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File Pursuant To Rule 424(b)1
Registration No. 333-72991
333-72991-01
PROSPECTUS
300,000 SHARES OF COMMON STOCK
METROPOLITAN FINANCIAL CORP.
$7.875 PER SHARE
------------------------
$15,000,000
METROPOLITAN CAPITAL TRUST II
9.50% TRUST PREFERRED SECURITIES
GUARANTEED BY METROPOLITAN FINANCIAL CORP.
[Metropolitan Logo]
METROPOLITAN FINANCIAL CORP.
- - Metropolitan Financial Corp. is offering its common stock.
- - Metropolitan Financial Corp. lists its common stock on the Nasdaq Stock
Market's National Market under the symbol "METF."
- - On May 10, 1999, the last reported sale price of the common stock was $8.125.
METROPOLITAN CAPITAL TRUST II
- - Metropolitan Capital Trust II is offering 9.50% preferred securities.
- - Metropolitan Capital Trust II plans to list the preferred securities on the
Nasdaq Stock Market's National Market under the trading symbol "METFO."
INVESTING IN THE COMMON STOCK AND THE PREFERRED SECURITIES INVOLVES RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 11.
THE OFFERINGS
THE OFFERINGS OF COMMON STOCK AND PREFERRED SECURITIES DEPEND ON THE SUCCESSFUL
COMPLETION OF EACH OTHER.
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ----------------------------------------------------------
COMMON STOCK PER SHARE TOTAL PREFERRED SECURITIES PER SECURITY TOTAL
- ---------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Public Price................ $7.875 $ 2,362,500 Public Price................ $10.00 $15,000,000
Underwriting Discount....... $.0551 $ 165,300 Underwriting Commission..... $0.375 $ 562,500
Proceeds to Metropolitan Proceeds to Metropolitan
Financial Corp............ $7.324 $ 2,197,200 Financial Corp............ $9.625 $14,437,500
- ---------------------------------------------------------- ----------------------------------------------------------
</TABLE>
Metropolitan Financial Corp. will pay all underwriting commissions.
Ryan, Beck & Co. is offering the common stock and the preferred securities
on a firm commitment basis. Ryan, Beck & Co. has options to purchase up to
45,000 additional shares of common stock and up to 225,000 additional preferred
securities to cover over-allotments.
THESE SECURITIES ARE NOT DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[RYAN, BECK LOGO]
May 11, 1999
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[Map showing loan production and
full service offices of Metropolitan]
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SUMMARY
We urge you to read carefully the entire prospectus, including the
financial statements and related notes. Unless we indicate otherwise, we have
not adjusted the information in this prospectus to account for Ryan, Beck &
Co.'s exercise of its over-allotment options.
METROPOLITAN FINANCIAL CORP.
We are a savings and loan holding company. Our primary operating subsidiary
is Metropolitan Bank & Trust Company. Metropolitan Bank operates 17 full service
branch offices that primarily serve Northeastern Ohio.
Our executive office is located at 6001 Landerhaven Drive, Mayfield
Heights, Ohio 44124, and our telephone number is (440) 646-1111.
Operating Strategy. Our strategy is to maximize long-term profitability by
increasing our assets. We seek to maintain strong growth by:
- continuing to focus on the origination and purchase of multifamily and
commercial real estate loans which provide higher yields than one-to
four-family residential loans;
- building a portfolio of business and consumer loans which provide higher
yields and shorter maturities than one-to four-family residential loans;
- keeping loan losses to a low level;
- increasing assets at a rate that keeps capital near minimum regulatory
guidelines;
- increasing deposits from customers through marketing initiatives and
continuing to open new branches;
- supplementing customer deposit growth with borrowings and deposits we
primarily receive from other financial institutions; and
- re-investing our earnings in Metropolitan Bank and raising additional
capital when appropriate.
Recent Results. As a result of this strategy, our assets have increased
from $479.4 million at December 31, 1994 to $1.4 billion at December 31, 1998,
an annual compound growth rate of 29.9%. Our net income has approximately
doubled over the same period from $3.4 million for 1994 to $6.8 million for
1998.
Market Area. Metropolitan Bank originates multifamily and commercial real
estate loans primarily in Ohio, Southeastern Michigan, Central and Northern New
Jersey, Northern Kentucky, Western Pennsylvania and California, and purchases
them in other areas of the country.
Metropolitan Bank's Loan Portfolio. At December 31, 1998, our loan
portfolio totaled $1.0 billion. Of this amount:
- $337.4 million, or 31.1%, were multifamily loans;
- $228.8 million, or 21.1%, were commercial real estate loans; and
- $189.2 million, or 17.4%, were residential real estate loans.
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We intend to continue to focus on originating and purchasing adjustable
rate, and to a lesser degree fixed rate, multifamily loans. We also plan to
continue to add commercial real estate loans to our portfolio through purchases
and, to a lesser extent, through originations.
METROPOLITAN CAPITAL TRUST II
Metropolitan Capital Trust II exists to:
- issue and sell its preferred securities to the public;
- issue and sell its common securities to us; and
- use the proceeds from the sale of the preferred securities and its common
securities to purchase 9.50% junior subordinated debentures from us.
The executive office and telephone number of Trust II are the same as ours.
THE OFFERING
GENERAL
SECURITIES OFFERED.............. 300,000 shares of common stock and 1,500,000
preferred securities.
OFFERINGS ARE INTERDEPENDENT.... The offerings of common stock and preferred
securities depend on the successful
completion of each other.
USE OF PROCEEDS................. Trust II will use approximately $15.0
million of the proceeds from the sale of the
preferred securities to buy our junior
subordinated debentures. We will use
approximately $15.9 million of the net
proceeds from the sale of the common stock
and the junior subordinated debentures for
general corporate purposes, including:
- repayment of the current balance on our
commercial bank line of credit, which was
$12.0 million on April 30, 1999;
- capital contributions of approximately
$3.9 million to Metropolitan Bank to
support growth and for working capital;
and
- acquisitions of financial services
companies, although no agreements or
understandings with respect to any
acquisition presently exist.
RISK FACTORS.................... We urge you to read carefully the "Risk
Factors" section of this prospectus,
beginning on page 11, and the rest of this
prospectus before you make your investment
decision. Because the sole source of funds
for distributions on and redemptions of the
preferred securities are payments on the
junior subordinated debentures, purchasers
of the preferred
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securities are also making an investment
decision with regard to the junior
subordinated debentures. Therefore, those
purchasers should review carefully all of
the information regarding the junior
subordinated debentures contained in this
prospectus.
COMMON STOCK OFFERING
THE ISSUER...................... Metropolitan Financial Corp.
PRICE TO PUBLIC................. $7.875 per share.
COMMON STOCK OFFERED............ 300,000 shares, or 345,000 shares if Ryan,
Beck & Co. exercises its over-allotment
option in full.
COMMON STOCK OUTSTANDING
AFTER THE OFFERING............ 8,056,393 shares based upon 7,756,393 shares
outstanding on April 30, 1999, or 8,101,393
shares if Ryan, Beck & Co. exercises
its over-allotment option in full.
RESTRICTIONS ON DIVIDENDS....... We have entered into agreements which
restrict our ability to declare dividends on
the common stock. The provisions of the
preferred securities contain similar
restrictions.
NASDAQ NATIONAL MARKET SYMBOL... "METF"
PREFERRED SECURITIES OFFERING
THE ISSUER...................... Metropolitan Capital Trust II
SECURITIES OFFERED.............. 1,500,000 preferred securities, or 1,725,000
if Ryan, Beck & Co. exercises its
over-allotment option in full.
OFFERING PRICE.................. $10 per preferred security.
DISTRIBUTIONS................... As a holder of preferred securities, you
will be entitled to receive cash
distributions at an annual rate of 9.50% of
the $10 liquidation amount of each preferred
security, or $0.95 per year. Trust II will
pay distributions quarterly on March 31,
June 30, September 30 and December 31 of
each year, beginning on June 30, 1999. See
"Description of the Preferred Securities."
JUNIOR SUBORDINATED
DEBENTURES...................... Trust II will buy the junior subordinated
debentures from us with the proceeds from
the sale of its common securities and the
preferred securities. Unless we redeem them,
the junior subordinated debentures will
mature on June 30, 2029. The junior
subordinated debentures will rank equal in
right of
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payment to the $27.8 million of debentures
we sold during the second quarter of 1998 to
Metropolitan Capital Trust I. In addition,
our obligations under the junior
subordinated debentures will be junior to
our senior indebtedness and all existing and
future liabilities and obligations of our
subsidiaries, including Metropolitan Bank.
At April 30, 1999, we had $26.0 million in
outstanding senior indebtedness. We will
repay a portion of this indebtedness with a
portion of the proceeds from this offering.
There is no limitation on the amount of
senior indebtedness we may issue in the
future.
GUARANTEE....................... We will fully, irrevocably and
unconditionally guarantee all of Trust II's
obligations under the preferred securities.
We will guarantee the payment of
distributions on the preferred securities
and payments on liquidation of Trust II or
redemption of the preferred securities. Our
guarantee is limited to the amount of funds
held by Trust II. Our obligations to make
payments under the guarantee will be junior
to our obligations to make payments on our
senior indebtedness. See "Description of the
Guarantee" and "Relationship Among the
Preferred Securities, the Junior
Subordinated Debentures, the Expense
Agreement and the Guarantee."
RIGHT TO DEFER INTEREST
PAYMENTS........................ If we are not in default under the trust
indenture, we may defer interest payments on
the junior subordinated debentures for a
period of up to twenty consecutive quarters,
but not beyond June 30, 2029. There is no
limitation on the number of times that we
may begin an interest deferral period if we
are not in default under the trust
indenture. At the end of any interest
deferral period, we must pay all accrued and
unpaid interest. During an interest deferral
period, interest will continue to accrue. If
we defer interest, you will be required to
accrue interest income for United States
federal income tax purposes even though you
do not receive any cash distribution. See
"Description of the Junior Subordinated
Debentures -- Right to Defer Interest
Payment Obligation" and "Federal Income Tax
Consequences -- Interest Income and Original
Issue Discount."
