapture may be suspended for up to two years
if, during those years, the savings association satisfies a residential loan
requirement.
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 difference (positive or negative) between
adjusted current earnings ("ACE") and AMTI. Any ACE reductions to AMTI are
limited to prior aggregate ACE increases to AMTI. ACE equals pre-adjustment
AMTI: (a) 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 (b) 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).
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. The Internal Revenue Service has audited
Metropolitan, the Bank and other includable subsidiaries through December 31,
1994.
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<PAGE> 34
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 1.4% and will drop to 1.3% for tax years 2000 and
thereafter. 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.
Metropolitan, at the holding company level, 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 8.5%
of the remainder, with an additional add-on tax not to exceed $5,000) or a
specified percentage of net worth (currently approximately 0.4%, with a cap on
the net worth tax of $150,000, plus an add-on tax not to exceed $5,000). In
calculating net income for this purpose, dividends from wholly-owned
subsidiaries, such as the Bank, would be excluded. Beginning with the 1999 tax
year, Metropolitan may be exempt from the net worth portion of the franchise tax
if it satisfies the requirements, including appropriate election, to be treated
as a qualified holding company.
ITEM 2. PROPERTIES
Our executive office is leased under an agreement that extends through
December 31, 2000. It is located at 6001 Landerhaven Drive, Mayfield Heights,
Ohio 44124. We have executed an option to purchase land in Highland Hills, Ohio.
We have preliminary plans to build an executive office at the location. We
anticipate that design of the office will take place during 1999 and
construction will be completed during 2000. We operate seventeen branch
locations. We lease seven of these locations under long-term lease agreements
with various parties. We own the other ten branches, located in Cleveland,
Euclid, Willoughby Hills, Mayfield Heights, Macedonia, Cleveland Heights,
Hudson, Aurora, Stow, and Twinsburg, Ohio. In addition, we own land in Auburn
and Medina, and land and a building in Willoughby. We plan on using these sites,
along with leased space in Beachwood, Ohio, for future full service retail
offices. The Bank currently leases office space for its loan production offices
in North Olmsted and Cincinnati, Ohio, Grosse Point and West Bloomfield,
Michigan, and Pittsburgh, Pennsylvania. We are planning future loan production
offices for Columbus, North Canton and Fairlawn, Ohio, in 1999.
ITEM 3. LEGAL PROCEEDINGS
The Bank is involved in various legal proceedings incidental to the
conduct of its business. We do not expect that any of these proceedings will
have a material adverse effect on our 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 shareholders of the Corporation
during the fourth quarter of the fiscal year covered by this Report, through the
solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE COMPANY
(Included pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation
S-K)
The executive officers of the Company as of March 1, 1999, unless otherwise
indicated, were as follows:
<TABLE>
<CAPTION>
NAME BUSINESS EXPERIENCE
<S> <C>
Positions held with Metropolitan
and the Bank
Robert M. Kaye Mr. Kaye has served as Chairman and Chief Executive
Age 62 Officer of Metropolitan and the Bank since 1987. He
Chairman and Chief has also served as President of Planned Residential
Executive Officer, Communities, Inc. since 1960. Planned Residential
and a Director, of Communities, Inc. is actively engaged in every aspect
Metropolitan of multifamily housing from new construction and
rehabilitation to acquisition and management. Mr.
Chairman and Chief Kaye serves as a member of the Board of Directors of
Executive Officer, Community Bank of New Jersey. He has also been a
and a Director, of member of the Corporate Council of the Cleveland
the Bank Museum of Art since its inception in 1993 and has
been a member of the Board of Trustees of the College
of New Jersey since 1980 and of The Peddie School
since 1988.
David G. Lodge Mr. Lodge joined Metropolitan in December
Age 59 1988 as Executive Vice President. He has
served as President of Metropolitan and the
President, Director, Bank since August 1991. Mr. Lodge has also
Assistant Secretary served as Director of Metropolitan and the
and Assistant Bank since 1991 and as Assistant Secretary
Treasurer of and Assistant Treasurer of Metropolitan
Metropolitan since 1992. Mr. Lodge has served as a
Director of University Circle Incorporated
President and Chief and Vocational Guidance Services since 1994
Operating Officer and became a member of the Board of Trustees
Of the Bank of The Cleveland Playhouse in June 1995.
</TABLE>
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<PAGE> 35
<TABLE>
<S> <C>
MALVIN E. BANK Mr. Bank has been the Secretary, Assistant Treasurer and a Director of Metropolitan
Age 68 and Secretary and Director of the Bank for more than five years. Mr. Bank is a
senior partner with the Cleveland law firm of Thompson Hine & Flory LLP. Mr. Bank
Director, Secretary also serves as a Director of Oglebay Norton Company. Mr. Bank also serves as a
and Assistant Trustee of Case Western Reserve University, The Holden Arboretum, Chagrin River Land
Treasurer of Conservancy, Cleveland Center for Research in Child Development, Hanna Perkins
Metropolitan School, and numerous other civic and charitable organizations and foundations.
Director, Secretary
and Assistant
Treasurer of
the Bank
DAVID P. MILLER Mr. Miller has served as a Director of Metropolitan and the Bank since 1992. Mr.
Age 66 Miller has also held the positions of Treasurer and Assistant Secretary of
Metropolitan. Since 1986, Mr. Miller has been the Chairman and Chief Executive
Director, Treasurer Officer of Columbia National Group, Inc., a Cleveland-based scrap and waste materials
And Assistant wholesaler and steel manufacturer. He is currently commissioner of the Ohio Lottery.
Secretary of
Metropolitan
Director of the Bank
PATRICK W. BEVACK Mr. Bevack has been Executive Vice President of the Bank since May 1992. Mr. Bevack
Age 52 became Treasurer and Assistant Secretary of the bank in 1993. Prior to joining
Metropolitan, Mr. Bevack was Executive Vice president of TransOhio Savings Bank.
Executive Vice
President of the Bank
KENNETH T. KOEHLER Mr. Koehler became Executive Vice President of the Bank in January 1999. Prior to
Age 52 joining Metropolitan, Mr. Koehler was President and Chief Executive Officer of United
Heritage Bank, Edison, NJ, a community bank (1998 to January 1999); President and
Chief Executive Officer of Golden City Commercial Bank, New York, NY, a community
Executive Vice bank (1994 - 1998); and Principal of Lyons, Zombach & Ostrowski, Inc., New York, NY
President of the Bank bank and thrift consultants (1992 to 1993).
JUDITH Z. ADAM Ms. Adam became Senior Vice President and Chief Financial Officer of the Bank in
Age 43 September 1998). Prior to that, Ms. Adam held the positions of Senior Vice President
- Finance & Accounting (and Chief Financial Officer) (1997 - 1998) and Vice President
Senior Vice President - Finance (1992 - 1997), with the Bank.
and Chief Financial
Officer of the Bank
LLOYD W. W. BELL, JR. Mr. Bell has held several positions with Metropolitan, including Senior Vice
Age 57 President - Chief Lending Officer (July 1998 to present); Senior Vice President -
Commercial Real Estate (1997 to July 1998) and was given responsibility for the
Senior Vice President Commercial Lending Department in April 1998. Prior to joining Metropolitan, Mr. Bell
and Chief Lending was a partner in O'Brien & Bell, an executive search and consulting firm specializing
Officer of the Bank in financial institutions (1991 - 1997).
CARL R. STAUFFENEGER Mr. Stauffeneger has held the position of Senior Vice President - Consumer Banking
Age 50 since 1995. Prior to joining Metropolitan, Mr. Stauffeneger was responsible for
client services at Money Access Service (MAC), Midwest Division, a provider of
Senior Vice Consumer automated teller machine services (1992 - 1995).
President-Banking
of the Bank
</TABLE>
All executive officers serve at the pleasure of the Board of Directors, with no
fixed term of office.
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<PAGE> 36
PART II
STOCKHOLDER REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
ITEM 5. MARKET FOR STOCKHOLDER MATTERS
Metropolitan's Common Stock, no par value ("Common Stock"), the only
outstanding class of equity securities of Metropolitan, is traded on the Nasdaq
National Market System. There are 10,000,000 shares of Common Stock authorized
and 7,756,393 shares issued and outstanding. The first day of trading in the
Corporation's Common Stock was October 29, 1996. Detailed in the table below is
the quarterly high and low price for the Corporation's Common Stock during 1998
and 1997(adjusted for a two-for-one split completed in the fourth quarter of
fiscal 1997 and the 10% stock dividend in the fourth quarter 1998):
High Low
------ ------
First quarter 1997 $ 5.11 $ 4.89
Second quarter 1997 7.39 4.89
Third quarter 1997 9.09 7.05
Fourth quarter 1997 14.32 8.64
First quarter 1998 17.16 13.64
Second quarter 1998 15.46 13.18
Third quarter 1998 13.75 8.64
Fourth quarter 1998 12.00 8.18
Metropolitan paid no dividends during the past three years and has no
intention of paying dividends in the foreseeable future. The Indenture dated as
of December 1, 1995 between the Corporation and Bank of New York covering the
1995 Subordinated Notes and the Huntington Loan Agreement prohibit the
Corporation from paying a dividend or other distribution on its equity
securities unless the Corporation's ratio of tangible equity to total assets
exceeds 7%.
The approximate number of record common shareholders at March 2, 1999
was 1,099. Robert M. Kaye, previously the sole shareholder, controlled 6,013,997
shares or 77.5% of the amount outstanding on this date.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this item is set forth in the sections
captioned FIVE YEAR SUMMARY OF SELECTED DATA on pages 1 and 2 of the
Corporation's 1998 Annual Report to Shareholders which are incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information in response to this item is set forth in the section
captioned MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION on pages 3 through 22 of the Corporation's 1998 Annual
Report to Shareholders which are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this item is set forth in the section
captioned Quantitative and Qualitative Disclosures About Market Risk on pages 18
through 21 of the Corporation's 1998 Annual Report to Shareholders which are
incorporated herein by reference.
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<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements together with the report thereon
of Crowe, Chizek and Company LLP, dated February 12, 1999, appearing on pages 24
through 56 of the Corporation's 1998 Annual Report to Shareholders under the
sections captioned REPORT OF INDEPENDENT AUDITORS, CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION, OPERATIONS, SHAREHOLDERS' EQUITY, AND CASH FLOWS AND NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
37
<PAGE> 38
PART III
Information in this Part III required by Item 10 ("Directors and Executive
Officers of the Company"), Item 11 ("Executive Compensation"), Item 12
(Security Ownership of Certain Beneficial Owners and Management") and Item 13
("Certain Relationships and Related Transactions") is incorporated herein by
reference to the information contained in the Proxy Statement, dated March 26,
1999 and filed on that date in connection with the Company's 1999 Annual
Meeting of Shareholders. Information concerning executive officers of the
Company also required by Item 10 is contained in Part I of this report under
the heading "Executive Officers of the Company."
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) EXHIBITS, FINANCIAL STATEMENTS, AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
1.FINANCIAL STATEMENTS PAGE NO.*
-------------------- --------
<S> <C>
Report of Independent Auditors 23
Consolidated Statements of Financial Condition 24
Consolidated Statements of Operations 25
Consolidated Statements of Changes in Shareholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
</TABLE>
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<PAGE> 39
2. FINANCIAL STATEMENT SCHEDULES
Parent Company Financial Statements 53
* Incorporated by reference from the indicated page of the Corporation's 1998
Annual Report to Shareholders filed as Exhibit 13 to this Form 10-K.
3. EXHIBITS
<TABLE>
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Metropolitan (filed
as Exhibit 2 to the Corporation's Form 8-A, filed October 15, 1996 and
incorporated herein by reference)
3.2 Amended and Restated Code of Regulations of Metropolitan (filed as
Exhibit 3.2 to Metropolitan's Registration Statement on Form S-1, filed
February 26, 1999 and incorporated herein by reference)
10.1 Form of Incentive Pay Plan (filed as Exhibit 10.1 to Metropolitan's
Form 10-K, filed March 30, 1998 and incorporated herein by reference)**
10.2 Metropolitan Financial Corp. 1997 Stock Option Plan (filed as Exhibit A
to the Metropolitan's Definitive Proxy Statement, filed March 27, 1998
and incorporated herein by reference)
10.3 Indenture, dated as of April 30, 1998, between Metropolitan and
Wilmington Trust Company, as trustee, relating to the 8.60% Junior
Subordinated Deferrable Interest Debentures due June 30, 2028 (filed as
Exhibit 4.1 to Metropolitan's Form 10-Q, filed May 15, 1998 and
incorporated herein by reference)
10.4 Amended and Restated Trust Agreement, dated as of April 30, 1998, among
Metropolitan, as depositor, Wilmington Trust Company, as property
trustee, the administrative trustees named therein and the several
holders of the 8.60% Cumulative Trust Preferred Securities of
Metropolitan Capital Trust I (filed as Exhibit 4.2 to Metropolitan's
Form 10-Q, filed May 15, 1998 and incorporated herein by reference)
10.5 Preferred Securities Guarantee Agreement, dated as of April 30, 1998,
between Metropolitan and Wilmington Trust Company, as trustee, for the
benefit of the holders of the 8.60% Cumulative Trust Preferred
Securities of Metropolitan Capital Trust I (filed as Exhibit 4.3 to
Metropolitan's Form 10-Q, filed May 15, 1998 and incorporated herein by
reference)
10.6 Agreement as to Expenses and Liabilities, dated as of April 30, 1998,
between Metropolitan and Metropolitan Capital Trust I (filed as Exhibit
4.4 to Metropolitan's Form 10-Q, filed May 15, 1998 and incorporated
herein by reference)
13 1998 Annual Report to Shareholders
21 List of subsidiaries of the Corporation (filed as Exhibit 21 to
Metropolitan's Registration Statement on Form S-1, filed February 26,
1999 and incorporated herein by reference)
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------ -----------
<S> <C>
99.1 Specimen Subordinated Note relating to the 9 5/8% Subordinated Notes
due January 1, 2005 (found at Sections 2.2 and 2.3 of the Form of
Indenture filed as Exhibit 4.1 to Metropolitan's Amendment No. 1 to
Registration Statement on Form S-1, filed November 13, 1995 and
incorporated herein by reference)
99.2 Form of Indenture entered into December 1, 1995 between Metropolitan
and Boatmen's Trust Company (filed as Exhibit 4.1 to Metropolitan's
Amendment No. 1 to Registration Statement on Form S-1, filed November
13, 1995 and incorporated herein by reference)
99.3 The Restated Loan Agreement by and between The Huntington National Bank
and Metropolitan dated as of March 31, 1998 (filed as Exhibit 99.1 to
Metropolitan's Form 10-Q, filed May 14, 1998 and incorporated herein by
reference)
99.4 Second Amendment to Restated Loan Agreement by and between The
Huntington National Bank and the Corporation dated as of December 18,
1998 (filed as Exhibit 99.4 to Metropolitan's Registration Statement on
Form S-1 filed on February 29, 1999 and incorporated herein by
reference)
</TABLE>
** Indicates that the exhibit is a management contract or compensatory
plan or arrangement.
Reports on Form 8-K
On December 8, 1998 the Corporation filed a Current Report on Form 8-K
to report, under Item 5, that on November 24, 1998, its Board of Directors
authorized 10% stock dividend of the Corporation's common stock, to be effected
in the form of a 10% stock dividend to shareholders of record on December 15,
1998.
40
<PAGE> 41
SIGNATURES
----------
Pursuant to the requirements of Sections 13 and 15 (d) of
the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
METROPOLITAN FINANCIAL CORP.
By: /s/ David G. Lodge
---------------------------------------
David G. Lodge,
President,
Assistant Secretary,
Assistant Treasurer, and Director
Date: March 30, 1999
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ David G. Lodge
---------------------------------------
David G. Lodge,
President,
Assistant Secretary,
Assistant Treasurer, and Director
(Principal Financial and Accounting Officer)
Date: March 30, 1999
---------------------------------------
Robert M. Kaye, Chairman of the Board and Director (Principal Executive
Officer); Malvin E. Bank, Secretary, Assistant Treasurer, and Director; David P.
Miller, Treasurer, Assistant Secretary and Director; Robert R. Broadbent,
Director; Marjorie M. Carlson, Director; Lois K. Goodman, Director; Marguerite
B. Humphrey, Director; James A. Karman, Director; Ralph D. Ketchum, Director;
Alfonse M. Mattia, Director.
By: /s/ David G. Lodge
---------------------------------------
David G. Lodge
Attorney-in-Fact
Date: March 30, 1999
---------------------------------------
41
<PAGE> 42
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Metropolitan (filed
as Exhibit 2 to the Corporation's Form 8-A, filed October 15, 1996 and
incorporated herein by reference)
3.2 Amended and Restated Code of Regulations of the Corporation (filed as
Exhibit 3.2 to Metropolitan's Registration Statement on Form S-1, filed
February 26, 1999 and incorporated herein by reference)
10.1 Form of Incentive Pay Plan (filed as Exhibit 10.1 to Metropolitan's
Form 10-K, filed March 30, 1998 and incorporated herein by reference)
10.2 Metropolitan Financial Corp. 1997 Stock Option Plan (filed as Exhibit A
to Metropolitan's Definitive Proxy Statement, filed March 27, 1998 and
incorporated herein by reference)
10.3 Indenture, dated as of April 30, 1998, between Metropolitan and
Wilmington Trust Company, as trustee, relating to the 8.60% Junior
Subordinated Deferrable Interest Debentures due June 30, 2028 (filed as
Exhibit 4.1 to Metropolitan's Form 10-Q, filed May 15, 1998 and
incorporated herein by reference)
10.4 Amended and Restated Trust Agreement, dated as of April 30, 1998, among
Metropolitan, as depositor, Wilmington Trust Company, as property
trustee, the administrative trustees named therein and the several
holders of the 8.60% Cumulative Trust Preferred Securities of
Metropolitan Capital Trust I (filed as Exhibit 4.2 to Metropolitan's
Form 10-Q, filed May 15, 1998 and incorporated herein by reference)
10.5 Preferred Securities Guarantee Agreement, dated as of April 30, 1998,
between Metropolitan and Wilmington Trust Company, as trustee, for the
benefit of the holders of the 8.60% Cumulative Trust Preferred
Securities of Metropolitan Capital Trust I (filed as Exhibit 4.3 to
Metropolitan's Form 10-Q, filed May 15, 1998 and incorporated herein by
reference)
10.6 Agreement as to Expenses and Liabilities, dated as of April 30, 1998,
between Metropolitan and Metropolitan Capital Trust I (filed as Exhibit
4.4 to Metropolitan's Form 10-Q, filed May 15, 1998 and incorporated
herein by reference)
13 1998 Annual Report to Shareholders
21 List of subsidiaries of the Corporation (filed as Exhibit 21 to
Metropolitan's Registration Statement on Form S-1 filed February 26,
1999 and incorporated herein by reference)
24 Power of Attorney
27 Financial Data Schedule
99.1 Specimen Subordinated Note relating to the 9 5/8% Subordinated Notes
due January 1, 2005 (found at Sections 2.2 and 2.3 of the Form of
Indenture filed as Exhibit 4.1 to Metropolitan's Amendment No. 1 to
Registration Statement on Form S-1, filed November 13, 1995 and
incorporated herein by reference)
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NO DESCRIPTION
------ -----------
<S> <C>
99.2 Form of Indenture entered into December 1, 1995 between Metropolitan
and Boatmen's Trust Company (filed as Exhibit 4.1 to Metropolitan's
Amendment No. 1 to Registration Statement on Form S-1, filed November
13, 1995 and incorporated herein by reference)
99.3 The Restated Loan Agreement by and between The Huntington National Bank
and Metropolitan dated as of March 31, 1998 (filed as Exhibit 99.1 to
Metropolitan's Form 10-Q, filed May 14, 1998 and incorporated herein by
reference)
99.4 Second Amendment to Restated Loan Agreement by and between The
Huntington National Bank and the Corporation dated as of December 18,
1998 (filed as Exhibit 99.4 to Metropolitan's Registration Statement on
Form S-1 filed on February 26, 1999 and incorporated herein by
reference)
</TABLE>
43
<PAGE> 1
Exhibit 10.1
AMENDMENT
TO INCENTIVE PAY PLAN
The Incentive Pay Plan, dated December 18, 1997, for the areas of Metropolitan
Bank and Trust Company (the "Bank") supervised by Patrick W. Bevack (i.e.,
Residential Lending, Construction Lending, Mortgage Servicing, and Commercial
Real Estate Loan Servicing), is hereby amended by deleting paragraph D in
therein in its entirety, and replacing it with the following:
"D. (1) INITIAL PERIODS/PLAN YEARS. The Incentive Pay Plan, which is a new
plan for the Bank, shall have two initial periods. The purpose of the initial
periods shall be to review performance of the areas of the Bank supervised by
Mr. Bevack under the Incentive Pay Plan, with the goal being the implementation
of additional performance goals for the Incentive Pay Plan. The first initial
period shall consist of the last quarter of 1997. The second initial period
shall consist of the first two quarters of 1998.
Shared profit earned during each of the two initial periods shall
be earned on the last day of each respective initial period, and shall not be
subject to forfeiture. Periods after the initial periods shall consist of four
quarters, each commencing on July 1st and ending on June 30th of the following
calendar year ("Plan Years"). While the Bank may provisionally pay amounts of
shared profits calculated with reference to quarterly results during each Plan
Year, such amounts provisionally paid shall be subject to forfeiture for the
failure to continue to meet certain quarterly performance goals and, as such,
shall not be earned until the last day of each Plan Year. Amounts previously
provisionally paid that are subsequently forfeited shall be repaid to the Bank
by plan participants and may be withheld by the Bank from payments otherwise due
under other or future incentive plans.
(2) MINIMUM TARGETS/EXPECTED TARGETS. The President of the Bank, after
consulting with Mr. Bevack, shall set the following goals for each quarter
during Plan Years:
- MINIMUM TARGET. The "Minimum Target" for each quarter during each Plan
Year shall be the minimally acceptable amount of CONTRIBUTION TO OVERHEAD
expected to be earned by all areas supervised by Mr. Bevack. A Minimum
Target shall be set for each quarter during each Plan Year. A failure to
meet the Minimum Target for any quarter during the Plan Year shall result
in the
<PAGE> 2
forfeiture of all amounts of shared profits previously provisionally paid,
if any, during that Plan Year
- EXPECTED TARGET. The "Expected Target" for each quarter during each Plan
Year shall be that amount of CONTRIBUTION TO OVERHEAD expected to be
earned by all areas supervised by Mr. Bevack. An Expected Target shall be
set for each quarter during each Plan Year. Performance of the areas
supervised by Mr. Bevack that exceeds the Minimum Target but fails to
reach the Expected Target shall result in no further payments of shared
profits for subsequent quarters during that Plan Year, but shall not
result in a forfeiture of shared profits previously provisionally paid
during that Plan Year.
- PERFORMANCE AT OR ABOVE THE EXPECTED TARGET. CONTRIBUTION TO OVERHEAD
earned equal to or in excess of the Expected Target during each quarter of
each Plan Year entitles the plan participants to continue to receive
provisional payments of shared profits for the subsequent quarter of the
Plan Year.
(3) PLAN YEAR TARGETS. Minimum Targets and Expected Targets for each
quarter during Plan Years, as set by the President of the Bank after
consultation with Mr. Bevack, shall reflected on a Schedule to be attached each
year to this Incentive Pay Plan.
(4) PLAN TERMINABLE BY THE BANK. The Bank may terminate, modify or suspend
the Incentive Pay Plan at any time after the initial periods, with such action
being effective as of the beginning of the quarter during which Mr. Bevack is
notified, either orally or in writing, of such termination, suspension or
modification ("Notice"). No amounts of shared profits shall be earned for any
quarter, or beyond, in which notification of termination or suspension of the
Incentive Pay Plan is given to Mr. Bevack. Amounts of shared profits relating to
quarters ending prior to the quarter in which notification of a termination or
suspension of the Incentive Pay Plan is given that have not otherwise been
forfeited (or subject to forfeiture) shall be earned at the end of the quarter
during which the Notice is given.
(5) LOSS OF EMPLOYMENT. Should Mr. Bevack's employment be terminated for
any reason other than cause, he will be entitled to a lump sum payment equal to
the shared profit for the immediately preceding quarter, provided that the
Minimum Target for such quarter and prior quarters in the Plan Year have been
met. Cause is defined as gross misconduct and does not apply to Bank
restructures, change of ownership, layoffs or changes of company emphasis."
<PAGE> 3
THIS AMENDMENT is entered into as of the 1st day of October 1998.
METROPOLITAN BANK AND TRUST COMPANY
By: __________________________________________
David G. Lodge
President
__________________________________________
Patrick W. Bevack
<PAGE> 4
SCHEDULE TO INCENTIVE PAY PLAN
------------------------------
1999 Plan Year
(July 1, 1998 to June 30, 1999)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Plan Year Quarter Ending Minimum Target for CONTRIBUTION Expected Target for CONTRIBUTION
TO OVERHEAD for areas supervised TO OVERHEAD for areas supervised
by Mr. Bevack by Mr. Bevack
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
September 30, 1998 $ 250,000 $ 500,000
- ------------------------------------------------------------------------------------------------------------
December 31, 1998 $ 250,000 $ 500,000
- ------------------------------------------------------------------------------------------------------------
March 31, 1999 $1,000,000 $2,000,000
- ------------------------------------------------------------------------------------------------------------
June 30, 1999 $1,000,000 $2,000,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 13
METROPOLITAN FINANCIAL CORP.
1998 ANNUAL REPORT
<PAGE> 2
FIVE YEAR SUMMARY OF SELECTED DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996(1) 1995 1994
---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION
DATA:
Total assets.................. $1,363,434 $924,985 $769,076 $590,095 $479,384
Loans receivable, net......... 1,018,271 693,655 637,493 478,345 424,944
Loans held for sale........... 15,017 14,230 8,973 1,504 84
Mortgage-backed securities.... 198,295 143,167 56,672 39,156 16,785
Securities.................... 35,661 6,446 13,173 22,806 7,641
Intangible assets............. 2,724 2,987 3,239 3,188 3,409
Loan servicing rights......... 13,412 9,224 8,051 9,130 4,825
Deposits...................... 1,051,357 737,782 622,105 503,742 436,198
Borrowings.................... 215,486 135,870 101,874 46,874 15,504
Preferred securities(2)....... 27,750 -- -- -- --
Shareholders' equity.......... 42,645 36,661 30,244 25,466 20,280
SELECTED OPERATIONS DATA:
Total interest income......... $ 85,728 $ 69,346 $ 54,452 $ 43,435 $ 31,639
Total interest expense........ 53,784 41,703 33,116 26,816 15,992
---------- -------- -------- -------- --------
Net interest income......... 31,944 27,643 21,336 16,619 15,647
Provision for loan losses..... 2,650 2,340 1,636 959 766
---------- -------- -------- -------- --------
Net interest income after
provision for loan
losses................... 29,294 25,303 19,700 15,660 14,881
Loan servicing income, net.... 788 1,293 1,204 1,068 642
Net gain on sale of loans and
securities.................. 3,523 580 336 833 86
Other noninterest income...... 3,005 2,268 2,233 2,323 873
Noninterest expense........... (25,522) (20,149) (20,839) (14,187) (11,058)
---------- -------- -------- -------- --------
Income before income taxes
and extraordinary item... 11,088 9,295 2,634 5,697 5,424
Income tax expense............ (4,049) (3,492) (1,095) (2,155) (1,987)
Extraordinary item(3)......... (245) -- -- -- --
---------- -------- -------- -------- --------
Net income.................... $ 6,794 $ 5,803 $ 1,539 $ 3,542 $ 3,437
========== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Noninterest expense for 1996 includes a $2.9 million pre-tax or $1.9 million
net of tax one-time assessment to recapitalize the Savings Association
Insurance Fund.
(2) 8.60% preferred securities sold during the second quarter of 1998 by
Metropolitan Capital Trust I.
(3) The extraordinary item represents expenses associated with the early
retirement of 10% notes.
1
<PAGE> 3
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996(1) 1995 1994
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA, RESTATED FOR STOCK
SPLITS:
Basic net income per share........ $ 0.88 $ 0.75 $ 0.22 $ 0.52 $ 0.50
Diluted net income per share...... 0.87 0.75 0.22 0.52 0.50
Book value per share.............. 5.50 4.73 3.90 3.70 2.94
Tangible book value per share..... 5.15 4.34 3.48 3.24 2.45
PERFORMANCE RATIOS:
Return on average assets.......... 0.64% 0.69% 0.23% 0.65% 0.82%
Return on average equity.......... 17.16 17.58 5.75 16.19 17.83
Interest rate spread.............. 2.90 3.20 3.07 2.98 3.71
Net interest margin............... 3.16 3.48 3.34 3.24 3.94
Average interest-earning assets to
average interest-bearing
liabilities..................... 104.96 105.30 105.39 105.13 105.53
Noninterest expense to average
assets.......................... 2.39 2.40 3.08 2.61 2.64
Efficiency ratio(2)............... 64.45 62.75 82.57 68.28 62.95
ASSET QUALITY RATIOS:(3)
Nonperforming loans to total
loans........................... 1.23% 0.44% 0.80% 0.69% 0.55%
Nonperforming assets to total
assets.......................... 1.34 0.56 0.70 0.60 0.51
Allowance for losses on loans to
total loans..................... 0.66 0.79 0.64 0.57 0.45
Allowance for losses on loans to
nonperforming total loans....... 54.44 178.60 80.38 83.61 80.70
Net charge-offs to average
loans........................... 0.16 0.13 0.04 0.02 0.03
CAPITAL RATIOS:
Shareholders' equity to total
assets.......................... 3.13% 3.96% 3.93% 4.32% 4.23%
Average shareholders' equity to
average assets.................. 3.70 3.94 3.96 4.02 4.60
Tier 1 capital to total
assets(4)....................... 6.27 5.47 5.58 5.77 5.34
Tier 1 capital to risk-weighted
assets(4)....................... 7.85 7.75 7.87 8.20 7.60
OTHER DATA:
Loans serviced for others
(000's)......................... $1,504,604 $1,190,185 $1,102,514 $1,182,216 $739,425
Number of full service offices.... 17 15 14 13 11
Number of loan production
offices......................... 5 4 5 5 4
</TABLE>
- ---------------
(1) Noninterest expense for 1996 includes a $2.9 million pre-tax or $1.9 million
net of tax one-time assessment to recapitalize the Savings Association
Insurance Fund. All per share data and performance ratios include the effect
of this assessment.
(2) Equals noninterest expense less amortization of intangible assets divided by
net interest income plus noninterest income (excluding gains or losses on
securities transactions).
(3) Ratios are calculated on end of period balances except net charge-offs to
average loans.
(4) Ratios are for the Bank only.
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The reported results of Metropolitan primarily reflect the operations of
Metropolitan Bank. For purposes of this section, unless otherwise indicated,
"we," "our" or "us" means Metropolitan and its subsidiaries.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Income. Net income for 1998 increased 17.1% from net income for 1997.
Net income for 1998 was $6.8 million, or $0.88 per common share, and net income
for 1997 was $5.8 million, or $0.75 per common share. Earnings for 1998 included
an extraordinary expense of $245,000, net of tax, or $0.03 per common share.
This extraordinary expense represented the cost of retiring our 10.0%
subordinated debt with part of the proceeds from our issuance of 8.60%
cumulative trust preferred securities in April 1998. Net income before the
extraordinary item was $7.0 million for 1998, or $0.91 per common share, which
was a 21.3% increase over 1997 net income of $5.8 million. This increase in
income was due to growth in interest-earning assets and noninterest income.
Total assets grew 47.4% to $1.4 billion at December 31, 1998 from $925.0
million at December 31, 1997. Net income increased at a slower pace than assets
during 1998 because asset growth did not take place uniformly during the year.
Asset growth was concentrated in the second half of the year. Asset growth in
1998 was greater than usual because both capital and quality assets were
available. Although we do not expect asset growth to continue at that rate, we
do expect it to be approximately 20% annually.
Noninterest income grew 76.7% to $7.3 million in 1998 from $4.1 million in
1997. This growth was primarily due to a 607% increase in gain on sale of loans.
Our gain on sale of loans increased to $3.5 million in 1998 from $0.5 million in
1997. We restructured our residential lending operations late in 1997 in order
to increase our market share in the greater Cleveland area. As part of the
restructuring, Metropolitan hired additional commissioned loan officers. These
efforts, along with increased residential refinancing activity, resulted in
significant increases in loan originations, loan sales, and gain on sale of
loans.
Interest Income. Total interest income increased 23.6% to $85.7 million for
1998 from $69.3 million for 1997. This increase was due to a 27.4% increase in
the average balance of interest-earning assets. Average interest-earning assets
grew as a result of our strategy to increase assets if loans with acceptable
portfolio characteristics are available. The increase in interest income
attributable to the increase in the average balance of interest-earning assets
was partially offset by the decline in the weighted average yield on loans
receivable. This decline in weighted average yield to 8.48% during 1998 from
8.73% during 1997 was caused by the following factors:
- an overall decline in market interest rates;
- the narrowing of spreads on nonresidential loans caused by competition
from other lenders; and
3
<PAGE> 5
- a $500,000 decline in prepayment penalties.
Interest Expense. Total interest expense increased 29.0% to $53.8 million
for 1998 from $41.7 million for 1997. Interest expense increased primarily
because the average balance of interest-bearing liabilities increased 27.8% from
the prior year. We increased our average balance of interest-bearing liabilities
in order to fund our growth of interest-earning assets. Cost of funds increased
slightly to 5.58% in 1998 from 5.53% in 1997. We paid higher rates on new
borrowings and deposits to lengthen maturities. In addition, we paid higher
rates on retail deposits to increase our market share to fund asset growth.
Net Interest Margin. Net interest margin refers to net interest income
divided by total interest-earning assets. Our net interest margin declined 32
basis points to 3.16% for 1998 from 3.48% for 1997. The yield on
interest-earning assets decreased due to the declining interest rate environment
in 1998. We experienced increases in deposit and borrowing costs in 1998 despite
the declining interest rate environment. These increases resulted from our
efforts to lengthen maturities on deposits and borrowings and our issuance of
additional debt.