REDEMPTION...................... If we obtain any required regulatory
approval and comply with the restrictions
contained in the indenture for our 9.625%
subordinated notes maturing January 1, 2005,
we may, at our option, redeem:
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- all or some of the junior subordinated
debentures at any time on or after June
30, 2004, or
- all of the junior subordinated debentures
at any time within ninety days if there
are unfavorable changes in regulatory or
tax laws.
If we redeem some of the junior subordinated
debentures before their stated maturity
date, Trust II must redeem the same dollar
amount of its common and preferred
securities. We will pay the full principal
amount of the redeemed junior subordinated
debentures, plus any accrued and unpaid
interest, upon any redemption. See
"Description of the Preferred
Securities -- Redemption" and "Description
of the 1995 Notes."
DISTRIBUTION OF THE JUNIOR
SUBORDINATED DEBENTURES IF WE
DISSOLVE TRUST II............. We may dissolve Trust II at any time. We may
be required to obtain regulatory approval
before dissolving Trust II. If we dissolve
Trust II, after it satisfies its creditors,
you will be entitled to receive the
liquidation amount of $10 per preferred
security plus accumulated and unpaid
distributions to the date of payment. This
payment may be in the form of a distribution
of the junior subordinated debentures. See
"Description of the Preferred Securities --
Liquidation Distribution upon Dissolution,"
and "-- Liquidation of Trust II and
Distribution of the Junior Subordinated
Debentures to Holders."
VOTING RIGHTS................... If you purchase the preferred securities,
you will have very limited voting rights.
See "Description of the Preferred
Securities -- Voting Rights; Amendment of
Trust Agreement."
NASDAQ NATIONAL MARKET SYMBOL... Trust II plans to list the preferred
securities on the Nasdaq Stock Market's
National Market under the trading symbol
"METFO."
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the following data together with more detailed information
contained in our Consolidated Financial Statements and related notes, and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in this prospectus.
You should read the following information with the data in the table below:
- 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.
- The extraordinary item in 1998 represents expenses associated with the
early retirement of 10% notes.
- The efficiency ratio equals expense less amortization of intangible
assets divided by net income plus noninterest income.
- Capital ratios are for Metropolitan Bank only. Tier 1 capital is
shareholder's equity less unrealized gains and losses on securities
available for sale and intangible assets. Risk weighted assets is
computed by applying risk weight percentages per regulatory guidelines to
total assets and off-balance sheet items.
- For purposes of computing the ratios of earnings to fixed charges,
earnings represent income from continuing operations before taxes,
extraordinary item and cumulative effect of a change in accounting
principle plus fixed charges. Fixed charges represent total interest
expense, including and excluding interest on deposits, as applicable, as
well as the interest component of rental expense.
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<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................ $1,363,434 $924,985 $769,076 $590,095 $479,384
Total loans receivable...... 1,033,288 707,885 646,466 479,849 425,028
Mortgage-backed
securities................ 198,295 143,167 56,672 39,156 16,785
Deposits.................... 1,051,357 737,782 622,105 503,742 436,198
Borrowings.................. 215,486 135,870 101,874 46,874 15,504
Shareholders' equity........ 42,645 36,661 30,244 25,466 20,280
SELECTED RESULTS OF
OPERATIONS:
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
Noninterest income.......... 7,316 4,141 3,773 4,224 1,601
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.......... (245) -- -- -- --
Net income.................. $ 6,794 $ 5,803 $ 1,539 $ 3,542 $ 3,437
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
OTHER DATA:
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
Net interest margin......... 3.16 3.48 3.34 3.24 3.94
Efficiency ratio............ 64.45 62.75 82.57 68.28 62.95
Nonperforming loans to total
loans..................... 1.23 0.44 0.80 0.69 0.55
Allowance for losses on
loans to total loans...... 0.66 0.79 0.64 0.57 0.45
Net charge-offs to average
loans..................... 0.16 0.13 0.04 0.02 0.03
Tier 1 capital to total
assets.................... 6.27 5.47 5.58 5.77 5.34
Tier 1 capital to
risk-weighted assets...... 7.85 7.75 7.87 8.20 7.60
EARNINGS TO FIXED CHARGES
RATIOS:
Including interest on
deposits.................. 1.21x 1.22x 1.08x 1.21x 1.34x
Excluding interest on
deposits.................. 1.96x 2.18x 1.50x 2.59x 5.32x
</TABLE>
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SUMMARY OF RECENT DEVELOPMENTS
You should read the following information together with more detailed
information contained in our Consolidated Financial Statements and related
notes, and the Management's Discussion and Analysis of Financial Condition and
Results of Operations in this prospectus. We have derived this information from
unaudited consolidated financial statements, and it includes all adjustments,
consisting only of normal recurring accruals, which are necessary to present
fairly the results for such periods. Results for the three-month period ended
March 31, 1999 may not be indicative of our operations for any other period.
We calculated the ratios reflected in the table below as follows:
- Performance ratios for the three months ended March 31, 1999 and
1998 are based on average daily balances and are annualized where
appropriate, and
- The efficiency ratio equals noninterest expense less amortization of
intangible assets divided by net interest income plus noninterest
income less gains (losses) on sales of securities.
In addition, Capital ratios are for Metropolitan Bank only.
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
FINANCIAL CONDITION DATA:
Total assets............................................. $1,440,071 $1,363,434
Total loans receivable................................... 1,108,133 1,033,288
Mortgage-backed securities............................... 183,486 198,295
Deposits................................................. 1,138,816 1,051,357
Borrowings............................................... 206,349 215,486
Shareholders' equity..................................... 43,171 42,645
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Net interest income...................................... $8,976 $7,556
Provision for loan losses................................ 650 450
Noninterest income....................................... 1,457 1,638
Noninterest expense...................................... 7,541 5,570
Income tax expense....................................... 804 1,187
Net Income............................................... 1,438 1,987
</TABLE>
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<TABLE>
<CAPTION>
AS OF OR FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
PER SHARE DATA, RESTATED FOR STOCK SPLITS:
Basis net income per share........................... $0.19 $0.26
Diluted net income per share......................... 0.19 0.25
Book value per share................................. 5.57 4.93
Tangible book value per share........................ 5.22 4.54
OTHER DATA:
Return on average assets............................. 0.41% 0.84%
Return on average equity............................. 13.40 21.23
Net interest margin.................................. 2.76 3.45
Efficiency ratio..................................... 71.65 60.31
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS AS OF OR FOR THE
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1999 1998
---------------- ----------------
<S> <C> <C>
OTHER DATA:
Nonperforming loans to total loans................... 1.13% 1.23%
Allowance for losses on loans to total loans......... 0.66 0.66
Net charge-offs to average loans..................... 0.11 0.16
Tier 1 capital to total assets....................... 6.29 6.27
Tier 1 capital to risk-weighted assets............... 7.77 7.85
</TABLE>
Financial Condition. Total assets amounted to $1,440.1 million as of March
31, 1999 as compared to $1,363.4 million at December 31, 1998, an increase of
$76.7 million, or 5.6%. During the three-month period ended March 31, 1999, we
continued to experience loan growth which was funded by increased deposits.
Loans receivable, including loans held for sale, increased $74.8 million,
or 7.2%, during the three months ended March 31, 1999. This increase was
primarily due to increases in multifamily loans of $13.1 million, commercial
real estate loans of $22.0 million, and business loans of $19.0 million. These
increases resulted from high demand due to the relatively low interest rate
environment experienced in the first quarter and increased marketing efforts.
Mortgage-backed securities decreased $14.8 million, or 7.5%, to $183.5
million, during the three months ended March 31, 1999. The decline was primarily
the result of principal prepayments experienced during the quarter.
Deposits increased $87.5 million, or 8.3%, to $1,138.8 million, during the
three months ended March 31, 1999. This increase was primarily due to
management's marketing efforts, growth in deposits at newer retail sales
offices, and payment of competitive rates to increase certificate of deposit
balances.
Borrowings decreased $9.1 million to $206.3 million during the three months
ended March 31, 1999. These borrowings were replaced by growth in deposits.
Shareholders' equity increased by $0.5 million during the three months
ended March 31, 1999. This increase was due to the net income recorded for the
three months ended
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March 31, 1999, which was partially offset by the decline in unrealized gain
(loss) on securities available for sale, net of tax.
Net income. We earned $1.4 million for the three months ended March 31,
1999, a decrease of $0.6 million from the same period in 1998. The decrease in
net income was primarily due to a reduced net interest margin, the timing of
revenues from mortgage banking activities, an increased level of noninterest
expenses to support expanded levels of business activities, and a higher
provision for loan loss.
Interest income. Total interest income increased $6.7 million, or 34.8%, in
the three-month period ended March 31, 1999 as compared to the prior year
period. The increase in interest income resulted primarily from an increase in
average interest-earning assets, and was also affected by a decrease in the
yield on interest-earning assets to 7.97% from 8.77% in the prior year period.
Interest expense. Total interest expense increased $5.3 million in the
three-month period ended March 31, 1999 as compared to the prior year period.
Interest expense increased due to a higher average balance of interest-bearing
liabilities outstanding, although the cost of funds declined to 5.41% from 5.60%
in the prior year period.
Provision for loan losses. The provision for loan losses increased $200,000
for the three months ended March 31, 1999 as compared to the same period in
1998. Net charge-offs to average loans for the three-month periods ended March
31, 1999 and 1998 were both 0.11%. We increased the provision for loan losses
due to our ongoing analysis of the appropriate allowance for loan losses as
Metropolitan Bank continues to grow and increase its amount of loans, and not as
a response to any material change in the level of nonperforming loans or
charge-offs. Going forward, we expect to continue to increase the allowance for
loan losses.
Noninterest income. Noninterest income decreased $181,000 for the three
months ended March 31, 1999 as compared to the prior year period. The decrease
was primarily due to a decrease in net gain on sales of loans compared to the
first quarter, 1998. The principal balance of loans sold during the first
quarter, 1999 was $59.7 million, as compared to $46.8 million during the prior
year period. The decrease in gain on sale of loans was due to a decline in the
prices available in the market which was due to the slight rise in long-term
interest rates experienced in the first quarter, 1999 as compared to the same
period in 1998.
Noninterest expense. Noninterest expense increased $2.0 million for the
three months ended March 31, 1999 as compared to the prior year period,
primarily due to increases in personnel expenses and occupancy costs. These
increases relate to the growth of Metropolitan Bank's business, including the
greater number of retail sales offices and three new residential mortgage
origination offices.
Income tax expense. Income tax expense decreased $0.4 million for the three
months ended March 31, 1999 as compared to the prior year period. The decrease
was due to a lower level of taxable income.
Asset Quality. Nonperforming loans as a percentage of total loans decreased
from 1.23% at December 31, 1998 to 1.13% at March 31, 1999, while the allowance
for loan losses as a percentage of total loans remained constant at 0.66% at
both December 31, 1998 and March 31, 1999. The balance of nonperforming loans
has remained relatively stable during the first quarter, 1999 despite the
increase in the total loan portfolio balance.
Liquidity. In January 1999, we increased our borrowing on our commercial
bank line of credit from $8.0 million to its current balance of $12.0 million.
We contributed the majority of these funds as capital to Metropolitan Bank.
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RISK FACTORS
An investment in the common stock or the preferred securities involves a
number of risks. We urge you to read all of the information contained in this
prospectus. In addition, we urge you to consider carefully the following factors
in evaluating us, our business and Trust II before you purchase the common stock
or the preferred securities offered by this prospectus.
Because Trust II will rely on the payments it receives on the junior
subordinated debentures to fund all payments on the preferred securities, and
because Trust II may distribute the junior subordinated debentures in exchange
for the preferred securities, purchasers of the preferred securities are making
an investment decision that relates to the junior subordinated debentures as
well as the preferred securities. Those purchasers should carefully review the
information in this prospectus about the preferred securities, the junior
subordinated debentures and the guarantee.
RISK FACTORS RELATING TO METROPOLITAN'S BUSINESS
STATUTORY RESTRICTIONS ON BANK DIVIDENDS COULD LIMIT THE AMOUNTS METROPOLITAN
BANK MAY PAY TO US AND OUR ABILITY TO MAKE PAYMENTS ON OUR DEBT
As a holding company, we conduct our operations mainly through our
subsidiaries. Other than our investing and financing activities, our principal
source of cash is dividends Metropolitan Bank pays to us. If Metropolitan Bank
is unable to pay dividends to us, we may be unable to make interest or principal
payments on our debt, including payments on the junior subordinated debentures.
Various statutory provisions could restrict the amount of dividends Metropolitan
Bank can pay to us. For example, Metropolitan Bank operates with lower capital
ratios than most other banks and, as a result, faces a higher risk of falling
below regulatory capital requirements. If Metropolitan Bank becomes
undercapitalized, Metropolitan Bank will have to comply with increased
restrictions on the payment of dividends and may lose its ability to pay
dividends. See "Regulation and Supervision -- Metropolitan Bank" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DECLINE IN REAL ESTATE VALUES, PARTICULARLY IN OHIO, COULD REDUCE METROPOLITAN
BANK'S INCOME
The value of Metropolitan Bank's real estate collateral could be adversely
affected by downturns in the real estate markets where it conducts its business.
A decline in real estate values, particularly in Ohio, would reduce the value of
the real estate collateral securing Metropolitan Bank's loans and increase the
risk that Metropolitan Bank would incur losses if borrowers defaulted on their
loans. At December 31, 1998, real estate secured approximately 83.1% of
Metropolitan Bank's loans. At December 31, 1998, properties located in Ohio
secured approximately 50.0% of the principal amount of Metropolitan Bank's real
estate loans.
METROPOLITAN BANK'S EMPHASIS ON MULTIFAMILY AND COMMERCIAL REAL ESTATE LOANS
INCREASES THE POSSIBILITY OF LOAN LOSSES
We may incur significant losses because approximately 30% of Metropolitan
Bank's loans are secured by multifamily properties and approximately 20% of
Metropolitan Bank's
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<PAGE> 14
loans are secured by commercial real estate. Loans secured by multifamily
properties and commercial real estate are generally larger, and are considered
to have a higher risk of loss, than loans secured by one- to four-family
residences. Significant losses on loans secured by multifamily properties are
possible because the cash flows from multifamily properties securing the loans
may become inadequate to service the loan payments. Significant losses on loans
secured by commercial real estate are possible because the repayment of loans
secured by commercial real estate typically depends upon the successful
operation of the business activities being conducted at the commercial real
estate. Metropolitan's nonperforming assets, which are secured primarily by
multifamily and commercial real estate collateral, are higher than its regional
and national peers. See "Business -- Loan Originations and Purchases."
ROBERT M. KAYE CONTROLS METROPOLITAN AND HIS INTERESTS COULD BE DIFFERENT THAN
YOUR INTERESTS
Upon completion of this offering, Mr. Robert M. Kaye of Rumson, New Jersey,
will own approximately 75% of the outstanding shares of our common stock and
will have control of our company. He will continue to be able to elect or remove
all of our directors and determine the outcome of any issue submitted to a vote
of the shareholders, such as:
- approval of mergers or other business combinations;
- issuance of any additional common stock or other equity securities;
and
- issuance of any debt other than in the ordinary course of business.
Mr. Kaye's ability to reject an unsolicited bid for Metropolitan or any
other change in control could have an adverse effect on the market price of our
common stock. See "Description of The Capital Stock -- Potential Antitakeover
Effects of Articles of Incorporation, Code of Regulations and Ohio Law."
IF LOAN LOSSES EXCEED OUR ALLOWANCE FOR LOAN LOSSES, OUR INCOME COULD BE REDUCED
We maintain an allowance for losses on loans at a level we consider
adequate to cover currently anticipated losses. The amount of future losses is
vulnerable to changes in economic, operating, and other conditions, including
changes in interest rates. These changes may be beyond our control. We cannot
assure you that this allowance will be adequate to cover actual losses. If our
allowance is inadequate, our results of operations could be adversely affected.
Metropolitan's nonperforming assets, which are secured primarily by multifamily
and commercial real estate collateral, are higher than its regional and national
peers. See "Business -- Loan Delinquencies and Nonperforming Assets" and
" -- Allocation of Allowance for Losses on Loans."
AN INCREASE IN INTEREST RATES COULD REDUCE INCOME
Rising interest rates could adversely affect our business by reducing our
net income. This is because Metropolitan Bank has more short-term
interest-bearing liabilities than it has short-term interest-earning assets.
Consequently, an increase in interest rates could increase our interest expense
without an offsetting increase in our interest income. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quantitative and Qualitative Disclosures about Market Risk."
12
<PAGE> 15
THE FAILURE OF PARTIES WHOM WE DO BUSINESS WITH TO ADDRESS YEAR 2000 ISSUES
COULD PREVENT US FROM TIMELY SERVICING OUR CUSTOMERS
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.
Our most significant continuing year 2000 risk is the failure of third
parties with whom we do business to address their year 2000 problems. If our
suppliers, particularly public utilities, are not year 2000 ready, we may
experience an interruption of service to our customers. As a result, our
business and operations may be materially and adversely affected. We can make no
assurances that the systems or products of third parties on which we rely will
be timely converted or that a failure by a third party, or a conversion that is
incompatible with our systems, would not have a material adverse effect on us.
For a more detailed discussion of this risk and the status of our year 2000
program see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000."
CHANGES IN REGULATIONS COULD ADVERSELY AFFECT THE GROWTH OF OUR ASSETS
We are governed by significant federal and state regulation and supervision
which is primarily for the benefit and protection of our customers and not for
the benefit of our investors. Laws, regulations and policies currently affecting
us and our subsidiaries may change at any time. For example, Congress has
considered legislation that may result in thrift institutions like Metropolitan
Bank being forced to convert into state or national banks. If Congress enacts
this type of legislation, we could become a bank holding company and be subject
to the regulations of the Federal Reserve Board. These regulations impose
capital requirements. Metropolitan, as a savings and loan holding company, is
not currently subject to capital requirements. Therefore, our business may be
adversely affected by any future changes in laws, regulations or policies. See
"Regulation and Supervision -- Metropolitan Bank."
RISK FACTORS RELATING TO THE COMMON STOCK
OUR POLICY OF NOT PAYING DIVIDENDS MAY REDUCE THE MARKET VALUE OF OUR COMMON
STOCK
The market may value our common stock at a lower price than the common
stock of a similar company with a history of paying cash dividends. Dividend
yield is one of a number of factors that can affect the market price of a stock.
We have not paid any cash dividends. Currently, we have no plans to pay cash
dividends. In addition, we have entered into various agreements that limit our
ability to pay cash dividends. See "Price Range of Common Stock and Dividends."
FUTURE COMMON STOCK OFFERINGS MAY REDUCE THE VALUE OF YOUR COMMON STOCK
If we issue additional common stock in the future, you may experience
dilution in the book value per share of your common stock.
13
<PAGE> 16
YOU MAY HAVE DIFFICULTY SELLING YOUR COMMON STOCK BECAUSE OF THE LIMITED TRADING
VOLUME FOR OUR COMMON STOCK
Because a majority of our common stock is owned by Mr. Robert Kaye, the
trading volume of the common stock has been less active than other companies
listed on the Nasdaq Stock Market's National Market. A public market having the
desired characteristics of depth, liquidity, and orderliness depends upon the
presence of willing buyers and sellers of the common stock in the marketplace.
In turn, the presence of buyers and sellers depends, among other things, on the
individual decisions of investors and upon general economic and market
conditions over which we have no control. See "Price Range of Common Stock and
Dividends."
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
HOLDERS OF OUR SENIOR INDEBTEDNESS WILL GET PAID BEFORE YOU GET PAID UNDER THE
GUARANTEE
Our obligations under the guarantee are unsecured and rank:
- junior in right of payment to all our senior indebtedness, and
- equal to our most senior preferred or preference stock, including the
$27.8 million aggregate principal amount of debentures we sold during the
second quarter of 1998 to Metropolitan Capital Trust I.
Our obligations under the junior subordinated debentures are unsecured and
rank junior in right of payment to all of our senior indebtedness and equal to
our other junior debt securities. The junior subordinated debentures also will
be effectively junior to all obligations of our subsidiaries.
The preferred securities, the junior subordinated debentures and the
guarantee do not limit our ability to incur additional indebtedness, including
indebtedness that ranks senior to the junior subordinated debentures and the
guarantee. See "Description of the Guarantee -- Status of the Guarantee" and
"Description of the Junior Subordinated Debentures -- Subordination."