Average Balances and Yields. The following table presents the total dollar
amount of interest income from average interest-earning assets and the resulting
rates, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. Net interest
margin is influenced by the level and relative mix of interest-earning assets
and interest-bearing liabilities. All average balances are daily average
balances. Nonaccruing loans are included in average loan balances. The average
balance of mortgage-backed securities and securities are presented at historical
cost.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ----------------------------- -----------------------------
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................ $ 848,931 $74,059 8.72% $673,809 $61,230 9.09% $574,502 $50,268 8.75%
Mortgage-backed securities...... 119,152 8,895 7.47 101,160 6,947 6.87 43,734 2,890 6.61
Other........................... 43,423 2,774 6.39 18,923 1,169 6.18 20,417 1,294 6.34
---------- ------- -------- ------- -------- -------
Total interest-earning
assets.................... 1,011,506 85,728 8.48 793,892 69,346 8.73 638,653 54,452 8.53
------- ------- -------
Nonearning assets............... 57,804 44,727 37,021
---------- -------- --------
Total assets................ $1,069,310 $838,619 $675,674
========== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits........................ $ 790,897 42,537 5.38 $636,777 34,120 5.36 $532,100 28,132 5.29
Borrowings...................... 154,228 9,614 6.23 117,150 7,583 6.47 73,899 4,984 6.74
Junior subordinated
debentures.................... 18,577 1,633 8.79 -- -- -- -- -- --
---------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............... 963,702 53,784 5.58 753,927 41,703 5.53 605,999 33,116 5.46
------- ---- ------- ---- ------- ----
Noninterest-bearing
liabilities................... 66,009 51,674 42,924
Shareholders' equity............ 39,599 33,018 26,751
---------- -------- --------
Total liabilities and
shareholders' equity...... $1,069,310 $838,619 $675,674
========== ======== ========
Net interest income and interest
rate spread................... $31,944 2.90 $27,643 3.20 $21,336 3.07
======= ==== ======= ==== ======= ====
Net interest margin............. 3.16 3.48 3.34
Average interest-earning assets
to average interest bearing
liabilities................... 104.96% 105.30% 105.39%
</TABLE>
4
<PAGE> 6
Rate and Volume Variances. Changes in the level of interest-earning assets
and interest-bearing liabilities (known as changes due to volume) and changes in
yields earned on assets and rates paid on liabilities (known as changes due to
rate) affect net interest income. The following table provides a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates. Changes attributable to the combined impact of volume and
rate have been allocated proportionately to change due to volume and change due
to rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------------- ---------------------------
CHANGE CHANGE CHANGE
TOTAL DUE TO DUE TO TOTAL DUE TO TOTAL
CHANGE VOLUME RATE CHANGE VOLUME CHANGE
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON:
Loans receivable............. $12,829 $15,162 $(2,333) $10,962 $ 8,962 $ 2,000
Mortgage-backed securities... 1,948 1,308 640 4,057 3,940 117
Other........................ 1,605 1,564 41 (125) (93) (32)
------- ------- ------- ------- ------- -------
Total interest income........ 16,382 $18,034 $(1,652) 14,894 $12,809 $ 2,085
------- ======= ======= ------- ======= =======
INTEREST EXPENSE ON:
Deposits..................... 8,417 $ 8,289 $ 128 5,988 $ 5,603 $ 385
Borrowings................... 2,031 2,300 (269) 2,599 2,792 (193)
Junior Subordinated
Debentures................. 1,633 1,633
------- ------- ------- ------- ------- -------
Total interest expense....... 12,081 $12,222 $ (141) 8,587 $ 8,395 $ 192
------- ======= ======= ------- ======= =======
Increase in net interest
income..................... $ 4,301 $ 6,307
======= =======
</TABLE>
Provision for Loan Losses. Our provision for loan losses increased 13.2% to
$3.0 million in 1998 from $2.3 million in 1997. This 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 46.0% to $1.0 billion at December 31, 1998 from $707.9 million at the
same date a year earlier. The allowance for losses on loans at December 31, 1998
was $6.9 million, or 0.66% of total loans, compared to $5.6 million, or 0.79% of
total loans, at the same date in 1997. Management bases its estimate of the
adequacy of the allowance for losses on loans on an analysis of various factors.
These factors include historical loan loss experience, the status of impaired
loans, economic conditions affecting real estate markets, and regulatory
considerations.
Noninterest Income. Total noninterest income increased 76.7% to $7.3
million in 1998 from $4.1 million in 1997. This increase occurred primarily
because of the increase in our gain on sale of loans.
In late 1997, we restructured our residential lending operation. We
expanded our product offerings and hired additional loan origination personnel.
We also restructured our compensation plans to increase incentives to produce
additional profitable volume. During 1998 long-term interest rates were
declining and were at lower levels than in 1997. This decline in rates
stimulated customer demand for fixed rate loans for purchases and refinances. In
addition, we generally sell fixed rate residential loans within 60 to 90 days of
origination
5
<PAGE> 7
in order to limit the risk of declining interest income from rising interest
rates. All of these factors combined to bring about the following increases for
all types of loans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- PERCENTAGE
1998 1997 INCREASE
--------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated for sale................. $211,677 $36,732 476%
Loans purchased for sale.................. 49,447 10,654 364%
Sale of loans............................. 258,064 51,402 402%
Gain on sale of loans..................... 3,453 488 607%
</TABLE>
Because these increases were due to the restructuring of our residential
lending operations and favorable interest rates, we expect that some, but not
all, of the increases will continue if market interest rates increase
significantly.
Net loan servicing income decreased 39.0% to $788,000 in 1998 from $1.3
million in 1997. This decrease in net loan servicing fees was a result of the
writedown of purchased and originated mortgage servicing rights. The writedown
occurred because a decline in long-term interest rates caused a high level of
prepayments during 1998. When loans prepay, the servicing rights associated with
those loans are written off. Management believes that based on the current level
of long-term interest rates, the high level of prepayments may continue. The
portfolio of loans serviced for others increased to $1.5 billion at December 31,
1998 from $1.2 billion at the same date a year earlier. This increase was a
result of the sale of $233.6 million of residential loan production, the
securitization of $101.0 million of commercial real estate loans during the
fourth quarter of 1998, and the continued acquisition of loan servicing
portfolios. These increases more than offset prepayments and amortization of
existing loans serviced for others. We remain committed to servicing loans for
others and will continue to acquire the rights to service portfolios where the
loan characteristics and pricing are consistent with our long-term profitability
and risk objectives.
Service charges on deposit accounts increased 26.5% to $906,000 in 1998
from $716,000 in 1997. The primary reason for the increase was the increase in
the level of passbook, statement savings and transaction accounts.
During 1998, we sold $43.2 million of mortgage-backed securities available
for sale for a net gain of $70,000. During 1997, we sold $16.6 million of
securities available for sale at a net gain of $92,000. We purchase or sell
securities and mortgage-backed securities for a variety of reasons. These
reasons include the management of liquidity, interest rate risk, capital levels,
collateral levels for borrowings, and to take advantage of favorable market
conditions. We do not currently hold any securities for trading purposes. Gains
or losses from the sale of securities are incidental to the sale of those
securities for the reasons listed above.
Loan option income was $388,000 in 1998 compared to $320,000 in 1997. In
loan option transactions, we purchase loans and sell nonrefundable options to a
third party to purchase these same loans at a later date. At the time the option
is exercised or the option period expires, we recognize fee income. The amount
of loan option income depends upon the amount of loans for which options are
written and the price negotiated. Both of these factors are affected by market
conditions. During 1998, we purchased $17.9 million of loans for option
transactions compared to $10.6 million in 1997.
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<PAGE> 8
We recognized loan credit discount income of $137,000 in 1998. At times we
purchase loans at a discount based upon our assessment of credit risk and the
value of the underlying collateral. We do not recognize these collateral
discounts in income over the life of the loan. When the loans are repaid, any
discount related to management's initial assessment of the deficiency in
collateral values which is not utilized as part of the payoff is recognized as
noninterest income. The loan credit discount income we recognized in 1998 is the
result of realizing collateral discounts on two loans which were paid in full in
September 1998.
Other income increased 27.9% to $1.6 million in 1998 from $1.2 million in
1997. This increase was primarily due to increased fee income from credit cards
and ATMs and greater rental income at branch locations.
Noninterest Expense. Total noninterest expense increased 26.7% to $25.5
million in 1998 from $20.1 million in 1997. This increase in expenses resulted
primarily from growth in assets and increased staffing requirements due to
greater business volume.
Personnel related expenses increased 28.1% to $13.7 million in 1998 from
$10.7 million in 1997. This increase was caused by the following factors:
- increases in staffing due to the growth of Metropolitan Bank;
- the payment of incentives for loan and deposit production;
- the addition of staff to increase loan production; and
- the effects of merit increases.
We expect increases in personnel costs to continue as we continue to grow.
Occupancy and equipment expense increased 18.9% to $3.6 million in 1998
from $3.0 million in 1997. Generally, these expenses increased because of the
following factors:
- the addition of two full service branch offices;
- maintenance costs; and
- the leasing of additional space at the executive office to support the
increased business volume.
Presently, we plan to open five new branch offices by the end of 2000. We are
also considering additional sites for future expansion. In addition, we have
executed an option to purchase land where we expect to build a new executive
office. We expect to occupy our new office in late 2000. Based on these facts we
expect occupancy costs will continue to increase.
Marketing expense increased $222,000 to $908,000 for 1998 from $686,000 in
1997. This increase was the result of marketing efforts to increase lending and
deposits.
Other operating expenses include miscellaneous general and administrative
costs such as loan servicing, loan processing costs, business development, check
processing and ATM expenses. Other operating expenses increased $1.4 million to
$5.3 million for 1998 from $3.9 million for 1997. Generally, this increase was
due to:
- greater expenses relating to increased loan origination/purchase volume;
- real estate owned expenses; and
- increased loan servicing costs associated with the higher level of
prepayments.
Provision for Income Taxes. The provision for income taxes increased to
$4.0 million in 1998 from $3.5 million in 1997 due to the increase in income
before taxes. The effective tax
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<PAGE> 9
rate was 36.5% for 1998 and 37.6% for 1997. The effective tax rate in 1998 was
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 1997 as a result of increased pre-tax income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Income. Net income for 1997 was $5.8 million, or $0.75 per common
share, an increase of $4.3 million from 1996. Net income for 1996 was $1.5
million, or $0.22 per common share. This increase was primarily due to the
increase in net interest income and the $1.9 million after tax Savings
Association Insurance Fund assessment in 1996 which was not repeated in 1997.
Excluding the one-time Savings Association Insurance Fund assessment, net income
for 1996 was $3.5 million, or $0.49 per common share.
Interest Income. Total interest income grew 27.4% to $69.3 million for 1997
from $54.5 million for 1996. This growth was due to a 24.3% increase in average
interest-earning assets between 1997 and 1996 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 our strategy to increase assets if loans
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
from 8.53% during 1996. This 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. Increases in
consumer and business loans relative to real estate loans caused the weighted
average rate to increase.
Interest Expense. Total interest expense increased 25.9% to $41.7 million
for 1997 from $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. Our cost of funds
increased to 5.53% in 1997 from 5.46% in 1996. This increase occurred as we
increased our efforts to lengthen maturities on deposits and borrowings 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. Our net interest margin rose 14 basis points to 3.48%
for 1997 from 3.34% for 1996. While overall interest rates on loans and deposits
declined during 1997, we experienced increases in yields on interest-earning
assets due to prepayment penalties and changes in asset mix. In addition, we
experienced increased liability costs as a result of our 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 funds.
Provision for Loan Losses. The provision for loan losses increased 43.1% to
$2.3 million in 1997 compared to $1.6 million in 1996. This 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, compared to
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<PAGE> 10
$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 various factors. These factors include 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 from $3.8 million in 1996. Net loan servicing income increased 7.4% to
$1.3 million in 1997 from $1.2 million in 1996. The increase in net loan
servicing fees was a result of our strategy to increase fee income. The
portfolio of loans serviced for others increased to $1.2 billion at December 31,
1997 from $1.1 billion at the same date a year earlier. This increase was the
result of securitization of $93.0 million of multifamily loans with FannieMae
during the third quarter of 1997. Purchases of loan servicing rights and
origination of loan servicing during 1997 approximately offset payoffs and
amortization of existing loans serviced.
Service charges on deposit accounts increased 26.7% to $716,000 in 1997
from $565,000 in 1996. The primary reason for the increase was the overall
growth in deposit accounts and greater fee income derived from increased
business levels in various accounts.
Gain on sale of loans was $488,000 in 1997 compared to $203,000 in 1996.
This income depends upon the amount of loans sold, secondary market pricing, and
the value allocated to mortgage servicing rights. These variables were in turn
directly affected by prevailing interest rates. 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 compared to $55.5 million in 1996.
Gain on sale of securities was $92,000 in 1997 compared to $134,000 in
1996. During 1997, we sold securities with a principal balance outstanding of
$16.6 million. In 1996, we sold $3.6 million of mortgage-backed securities for a
gain of $134,000. We do not actively purchase mortgage-backed securities for
resale. However, we monitor the existing portfolio of mortgage-backed securities
for opportunities to improve the yield, manage interest rate risk, and increase
profits. As a result, certain mortgage-backed securities have been sold.
Loan option income was $320,000 in 1997 compared to $696,000 in 1996. Loan
option income depends upon the amount of loans for which options are written and
the price negotiated. Both of these factors are affected by market conditions.
During 1997, we purchased $10.6 million of loans and sold nonrefundable options
to purchase those same loans at a specified price within a specified time
period. In 1996, we sold options on $16.7 million of loans that we purchased.
Other income increased 26.7% to $1.2 million in 1997 from $972,000 in 1996.
This increase was primarily due to increased fee income earned on investment
services, rental income at branch office locations, and fee income from credit
cards.
Noninterest Expense. Total noninterest expense decreased 3.3% to $20.1
million in 1997 from $20.8 million in 1996. Noninterest expense in 1996 included
a $2.9 million one-time assessment to recapitalize the Savings Association
Insurance Fund. Increases in other expense categories in 1997 related primarily
to growth in assets, increases in branch offices, and personnel.
Personnel related expenses increased $2.0 million in 1997, or 23.1%, from
1996. This increase resulted from increased staffing due to the growth of the
payment of
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<PAGE> 11
incentives for loan and deposit production, the addition to staff for
loan production, and the effects of merit increases.
Occupancy and equipment expense increased 23.5% to $3.0 million in 1997
from $2.5 million in 1996. These increases were generally the result of the
addition of full service branch offices, remodeling of certain other branch
offices, and expanded space at the executive office.
Federal deposit insurance expense decreased $3.6 million to $595,000 for
1997 from $4.2 million for 1996. This decrease was primarily a result of the
one-time assessment to recapitalize the Savings Association Insurance Fund in
1996. The one-time Savings Association Insurance Fund 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.
The Savings Association Insurance Fund recapitalization made this decline
possible.
Data processing expense decreased 26.3% to $441,000 in 1997 from $599,000
in 1996. The main reason for the decrease was the discount on processing fees
from Metropolitan Bank's primary data services provider in mid-1997. This
discount on fees continued until mid-1998 when fees returned to their normal
range prior to the discount.
Other operating expenses increased $424,000 to $3.9 million for 1997 from
$3.5 million for 1996. This increase was primarily due to greater credit card
servicing costs. These servicing costs grew 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 from $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. The relationship
was less significant as a result of the unfavorable effect the one-time
assessment to recapitalize the Savings Association Insurance Fund had on pre-tax
income in 1996. This more than offset the fact that we incurred significant
state income tax and were subject to a higher federal tax rate in 1997 for the
first time.
ASSET QUALITY
Nonperforming Assets. Our goal is to maintain high quality loans in the
loan portfolio through conservative lending policies and prudent underwriting.
We undertake detailed reviews of the loan portfolio regularly to identify
potential problem loans or trends early and to provide for adequate estimates of
potential losses. In performing these reviews, management considers, among other
things, current economic conditions, portfolio characteristics, delinquency
trends, and historical loss experiences. We normally consider 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, a loan is considered 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,
we assess the collectibility of the unpaid interest. Interest determined to be
uncollectible is reversed from interest income. Future interest income is
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<PAGE> 12
recorded only if the loan principal and interest due is considered collectible
and is less than the estimated fair value of the underlying collateral.
The table below provides the amounts and categories of our nonperforming
assets as of the dates indicated. At December 31, 1998, all loans classified as
impaired were also classified as nonperforming.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997 1996
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans................................. $12,231 $2,763 $4,923
Loans past due greater than 90 days, still
accruing....................................... 460 384 271
------- ------ ------
Total nonperforming loans.............. 12,691 3,147 5,194
Real estate owned................................ 5,534 2,037 177
------- ------ ------
Total nonperforming assets............. $18,225 $5,184 $5,371
======= ====== ======
Nonperforming loans to total loans............... 1.23% 0.44% 0.80%
Nonperforming assets to total assets............. 1.34% 0.56% 0.70%
</TABLE>
Nonperforming assets increased $13.0 million to $18.2 million at December
31, 1998 from the prior year. Nonperforming loans increased in four areas:
commercial real estate, construction and land development, business loans, and
consumer loans. Real estate owned increased $3.5 million because we acquired two
properties in December.