IF METROPOLITAN BANK DOES NOT PAY DIVIDENDS TO US AND AS A RESULT WE ARE UNABLE
TO MAKE PAYMENTS ON THE JUNIOR SUBORDINATED DEBENTURES, TRUST II WILL NOT BE
ABLE TO PAY DISTRIBUTIONS AND OTHER PAYMENTS ON THE PREFERRED SECURITIES AND THE
GUARANTEE WILL NOT APPLY
Trust II's ability to pay distributions on the preferred securities depends
upon our making timely payments on the junior subordinated debentures. In turn,
our ability to make payments on the junior subordinated debentures depends on
Metropolitan Bank paying dividends to us in amounts sufficient for us to service
our obligations. If we default on our obligations to pay principal and interest
on the junior subordinated debentures, Trust II will not have sufficient funds
to pay distributions on, or the $10 liquidation amount of, the preferred
securities.
If we default on our obligation, you will not be able to rely upon the
guarantee for payment because the guarantee only applies if we make a payment of
principal or interest on the junior subordinated debentures. Instead, you or the
property trustee will have to sue us to
14
<PAGE> 17
enforce the property trustee's rights under the indenture relating to the junior
subordinated debentures. See "Description of the Guarantee."
IF WE DEFER DISTRIBUTIONS ON THE JUNIOR SUBORDINATED DEBENTURES, YOU WILL HAVE
TO INCLUDE INTEREST IN YOUR TAXABLE INCOME BEFORE YOU RECEIVE CASH
You will not receive distributions on the preferred securities if we defer
interest payments on the junior subordinated debentures. If this occurs, you
will have to include accrued interest in your income for United States federal
income tax purposes before you actually receive the cash distributions. In
addition, you would not receive the cash related to that income from Trust II if
you sell your preferred securities before the record date for the payment of any
deferred distribution, even if you held the preferred securities on the date
that the payments would normally have been paid. See "Federal Income Tax
Consequences" and "-- Sales or Redemption of the Preferred Securities."
If we are not in default on the payment of interest on the junior
subordinated debentures, we may defer interest payments on the junior
subordinated debentures one or more times for up to 20 consecutive quarters, but
not beyond the maturity date of the junior subordinated debentures. During an
interest deferral period, Trust II would defer distributions on the preferred
securities in the same amount. See "Description of the Preferred Securities --
Distributions" and "Description of the Junior Subordinated Debentures -- Right
to Defer Interest Payment Obligation."
If we defer any interest payment on the junior subordinated debentures, the
preferred securities will likely trade at prices that do not fully reflect the
value of accrued but unpaid interest related to the underlying junior
subordinated debentures. If you sell your preferred securities during an
interest deferral period, you must treat any accrued but unpaid interest on the
junior subordinated debentures as ordinary income. You must also add the amount
of the accrued but unpaid interest to your adjusted tax basis in the preferred
securities. You will recognize a capital loss if the selling price is less than
your adjusted tax basis. Generally, you cannot apply capital losses to offset
ordinary income for United States federal income tax purposes. See "Federal
Income Tax Consequences -- Sales or Redemption of the Preferred Securities."
IF WE DEFER DISTRIBUTIONS ON THE JUNIOR SUBORDINATED DEBENTURES, THE MARKET
PRICE OF THE PREFERRED SECURITIES MAY DECLINE
If we defer interest payments in the future, the market price of the
preferred securities will likely be adversely affected. Therefore, if you sell
your preferred securities during an interest deferral period, you may not
receive the same return on your investment as someone who continues to hold
their preferred securities. In addition, due to our right to defer interest
payments, the market price of the preferred securities may be more volatile than
the market prices of other similar securities that are not subject to optional
deferrals.
THE PREFERRED SECURITIES MAY BE REDEEMED PRIOR TO MATURITY; YOU MAY BE TAXED ON
THE PROCEEDS AND YOU MAY NOT BE ABLE TO REINVEST THE PROCEEDS AT THE SAME OR A
HIGHER RATE OF RETURN
If a tax event, an investment company event or a capital treatment event
occurs and continues as described under the caption "Description of the Junior
Subordinated Debentures -- Redemption or Exchange" we may be able to redeem the
junior subordinated debentures in whole, but not in part, within 90 days
following the event. We may also redeem the preferred securities at our option
in whole or in part on or after June 30, 2004.
15
<PAGE> 18
We will not exercise our right of redemption unless we have received any
necessary prior regulatory approval and are in compliance with the restrictions
set forth in the indenture (the "1995 Notes Indenture") for our 9.625%
subordinated notes maturing January 1, 2005 (the "1995 Notes"). See "Description
of the 1995 Notes."
If the junior subordinated debentures are redeemed, the preferred
securities will be redeemed at a redemption price equal to the $10 liquidation
amount, plus accumulated and unpaid distributions to the redemption date. Under
current United States federal income tax law, the redemption of the preferred
securities would be a taxable event to you. In addition, you may not be able to
reinvest the money you receive in the redemption at a rate that is equal to or
higher than the rate of return you received on the preferred securities. See
"Description of the Preferred Securities -- Redemption" and "Federal Income Tax
Consequences."
THE JUNIOR SUBORDINATED DEBENTURES MAY BE DISTRIBUTED TO THE HOLDERS OF THE
PREFERRED SECURITIES AND THE JUNIOR SUBORDINATED DEBENTURES MAY TRADE AT A LOWER
PRICE THAN WHAT YOU PAID FOR THE PREFERRED SECURITIES
We may dissolve Trust II at any time and distribute the junior subordinated
debentures to you in exchange for your preferred securities. We cannot predict
the market prices for the junior subordinated debentures that may be distributed
to you when Trust II is dissolved or liquidated. The junior subordinated
debentures may trade at a lower price than what you paid to purchase the
preferred securities in this offering.
If the junior subordinated debentures are distributed to the holders of
preferred securities if Trust II is liquidated, we will use our best efforts to
list the junior subordinated debentures on the Nasdaq Stock Market's National
Market or SmallCap Market or the stock exchanges on which the preferred
securities are then listed. However, we cannot assure you that the exchange will
approve the junior subordinated debentures for listing or that a trading market
will exist for the junior subordinated debentures.
Under United States federal income tax law, a distribution of junior
subordinated debentures upon the dissolution of Trust II would not be a taxable
event to you. If, however, Trust II were characterized as an association taxable
as a corporation at the time of the dissolution of Trust II, the distribution of
the junior subordinated debentures would constitute a taxable event to you. In
addition, any redemption of the preferred securities for cash would be a taxable
event to you. See "Federal Income Tax Consequences -- Distribution of the Junior
Subordinated Debentures to Holders of the Preferred Securities," and " -- Sales
or Redemption of the Preferred Securities."
IF YOU SELL YOUR PREFERRED SECURITIES BETWEEN RECORD DATES FOR DISTRIBUTION
PAYMENTS, YOU MAY HAVE TO INCLUDE ACCRUED BUT UNPAID DISTRIBUTIONS IN YOUR
TAXABLE INCOME
The preferred securities may trade at prices that do not fully reflect the
value of accrued but unpaid interest on the underlying junior subordinated
debentures.
If the Internal Revenue Service determines that the junior subordinated
debentures are subject to the original issue discount rules, and you dispose of
your preferred securities between record dates for any distribution payments,
you will have to include as ordinary income for United States federal income tax
purposes an amount equal to the accrued but unpaid interest on your
proportionate share of the interest on the junior subordinated debentures
through the date of your disposition. However, we believe that the junior
subordinated debentures are not subject to the original issue discount rules.
16
<PAGE> 19
You will recognize a capital loss on the amount that the selling price is
less than your adjusted tax basis. Normally, you may not apply capital losses to
offset ordinary income for United States federal income tax purposes.
See "Federal Income Tax Consequences" for more information.
WE GENERALLY WILL CONTROL TRUST II BECAUSE YOUR VOTING RIGHTS ARE VERY LIMITED;
YOUR INTERESTS MAY NOT BE THE SAME AS OUR INTERESTS
As a holder of preferred securities, you will have limited voting rights.
These voting rights will relate only to modifications of the preferred
securities and trust agreement and the exercise of Trust II's rights as holder
of the junior subordinated debentures and the guarantee. In general, only we, as
holder of Trust II's common securities, can appoint, remove or replace the
trustees under the trust agreement.
We and the trustees of Trust II may amend the trust agreement without your
consent, even if it adversely affects your interests, as described under the
heading "Description of the Preferred Securities -- Removal of Trust II
Trustees" and "-- Voting Rights; Amendment of Trust Agreement."
YOU MAY HAVE DIFFICULTY SELLING YOUR PREFERRED SECURITIES IF AN ACTIVE TRADING
MARKET DOES NOT DEVELOP
There is no current public market for the preferred securities. Trust II
has applied to list the preferred securities on the Nasdaq Stock Market's
National Market. However, a listing does not guarantee that a trading market for
the preferred securities will develop. If a trading market for the preferred
securities does develop, we can make no assurances regarding the depth of that
market and the ability of holders to sell their preferred securities easily.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. Some of the forward-looking statements in this prospectus
can be identified by the use of words such as "anticipates," "plans," "expects,"
"believes," and similar words. Forward-looking statements involve inherent risks
and uncertainties. A number of important facts could cause actual results to
differ materially from those in the forward-looking statements. These factors
include 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. For a more detailed discussion of factors that could cause actual
results to differ, please see the discussion under "Risk Factors."
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The common stock is listed for trading on the Nasdaq Stock Market's
National Market under the symbol "METF." The following table provides, for the
periods indicated, the high
17
<PAGE> 20
and low bid price for the common stock as reported by the Nasdaq Stock Market's
National Market.
<TABLE>
<CAPTION>
BID PRICE
----------------
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................... $ 5.11 $ 4.89
Second Quarter.............................................. 7.39 4.89
Third Quarter............................................... 9.09 7.05
Fourth Quarter.............................................. 14.32 8.64
YEAR ENDED DECEMBER 31, 1998
First Quarter............................................... $17.16 $13.64
Second Quarter.............................................. 15.46 13.18
Third Quarter............................................... 13.75 8.64
Fourth Quarter.............................................. 12.00 8.18
</TABLE>
The quotations set out above represent prices for the specific periods
indicated between dealers and do not include retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
The last reported bid price for the common stock on the Nasdaq Stock
Market's National Market on May 10, 1999 was $7.875. On March 1, 1999, we had
1,099 shareholders. The prices reflected above have been adjusted to reflect
Metropolitan's completion on December 10, 1997, of a two-for-one stock split,
and completion on December 29, 1998, of an eleven-for-ten stock split, each in
the form of a stock dividend to shareholders.