Nonperforming commercial real estate loans increased $5.9 million due to
three loans including a $4.0 million loan financing a waterpark in Southern
California. This loan and one other are bridge loans, a program we are no longer
actively marketing. Based on appraisals and other current estimates of value, we
do not anticipate losses on these three loans.
Nonperforming construction and land development loans increased $1.8
million due to two borrowers. The largest loan is a $1.3 million land
development loan for residential lots that has experienced slower than
anticipated lot sales. The remaining loans are model home construction loans.
Based on appraised values and current market research, we do not anticipate
losses on these two loans.
Nonperforming business loans increased $1.5 million due to five loans. This
increase is consistent with the growth in this business line. We began making
business loans in 1995. From 1996 to 1997, business loans grew $34.0 million to
$57.5 million. In 1998, business loans grew another $24.8 million to $82.3
million. Total nonperforming business loans are $1.7 million or 2.1% of that
loan category. Unlike the real estate secured lending which comprises over 80%
of our loan portfolio, business loans often depend on the successful operation
of the business or depreciable collateral. Therefore, we expect nonperforming
loans and losses to be higher for business loans than for real estate loans.
Management currently estimates probable losses on these five loans at $900,000.
We have allocated a part of the allowance for loan losses to this estimate until
the actual loss is determined and charged-off. We are aggressively pursuing
collection of all nonperforming loans.
Nonperforming consumer loans have increased $500,000 to $2.5 million at
December 31, 1998. Nonperforming consumer loans represent 2.5% of the consumer
portfolio. The increase in these loans is primarily attributable to subprime
lending. We began subprime lending in 1997. These loans typically exhibit higher
delinquency rates than other consumer
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<PAGE> 13
loans but provide a greater yield to compensate for these costs of delinquency
and collection. These loans accounted for $240,000 or 29.7% of consumer loan
charge-offs in 1998. The aggregate balance of the subprime portfolio at December
31, 1998 was $10.2 million or less than one percent of total loans. All consumer
loans that are delinquent 120 days or more are 100% covered by loan insurance or
included in the allowance for loan losses in an amount equal to the estimated
loss for that loan.
In December 1998, we acquired a motel in Northeastern Ohio and a marina in
California. We transferred the loans related to these properties to real estate
owned. We adjusted the loans to their estimated fair value of $3.4 million and
$1.3 million, respectively, at the time of acquisition. We are actively pursuing
the sale of both properties. We do not anticipate further losses.
In addition to the nonperforming assets included in the table above, we
identify potential problem loans which are still performing but have a weakness
which causes us to classify those loans as substandard for regulatory purposes.
There was $3.1 million of potential problem loans in our portfolio at December
31, 1998. Seven loans secured by multifamily and commercial real estate are $1.8
million of this amount.
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. The following
table provides an analysis of the allowance for losses on loans at the dates
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period...................... $5,622 $4,175 $2,765
Charge-Offs:
One- to four-family................................. 5 32 22
Multifamily......................................... 39 494 119
Commercial real estate.............................. -- -- --
Construction and land............................... -- -- --
Consumer............................................ 809 363 95
Business............................................ 565 10 --
------ ------ ------
Total charge-offs......................... 1,418 899 236
------ ------ ------
Recoveries:
One- to four-family................................. 25 -- --
Multifamily......................................... 13 -- --
Commercial real estate.............................. -- -- --
Construction and land............................... -- -- --
Consumer............................................ 17 6 11
Business............................................ -- -- --
------ ------ ------
Total recoveries.......................... 55 6 11
------ ------ ------
</TABLE>
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<PAGE> 14
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net charge-offs..................................... 1,363 893 225
Provision for loan losses........................... 2,650 2,340 1,635
------ ------ ------
Balance at end of period............................ $6,909 $5,622 $4,175
====== ====== ======
Net charge-offs to average loans.................... 0.16% 0.13% 0.04%
Provision for loan losses to average loans.......... 0.31% 0.35% 0.28%
Allowance for losses on loans to total nonperforming
loans at end of period............................ 54.44% 178.68% 80.38%
Allowance for losses on loans to total loans at end
of period......................................... 0.66% 0.79% 0.64%
</TABLE>
In 1998, loans receivable increased 46.0% in 1998 to $1.0 billion while the
allowance for losses on loans increased only 22.9% to $6.9 million. We
considered the following factors in determining that this level of allowance for
losses on loans was adequate.
- Loan concentrations for each year are similar. In 1998 and 1997, real
estate secured approximately 83% of the loan portfolio. Commercial real
estate loans were approximately 21% of the portfolio in both years.
Multifamily loans have increased to 31% of the portfolio at December 1998
compared to 22% a year earlier.
- Average loan sizes remain relatively small for multifamily and commercial
real estate loans. As a result, the risk of loss is spread among many
borrowers and properties. The average loan size for a multifamily loan
was $534,000 at December 1998 compared to $543,000 a year earlier. The
average loan size for a commercial real estate loan was $618,000 at
December 1998 compared to $677,000 a year earlier.
- Historical charge-off experience on real estate loans has not been
significant.
- We separately evaluated individual nonperforming loans for the adequacy
of collateral values. Although we consider several of these loans to be
individually large because they exceed $1 million, we were able to
determine that our principal balance is well secured. We reached this
determination by reviewing current or updated appraisals, brokers' price
opinions, and other market surveys.
- Consumer loan charge-offs continued to increase. This increase was due
primarily to subprime lending. We are not currently expanding subprime
lending. The current balance in this portfolio is $10.2 million.
- Business loan charge-offs increased in 1998. We expect business loan
charge-offs to continue to grow as our emphasis in this area causes the
portfolio to grow.
After careful consideration of all of these factors, we concluded that it
was necessary to increase the allowance for loan losses but not at the same rate
that loans increased during 1998. Therefore, the provision for loan losses was
increased 13.2% to $3.0 million in 1998 which resulted in an increase in the
allowance for loan losses of $1.3 million.
COMPARISON OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 FINANCIAL CONDITION
Total assets amounted to $1.4 billion at December 31, 1998 compared to
$925.0 million at December 31, 1997. Total assets increased $438.4 million, or
47.4%. The increase in
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<PAGE> 15
assets was funded primarily with deposit growth of $313.6 million, increased
borrowings of $79.6 million, and the issuance of $27.8 million in preferred
securities by a new, wholly owned subsidiary of Metropolitan named Metropolitan
Capital Trust I. Asset growth in 1998 was greater than usual because both
capital and quality assets were available. Although we do not expect asset
growth to continue at this rate, we expect it to be approximately 20% over the
next several years.
Securities available for sale increased by $17.8 million to $19.4 million
at December 31, 1998 from $1.7 million the prior year. This increase was
primarily due to our purchase of $7.5 million of FreddieMac preferred stock and
a $9.9 FannieMae medium term note. Securities available for sale are primarily
maintained to meet the liquidity maintenance requirement of our subordinated
notes maturing January 1, 2005 and to meet regulatory liquidity requirements.
Securities held to maturity increased $11.5 million to $16.2 million at
December 31, 1998 from $4.7 million at December 31, 1997. This increase was
primarily due to our purchase of $14.8 million of tax exempt municipal bonds and
$1.4 million of revenue bonds which were offset by the early redemption of $4.7
million of tax-exempt bonds.
Mortgage-backed securities increased $55.1 million to $198.3 million at
December 31, 1998 from $143.2 million a year earlier. Our securitization of
commercial real estate loans of $101.0 million and purchases of $45.7 million of
mortgage-backed securities were partially offset by repayments of $46.3 million
of mortgage-backed securities and sales of $43.2 million of mortgage-backed
securities. In December 1998, we completed the securitization of $101.0 million
of commercial real estate loans with a private issuer in a structure that used
an insurance policy to assume all credit risk. We expect to consider similar
transactions in the future because they improve our credit risk profile by
converting whole loans to mortgage-backed securities. In addition, these
transactions provide high quality collateral for wholesale borrowings.
Loans receivable, including loans held for sale, increased $325.4 million,
or 46.0%, to $1.0 billion. This increase was consistent with our overall
strategy of increasing assets while adhering to prudent underwriting standards
and preserving our "adequately capitalized" status.
We experienced the following increases by loan category:
- multifamily -- $143.0 million;
- commercial real estate loans -- $62.2 million;
- one- to four-family loans -- $37.7 million;
- consumer loans -- $33.1 million;
- business loans -- $24.8 million; and
- construction and land loans (net of loans in process) -- $21.0 million.
Premises and equipment increased $5.2 million, or 37.2%, to $19.1 million.
This increase was primarily the result of our opening two branch offices in
1998, the purchase of computer hardware and software, and the acquisition of
land for new branch offices. We have executed an option to purchase land for a
new executive office. We plan to begin construction during 1999 for occupancy
late in 2000. We continue to evaluate sites for future branch office expansion.
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<PAGE> 16
Other assets include a $1.0 million investment in a limited partnership
which services real estate loans. The loans in the partnership's servicing
portfolio prepaid more quickly during 1998 than in 1997. If these prepayments
increase or remain at current levels for a long period of time, the full value
of this asset might not be realized.
Deposits totaled $1.1 billion at December 31, 1998, an increase of $313.6
million, or 42.5%, from December 31, 1997. This increase resulted from
management's marketing efforts, growth at newer branch offices, a $108.6 million
increase in out-of-state time deposits primarily from financial institutions,
and increased custodial checking balances.
Borrowings increased $79.6 million to $215.5 million at December 31, 1998,
from $135.9 million at December 31, 1997. This increase was the result of our
increased use of Federal Home Loan Bank advances and reverse repurchase
agreements to fund asset growth not funded by the increased balance of deposits.
During 1998, Metropolitan's wholly owned subsidiary, Metropolitan Capital
Trust I, issued $27.8 million of 8.60% cumulative trust preferred securities.
This subsidiary invested the proceeds of the offering in 8.60% junior
subordinated debentures of Metropolitan. The proceeds from these securities were
used to retire our 10.0% subordinated notes scheduled to mature December 31,
2001 and to fund capital contributions to Metropolitan Bank during 1998 to
support asset growth.
Shareholders' equity increased $5.9 million, or 16.3%, to $42.6 million,
due largely to the retention of net income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The term "liquidity" refers to our ability to generate adequate
amounts of cash for funding loan originations, loan purchases, deposit
withdrawals, maturities of borrowings and operating expenses. Our primary
sources of internally generated funds are principal repayments and payoffs of
loans, cash flows from operations, and proceeds from sales of assets. External
sources of funds include increases in deposits and borrowings and public or
private offerings by Metropolitan.
In addition to debt or equity offerings, the primary source of funds for
Metropolitan, at the holding company level, is dividends from Metropolitan Bank.
The payment of these dividends are subject to restrictions imposed by federal
bank regulatory agencies. At December 31, 1998, Metropolitan had liquid assets
of $2.1 million and had $4.0 million available to borrow on its commercial bank
line of credit. Currently, Metropolitan primarily uses funds for interest
payments on its existing debt. The covenants associated with its subordinated
notes maturing January 1, 2005 require Metropolitan to maintain liquid assets
sufficient to pay six months interest, or approximately $675,000. Metropolitan
could also use funds for additional capital contributions to Metropolitan Bank,
other operating expenses, purchase of investment securities, or the acquisition
of other assets.
Sources of funds for Metropolitan 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. Metropolitan Bank currently has a
$60 million cash management line of credit with the Federal Home Loan Bank. This
line of credit is available to meet liquidity needs. As of December 31, 1998,
the balance on this line was $28.4 million. We regularly review cash
15
<PAGE> 17
flow needs to fund operations. We believe that the resources described above are
adequate to meet our requirements for the foreseeable future.
When evaluating sources of funds, we consider the cost of various
alternatives such as local retail deposits, Federal Home Loan Bank advances, and
other wholesale borrowings. One option we have considered and used in the past
has been the acceptance of out-of-state time deposits from individuals and
entities, predominantly financial institutions. These deposits typically have
balances of $90,000 to $100,000 and have a term of one year or more. We do not
accept these deposits through brokers. At December 31, 1998, approximately
$166.3 million of certificates of deposits, or 15.8% of our total deposits, were
held by these individuals and entities. If we were unable to replace these
deposits upon maturity, our liquidity could be adversely affected. We monitor
these maturities to attempt to minimize any potential adverse effect on
liquidity.
At December 31, 1998, $129.4 million, or 18.0%, of our 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, our liquidity could be adversely affected. We monitor maturities
regularly to attempt to minimize any potential adverse effect on liquidity.
Historically, Metropolitan Bank has been subject to a regulatory liquidity
requirement. In November 1997, liquidity regulations were changed significantly.
These new regulations require Metropolitan Bank to maintain liquid assets equal
to at least 4% of Metropolitan Bank's 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"), FannieMae, or FreddieMac 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 1998 was
5.04%.
Capital. Our total shareholders' equity at December 31, 1998 was $42.6
million, an increase of $5.9 million, or 16.3%, from equity of $36.7 million at
December 31, 1997. This increase was due to net income of $6.8 million and a
decrease in unrealized gains on securities available for sale, net of tax, of
$811,000. No dividends were paid in 1998, 1997 or 1996. The terms of our
subordinated notes maturing January 1, 2005 and the commercial bank line of
credit prohibit the payment of dividends unless tangible equity divided by total
assets is greater than 7.0%. In 1998, Metropolitan's wholly owned subsidiary,
Metropolitan Capital Trust I, issued $27.8 million of 8.60% cumulative trust
preferred securities. Sources of future capital could include, but would not be
limited to, our earnings or additional offerings of debt or equity securities.
The Office of Thrift Supervision imposes capital requirements on savings
associations. Savings associations are required to meet three minimum capital
standards. These standards are a leverage requirement, a tangible capital
requirement, and a risk-based capital requirement.
These standards must be no less stringent than those applicable to national
banks. In addition, the Office of Thrift Supervision is authorized to impose
capital requirements in excess of these standards on individual associations on
a case-by-case basis.
The Office of Thrift Supervision leverage requirement expressly requires
that savings associations maintain core capital in an amount not less than 3% of
adjusted total assets. The Office of Thrift Supervision has taken the position,
however, that the prompt corrective action
16
<PAGE> 18
regulations have 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, savings associations must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital is defined as core capital less all intangible assets, except a
limited amount of qualifying purchased mortgage servicing rights. Adjusted total
assets, for the purpose of the tangible capital ratio, include total assets less
all intangible assets except qualifying purchased mortgage servicing rights.
The risk-based capital requirement is calculated based on the risk weight
assigned to on-balance sheet assets and off-balance sheet commitments. Risk
weights range from 0% to 100% of the book value of the asset and are based upon
the risk inherent in the asset. The risk weights assigned by the Office of
Thrift Supervision for principal categories of assets are:
- 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;
- 20% for securities, other than equity securities, issued by U.S.
Government sponsored agencies, and for mortgage-backed securities issued
by, or fully guaranteed as to principal and interest, by FannieMae or
FreddieMac except for those classes with residual characteristics or
stripped mortgage-related securities;
- 50% for the following loans:
- 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 than 80% at origination unless insured to that
ratio by an insurer approved by FannieMae or FreddieMac;
- certain qualifying multifamily first lien mortgage loans;
- residential construction loans; and
- 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 and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital as well as 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.
17
<PAGE> 19
The Bank's regulatory capital ratios at December 31, 1998 were in
excess of the capital requirements specified by the Office of Thrift Supervision
regulations as shown by the following table:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CAPITAL AMOUNT:
Actual................ $84,935 6.26% $85,113 6.27% $89,086 8.22%
Required.............. 20,361 1.50% 54,296 4.00% 86,731 8.00%
------- ---- ------- ---- ------- ----
Excess................ $64,574 4.76% $30,817 2.27% $ 2,355 0.22%
======= ==== ======= ==== ======= ====
</TABLE>
The Bank is also subject to the capital adequacy requirements
under the Federal Deposit Insurance Corporation Improvement Act of 1991. The
additional capital adequacy ratio imposed on Metropolitan Bank in this
evaluation is the Tier 1 risk-based capital ratio which at December 31, 1998 was
7.85% compared to the required ratio of 4%.
The Bank's primary sources of capital are the earnings of Metropolitan Bank
and additional capital investments from Metropolitan. Our strategy is to
contribute additional capital to Metropolitan Bank as growth occurs to maintain
risk-based capital at "adequately capitalized" levels as defined by the Office
of Thrift Supervision regulations. We believe that under current regulations,
Metropolitan Bank will continue to meet its minimum capital requirements in the
foreseeable future. However, events beyond our control, such as increases in
interest rates or a downturn in the economy, could adversely affect future
earnings and, consequently, the ability of Metropolitan Bank to meet its future
capital requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Metropolitan, like other financial institutions, is subject to market risk.
Market risk is the risk that a company can suffer economic loss due to changes
in the market values of various types of assets or liabilities. As a financial
institution, we make a profit by accepting and managing various types of risks.
The most significant of these risks are credit risk and interest rate risk. See
"-- Asset Quality" for a comprehensive discussion of credit risk. The principal
market risk for us is interest rate risk. Interest rate risk is the risk that
changes in market interest rates will cause significant changes in net interest
income because interest-bearing assets and interest-bearing liabilities mature
at different intervals and reprice at different times.
We manage interest rate risk in a number of ways. Some of the tools used to
monitor and quantify interest rate risk include:
- annual budgeting process;
- quarterly review of certificate of deposit maturities by day;
- monthly forecast of balance sheet activity;
- monthly review of listing of liability rates and maturities by month;
- monthly shock report of effect of sudden interest rate changes on net
interest income;
- monthly shock report of effect of sudden interest rate changes on net
value of portfolio equity; and
18
<PAGE> 20
- monthly analysis of rate and volume changes in historic net interest
income.
We have established an asset and liability committee to monitor interest
rate risk. This committee is made up of senior officers from finance, lending
and deposit operations. The committee meets at least quarterly, reviews our
current interest rate risk position, and determines strategies to pursue for the
next quarter. The activities of this committee are reported to the Board of
Directors of Metropolitan Bank quarterly. Between meetings the members of this
committee are involved in setting rates on deposits, setting rates on loans and
serving on loan committees where they work on implementing the established
strategies.
During 1997 and 1998, like many financial institutions, we had exposure to
potential declines in net interest income from rising interest rates. This is
because Metropolitan has had more short-term interest rate sensitive liabilities
than short-term interest rate sensitive assets. One of the ways we monitor
interest rate risk quantitatively is to measure the potential change in net
interest income based on various immediate changes in market interest rates. The
following table shows the change in net interest income for immediate sustained
parallel shifts of 1% and 2% in market interest rates as of the end of the last
two years.
<TABLE>
<CAPTION>
EXPECTED CHANGE IN NET INTEREST INCOME
--------------------------------------
CHANGE IN INTEREST RATE DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- ----------------- -----------------
<S> <C> <C>
+2%......................................... -19% -19%
+1%......................................... -10% -9%
- -1%......................................... +9% +8%
- -2%......................................... +18% +17%
</TABLE>
The change in net interest income from a change in market rates is a
short-term measure of interest rate risk. The results above indicate that we
have a significant short-term exposure to rising rates but that the exposure has
remained at a stable level over the past year.
Another quantitative measure of interest rate risk is the change in the
market value of all financial assets and liabilities based on various immediate
sustained shifts in market interest rates. This concept is also known as net
portfolio value and is the methodology used by the Office of Thrift Supervision
in measuring interest rate risk. The following table shows the change in net
portfolio value for immediate sustained parallel shifts of 1% and 2% in market
interest rates as of the end of the last two years.
<TABLE>
<CAPTION>
EXPECTED CHANGE IN NET PORTFOLIO VALUE
--------------------------------------
CHANGE IN INTEREST RATE DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- ----------------- -----------------
<S> <C> <C>
+2%......................................... -39% -17%
+1%......................................... -20% -8%
- -1%......................................... +25% +7%
- -2%......................................... +55% +18%
</TABLE>
The change in net portfolio value is a long-term measure of interest rate
risk. It assumes that no significant changes in assets or liabilities held would
take place if there were a sudden change in interest rates. Because we monitor
interest rate risk regularly and actively manage that risk, these projections
serve as a worst case scenario assuming no reaction to changing rates. The
results above indicate an increase in interest rate risk over the past year
because they are measuring long-term interest rate risk.
19
<PAGE> 21
Our strategies to limit interest rate risk from rising interest rates are
as follows:
- originate one- to four-family adjustable rate loans for the portfolio;
- originate one- to four-family fixed rate loans for sale;
- originate the majority of business loans to float with prime rates;
- increase core deposits which have low interest rate sensitivity;
- increase certificates of deposit with maturities over one year;
- borrow funds with maturities greater than a year; and
- increase the volume of loans serviced since they rise in value as rates
rise.
We also follow strategies that increase interest rate risk in limited ways
including:
- originating and purchasing fixed rate multifamily and commercial real
estate loans limited to ten year maturities; and
- originating and purchasing fixed rate consumer loans with terms from two
to fifteen years.
The result of these strategies taken together is that Metropolitan has
taken on long-term interest rate risk by adding some ten year fixed rate loans
and financing those loans with certificates of deposit and borrowings with terms
from one to five years. We made a conscious decision to add this long-term
interest rate risk during 1998 because these loans met our credit quality, rate,
and geographic diversity requirements.
The Bank's level of interest rate risk as of December 31, 1998,
was above limits previously established by Metropolitan Bank's Board of
Directors for rising interest rate scenarios. However, we feel that the current
level of interest rate risk is acceptable for several reasons. The risk is
weighted toward the long-term where changes in assets and liabilities can be
made if rates do rise. We have a history of growth of 20% to 30% in assets over
the past five years. As long as growth can be maintained at 20% per year
interest rate risk can be rapidly diluted by growth in short term and adjustable
rate assets funded by long term liabilities. We feel that the likelihood of
large increases in market rates is low at this time. An analysis of the average
quarterly change in the Treasury yield curve from 1988 to 1997 indicates that a
parallel curve shift of 1.5% or more is an event that has less than a 0.1%
chance of occurrence. In addition, the asset and liability committee has
developed strategies designed to reduce our exposure to rising interest rates.
Metropolitan Bank's Board of Directors approved new interest rate risk limits
which are more reflective of Metropolitan Bank's current interest rate risk
strategy. The Bank is in compliance with the revised interest rate risk
limits. Management anticipates that the current level of interest rate risk will
be maintained or will decline modestly in 1999.
We are also aware that any method of measuring interest rate risk including
the two used above has certain shortcomings. For example, certain assets and
liabilities may have similar maturities or repricing dates but their repricing
rates may not follow the general trend in market interest rates. Also, as a
result of competition, the interest rates on certain assets and liabilities may
fluctuate in advance of changes in market interest rates while rates on other
assets and liabilities may lag market rates. In addition, any projection of a
change in market rates requires that prepayment rates on loans and early
withdrawal of certificates of deposits be projected and those projections may be
inaccurate. We focus on the change in net interest income and the change in net
portfolio value as a result of immediate and sustained parallel shifts in
interest rates as a balanced approach to monitoring interest rate risk when used
with budgeting and the other tools noted above.
20
<PAGE> 22
At the present time we do not hold any trading positions, foreign currency
positions, or commodity positions. Equity investments are approximately 1% of
assets and half of that amount is held in Federal Home Loan Bank stock which can
be sold to the Federal Home Loan Bank of Cincinnati at par. Therefore, we do not
consider any of these areas to be a source of significant market risk.
YEAR 2000
The year 2000 issue refers to computer programs being written using two
digits rather than four to define an applicable year. A company's hardware, date
driven automated equipment or computer programs that have a two digit field to
define the year may recognize a date using "00" as the year 1900 rather than the
year 2000. This faulty recognition could result in a system failure, disruption
of operations, or inaccurate information or calculations. Similar to other
companies, we face the challenge of ensuring that all of our computer related
functions will work properly from the year 2000 and beyond.
We completed the assessment and planning phases, and substantially
completed the remediation and testing phases, of our year 2000 program by
December 31, 1998. By June 30, 1999, we will complete the testing and
remediation of our internal equipment and software. However, we expect to retest
our equipment and software during the remainder of 1999. As part of our year
2000 program, we have fully upgraded and tested our computer systems which
service the majority of our customers accounts. As a result of these upgrades,
we believe that these systems are year 2000 ready. During the first quarter of
1999, we will test our supporting systems. We believe that all of these internal
components will be adequate to provide quality service to our customers without
interruption by January 1, 2000. In addition, we are continuing our efforts to
test our interface systems with third parties. We expect to complete this
testing by September 1999.
In addition to internal resources, we are utilizing external resources to
implement our year 2000 program. We have contracted with outside consultants to
verify our assessment of our year 2000 problems and to assist us with our
remediation efforts.
We may experience an increase in problem loans and credit losses if
borrowers fail to respond to year 2000 issues. In addition, higher funding costs
may result if consumers react to publicity about the issue by withdrawing
deposits. In response to these concerns, we formed a task force. The task force
has conducted a survey of significant credit customers to determine their year
2000 readiness and to evaluate the level of potential credit risk to us. These
customers have assured us that they are or will be year 2000 compliant. We have
also implemented a customer awareness program to provide deposit customers with
an understanding of our year 2000 readiness.
On an ongoing basis, we are contacting our key suppliers and third parties
with whom we conduct business to determine their year 2000 readiness. We have
put in place a program to monitor third party progress on year 2000 issues
during 1999. Despite our efforts, we can make no assurances that the critical
third parties with which we do business will adequately address their year 2000
issues. If our suppliers and customers are not year 2000 compliant by January 1,
2000, their noncompliance could materially affect our business, results of
operations and financial condition.
We believe that our worst case scenario involves the inability of electric
utility companies to service our various offices due to year 2000 problems. If
the electric utility
21
<PAGE> 23
companies cannot provide power to a significant number of our offices, our
business and operations could be materially disrupted.
We are in the process of developing contingency plans that focus on
reducing any disruption that might be created by third parties with whom we do
business being year 2000 noncompliant. We have also created a task force to
document and test a business resumption plan. This plan is anticipated to be in
place and tested by September 30, 1999.
In management's opinion, any incremental costs or potential loss of
revenues would not have a material impact on our financial condition,
operations, or cash flows. To date, we have spent $34,000 for incremental
services directly related to ensuring year 2000 readiness. In addition, we have
spent $110,000 to upgrade computer hardware and software in 1998, which was
necessary to ensure year 2000 readiness. We expect to spend an additional
$200,000 in the first half of 1999 to finalize upgrades to computer hardware and
software to be year 2000 ready.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities." Statement of Financial Accounting Standard No. 133
addresses the accounting for derivative instruments and certain derivative
instruments embedded in other contracts, and hedging activities. The statement
standardizes the accounting for derivative instruments by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. This statement is effective
for all fiscal years beginning after June 15, 1999.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." Statement of Financial Accounting Standard No.
134 will, in 1999, allow mortgage loans held for sale that are securitized to be
classified as trading, available for sale, or in certain circumstances held to
maturity. Currently, these must be classified as trading. We do not expect these
statements to have a material effect on the Company's consolidated financial
position or results of operation.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes included in this prospectus
have been prepared in accordance with generally accepted accounting principles.
These principles require the measurement of financial position and operating
results in terms of historical dollars without consideration of changes in
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of our 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 and in monetary and fiscal policies. Our ability to
match the interest rate sensitivity of our financial assets to the interest
sensitivity of our financial liabilities in our asset/liability management may
tend to minimize the effect of changes in interest rates on our 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.
22
<PAGE> 24
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, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Cleveland, Ohio
February 12, 1999
23
<PAGE> 25
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................ $ 19,810,617 $ 14,152,785
Interest-bearing deposits in other banks........... 9,275,257 1,961,183
Securities purchased under resale agreements....... 6,396,720
-------------- ------------
Cash and cash equivalents........................ 29,085,874 22,510,688
Securities available for sale...................... 19,443,264 1,705,879
Securities held to maturity........................ 16,217,406 4,740,000
Mortgage-backed securities available for sale...... 198,295,290 143,166,654
Loans held for sale................................ 15,016,632 14,230,130
Loans receivable, net.............................. 1,018,270,921 693,654,608
Federal Home Loan Bank stock, at cost.............. 6,053,900 5,349,700
Accrued interest receivable........................ 8,678,479 5,752,161
Premises and equipment, net........................ 19,113,869 13,927,911
Real estate owned, net............................. 5,534,229 2,037,465
Intangible assets.................................. 2,723,880 2,986,539
Loan servicing rights.............................. 13,412,167 9,223,974
Prepaid expenses and other assets.................. 11,587,703 5,698,912
-------------- ------------
Total assets.................................. $1,363,433,614 $924,984,621
============== ============
LIABILITIES
Noninterest-bearing deposits....................... $ 63,716,544 $ 46,234,027
Interest-bearing deposits.......................... 987,640,170 691,547,834
Borrowings......................................... 215,485,780 135,869,673
Accrued interest payable........................... 5,511,306 3,272,815
Other liabilities.................................. 20,685,291 11,399,016
-------------- ------------
Total liabilities............................. 1,293,039,091 888,323,365
-------------- ------------
Guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures..... 27,750,000
SHAREHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized
Common stock, no par value, 10,000,000 shares
authorized, 7,756,393 shares issued and
outstanding
Additional paid-in capital......................... 18,505,174 11,101,383
Retained earnings.................................. 23,660,349 24,269,873
Accumulated other comprehensive income............. 479,000 1,290,000
-------------- ------------
Total shareholders' equity.................... 42,644,523 36,661,256
-------------- ------------
Total liabilities and shareholders'
equity................................... $1,363,433,614 $924,984,621
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.................................. $74,059,415 $61,230,083 $50,267,618
Interest on mortgage-backed securities...................... 8,894,573 6,946,824 2,890,437
Interest and dividends on other investments................. 2,774,186 1,169,208 1,293,828
----------- ----------- -----------
Total interest income................................... 85,728,174 69,346,115 54,451,883
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits........................................ 42,536,460 34,120,452 28,131,837
Interest on borrowings...................................... 9,614,062 7,582,855 4,984,212
Interest on junior subordinated debentures.................. 1,633,454
----------- ----------- -----------
Total interest expense.................................. 53,783,976 41,703,307 33,116,049
----------- ----------- -----------
NET INTEREST INCOME......................................... 31,944,198 27,642,808 21,335,834
Provision for loan losses................................... 2,650,000 2,340,000 1,635,541
----------- ----------- -----------
Net interest income after provision for loan losses......... 29,294,198 25,302,808 19,700,293
----------- ----------- -----------
NONINTEREST INCOME
Net gain on sale of loans................................... 3,452,612 488,104 202,621
Loan servicing income, net.................................. 788,305 1,292,719 1,203,779
Service charges on deposit accounts......................... 905,659 715,657 564,654
Net gain on sale of securities.............................. 70,033 92,338 133,706
Loan option income.......................................... 388,006 320,464 695,798
Loan credit discount income................................. 137,104
Other operating income...................................... 1,574,844 1,231,524 972,057
----------- ----------- -----------
Total noninterest income................................ 7,316,563 4,140,806 3,772,615
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and related personnel costs........................ 13,668,661 10,671,192 8,669,705
Occupancy and equipment expense............................. 3,618,751 3,044,220 2,464,926
Federal deposit insurance premiums.......................... 688,037 595,268 4,211,869
Marketing expense........................................... 907,831 685,954 694,898
State franchise taxes....................................... 622,762 542,577 461,127
Data processing expense..................................... 491,604 441,335 599,150
Amortization of intangibles................................. 262,659 262,659 255,720
Other operating expenses.................................... 5,261,961 3,905,522 3,481,610
----------- ----------- -----------
Total noninterest expense............................... 25,522,266 20,148,727 20,839,005
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM........... 11,088,495 9,294,887 2,633,903
Provision for income taxes.................................. 4,049,000 3,492,000 1,095,000
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM............................ 7,039,495 5,802,887 1,538,903
----------- ----------- -----------
Extraordinary item.......................................... (245,228)
NET INCOME.................................................. $ 6,794,267 $ 5,802,887 $ 1,538,903
=========== =========== ===========
Basic earnings per share:
Before extraordinary item................................. $ 0.91 $ 0.75 $ 0.22
Extraordinary item........................................ 0.03
----------- ----------- -----------
Basic earnings per share.................................... $ 0.88 $ 0.75 $ 0.22
=========== =========== ===========
Diluted earnings per share:
Before extraordinary item................................. $ 0.90 $ 0.75 $ 0.22
Extraordinary item........................................ 0.03
----------- ----------- -----------
Diluted earnings per share................................ $ 0.87 $ 0.75 $ 0.22
=========== =========== ===========
Weighted average shares for basic earnings per share........ 7,756,393 7,756,393 7,023,064
Effect of dilutive stock options............................ 82,412 12,899
----------- ----------- -----------
Weighted average shares for diluted earnings per share...... 7,838,805 7,769,292 7,023,064
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
------ ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1996......... $ 100 $ 7,801,283 $16,928,083 $ 736,949 $25,466,415
Comprehensive income:
Net income.................... 1,538,903 1,538,903
Change in unrealized gain on
securities, net of tax and
net of reclassification of
gain of $88,000 from net
income...................... (60,949) (60,949)
-----------
Total comprehensive
income.................... 1,477,954
Issuance of 400,000 shares of
Common stock................ 3,300,000 3,300,000
Change in stated value of
common stock................ (100) 100 --
----- ----------- ----------- ---------- -----------
BALANCE DECEMBER 31, 1996....... 11,101,383 18,466,986 676,000 30,244,369
Comprehensive income:
Net income.................... 5,802,887 5,802,887
Change in unrealized gain on
securities, net of tax and
net of reclassification of
gain of $60,000 from net
income...................... 614,000 614,000
-----------
Total comprehensive
income.................... 6,416,887
----- ----------- ----------- ---------- -----------
BALANCE DECEMBER 31, 1997....... 11,101,383 24,269,873 1,290,000 36,661,256
Comprehensive income:
Net income.................... 6,794,267 6,794,267
Change in unrealized gain on
securities, net of tax and
net of reclassification of
gain of $46,000 from net
income...................... (811,000) (811,000)
-----------
Total comprehensive
income.................... 5,983,267
10% stock dividend............ 7,403,791 (7,403,791) --
----- ----------- ----------- ---------- -----------
BALANCE DECEMBER 31, 1998....... $18,505,174 $23,660,349 $ 479,000 $42,644,523
===== =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 6,794,267 $ 5,802,887 $ 1,538,903
Adjustments to reconcile net income to net cash provided by
operating activities:
Net amortization and depreciation........................ 4,338,086 4,533,303 3,022,358
Gain on sale of securities............................... (70,033) (92,338) (133,706)
Provision for loan and REO losses........................ 2,850,000 2,340,000 1,677,541
Deferred tax provision................................... (709,604) (1,131,325) (183,303)
Loans originated for sale................................ (211,676,778) (36,731,553) (35,235,545)
Loans purchased for sale................................. (49,446,855) (10,654,255) (16,675,331)
Proceeds from sale of loans.............................. 258,063,886 51,402,212 43,410,896
Repayments on loans held for sale........................ 39,180 809,737
Loss on sale of premises, equipment and real estate
owned.................................................. 122,839 104,608 113,428
FHLB stock dividend...................................... (400,100) (348,800) (264,100)
Changes in other assets.................................. (5,179,187) (865,930) (2,980,967)
Changes in other liabilities............................. 6,888,774 (561,078) 1,051,576
-------------- -------------- --------------
Net cash provided by (used in) operating activities.... 11,575,295 13,836,911 (3,848,513)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursement of loan proceeds.............................. (450,712,197) (288,659,170) (218,376,200)
Purchases of:
Loans.................................................... (280,336,145) (103,062,046) (110,565,748)
Mortgage-backed securities............................... (45,663,268) (6,364,379) (13,570,050)
Securities available for sale............................ (38,556,800) (5,101,096) (13,336,840)
Securities held to maturity.............................. (16,212,500) (4,740,000)
Mortgage Loan servicing rights........................... (4,282,274) (2,055,908) (732,262)
FHLB stock............................................... (304,100) (1,012,300) (155,800)
Premises and equipment................................... (6,616,504) (3,713,528) (4,506,250)
Proceeds from maturities and repayments of:
Loans.................................................... 287,095,932 208,024,684 140,245,124
Mortgage-backed securities............................... 46,348,016 18,111,121 7,189,624
Securities available for sale............................ 8,000,000 6,051,195
Securities held to maturity.............................. 4,740,000
Proceeds from sale of:
Loans.................................................... 13,470,986 14,088,337 12,106,490
Mortgage-backed securities............................... 43,187,001 3,636,772
Securities available for sale............................ 12,800,000 16,582,643 16,690,055
Premises, equipment and real estate owned................ 1,225,767 551,043 1,250,813
Additional investment in real estate owned................. (52,278) (88,481)
Premium paid for credit card relationships................. (10,359) (306,146)
-------------- -------------- --------------
Net cash used for investing activities................. (425,868,364) (157,449,439) (174,379,223)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts............................. 313,502,148 115,604,639 118,279,840
Proceeds from borrowings................................... 217,007,000 115,219,000 210,000,000
Repayment of borrowings.................................... (172,290,893) (76,223,000) (155,000,000)
Proceeds from issuance of guaranteed preferred beneficial
interests in the corporation's junior subordinated
debentures............................................... 27,750,000
Net activity on lines of credit............................ 34,900,000 (5,000,000)
Proceeds from issuance of stock............................ 3,300,000
-------------- -------------- --------------
Net cash provided by financing activities.............. 420,868,255 149,600,639 176,579,840
-------------- -------------- --------------
Net change in cash and cash equivalents.................... 6,575,186 5,988,111 (1,647,896)
Cash and cash equivalents at beginning of year............. 22,510,688 16,522,577 18,170,473
-------------- -------------- --------------
Cash and cash equivalents at end of year................... $ 29,085,874 $ 22,510,688 $ 16,522,577
============== ============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 51,545,485 $ 42,550,655 $ 33,546,947
Income taxes........................................... 4,217,500 4,871,000 1,587,000
Transfer from loans receivable to other real estate...... 4,844,182 2,282,807 1,325,948
Transfer from loans receivable to loans held for sale.... 9,678,044
Loans securitized........................................ 100,710,462 98,324,696 14,458,129
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is a
savings and loan holding company and an Ohio corporation. Metropolitan is
engaged in the business of originating multifamily and commercial real estate
loans primarily in Ohio, Pennsylvania, Michigan, and Kentucky and purchases
multifamily and commercial real estate loans throughout the United States.