We have not paid any cash dividends on our common stock since 1987. We
anticipate that we will retain future earnings to finance our operations and to
support the continued growth of Metropolitan Bank. Accordingly, we do not
currently anticipate paying cash dividends on our common stock in the
foreseeable future. The payment of future dividends will be subject to the
discretion of the Board of Directors of Metropolitan and will depend on our
results of operations, financial position and capital requirements, general
business conditions, restrictions imposed by financing arrangements, and legal
restrictions on the payment of dividends.
We have entered into agreements that limit our ability to pay dividends.
Our commercial bank line of credit prohibits us from paying a dividend or other
distribution on our equity securities without the prior written consent of the
lender unless our ratio of tangible equity to total assets is in excess of 7.0%.
For these purposes, the line of credit agreement defines tangible equity as
consolidated net worth less goodwill.
MARKET FOR THE PREFERRED SECURITIES
The Trust plans to list the preferred securities on the Nasdaq Stock
Market's National Market under the symbol "METFO." Although Ryan, Beck & Co.
intends to make a market in the preferred securities, Ryan, Beck & Co. is not
obligated to do so and may discontinue such market making at any time.
Therefore, we cannot assure you that an active and liquid trading market will
develop or, if developed, that such a market will be sustained. Representatives
of Metropolitan and Ryan, Beck & Co. have determined the offering price and
distribution rate by negotiation. The offering price of the preferred securities
may not be indicative of the market price following the offering. See
"Underwriting."
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<PAGE> 21
USE OF PROCEEDS
We estimate the net proceeds from the sale of the common stock (at the
public offering price of $ 7.875 per share) will be approximately $2.0 million
($2.3 million if Ryan, Beck & Co.'s over-allotment options are exercised in
full), and the net proceeds from the sale of the preferred securities will be
approximately $13.9 million ($16.1 million if Ryan, Beck & Co.'s over-allotment
options are exercised in full), in each case, after deducting the underwriting
discounts, commissions and estimated expenses. The Trust will invest all of the
proceeds from the sale of the preferred securities in junior subordinated
debentures. Metropolitan intends to use the net proceeds from the sale of the
common stock and the junior subordinated debentures for general corporate
purposes, including, but not limited to:
- repayment of the current balance on Metropolitan's commercial bank line
of credit, which was $12.0 million on April 30, 1999;
- capital contributions of approximately $3.9 million to Metropolitan Bank
to support growth and for working capital; and
- acquisitions of financial services companies although no agreements or
understandings with respect to any such acquisition presently exist.
ACCOUNTING TREATMENT
For financial reporting purposes, Trust II will be treated as a subsidiary
of Metropolitan. As a result, the consolidated financial statements of
Metropolitan will include Trust II's financial statements. The consolidated
statements of financial condition of Metropolitan will include the preferred
securities under the caption "Guaranteed Preferred Beneficial Interests in
Metropolitan's Junior Subordinated Debentures," and the notes to the
consolidated financial statements will include appropriate disclosures about the
preferred securities. For financial reporting purposes, Metropolitan will record
distributions payable on the preferred securities as an interest expense in the
consolidated statements of operations.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth Metropolitan's consolidated ratios of
earnings to fixed charges for the periods indicated. For purposes of computing
the ratios of earnings to fixed charges, earnings represent income from
continuing operations before income taxes, extraordinary items and cumulative
effect of a change in accounting principle plus fixed charges. Fixed charges
represent total interest expense, including and excluding interest on deposits,
as applicable, as well as the interest component of rental expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996(1) 1995 1994
----- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges:
Including interest on deposits..... 1.21x 1.22x 1.08x 1.21x 1.34x
Excluding interest on deposits..... 1.96x 2.18x 1.50x 2.59x 5.32x
</TABLE>
- ---------------
(1) Income from continuing operations before income taxes in 1996 includes a
$2.9 million one-time assessment to recapitalize the Savings Association
Insurance Fund.
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<PAGE> 22
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 1998, as adjusted to give effect to the completion of the offering
of the common stock and the preferred securities, including the application of
the net proceeds as proposed. We urge you to read the following data, together
with the Consolidated Financial Statements and related notes, included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deposits.............................................. $1,051,357 $1,051,357
Borrowings:
Federal Home Loan Bank advances....................... 111,235 111,235
9.625% subordinated notes maturing January 1, 2005.... 14,000 14,000
Commercial bank line of credit........................ 8,000 --
Other borrowings...................................... 82,250 82,250
---------- ----------
Total borrowings................................. 215,485 207,485
---------- ----------
Total deposits and borrowings.................... $1,266,842 $1,258,842
========== ==========
Guaranteed preferred beneficial interests in
Metropolitan's junior subordinated debentures (1)... $ 27,750 $ 42,750
========== ==========
Shareholders' equity:
Shares of common stock, no par value, 10,000,000
shares authorized, 7,756,393 shares issued and
outstanding at December 31, 1998, 8,056,393 as
adjusted (2)........................................ $ -- $ --
Additional paid-in capital............................ 18,505 20,502
Retained earnings..................................... 23,660 23,660
Unrealized gain on securities available for sale...... 479 479
---------- ----------
Total shareholders' equity....................... $ 42,644 $ 44,641
========== ==========
</TABLE>
- ---------------
(1) The as adjusted preferred securities of Trust II include beneficial
interests in $15.0 million aggregate principal amount of the junior
subordinated debentures issued by Metropolitan to Trust II. The junior
subordinated debentures will bear interest at the annual rate of 9.50% of
the principal amount thereof, payable quarterly and will mature on June 30,
2029. Metropolitan owns all of Trust II's common securities.
(2) The as adjusted additional paid-in capital includes net proceeds of $2.0
million from the issuance of 300,000 shares of common stock.
20
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table represents selected financial information which you
should read together with our Consolidated Financial Statements and related
notes, and the Management's Discussion and Analysis of Financial Condition and
Results of Operations in this prospectus.
<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.
21
<PAGE> 24
<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
EARNINGS TO FIXED CHARGES
RATIOS:(3)
Including interest on deposits.... 1.21x 1.22x 1.08x 1.21x 1.34x
Excluding interest on deposits.... 1.96x 2.18x 1.50x 2.59x 5.32x
ASSET QUALITY RATIOS:(4)
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(5)....................... 6.27 5.47 5.58 5.77 5.34
Tier 1 capital to risk-weighted
assets(5)....................... 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) For purposes of computing the ratios of earnings to fixed charges, earnings
represent income from continuing operations before taxes, extraordinary
items and cumulative effect of a change in accounting principle plus fixed
charges. Fixed charges represent total interest expense, including and
excluding interest on deposits, as applicable, as well as the interest
component of rental expense.
(4) Ratios are calculated on end of period balances except net charge-offs to
average loans.
(5) Ratios are for Metropolitan Bank only.
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of Metropolitan's
financial condition and results of operations in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
prospectus.
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
- a $500,000 decline in prepayment penalties.
23
<PAGE> 26
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>
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
24
<PAGE> 27
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
25
<PAGE> 28
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 $44.4 million of loans for option
transactions compared to $12.8 million in 1997.
26
<PAGE> 29
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
27
<PAGE> 30
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
28
<PAGE> 31
$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 $12.8 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
Metropolitan Bank, the
29
<PAGE> 32
payment of 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
30
<PAGE> 33
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
31
<PAGE> 34
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 title to a motel in Northeastern Ohio and a
marina in California through foreclosure. We transferred the loan balance
related to these properties to real estate owned. 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 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>
32
<PAGE> 35
<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.
- A portion of the allowance for loan losses is temporarily allocated to
specific loans to cover management's estimates of probable losses until
the actual loss is determined and the loan is charged-off. At December
31, 1998, $1.9 million of the allowance for loan losses was allocated to
specific consumer loans and $900,000 was allocated to specific business
loans.
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
33
<PAGE> 36
1998. Therefore, the provision for loan losses was increased 13.2% to $2.7
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 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.
34
<PAGE> 37
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.
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. As of December 31, 1998, no loss has been
recognized in connection with this investment.
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.
Metropolitan Bank has paid dividends to Metropolitan of $500,000, $1.5 million
and $1.4 million in 1998, 1997 and 1996, respectively. Due to the increased debt
service requirements from this and a previous offering, we anticipate that
future dividends to Metropolitan will be approximately $4.0 million per year.
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
35
<PAGE> 38
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 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
36
<PAGE> 39
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 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-
37
<PAGE> 40
weighted assets. Supplementary capital may be used to satisfy the risk-based
requirement only to the extent of core capital.
Metropolitan 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>
Metropolitan 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;
38
<PAGE> 41
- monthly shock report of effect of sudden interest rate changes on net
value of portfolio equity; and
- 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.
39
<PAGE> 42
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.
Metropolitan 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. If we grow at a rate significantly
lower than 20% we could still decrease interest rate risk by taking actions such
as selling fixed rate assets and reinvesting in short-term assets or assets with
short repricing periods. However, this could result in losses on the sale of
assets or a decrease in the yield on assets. 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. Metropolitan 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
40
<PAGE> 43
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.
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.
41
<PAGE> 44
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 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.
42
<PAGE> 45
BUSINESS
GENERAL
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.
Metropolitan 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 Metropolitan 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. After the offering described in this
prospectus, Mr. Kaye will own 74.6% (74.2% if the overallotment option is
exercised) 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 Metropolitan Bank. In addition, Mr. Kaye is
Chairman of the Board and Chief Executive Officer of the Corporation and
Metropolitan 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 Metropolitan Bank up to applicable
limits.
We directly or indirectly own the following active and inactive
subsidiaries:
<TABLE>
<CAPTION>
ACTIVE SUBSIDIARIES INACTIVE SUBSIDIARIES
------------------- ---------------------
<S> <C>
- - Metropolitan Bank and Trust Company - MetroCapital Corporation
- - Metropolitan Capital Trust I - Metropolitan Savings Service
Corporation
- - Kimberly Construction Company - Metropolitan Securities Corporation
</TABLE>
Metropolitan 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.
43
<PAGE> 46
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.
<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.