Metropolitan offers full service banking services to communities in Northeast
Ohio where its additional lending activities include originating one-to
four-family residential real estate, construction, business and consumer loans.
The accounting policies of the Corporation conform to generally accepted
accounting principles and prevailing practices within the financial services
industry. A summary of significant accounting policies follows:
CONSOLIDATION POLICY: The Corporation and its wholly owned subsidiaries,
MetroCapital Corporation, Metropolitan Capital Trust I and Metropolitan Bank and
Trust Company ("Metropolitan Bank"), formerly known as Metropolitan Savings Bank
of Cleveland and its wholly-owned subsidiaries, are included in the accompanying
consolidated financial statements. All significant intercompany balances have
been eliminated.
USE OF ESTIMATES: 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
loan losses, 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 17. 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 activity on line of credit borrowings.
28
<PAGE> 30
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
and recognized as part of comprehensive income. 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 Metropolitan 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 deferred costs and accretion of
discounts and deferred fees using the interest method. At December 31, 1998 and
1997, management had the intent and Metropolitan 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: The allowance for losses on loans is
established by a provision for loan losses charged against income. 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 probable 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 often continue and future
recoveries may occur.
29
<PAGE> 31
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by allocating a
portion of the allowance for losses on loans to such loans. If these allocations
require an increase in the allowance for losses on loans, such increase is
reported as a provision for loan losses. Management excludes all consumer loans
and residential single family loans with balances less than $200,000 from its
review for impairment. However, these loans are considered in determining the
appropriate level of the allowance for loss on loans. All impaired loans are
placed on nonaccrual status.
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 the lower of fair value, less estimated selling
costs or cost at the date of foreclosure. Any reduction from the carrying value
of the related loan to fair value at the time of acquisition is accounted for as
a charge-off. 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.
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
Metropolitan 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
Metropolitan Bank's shareholder's equity in calculating tangible capital for
regulatory purposes. Identifiable intangible assets are amortized over the
estimated periods of benefit.
LOAN SERVICING RIGHTS: Purchased mortgage servicing rights are initially
valued at cost. When originated 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 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
30
<PAGE> 32
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. When a loan
is placed on nonaccrual status, accrued and unpaid interest is charged against
income. Payments received on nonaccrual loans are applied against principal
until the recovery of the remaining balance is reasonably assured. The net
amount deferred is reported in the consolidated statements of financial
condition as a reduction of loans.
LOAN OPTION INCOME: Periodically Metropolitan 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 Metropolitan Bank recognizes a
non-refundable fee in income.
INCOME TAXES: The Corporation and its subsidiaries, excluding Metropolitan
Capital Trust I, 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 one period and recognized for income tax
purposes in a different period. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
STOCK OPTIONS: Expense for employee compensation under stock option plans
is based on Accounting Principles Board ("APB") Opinion No. 25 with expense
reported only if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are provided as if the fair
value method of SFAS No. 123 were used for stock based compensation. For the
periods presented, no expense has been recognized as the option price of the
common shares equals or exceeds the market 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: 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. The Corporation declared a 100% stock
split in the form of a dividend in 1997. During 1998, the Corporation declared a
10% stock dividend which was recorded by a transfer, equal to the fair value of
the shares issued, from retained earnings to additional paid in capital. All per
share information has been retroactively adjusted to reflect the effect of the
stock dividend and stock split.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses on
31
<PAGE> 33
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities available for sale which are also recognized as separate components
of equity. The accounting standard that requires reporting comprehensive income
first applies for 1998, with prior information restated to be comparable.
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not recorded. This is not expected to have a
material effect but the effect will depend on derivative holdings when this
standard applies.
Mortgage loans originated in mortgage banking are converted into securities
on occasion. A new accounting standard for 1999 will allow classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect but the effect will vary depending on the level and designation
of securitizations as well as as on market price movements.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
INDUSTRY SEGMENT: Internal financial information is primarily reported and
aggregated in two lines of business, retail and commercial banking and mortgage
banking.
FINANCIAL STATEMENT PRESENTATION: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1998
presentation.
32
<PAGE> 34
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values of
investment securities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Mutual funds................. $ 2,058,890 $ 2,058,890
FreddieMac preferred stock... 7,500,000 7,500,000
FannieMae medium term note... 9,921,501 $ (37,127) 9,884,374
Mortgage-backed securities... 197,520,786 $953,892 (179,388) 198,295,290
------------ -------- --------- ------------
217,001,177 953,892 (216,515) 217,738,554
HELD TO MATURITY
Tax-exempt municipal bond.... 14,817,406 14,817,406
Revenue bond................. 1,400,000 1,400,000
------------ -------- --------- ------------
16,217,406 16,217,406
------------ -------- --------- ------------
Totals..................... $233,218,583 $953,892 $(216,515) $233,955,960
============ ======== ========= ============
</TABLE>
<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
------------ ---------- -------- ------------
Total investment
securities............. 142,854,698 2,077,015 (59,180) 144,872,533
HELD TO MATURITY
Tax-exempt municipal bond... 4,740,000 4,740,000
------------ ---------- -------- ------------
Totals.................... $147,594,698 $2,077,015 $(59,180) $149,612,533
============ ========== ======== ============
</TABLE>
33
<PAGE> 35
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of debt securities at December 31, 1998,
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 available for sale:
Due after five years through ten years........... $ 9,921,501 $ 9,884,374
Mortgage-backed securities available for sale.... 197,520,786 198,295,290
------------ ------------
207,442,287 208,179,664
Securities held to maturity:
Due after ten years.............................. 16,217,406 16,217,406
------------ ------------
Total debt securities............................ $223,659,693 $224,397,070
============ ============
</TABLE>
Proceeds from the sale of mortgage-backed securities available for sale
were $43,187,001 in 1998. Proceeds from the sale of mortgage-backed securities
available for sale were $3,636,772 in 1996. Proceeds from the sale of securities
available for sale were $12,800,000 in 1998, $16,582,643 in 1997, and
$16,690,055 in 1996. Gross gains realized on those sales were $108,307 in 1998,
$102,955 in 1997 and $133,706 in 1996. Gross losses of $38,274 and $10,617 were
realized in 1998 and 1997, respectively.
Certain securities with a carrying value of $87,718,000 and a market value
of $88,440,000 at December 31, 1998, were pledged to secure reverse repurchase
agreements. Other securities with a carrying value of $2,017,000 and a market
value of $2,035,000 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.
34
<PAGE> 36
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. LOANS RECEIVABLE
The composition of the loan portfolio at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------
ORIGINATED PURCHASED TOTAL
------------ ------------ --------------
<S> <C> <C> <C>
Real estate loans
Construction loans
Residential single family........ $ 81,584,178 $ 81,584,178
Commercial....................... 19,129,204 19,129,204
Land............................. 34,989,879 34,989,879
Loans in process................. (46,001,413) (46,001,413)
------------ --------------
Construction loans, net........ 89,701,848 89,701,848
Permanent loans
Residential single family........ 165,419,246 $ 23,763,074 189,182,320
Multifamily...................... 123,655,857 213,756,121 337,411,978
Commercial....................... 75,186,943 153,637,299 228,824,242
Other............................ 1,319,980 1,319,980
------------ ------------ --------------
Total real estate loans........ 455,283,874 391,156,494 846,440,368
Consumer loans........................ 42,186,074 53,929,342 96,115,416
Business loans and other loans........ 82,317,575 82,317,575
------------ ------------ --------------
Total loans................. $579,787,523 $445,085,836 1,024,873,359
============ ============
Premium on loans, net................. 5,320,149
Deferred loan fees, net............... (5,013,470)
Allowance for losses on loans......... (6,909,117)
--------------
$1,018,270,921
==============
</TABLE>
35
<PAGE> 37
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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
Multi family.......................... 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>
Loans with adjustable rates, included above, totaled $505,359,000 and
$485,259,000 at December 31, 1998 and 1997, respectively.
Metropolitan's real estate loans are secured by property in the following
states:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Ohio........................................................ 50% 60%
California.................................................. 19 11
Michigan.................................................... 2 5
Pennsylvania................................................ 8 5
Other....................................................... 21 19
--- ---
100% 100%
=== ===
</TABLE>
Activity in the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year................. $ 5,621,879 $4,175,015 $2,764,664
Provision for loan losses.................... 2,650,000 2,340,000 1,635,541
Net charge-offs.............................. (1,362,762) (893,136) (225,190)
----------- ---------- ----------
$ 6,909,117 $5,621,879 $4,175,015
=========== ========== ==========
</TABLE>
36
<PAGE> 38
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
----------- -----------
<S> <C> <C>
Balance of impaired loans............................. $10,141,909 $ 516,498
Less portion for which no allowance for losses on
loans is allocated.................................. 9,002,146 516,498
----------- -----------
Portion of impaired loan balance for which an
allowance for losses on loans is allocated.......... $ 1,139,763 $ --
=========== ===========
Portion of allowance for losses on loans allocated to
the impaired loan balance........................... $ 1,012,388 $ --
=========== ===========
</TABLE>
Information regarding impaired loans is as follows for the year ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- ----------
<S> <C> <C> <C>
Average investment in impaired loans during
the year.................................... $11,509,597 $944,283 $4,220,286
Interest income recognized during
impairment.................................. 191,036 16,691 48,146
Interest income recognized on cash basis
during the year............................. 191,036 16,691 48,146
</TABLE>
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land.................................................. $ 4,284,502 $ 2,752,946
Office buildings...................................... 6,186,293 5,334,323
Leasehold improvements................................ 2,939,786 2,783,785
Furniture, fixtures and equipment..................... 8,804,768 6,389,966
Construction in progress.............................. 1,235,612 458,515
----------- -----------
Total............................................... 23,450,961 17,719,535
Accumulated depreciation.............................. 4,337,092 3,791,624
----------- -----------
$19,113,869 $13,927,911
=========== ===========
</TABLE>
Depreciation expense was $1,281,694, $978,193, and $683,718 for the years
ended December 31, 1998, 1997 and 1996, respectively.
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, 1998, 1997 and 1996 was $989,617,
$923,395, and $874,164, respectively.
37
<PAGE> 39
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum annual rental commitments as of December 31, 1998 for
all noncancelable leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $1,088,659
2000........................................................ 1,056,308
2001........................................................ 315,852
2002........................................................ 239,269
2003........................................................ 225,567
Thereafter.................................................. 634,546
----------
$3,560,201
==========
</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,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year.................... $ -- $57,000 $15,000
Provision for loss.............................. 200,000 -- 42,000
Charge-offs..................................... -- (57,000) --
-------- ------- -------
Balance at end of year.......................... $200,000 $ -- $57,000
======== ======= =======
</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,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Mortgage loan portfolios serviced for:
FreddieMac................................... $ 794,285,277 $ 656,816,894
FannieMae.................................... 587,476,160 507,345,160
Other........................................ 114,585,090 26,023,287
-------------- --------------
$1,496,346,527 $1,190,185,341
============== ==============
</TABLE>
Custodial balances maintained in noninterest-bearing deposit accounts with
Metropolitan Bank in connection with the foregoing loan servicing were
approximately $28,066,000 and $18,894,000 at December 31, 1998 and 1997,
respectively.
38
<PAGE> 40
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is an analysis of the changes in loan servicing rights acquired
for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Balance at beginning of year........................... $ 7,659,518 $ 7,286,403
Additions.............................................. 4,282,274 2,055,908
Amortization........................................... (2,047,748) (1,682,793)
----------- -----------
Balance at end of year................................. $ 9,894,044 $ 7,659,518
=========== ===========
</TABLE>
Following is an analysis of the changes in loan servicing rights originated
for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance at beginning of year............................ $1,564,456 $ 764,434
Additions............................................... 2,699,653 1,157,451
Amortization............................................ (745,986) (357,429)
---------- ----------
Balance at end of year.................................. $3,518,123 $1,564,456
========== ==========
</TABLE>
The Corporation did not have a valuation allowance associated with loan
servicing rights at any time during the years ended December 31, 1998, 1997, and
1996.
NOTE 7. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1998 1997
------------------------ ----------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- ------- ------------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing deposits........ $ 63,716,544 6% $ 46,234,027 6%
-------------- ------------
Interest-bearing checking accounts--
2.08% to 3.20%.................... 54,158,621 5 43,080,404 6
Passbook savings and statement
savings -- 2.72% to 5.46%......... 212,710,522 20 170,442,615 23
Certificates of deposit............. 720,771,027 69 478,024,815 65
-------------- --- ------------ ---
Total interest-bearing
deposits............... 987,640,170 94 691,547,834 94
-------------- ------------
$1,051,356,714 100% $737,781,861 100%
============== === ============ ===
</TABLE>
39
<PAGE> 41
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
YEAR INTEREST
ENDED AMOUNT RATE
- ----- ------------ --------
<S> <C> <C>
1999.................................................... $532,609,151 5.63%
2000.................................................... 146,515,772 5.90%
2001.................................................... 29,182,054 5.83%
2002.................................................... 3,068,602 5.87%
2003.................................................... 7,146,869 6.04%
Thereafter.............................................. 2,248,579 5.78%
------------
$720,771,027 5.70%
============
</TABLE>
The aggregate amount of certificates of deposit with balances of $100,000
or more was approximately $129,430,000 and $86,884,000 at December 31, 1998 and
1997, respectively. The Bank also accepts out-of-state time deposits from
individuals and entities, predominantly credit unions. At December 31, 1998,
approximately $166,300,000 of time deposits, or 15.8% of Metropolitan's total
deposits, were held by these entities. At December 31, 1997, approximately
$57,700,000 million of time deposits, or 7.8% of Metropolitan's total deposits,
were held by these entities.
NOTE 8. BORROWINGS
Borrowings consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Federal Home Loan Bank advances (5.4% and 5.7% at
December 31, 1998 and 1997, respectively)......... $111,235,780 $ 41,000,000
Reverse repurchase agreements (5.6% and 5.7%
December 31, 1998 and 1997, respectively)......... 82,250,000 74,496,000
Commercial bank line of credit (7.71% and 8.5% at
December 31, 1998 and 1997, respectively)......... 8,000,000 1,500,000
Subordinated debt maturing December 31, 2001 (10%
fixed rate)....................................... 4,873,673
Subordinated debt maturing January 1, 2005 (9.625%
fixed rate)....................................... 14,000,000 14,000,000
------------ ------------
$215,485,780 $135,869,673
============ ============
</TABLE>
40
<PAGE> 42
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, scheduled payments on borrowings are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
YEAR INTEREST
ENDED AMOUNT RATE
- ----- ------------ --------
<S> <C> <C>
1999.................................................... $ 66,400,000 5.51%
2000.................................................... 5,000,000 5.12%
2001.................................................... 3,000,000 6.15%
2002.................................................... 62,250,000 5.62%
2003.................................................... 50,000,000 5.81%
Thereafter.............................................. 28,835,780 7.84%
------------
$215,485,780 5.92%
============
</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 $184,000,000 and $147,000,000 at December 31, 1998 and 1997,
respectively. In addition, Metropolitan also has a $60,000,000 cash management
line with the Federal Home Loan Bank. At December 31, 1998 the balance of this
line was $28,400,000.
The Corporation has a commercial line of credit agreement with a commercial
bank. The maximum borrowing under the line is $12,000,000. The agreement was
modified during 1998 increasing the maximum borrowing to the current limit from
$4,000,000. At the same time, the term was also modified so that the line
matures May 30, 1999, but can be renewed annually as agreed by both parties. As
collateral for the loan, the Corporation's largest shareholder, Robert Kaye, has
agreed to pledge a portion of his common shares in an amount at least equal to
200% of any outstanding balance. At December 31, 1998, the outstanding balance
under this agreement was $8,000,000.
In 1993 and early 1994, the Corporation issued subordinated notes ("1993
Subordinated Notes") totaling $4,873,673. These subordinated notes were retired
in 1998 with the proceeds of a new offering (see note 9). The early retirement
of the 1993 Subordinated Notes required the payment of a 6% premium and the
write-off of the unamortized issuance costs totalling $376,228. This amount, net
of tax, is included in the extraordinary item on the face of the income
statement.
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 be redeemed
through November 30, 1999 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.
41
<PAGE> 43
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth certain information about borrowings during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
MAXIMUM MONTH-END BALANCES:
FHLB advances........................................ $119,000,000 $73,700,000
1993 subordinated notes.............................. 4,873,673 4,873,673
1995 subordinated notes.............................. 14,000,000 14,000,000
Commercial bank line of credit....................... 8,000,000 4,000,000
Reverse repurchase agreements........................ 97,983,000 74,496,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
AVERAGE BALANCE:
FHLB advances......................................... $65,713,668 $59,324,587
1993 subordinated notes............................... 1,998,716 4,873,673
1995 subordinated notes............................... 14,000,000 14,000,000
Commercial bank line of credit........................ 2,147,312 113,699
Reverse repurchase agreements......................... 70,368,462 38,843,324
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1998 1997
----- -----
<S> <C> <C>
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances............................................... 5.68% 5.65%
1993 subordinated notes..................................... 10.47 10.47
1995 subordinated notes..................................... 10.48 10.48
Commercial bank line of credit.............................. 8.49 8.98
Reverse repurchase agreements............................... 5.66 5.73
</TABLE>
NOTE 9. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR
SUBORDINATED DEBENTURES
During 1998, the Corporation issued 2,775,000 shares ($10 liquidation
amount per security) of 8.60% cumulative trust preferred securities (the "Trust
Preferred") through a new, wholly-owned subsidiary Metropolitan Capital Trust I
(the "Trust Issuer"). The Trust Issuer invested the total proceeds from the sale
of the Trust Preferred in the 8.60% Guaranteed Preferred Beneficial Interests in
the Corporation's junior subordinated debentures (the "junior subordinated
debentures"), which mature on June 30, 2028. The obligations of Metropolitan
under the guarantee, the Trust Agreement, the junior subordinated debentures,
the Indenture, and the Expense Agreement constitute in the aggregate a full,
irrevocable, and unconditional guarantee, on a subordinated basis, by
Metropolitan of all of Trust II's obligations under the preferred securities.
Total issuance costs of $1,432,987 are being amortized on a straight-line basis
over the life of the junior subordinated debentures. The
42
<PAGE> 44
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trust Preferred are listed on the NASDAQ Stock Market's National Market under
the symbol "METFP." At December 31, 1998, the outstanding balance of the junior
subordinated debentures was $27,750,000.
NOTE 10. EXTRAORDINARY ITEM
In the second quarter, 1998, earnings were affected by an extraordinary
expense of $376,228, $245,228 net of tax, or $0.03 per common share, pertaining
to the Corporation's early retirement of $4,873,673 of 10% Subordinated Notes
which were scheduled to mature December 31, 2001. This amount represents the
write-off of the unamortized issuance costs and the prepayment premium resulting
from the early retirement. The retirement of the 10% Subordinated Notes was
funded through the issuance of the 8.60% guaranteed preferred beneficial
interests in the junior subordinated debentures.
NOTE 11. INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Current tax provision:
Federal expense............................ $4,680,604 $ 4,478,325 $1,278,303
State expense.............................. 78,000 145,000 --
---------- ----------- ----------
Total current expense................... 4,758,604 4,623,325 1,278,303
Deferred federal benefit................... (709,604) (1,131,325) (183,303)
---------- ----------- ----------
$4,049,000 $ 3,492,000 $1,095,000
========== =========== ==========
</TABLE>
Deferred income taxes are provided for temporary differences. The
components of the Corporation's net deferred tax asset (liability) consist of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets
Deferred loan fees.................................... $ 104,684 $ 124,872
Bad debt deduction.................................... 1,998,557 1,051,179
Loan servicing rights................................. 296,870 426,811
Other................................................. 126,375 19,859
---------- ----------
2,526,486 1,622,721
---------- ----------
Deferred tax liabilities
Equity in partnership................................. (100,163)
Employment contract................................... (93,933) (100,891)
Depreciation expense.................................. (52,978) (95,103)
Stock dividends on FHLB stock......................... (430,318) (290,287)
Other................................................. (4,212) (1,162)
---------- ----------
(681,604) (487,443)
---------- ----------
Net deferred tax asset............................. $1,844,882 $1,135,278
========== ==========
</TABLE>
43
<PAGE> 45
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate............................... 35% 35% 34%
Income taxes at statutory rate............... $3,880,974 $3,253,210 $ 895,527
Officer's life premium....................... 13,078 9,610 30,441
Amortization of purchased intangibles........ 90,745 92,051 97,962
Stock dividend exclusion..................... (70,692)
Tax exempt income............................ (65,660) (64,286)
Current state expense........................ 50,700 94,250
Utilization of capital loss carryforward..... (35,000)
Business expense limitation.................. 73,467 62,684 67,368
Other........................................ 76,388 79,481 3,702
---------- ---------- ----------
Provision for income taxes................. $4,049,000 $3,492,000 $1,095,000
========== ========== ==========
</TABLE>
Taxes attributable to security's gains and (losses) totaled $24,511, ($2,682)
and $45,460 for the years ended December 31, 1998, 1997 and 1996, respectively.
Prior to January 1, 1996, Metropolitan 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 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 12. SALARY DEFERRAL -- 401(k) PLAN
The Corporation maintains a 401(k) plan covering substantially all
employees who have attained the age of 21 and have completed one year of service
with the Corporation. This is a salary deferral plan, which calls for matching
contributions by the Corporation based on a percentage (50%) of each
participant's voluntary contribution (limited to a maximum of eight percent (8%)
of a covered employee's annual compensation). In addition to the Corporation's
required matching contribution, a contribution to the plan may be made at the
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 $205,857, $166,895 and $126,599 for
the years ended December 31, 1998, 1997 and 1996, respectively. No discretionary
contributions have been made by the Corporation for the periods presented.
NOTE 13. STOCK OPTION PLAN
On October 28, 1997, the Board of Directors of Metropolitan adopted the
Metropolitan Financial Corp. 1997 Stock Option Plan for key employees and
officers of the Corporation.
44
<PAGE> 46
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 715,000, which reflects
adjustments for the 2-for-1 stock split completed in December, 1997 and the 10%
stock dividend completed in December, 1998. The Plan provides for the grant of
options, which may qualify as either incentive stock options or nonqualified
options. Grants of options are 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 88,000
incentive stock options and 352,000 nonqualified options. On May 19, 1998, the
Board of Directors approved grants of an additional 39,600 incentive stock
options and 77,000 nonqualified options.
An option may be exercised in one or more installments at the time or times
provided in the option instrument. One-half of the options granted to employees
will become exercisable on the third anniversary, and one-fourth of the Common
Shares covered by the option on the fourth and fifth anniversary 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.
A summary of option activity is presented below:
STOCK OPTION ACTIVITY:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
------------------------ ---------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
------- -------------- ------- -----------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997.............. -- --
Granted..................................... 88,000 $9.21 352,000 $9.21 - $10.13
Exercised................................... -- --
Forfeited................................... -- --
------- -------
Outstanding at December 31, 1997............ 88,000 $9.21 352,000 $9.21 - $10.13
------- -------
Granted..................................... 39,600 $14.44 77,000 $14.44 - $15.88
Exercised................................... -- --
Forfeited................................... (2,200) $9.21 --
------- -------
Outstanding at December 31, 1998............ 125,400 $9.21 - $14.44 429,000 $9.21 - $15.88
======= =======
Closing stock price on date of
grant -- 1997............................. $9.21 $9.21
Closing stock price on date of
grant -- 1998............................. $14.44 $14.44
Assumptions used:
Expected option life...................... 10 years 5 years
Risk-free interest rate -- 1997........... 5.97% 5.75%
Risk-free interest rate -- 1998........... 4.69% 4.87%
Expected stock price volatility -- 1997... 33.00% 33.00%
Expected stock price volatility -- 1998... 32.22% 32.22%
Expected dividends........................ -- --
</TABLE>
45
<PAGE> 47
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated fair value of options granted:
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NONQUALIFIED OPTIONS
------------------------ --------------------
<S> <C> <C> <C> <C>
1997:
Granted at $9.21................... $4.14 $2.30
Granted at $10.13.................. $1.61
1998:
Granted at $14.44.................. $5.57 $3.02
Granted at $15.88.................. $1.90
</TABLE>
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 effected as summarized in the schedule below:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income -- as reported............................... $6,794,267 $5,802,887
Net income -- pro forma................................. 6,528,665 5,613,767
Earnings per share -- as reported....................... $ 0.88 $ 0.75
Earnings per share -- pro forma......................... 0.84 0.72
</TABLE>
NOTE 14. 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, 1998, Metropolitan Bank had fixed and variable rate
commitments to originate and/or purchase loans (at market rates) of
approximately $69,845,000 and $73,196,000, respectively. In addition,
Metropolitan Bank had firm commitments to sell fixed rate loans totaling
$24,046,000 at December 31, 1998. Metropolitan's commitments to originate and
purchase loans are for loans at rates ranging from 6.0% to 16.0% and commitment
periods up to one year.
During 1998 and 1997, the Corporation purchased approximately $44,385,000
and $12,816,000 of loans and sold non-refundable options to a third party to
purchase these same loans at a later date. The Corporation recognized a fee of
$388,006, $320,464, and $695,798 on the sale of options during the years ended
December 31, 1998, 1997, and 1996, respectively. During 1998, certain options
were sold with an agreement to share in the gain on sale of the loans in lieu of
an option fee. The Corporation recognized a gain of $251,000
46
<PAGE> 48
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the sale of these loans during the year ended December 31, 1998. At December
31, 1998, loans with a carrying value of $5,601,000 were held for sale in
connection with outstanding purchase options.
RESERVE REQUIREMENTS. The Bank was required to maintain $4,400,000 of cash
on hand or on deposit with the Federal Reserve to meet regulatory reserve
requirements at December 31, 1998. 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 15. CAPITAL AND EXTERNAL 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. 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. In addition, the Board of
Directors approved a 10% stock dividend in December, 1998, further increasing
the outstanding number of shares to 7,756,393.
Prior to 1996, Metropolitan 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, 1998 and 1997, 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.
47
<PAGE> 49
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
At year end, Metropolitan 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>
1998
Total capital (to risk
weighted assets)....... $89,086 8.22% $86,731 8.0% $108,414 10.0%
Tier 1 (core) capital (to
risk weighted
assets)................ 85,113 7.85 43,366 4.0 65,048 6.0
Tier 1 (core) capital (to
adjusted total
assets)................ 85,113 6.27 54,296 4.0 67,870 5.0
Tangible capital (to
adjusted total
assets)................ 84,935 6.26 20,361 1.5 N/A
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
</TABLE>
The Bank at year-end 1998 was categorized as adequately capitalized. At
December 31, 1998, the most restrictive regulatory consideration of the payment
of dividends from Metropolitan 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, 1998 that would change the capital category.
48
<PAGE> 50
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A savings association which fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
OTS requiring the following: an increase in capital; reduction of rates paid on
savings accounts; cessation of or limitations on deposit-taking and lending;
limitations on operational expenditures; an increase in liquidity; and such
other actions deemed necessary or appropriate by the OTS. In addition, a
conservator or receiver may be appointed under certain circumstances.
The appropriate federal banking agency has the authority to reclassify a
well-capitalized institution as adequately capitalized, and to treat an
adequately capitalized or undercapitalized institution as if it were in the next
lower capital category, if it is determined, after notice and an opportunity for
a hearing, to be in an unsafe or unsound condition or to have received and not
corrected a less-than-satisfactory rating for any of the categories of asset
quality, management, earnings or liquidity in its most recent examination. As a
result of 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.
The terms of the 1995 subordinated notes and related indenture agreement
prohibit the Corporation from paying cash dividends unless the Corporation's
ratio of tangible equity to total assets exceeds 7.0%. The commercial bank line
of credit also prohibits Metropolitan from paying cash dividends unless the
Corporation's ratio of tangible equity to tangible assets exceeds 7%. As a
result, the Corporation is currently prohibited from paying dividends to its
shareholders.
NOTE 16. RELATED PARTY TRANSACTIONS
In the years ended December 31, 1998, 1997 and 1996 the Corporation
expensed $96,000 per year for management fees relating to services provided by a
company with the same majority shareholder as the corporation.
Certain directors and executive officers of the Corporation and its
subsidiaries held 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. In addition, the Corporation's 401(k) salary deferral plan
held a $400,000 interest in the subordinated debt at December 31, 1997. As
previously discussed, these subordinated notes were retired in the second
quarter, 1998.
Metropolitan Bank has had, and expects to have in the future, banking
transactions in the ordinary course of business with Metropolitan's and
Metropolitan 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 $461,000
and $1,296,000 at December 31, 1998 and 1997, respectively.
49
<PAGE> 51
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Related party deposits totaled $2,155,000 and $1,116,000 at December 31,
1998 and 1997, respectively.
NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to
estimate that value. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value estimates presented do not reflect the underlying fair
value of the Corporation. While these estimates are based on management's
judgment of the most appropriate factors, there is no assurance that the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. As such, the
estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at year
end. The following table shows those financial instruments and the related
carrying values. Financial instruments are excluded from this table in the case
of carrying amount and fair value being equal.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Securities........... $ 35,660,670 $ 35,660,670 $ 6,445,879 $ 6,445,879
Mortgage-backed
securities........ 198,295,290 198,295,290 143,166,654 143,166,654
Loans, net........... 1,033,287,553 1,072,890,556 707,884,738 732,123,284
Loan servicing
rights............ 13,412,167 14,846,130 9,223,974 11,707,000
Financial liabilities:
Time deposits........ (720,771,027) (725,384,444) (478,024,815) (478,415,186)
Borrowings........... (215,485,780) (216,579,045) (135,869,673) (135,692,553)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of financial instruments:
CASH AND EQUIVALENTS -- The carrying amount of these items is a
reasonable estimate of the fair value.