44
<PAGE> 47
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>
45
<PAGE> 48
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 YEAR OR LESS THROUGH FIVE YEARS DUE AFTER 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.
46
<PAGE> 49
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>
47
<PAGE> 50
Multifamily Lending. We emphasize multifamily real estate loans. We
originate these loans from referrals by present customers of Metropolitan 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.
48
<PAGE> 51
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 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
----- ----- -------- -----
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
NUMBER
OF LOANS PERCENT PRINCIPAL PERCENT
-------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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>
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.
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<PAGE> 53
Property located in our Northeastern Ohio secures substantially all of the one-
to four-family residential mortgage loan originated for retention is 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 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.
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<PAGE> 54
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
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<PAGE> 55
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 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, 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
53
<PAGE> 56
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.
The following table sets forth information regarding the number and amount
of our business loans as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER TOTAL LOAN OUTSTANDING
OF LOANS COMMITMENT PRINCIPAL 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
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<PAGE> 57
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.
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 Metropolitan 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. Metropolitan 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."
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<PAGE> 58
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, Metropolitan 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 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 non-interest 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, Metropolitan Bank uses an
underwriting process with substantially the same standards as in its origination
process. In the
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<PAGE> 59
event the option is not exercised, we would sell the underlying loans or
transfer them to Metropolitan Bank's portfolio at its 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 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.
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<PAGE> 60
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>
LOANS DELINQUENT FOR:
60-89 DAYS 90 DAYS AND OVER TOTAL DELINQUENT LOANS
-------------------------- --------------------------- ---------------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------- -------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE
One- to four-
family........... 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.
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<PAGE> 61
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>
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
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<PAGE> 62
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 subprime 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.
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
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<PAGE> 63
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
----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............... $ 304 18.3% $ 237 19.8% $ 228 17.1%
Multifamily....................... 648 31.1 482 25.4 1,020 40.8
Commercial real estate............ 1,019 21.1 1,400 23.0 937 20.3
Construction and land............. 237 12.6 353 15.3 193 10.5
Consumer.......................... 2,335 9.3 2,132 9.0 1,182 7.9
Business.......................... 1,675 7.6 456 7.5 197 3.4
Unallocated....................... 691 -- 562 -- 418 --
------ ----- ------ ----- ------ -----
Total.................... $6,909 100.0% $5,622 100.0% $4,175 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1994
----------------------- -----------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family............... $ 172 15.2% $ 189 25.2%
Multifamily....................... 887 45.8 733 41.9
Commercial real estate............ 676 21.5 358 18.6
Construction and land............. 167 9.5 99 8.5
Consumer.......................... 512 6.3 340 5.8
Business.......................... 74 1.7 1 --
Unallocated....................... 277 -- 191 --
------ ----- ------ -----
Total.................... $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.
61
<PAGE> 64
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>
YEAR ENDED 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, Metropolitan Bank is required to hold a
minimum amount of Federal Home Loan Bank stock based upon asset size and mix. As
Metropolitan Bank grows, management anticipates this investment will increase.
62
<PAGE> 65
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
OR 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
We acquire mortgage-backed securities through purchases and through
securitization of loans from our own portfolio. Mortgage-backed securities offer
higher rates than treasury or agency securities with similar maturities. This is
due in part because the timing of the repayment of principal can vary based on
the level of prepayments. 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.
BPA Commercial Capital L.L.C. is a special purpose entity created by Boston
Portfolio Advisors of West Palm Beach, Florida specifically to be the issuer of
$101.0 million of private issue, nonrated commercial mortgage-backed securities.
These securities were formed in December 1998 through securitization of loans in
our portfolio. The risk of loss of principal on these mortgage-backed securities
is covered by a commercial mortgage certificate deficiency insurance policy.
63
<PAGE> 66
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>
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 YEAR TO
FIVE YEARS FIVE TO TEN YEARS OVER 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
Metropolitan 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.
64
<PAGE> 67
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.
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.
65
<PAGE> 68
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> <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 Metropolitan
Bank. The increase was primarily due to a 50.8% increase in time deposits to
$720.8 million. During the same period, Metropolitan 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>
66
<PAGE> 69
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
Metropolitan 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 Metropolitan
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.
Reverse Repurchase Agreements. From time to time, Metropolitan 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.
67
<PAGE> 70
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%.
68
<PAGE> 71
COMPETITION
Metropolitan 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.
Metropolitan 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 Metropolitan Bank's competitors,
however, have higher lending limits and substantially greater financial
resources than Metropolitan Bank.
Metropolitan 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. Metropolitan 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.
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. Metropolitan 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. Metropolitan 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. Metropolitan 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 Metropolitan 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 Metropolitan Bank. In addition, this
summary does not identify every statute and regulation that may apply to
Metropolitan or Metropolitan 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
69
<PAGE> 72
indirectly, from acquiring control of any other savings association or savings
and loan holding company, without prior approval of the Office 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 Metropolitan 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.
METROPOLITAN 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, Metropolitan 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 Metropolitan
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. Metropolitan 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.
70
<PAGE> 73
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 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 Metropolitan
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
Metropolitan 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
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<PAGE> 74
- 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 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, Metropolitan Bank complied with each of the tangible
capital, the core capital, and the risk-based capital requirements. The
following table presents Metropolitan Bank's regulatory capital position at
December 31, 1998.
<TABLE>
<CAPTION>
PERCENT OF ASSETS
AS DEFINED FOR
AMOUNT EACH 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>
Metropolitan 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
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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 Metropolitan 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);
- "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, Metropolitan 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.
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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.
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 Metropolitan 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.
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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 Metropolitan 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, Metropolitan 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 Metropolitan 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 Metropolitan 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;
- 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
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- 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 Metropolitan 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.
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 Metropolitan Bank.
Savings associations such as Metropolitan Bank are generally taxed in the
same manner as other corporations. For taxable years beginning prior to January
1, 1996, savings associations such as Metropolitan 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.
Metropolitan 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 Metropolitan Bank's actual loss experience, or
a percentage equal to 8% of Metropolitan
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Bank's taxable income, computed with certain modifications and reduced by the
amount of any permitted additions to the reserve for nonqualifying loans.
Metropolitan 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 Metropolitan Bank over a period of several years. Each
year Metropolitan 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 Metropolitan 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. 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 Metropolitan 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, Metropolitan 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, Metropolitan Bank and other includable subsidiaries through
December 31, 1994.
Metropolitan Bank is subject to the Ohio corporate franchise tax. As a
financial institution, Metropolitan Bank computes its franchise tax based on its
net worth. Under this method, Metropolitan 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
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drop to 1.3% for tax years 2000 and thereafter. As an Ohio-chartered savings and
loan association, Metropolitan 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 Metropolitan 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.
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.
LEGAL PROCEEDINGS
Metropolitan 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.
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MANAGEMENT
The following table provides the names of and certain information,
including any positions held with Metropolitan Bank, with respect to the
director nominees for election at Metropolitan's 1999 Annual Meeting and the
directors.
<TABLE>
<CAPTION>
POSITIONS CURRENTLY HELD WITH
DIRECTOR FOR TERM METROPOLITAN AND METROPOLITAN
NOMINEES FOR DIRECTOR AGE SINCE TO EXPIRE BANK
--------------------- --- -------- --------- -------------------------------------
<S> <C> <C> <C> <C>
Malvin E. Bank.................... 68 1991 2002 Secretary, Assistant Treasurer and
Director of Metropolitan and
Secretary and Director of
Metropolitan Bank
Robert M. Kaye.................... 62 1987 2002 Chairman of Metropolitan and Chairman
of Metropolitan Bank
David G. Lodge.................... 59 1991 2002 President, Assistant Secretary,
Assistant Treasurer and Director of
Metropolitan and President and
Director of Metropolitan Bank
David P. Miller................... 66 1992 2002 Treasurer, Assistant Secretary and
Director of Metropolitan and Director
of Metropolitan Bank
</TABLE>
<TABLE>
<CAPTION>
POSITIONS CURRENTLY HELD WITH
DIRECTOR TERM METROPOLITAN AND METROPOLITAN
CONTINUING DIRECTORS AGE SINCE EXPIRING BANK
-------------------- --- -------- --------- -------------------------------------
<S> <C> <C> <C> <C>
Robert R. Broadbent............... 77 1992 2001 Director of Metropolitan and
Metropolitan Bank
Marjorie M. Carlson............... 58 1994 2001 Director of Metropolitan and
Metropolitan Bank
James A. Karman................... 61 1992 2001 Director of Metropolitan and
Metropolitan Bank
Ralph D. Ketchum.................. 72 1991 2001 Director of Metropolitan and
Metropolitan Bank
Lois K. Goodman................... 65 1994 2000 Director of Metropolitan and
Metropolitan Bank
Marguerite B. Humphrey............ 57 1994 2000 Director of Metropolitan and
Metropolitan Bank
Alfonse M. Mattia................. 57 1996 2000 Director of Metropolitan and
Metropolitan Bank
</TABLE>
During the past five years, the business experience of each of the director
nominees, directors and executive officers has been as follows:
NOMINEES
Mr. Bank has served as a Director and as Secretary of Metropolitan and
Metropolitan Bank since 1991. Mr. Bank also serves as Assistant Treasurer of
Metropolitan. Mr. Bank is a senior partner with the Cleveland law firm of
Thompson Hine & Flory LLP. Mr. Bank serves as a Director of Oglebay Norton
Company. Mr. Bank also serves as a Trustee of Case
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Western Reserve University, The Holden Arboretum, Chagrin River Land
Conservancy, Cleveland Center for Research in Child Development, Hanna Perkins
School, and numerous other civic and charitable organizations and foundations.
Mr. Kaye has served as Chairman and Chief Executive Officer of Metropolitan
and Metropolitan Bank since 1987. He has also served as President of Planned
Residential Communities, Inc. since 1960. Planned Residential Communities, Inc.
is actively engaged in every aspect of multifamily housing from new construction
and rehabilitation to acquisition and management. Mr. Kaye serves as a member of
the Board of Directors of Community Bank of New Jersey. He has also been a
member of the Corporate Council of the Cleveland 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.
Mr. Lodge joined Metropolitan in December 1988 as Executive Vice President.