SECURITIES AND MORTGAGE-BACKED SECURITIES -- The estimated fair value
is based on quoted market prices or dealer estimates.
LOANS, NET -- For loans held for sale, the fair value was estimated
based on quoted market prices. The fair value of other loans is estimated
by discounting the future cash flows and estimated prepayments using the
current rates at which similar loans would be made to borrowers with
similar credit ratings for the same remaining term. Some loan types were
valued at carrying value because of their floating rate or expected
maturity characteristics.
50
<PAGE> 52
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEDERAL HOME LOAN BANK STOCK -- The fair value is based upon the
redemption value of the stock which equates to its carrying value.
ACCRUED INTEREST RECEIVABLE -- The carrying amount and fair value are
equal.
LOAN SERVICING RIGHTS -- The fair value is based upon the discounted
cash flow analysis.
DEMAND AND SAVINGS DEPOSITS -- The fair value is the amount payable on
demand at the reporting date.
TIME DEPOSITS -- the fair value of fixed maturity certificates of
deposit is estimated by discounting the estimated future cash flows using
the rates offered at year end for similar remaining maturities.
BORROWINGS -- The fair value of borrowings is estimated by discounting
the estimated future cash flows using the rates offered at year end for
similar remaining maturities.
ACCRUED INTEREST PAYABLE -- The carrying amount and fair value are
equal.
COMMITMENTS -- The estimated fair value is not materially different
from the nominal value.
NOTE 18. SEGMENT REPORTING
Metropolitan's operations include two major operating segments. A
description of those segments follows:
RETAIL AND COMMERCIAL BANKING -- Retail and commercial banking is the
segment of the business that brings in deposits and lends those funds out
to businesses and consumers. The local market for deposits is the consumers
and businesses in the neighborhoods surrounding our 17 retail sales offices
in Northeastern Ohio. The market for lending is Ohio and the surrounding
states for originations and throughout the United States for purchases. The
majority of loans are secured by multifamily and commercial real estate.
Loans are also made to businesses secured by business assets and consumers
secured by real or personal property. Business and consumer loans are
concentrated in Northeastern Ohio.
MORTGAGE BANKING -- Mortgage banking is the segment of our business
that originates, sells and services permanent or construction loans secured
by one- to four-family residential properties. These loans are primarily
originated through commissioned loan officers located in Northeastern Ohio
and Southeastern Michigan. In general, fixed rate loans are originated for
sale and adjustable rate loans are originated to be retained in the
portfolio. Loans being serviced include loans originated and still owned by
Metropolitan, loans originated by Metropolitan but sold to others with
servicing rights retained by Metropolitan, and servicing rights to loans
originated by others but purchased by Metropolitan. The servicing rights
Metropolitan purchases may be located in a variety of states and are
typically being serviced for FannieMae or FreddieMac.
51
<PAGE> 53
\ METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The category below labeled Parent and Other consists of the remaining
segments of Metropolitan's business. It includes corporate treasury, interest
rate risk, and financing operations which do not generate revenue from outside
customers.
Operating results and other financial data for the current and preceding
year are as follows:
As of or for the year ended December 31, 1998
<TABLE>
<CAPTION>
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Net interest income......... $ 21,187,193 $ 7,354,813 $ 3,402,192 $ 31,944,198
Provision for losses on
loans..................... 2,419,416 230,584 2,650,000
------------ ------------ ------------ --------------
Net interest income after
provision for loan
losses.................... 18,767,777 7,124,229 3,402,192 29,294,198
Noninterest income.......... 3,824,572 3,553,583 (61,592) 7,316,563
Direct noninterest
expense................... 13,142,155 4,993,235 343,943 18,479,333
Allocation of overhead...... 5,108,955 1,933,978 7,042,933
------------ ------------ ------------ --------------
Net income before income
taxes..................... $ 4,341,239 $ 3,750,599 $ 2,996,657 $ 11,088,495
============ ============ ============ ==============
FINANCIAL DATA:
Segment assets.............. $882,224,907 $304,120,202 $177,088,505 $1,363,433,614
Depreciation and
amortization.............. 1,602,173 2,851,403 352,465 4,806,041
Expenditures for additions
to premises and
equipment................. 5,458,568 1,157,936 6,616,504
</TABLE>
As of or for the year ended December 31, 1997
<TABLE>
<CAPTION>
RETAIL AND
COMMERCIAL MORTGAGE PARENT
BANKING BANKING AND OTHER TOTAL
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
OPERATING RESULTS:
Net interest income........... $ 19,657,647 $ 3,494,091 $ 4,491,070 $ 27,642,808
Provision for losses on
loans....................... 2,104,800 235,200 2,340,000
------------ ------------ ----------- ------------
Net interest income after
provision for loan losses... 17,552,847 3,258,891 4,491,070 25,302,808
Noninterest income............ 2,220,181 1,674,223 246,402 4,140,806
Direct noninterest expense.... 10,646,984 3,568,112 339,408 14,554,504
Allocation of overhead........ 4,195,099 1,398,438 686 5,594,223
------------ ------------ ----------- ------------
Net income before income
taxes....................... $ 4,930,945 $ (33,436) $ 4,397,378 $ 9,294,887
============ ============ =========== ============
FINANCIAL DATA:
Segment assets................ $605,867,224 $226,884,625 $92,232,772 $924,984,621
Depreciation and
amortization................ 947,432 2,016,810 350,391 3,314,633
Expenditures for additions to
premises and equipment...... 3,148,021 565,507 3,713,528
</TABLE>
52
<PAGE> 54
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The financial information provided for each major operating segment has
been derived from the internal profitability system used to monitor and manage
financial performance and allocate resources. The internal profitability system
has been in place for only the two latest years; therefore only two years
segment information is presented. Prior to the adoption of the internal
profitability system the Company operated as one segment.
The measurement of performance for the operating segments is based on the
organizational structure of Metropolitan and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not indicative of the segments' financial condition and
results of operations if they were independent entities.
Metropolitan evaluates segment performance based on contribution to income
before income taxes. Certain indirect expenses have been allocated based on
various criteria considered by management to best reflect benefits derived. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Indirect expense allocations and
accounting policies have been consistently applied for the periods presented.
There are no differences between segment profits and assets and the consolidated
profits and assets of Metropolitan. The net interest income that results from
investing in assets and liabilities with different terms to maturity or
repricing has been eliminated from the two major operating segments and is
included in the category labeled Parent and Other.
53
<PAGE> 55
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. 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,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks............................... $ 155,306 $ 349,563
Securities available for sale......................... 2,058,890 1,705,879
Loans receivable...................................... 50,000 50,000
Investment in Metropolitan Bank & Trust Company....... 88,176,617 54,234,523
Intangible assets..................................... 47,111 50,601
Prepaid expenses and other assets..................... 3,665,678 1,198,148
----------- -----------
Total assets........................................ $94,153,602 $57,588,714
=========== ===========
LIABILITIES
Borrowings............................................ $22,000,000 $20,373,673
Other liabilities..................................... 1,759,079 553,785
----------- -----------
Total liabilities................................... 23,759,079 20,927,458
----------- -----------
Guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures........ 27,750,000
SHAREHOLDERS' EQUITY
Common stock
Additional paid-in capital............................ 11,101,383 11,101,383
Retained earnings..................................... 31,064,140 24,269,873
Unrealized gain on securities available for sale, net
of tax.............................................. 479,000 1,290,000
----------- -----------
Total shareholders' equity.......................... 42,644,523 36,661,256
----------- -----------
Total liabilities and shareholders' equity.......... $94,153,602 $57,588,714
=========== ===========
</TABLE>
54
<PAGE> 56
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY ONLY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest on loans and securities........... $ 471,460 $ 107,505 $ 97,909
Interest on borrowings..................... 1,917,307 1,997,341 1,982,259
Interest on junior subordinated
debentures............................... 1,633,454
----------- ----------- -----------
Net interest expense....................... (3,079,301) (1,889,836) (1,884,350)
Noninterest income
Dividends from Metropolitan Bank & Trust
Company............................... 500,000 1,500,000 1,400,000
Other operating income................... 4,411 3,647 1,541
----------- ----------- -----------
504,411 1,503,647 1,401,541
----------- ----------- -----------
Noninterest expense
Amortization of intangibles.............. 3,490 3,490 3,490
State franchise taxes.................... 22,956 21,111 24,672
Other operating expenses................. 283,363 246,244 249,507
----------- ----------- -----------
309,809 270,845 277,669
----------- ----------- -----------
Income before income taxes................. (2,884,699) (657,034) (760,478)
Federal income tax benefit............ (1,171,000) (723,000) (702,000)
----------- ----------- -----------
Income before equity in undistributed net
income of Metropolitan Bank & Trust
Company............................... (1,713,699) 65,966 (58,478)
Equity in undistributed net income of
Metropolitan Bank & Trust Company........ 8,753,194 5,736,921 1,597,381
----------- ----------- -----------
Income before extraordinary item........... 7,039,495 5,802,887 1,538,903
Extraordinary item......................... (245,228)
----------- ----------- -----------
Net income............................ $ 6,794,267 $ 5,802,887 $ 1,538,903
=========== =========== ===========
</TABLE>
55
<PAGE> 57
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 6,794,267 $5,802,887 $1,538,903
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
Metropolitan Bank & Trust Company......... (8,753,194) (5,736,921) (1,597,381)
Amortization................................ 3,490 3,490 3,490
Change in other assets and liabilities...... (1,968,158) (203,209) 351,706
------------ ---------- ----------
Net cash from operating activities..... (3,923,595) (133,753) 296,718
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities........... 13,153,011 400,000 7,428,600
Purchase of securities available for sale... (12,800,000) (96,796) (8,335,440)
Capital contributions to Metropolitan Bank &
Trust Company............................. (26,000,000) (1,500,000) (7,300,000)
------------ ---------- ----------
Net cash from investing activities..... (25,646,989) (1,196,796) (8,206,840)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of guaranteed
preferred beneficial interests in the
Corporation's junior subordinated
debentures............................. 27,750,000
Repayment of borrowings..................... (4,873,673)
Net activity on lines of credit............. 6,500,000 1,500,000
Proceeds from issuance of stock............. 3,300,000
------------ ---------- ----------
Net cash from financing activities.......... 29,376,327 1,500,000 3,300,000
------------ ---------- ----------
Net change in cash and cash
equivalents.......................... (194,257) 169,451 (4,610,122)
Cash and cash equivalents at beginning of
year...................................... 349,563 180,112 4,790,234
------------ ---------- ----------
Cash and cash equivalents at end of year.... $ 155,306 $ 349,563 $ 180,112
============ ========== ==========
</TABLE>
NOTE 20. 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 ("BIF") insured deposits. The assessment of 65.7
basis points on deposits as of March 31, 1995 resulted in Metropolitan Bank
paying $2,927,800, which was expensed September 30, 1996.
56
<PAGE> 58
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21. 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>
1998
- -------------------------------------
Interest income...................... $19,213 $20,301 $21,366 $24,848
Net interest income.................. 7,556 7,631 7,875 8,882
Provision for loan losses............ 450 910 690 600
Income before extraordinary item..... 1,987 1,551 1,621 1,880
Extraordinary item................... 245
Net income........................... 1,987 1,306 1,621 1,880
Basic earnings per share............. $ 0.26 $ 0.17 $ 0.21 $ 0.24
Diluted earnings per share........... $ 0.26 $ 0.17 $ 0.21 $ 0.24
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............. $ 0.16 $ 0.17 $ 0.19 $ 0.23
Diluted earnings per share........... $ 0.16 $ 0.17 $ 0.19 $ 0.23
</TABLE>
57
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, Metropolitan Financial Corp. (the "Corporation") proposes to file
with the Securities and Exchange Commission ("SEC") and The Nasdaq Stock Market,
Inc. ("NASDAQ") a Registration Statement on Form S-1 and other related
documents, statements and filings, for the purposes of registering under the
Securities Act of 1933 up to approximately $40,250,000 of cumulative trust
preferred securities to be issued by a wholly-owned statutory business trust of
the Corporation, an equal amount of junior subordinated debentures to be issued
by the Corporation, and up to approximately $8,050,000 in common stock of the
Corporation ("Registration Statement"); and,
WHEREAS, the Corporation intends to file an annual report on Form 10-K for
the year ended December 31, 1998 (the "10-K") and a Notice of Annual
Shareholders Meeting and Proxy Statement for the Corporation's 1999 Annual
Shareholders Meeting (the "Proxy"), and other documents, statements and filings
related thereto, with the SEC and NASDAQ on or before March 31, 1999; and,
WHEREAS, each of the directors and/or officers of the Corporation desire to
appoint attorneys-in-fact to implement the filing of the Registration Statement,
the 10-K and the Proxy and take all such further and other action relating
thereto as is set forth herein,
NOW, THEREFORE, each of the directors and/or officers of Metropolitan
Financial Corp. whose signature appears below hereby appoints and grants full
authority to Robert M. Kaye, David G. Lodge, Judith Z. Adam and David G. Slezak,
and each of them severally, as his or her attorney-in-fact to sign in his or her
name and behalf, in any and all capacities stated below and to file with the SEC
and NASDAQ the Registration Statement, the 10-K and the Proxy, any and all
amendments to the Registration Statement, the 10-K and the Proxy making such
changes in the Registration Statement, the 10-K and the Proxy, as appropriate,
and generally to do all such things in their behalf in their capacities as
directors and/or officers to enable Metropolitan Financial Corp. to comply with
the provisions of the Securities Act of 1933, and all requirements of the SEC
and NASDAQ and hereby approving and ratifying all that said attorneys-in-fact,
and each of them, may lawfully do, have done or cause to be done by virtue
hereof.
(The remainder of this page is intentionally left blank)
<PAGE> 2
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
By: /s/ Robert M. Kaye Chairman of the Board, Chief Executive
----------------------------- and Director (Principal Executive
Robert M. Kaye Officer) January 19, 1999
By: /s/ David G. Lodge President, Assistant Secretary, Assistant
----------------------------- Treasurer and Director (Principal
David G. Lodge Financial and Accounting Officer) January 19, 1999
By: /s/ Malvin E. Bank Director January 19, 1999
-----------------------------
Malvin E. Bank
By: /s/ Robert R. Broadbent Director January 19, 1999
-----------------------------
Robert R. Broadbent
By: /s/ Marjorie M. Carlson Director January 19, 1999
-----------------------------
Marjorie M. Carlson
By: /s/ Lois K. Goodman Director January 19, 1999
-----------------------------
Lois K. Goodman
By: /s/ Marguerite B. Humphrey Director January 19, 1999
-----------------------------
Marguerite B. Humphrey
By: /s/ James A. Karman Director January 19, 1999
-----------------------------
James A. Karman
By: /s/ Ralph D. Ketchum Director January 19, 1999
-----------------------------
Ralph D. Ketchum
By: /s/ Alfonse M. Mattia Director January 19, 1999
-----------------------------
Alfonse M. Mattia
By: /s/ David P. Miller Director January 19, 1999
-----------------------------
David P. Miller
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
METROPOLITAN FINANCIAL CORPORATION DECEMBER 31, 1998 ANNUAL REPORT AND FORM
10-K INCLUDING THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION CONSOLIDATED
STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF CASH FLOWS AND THE
ACCOMPANYING NOTES
</LEGEND>
<CIK> 0001003233
<NAME> METROPOLITAN FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,811
<INT-BEARING-DEPOSITS> 9,275
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 217,739
<INVESTMENTS-CARRYING> 16,217
<INVESTMENTS-MARKET> 16,217
<LOANS> 1,040,197
<ALLOWANCE> 6,909
<TOTAL-ASSETS> 1,363,434
<DEPOSITS> 1,051,357
<SHORT-TERM> 66,400
<LIABILITIES-OTHER> 26,197
<LONG-TERM> 149,086
0
0
<COMMON> 0
<OTHER-SE> 42,645
<TOTAL-LIABILITIES-AND-EQUITY> 1,363,434
<INTEREST-LOAN> 74,059
<INTEREST-INVEST> 11,669
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 85,728
<INTEREST-DEPOSIT> 42,536
<INTEREST-EXPENSE> 53,784
<INTEREST-INCOME-NET> 31,944
<LOAN-LOSSES> 2,650
<SECURITIES-GAINS> 70
<EXPENSE-OTHER> 25,522
<INCOME-PRETAX> 11,088
<INCOME-PRE-EXTRAORDINARY> 7,039
<EXTRAORDINARY> 245
<CHANGES> 0
<NET-INCOME> 6,794
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 3.16
<LOANS-NON> 12,231
<LOANS-PAST> 460
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,117
<ALLOWANCE-OPEN> 5,622
<CHARGE-OFFS> 1,418
<RECOVERIES> 55
<ALLOWANCE-CLOSE> 6,909
<ALLOWANCE-DOMESTIC> 6,909
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