He has served as President of Metropolitan and Metropolitan Bank since August
1991. Mr. Lodge has also served as Director of Metropolitan and Metropolitan
Bank since 1991 and as Assistant Secretary and Assistant Treasurer of
Metropolitan since 1992. Mr. Lodge has served as a Director of University Circle
Incorporated and Vocational Guidance Services since 1994 and became a member of
the Board of Trustees of The Cleveland Playhouse in June 1995.
Mr. Miller has served as a Director of Metropolitan and Metropolitan Bank
since 1992. Mr. Miller also serves as Treasurer and Assistant Secretary of
Metropolitan. Since 1986, Mr. Miller has been the Chairman and Chief Executive
Officer of Columbia National Group, Inc., a Cleveland- based scrap and waste
materials wholesaler and steel manufacturer. He is currently commissioner of the
Ohio Lottery.
CONTINUING DIRECTORS
Mr. Broadbent has served as a Director of Metropolitan and Metropolitan
Bank since 1992. From 1984 to 1989, Mr. Broadbent served as Chairman and Chief
Executive Officer of The Higbee Company, a Cleveland-based clothing and
housewares retailer. Mr. Broadbent served as the Chairman of the Rock and Roll
Hall of Fame Museum, Inc. until May 1994 and is now on the advisory board. Mr.
Broadbent also serves as a Director of PICO Holdings, Inc., as well as a Trustee
of the Murphy Foundation.
Ms. Carlson has served as a Director of Metropolitan and Metropolitan Bank
since 1994. She is the retired Director of Development for the Cleveland
Foundation. Ms. Carlson is a member of the Board of Trustees of the College of
Wooster, the Musical Arts Association and Playhouse Square Foundation.
Ms. Goodman has served as a Director of Metropolitan and Metropolitan Bank
since 1994. Since 1990, she has been President of the Work & Family Consulting
Group, Inc., a consulting service for employers on managing working families.
Ms. Goodman is also a member of the Board of Trustees for the Cleveland Opera,
the Jewish Community Federation, Starting Point and Eldred Theater.
Ms. Humphrey has served as a Director of Metropolitan and Metropolitan Bank
since 1994. Ms. Humphrey developed and implemented workshops for trustee
education for the Cultural Arts Trustee Forum at the Cleveland Mandel Center
from 1992 to 1995. She is a trustee for the American Symphony Orchestra League,
the Cleveland Institute of Music, the Musical Arts Association, Rainbow Babies
and Children's Hospital and the Cleveland Zoological Society.
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Mr. Karman has served as a Director of Metropolitan and Metropolitan Bank
since 1992. Mr. Karman has been affiliated with RPM, Inc. since 1963, and in
1978 he became President of RPM, Inc., a manufacturer of protective coatings,
sealants and specialty chemicals. Mr. Karman serves as a member of the Board of
Directors of RPM, Inc., A. Schulman, Inc. and Shiloh Industries, Inc. Mr. Karman
also serves as a member of the Board of Trustees of the Boys & Girls Club of
Cleveland, Boys Hope, The Western Reserve Historical Society and is a member of
the Corporate Council, Cleveland Museum of Art.
Mr. Ketchum has served as a Director of Metropolitan and Metropolitan Bank
since 1991. Since 1987, Mr. Ketchum has been President of RDK Capital Inc., a
general partner in a partnership formed for the purposes of acquiring and
managing companies serving the aircraft industry. Prior to that time, he was a
Senior Vice President and Group Executive for the General Electric Company,
Lighting Group. Mr. Ketchum is also a member of the Board of Directors of
Oglebay Norton Company, Thomas Industries, Inc. and Lithium Technologies, Inc.
Mr. Mattia has served as a consultant to Metropolitan Bank since 1987 and
as a Director of Metropolitan and Metropolitan Bank since 1996. Mr. Mattia is a
CPA and a founding partner of Amper, Politziner & Mattia, a New Jersey-based
accounting and consulting firm. Mr. Mattia serves on the Assurance Services
Executive Committee of the AICPA and is co-Chairman of the Rutgers University
Family Business Forum. Mr. Mattia also serves as a director of United Heritage
Bank.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Judith L. Zawacki Adam, 44, has been Senior Vice President -- Finance and
Accounting and Chief Financial Officer of Metropolitan Bank since September
1997. Prior to that, Ms. Adam held the position of Vice President -- Finance
with Metropolitan Bank from 1992 to September 1997.
Lloyd W. W. Bell, Jr., 57, has been Senior Vice President -- Chief Lending
Officer of Metropolitan Bank since July 1998. Prior to that, Mr. Bell, Jr. held
the position of Senior Vice President -- Commercial Real Estate with
Metropolitan Bank from 1997 to July 1998. Prior to joining Metropolitan, Mr.
Bell, Jr. was a partner in O'Brien & Bell, an executive search and consulting
firm specializing in financial institutions.
Patrick W. Bevack, 52, has been Executive Vice President of Metropolitan
Bank since May 1992. Mr. Bevack became Treasurer and Assistant Secretary of
Metropolitan Bank in 1993. Prior to joining Metropolitan, Mr. Bevack was
Executive Vice President of TransOhio Savings Bank.
DIRECTOR COMPENSATION
For their services as directors, each member of the Board of Directors of
Metropolitan Bank who is not an employee of Metropolitan or Metropolitan Bank
receives a monthly consulting fee of $1,000, plus a $500 attendance fee for each
meeting of the Board attended. Members of the Board of Directors of Metropolitan
receive no fees for their services.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Organization Committee of Metropolitan's Board of
Directors consists of Messrs. Ketchum (Chair), Bank, Karman and Kaye.
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The law firm of Thompson Hine & Flory LLP, of which Malvin E. Bank is a
partner, provided legal services to Metropolitan in 1998 and during the current
year at costs negotiated in arms-length transactions.
Mr. Kaye, the Chairman of the Board, is the sole stockholder of Planned
Residential Communities, Inc. Planned Residential Communities, Inc. receives a
$96,000 annual fee for providing employee benefit related services and
multifamily property consulting services to Metropolitan.
Several of the directors and executive officers of Metropolitan purchased
10% subordinated notes due December 31, 2001, from Metropolitan during its 1993
private offering. These purchases were made on the same terms and at the same
prices offered to nonaffiliated investors. All of these subordinated notes were
repurchased by Metropolitan on May 22, 1998 with the proceeds of the 8.60%
preferred securities sold during the second quarter of 1998 by Metropolitan
Capital Trust I, including $515,000 and $200,000, in principal amounts, held
respectively by Messrs. Kaye and Ketchum.
CERTAIN TRANSACTIONS
The accounting firm of Amper, Politziner & Mattia, of which Alfonse M.
Mattia is a partner, provided tax services to Metropolitan in 1998 and during
the current year at costs negotiated in arms-length transactions.
As noted above, several of the directors and executive officers of
Metropolitan purchased subordinated notes due December 31, 2001, from
Metropolitan during its 1993 private offering. These purchases were made on the
same terms and at the same prices offered to nonaffiliated investors. All
subordinated notes were repurchased by Metropolitan on May 22, 1998, with the
proceeds of the 8.60% preferred securities sold during the second quarter of
1998 by Metropolitan Capital Trust I, including the following principal amounts:
- $200,000 held by David P. Miller;
- $400,000 jointly held by Metropolitan Bank's 401(k) Plan and the
Planned Residential Communities Management Co. Inc. and Affiliates
401(k) Plan; and
- $200,000 held by the Amper, Politziner & Mattia Profit Sharing
Trust, of which Alfonse M. Mattia is a trustee.
Metropolitan Bank has had banking transactions, including loans, with
Metropolitan's and Metropolitan Bank's directors, officers, stockholders and
associates, and expects these transactions to continue in the future. Those
transactions are in the ordinary course of Metropolitan Bank's business and are
on substantially the same terms, including interest rates and collateral on
loans, prevailing at the time for comparable transactions with other persons.
Those transactions do not involve more than the normal risk of collectability or
present other terms unfavorable to Metropolitan Bank.
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth, as of April 30, 1999, information
concerning shares of common stock beneficially owned by current directors of and
nominees for director of Metropolitan, executive officers included in the
Summary Compensation Table, and all directors, nominees for director and
executive officers of Metropolitan and Metropolitan Bank as a group. Except as
otherwise noted, each beneficial owner listed has sole investment and voting
power with respect to the shares of common stock indicated. The number of shares
of
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common stock owned reflects Metropolitan's completion, on December 29, 1998, of
an eleven-for-ten stock split by way of 10% stock dividend to shareholders of
record as of December 15, 1998.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL AMOUNT AND NATURE OF PERCENT OF
OR PERSONS IN GROUP BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- ----------
<S> <C> <C>
Robert M. Kaye........................... 6,013,997(1) 77.5%
David G. Lodge........................... 31,127(2) *
Malvin E. Bank........................... 16,500 *
David P. Miller.......................... 40,706 *
Ralph D. Ketchum......................... 25,300(3) *
James A. Karman.......................... 7,700 *
Robert R. Broadbent...................... 43,430(4) *
Marjorie M. Carlson...................... 22,000 *
Lois K. Goodman.......................... 18,700(5) *
Marguerite B. Humphrey................... 11,000 *
Alfonse M. Mattia........................ 83,820(6) 1.1%
Judith Z. Adam........................... 2,200 *
Lloyd W. W. Bell, Jr..................... 2,200 *
Patrick W. Bevack........................ 9,350 *
All directors and executive officers as a
group (14 persons)..................... 6,328,030 81.6%
</TABLE>
- ---------------
(1) Total includes 6,600 shares of common stock held by Mr. Kaye as trustee with
sole investment and voting power.
(2) Total includes 2,747 shares of common stock held by Mr. Lodge as custodian
for his children and 3,520 shares of common stock held by Mr. Lodge's
spouse, as to which Mr. Lodge disclaims beneficial ownership.
(3) Total includes 7,700 shares of common stock held by Mr. Ketchum's spouse, as
to which Mr. Ketchum disclaims beneficial ownership.
(4) Total includes 6,050 shares of common stock held by the Broadbent Family
Foundation, of which Mr. Broadbent is Chair.
(5) Total includes 11,000 shares of common stock held by Ms. Goodman's spouse,
as to which Ms. Goodman disclaims beneficial ownership.
(6) Total includes 42,460 shares of common stock held by Mr. Mattia as trustee,
5,610 shares of common stock held by a partnership in which Mr. Mattia is a
partner and 1,100 shares of common stock held by Mr. Mattia's spouse, as to
which Mr. Mattia disclaims beneficial ownership.
* Represents less than 1% of Metropolitan's outstanding shares of common stock.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Except as set forth below, no person is known to Metropolitan at April 30,
1999 to own beneficially within the meaning of the regulations of the Securities
and Exchange Commission, more than 5% of Metropolitan's outstanding common
stock. The shares of
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<PAGE> 86
common stock indicated reflect Metropolitan's completion, on December 29, 1998,
of an eleven-for-ten stock split by way of a 10% stock dividend to shareholders
of record as of December 15, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- ----------
<S> <C> <C>
Robert M. Kaye
6001 Landerhaven Drive
Mayfield Heights, Ohio 44124 6,013,997 77.5%
</TABLE>
CHANGE IN CONTROL
The commercial bank line of credit is a revolving line of credit that
matures on May 30, 1999, but can be renewed annually upon the agreement of both
parties. The maximum permitted borrowing amount is $12 million. As collateral
for the commercial bank line of credit, Mr. Kaye pledged a portion of his common
stock in an amount equal in value to 200% of any outstanding balance. At April
30, 1999, the outstanding balance under the commercial bank line of credit was
$12 million.
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<PAGE> 87
EXECUTIVE COMPENSATION AND OTHER INFORMATION
COMPENSATION TABLE
The following table provides information with respect to compensation
provided by Metropolitan and its subsidiaries during the years ended December
31, 1998, 1997 and 1996, to its chief executive officer and Metropolitan's other
executive officers whose annual salary and bonus exceed $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- ------------
FISCAL YEAR ALL OTHER SECURITIES
NAME AND ENDED COMPEN- UNDERLYING
PRINCIPAL POSITION DECEMBER 31 SALARY BONUS SATION(1) OPTIONS(2)
------------------ ----------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Robert M. Kaye, 1998 $394,465 $ 75,000(3) $5,000 61,600
Chairman of the Board and 1997 351,000 75,000(3) 4,750 363,000
Chief Executive Officer of 1996 295,000 65,000(3) 4,750 --
Metropolitan
David G. Lodge, 1998 269,696 75,000(3) 5,000 28,600
President, Assistant 1997 242,654 75,000(3) 4,750 55,000
Treasurer and
Assistant Secretary of 1996 205,000 65,000 4,750 --
Metropolitan
Patrick W. Bevack, 1998 142,525 277,185 5,000 3,300
Executive Vice President 1997 146,042 39,553 4,750 2,200
of Metropolitan Bank 1996 135,000 7,500 4,750 --
Lloyd W.W. Bell, Jr., 1998 125,654 130,871 -- 5,500
Senior Vice President and 1997 23,077 -- -- 2,200
Chief Lending Officer of -- -- -- -- --
Metropolitan Bank(4)
Judith Z. Adam, 1998 105,482 7,000 4,499 5,500
Senior Vice President and 1997 99,137 6,000 4,205 2,200
Chief Financial Officer of 1996 89,144 4,000 3,726 --
Metropolitan Bank
</TABLE>
- ---------------
(1) Represents Metropolitan Bank's contribution to the Metropolitan Bank and
Trust Company 401(k) Plan.
(2) Share figures are adjusted to reflect Metropolitan's eleven-for-ten stock
split in December, 1998 and two-for-one stock split in December, 1997.
(3) Paid in January in the following year.
(4) Mr. Bell did not join Metropolitan Bank until October 20, 1997.
OPTION GRANTS
The following table provides information regarding grants of options made
during the year ended December 31, 1998, to each of the executive officers named
in the Summary Compensation Table. All option, share and base price figures
reflect Metropolitan's completion, on December 29, 1998, of an eleven-for-ten
stock split by way of 10% stock dividend to shareholders of record as of
December 15, 1998. 50% of the options granted vest on the third anniversary of
the date of their grant, 25% vest on the date of the fourth anniversary, and the
remaining 25% vest on the date of the fifth anniversary of the date of their
grant.
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<PAGE> 88
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR TEN YEAR OPTION TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION --------------------------
NAME GRANTED YEAR ($/SHARE) DATE 5% 10%
---- ---------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Kaye 55,000 47.17% $14.43 05/20/2008 $ 499,122 $ 1,264,874
6,600(1) 5.66 15.87 05/20/2008 50,391 142,281
David G. Lodge 22,000 18.87 14.43 05/19/2008 199,649 505,949
6,600(1) 5.66 14.43 05/19/2008 59,895 151,785
Patrick W. Bevack 3,300(1) 2.83 14.43 05/19/2008 29,947 75,892
Lloyd W.W. Bell, Jr. 5,500(1) 4.72 14.43 05/19/2008 49,912 126,487
Judith Z. Adam 5,500(1) 4.72 14.43 05/19/2008 49,912 126,487
Increase in value to all common shareholders (2) $70,350,485 $178,397,039
</TABLE>
- ---------------
(1) Represents grants of incentive stock options.
(2) Calculated for the total number of shares of common stock outstanding on
December 31, 1998 (7,756,393), at a per share price of $23.50 for 5% annual
10-year price appreciation, and at a per share price of $37.43 for 10%
annual 10-year price appreciation.
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<PAGE> 89
DESCRIPTION OF THE CAPITAL STOCK
GENERAL
Metropolitan has authorized 10,000,000 shares of common stock, no par
value, and 10,000,000 shares of preferred stock, no par value. As of April 30,
1999, Metropolitan had 7,756,393 shares of common stock issued and outstanding,
and no shares of preferred stock issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held by
them on all matters being voted upon the shareholders. Subject to the
preferences of outstanding preferred stock, holders of common stock are entitled
to receive dividends ratably if, as, and when, declared by the Board out of
funds available for the payment of dividends. If Metropolitan is liquidated,
dissolved, or wound up, holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities and liquidation preferences of
any outstanding preferred stock. Holders of common stock have no preemptive
rights and no right to convert their shares of common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
shares of common stock. All outstanding shares of common stock are, and all
shares of common stock to be outstanding upon completion of the offering will
be, fully paid and nonassessable.
PREFERRED STOCK
Without action by the shareholders, the Board may issue up to 5,000,000
shares of Class A preferred stock, without par value, and 5,000,000 shares of
Class B preferred stock, without par value. The Board may issue Class A
preferred stock and Class B preferred stock in one or more series. The Board may
fix the rights, designations, preferences, privileges, qualifications and
restrictions of the shares of Class A preferred stock and Class B preferred
stock. These rights include dividend rights, conversion rights, rights and terms
of redemption, liquidation preferences, and sinking fund terms. Any or all of
these rights may be greater than the rights of the common stock. Without
shareholder approval, the Board can issue Class A preferred stock and Class B
preferred stock with voting, conversion, and other rights. These rights could
adversely affect the voting power and other rights of the holders of common
stock, such as their rights to receive dividend payments or payments upon
liquidation. Holders of Class A preferred stock would be entitled to one vote
per share for each share of Class A preferred stock held by them. Holders of
Class B preferred stock would not be entitled to vote upon matters presented to
the shareholders except in limited circumstances. The Board could issue Class A
preferred stock and Class B preferred stock quickly with terms calculated to
delay, deter, or prevent a change in control of Metropolitan or to make removal
of management more difficult, without any further action by the shareholders.
This type of issuance could decrease the market price of the common stock.
Metropolitan has no present plans to issue any Class A preferred stock or Class
B preferred stock.
POTENTIAL ANTITAKEOVER EFFECTS OF ARTICLES OF INCORPORATION, CODE OF REGULATIONS
AND OHIO LAW
As an Ohio corporation, Metropolitan is subject to Ohio laws which may
discourage or make more difficult an unsolicited takeover of Metropolitan. One
of these laws generally
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<PAGE> 90
prohibits any person who owns 10% or more of a corporation's stock from engaging
in a merger, consolidation, majority share acquisition, asset sale, loan or
other similar transaction with the corporation for a period of three years after
such person becomes a 10% or more shareholder. These transactions are permitted
only if the corporation's board of directors first approves the transaction
which results in the person owning 10% or more of the corporation's stock. If
the acquiring person does not obtain this approval, that person must wait until
the three-year waiting period expires. After the three-year waiting period, the
10% shareholder can complete the transaction only if, among other things:
- approval is received from two-thirds of all voting shares of the
corporation and from a majority of shares of the corporation excluding
shares held by the 10% shareholder or certain affiliated persons; or
- the transaction meets certain criteria designed to ensure fairness to all
remaining shareholders.
In addition, under Ohio law, a person can acquire shares entitling that
person to exercise (a) one-fifth or more, (b) one-third or more, or (c) a
majority of voting power of a corporation only with prior authorization. The
acquirer must obtain this authorization from:
- the holders of at least a majority of the total voting power of the
corporation; and
- the holders of at least a majority of the total voting power of the
corporation excluding the acquirer, officers of the corporation elected
or appointed by the directors, directors of the corporation who are also
employees, and certain shares that are transferred after the announcement
of the proposed acquisition and prior to the vote with respect to the
proposed acquisition.
Upon completion of the offering, Mr. Kaye will own approximately 74.6% of
Metropolitan's outstanding common stock (74.2% if Ryan, Beck & Co.'s
over-allotment option is exercised in full). As a result, an acquisition by a
third party requiring prior authorization will not be possible unless Mr. Kaye
votes in favor of such acquisition.
Certain provisions of Metropolitan's Code of Regulations may deter hostile
takeovers or delay or prevent changes in control or management of Metropolitan.
Specifically, Metropolitan's Regulations require a shareholder to give
Metropolitan advance notice if that shareholder desires to present a proposal or
director nomination at any annual meeting of shareholders. The Regulations also
provide that a majority of the directors in office, although less than a quorum,
may fill vacancies created by an increase in the size of the Board of Directors.
However, holders of a majority of Metropolitan's voting stock may fill vacancies
resulting from an increase in the size of the Board due to action by the
shareholders. In addition, Metropolitan's Regulations require the holders of at
least 75% of the voting stock to approve any amendment to certain provisions of
the Regulations. These provisions relate to the number and classification of
directors, filling of Board vacancies, the removal of directors, advance notice
of shareholder proposals, and nominations.
Similarly, the provisions in the Articles of Incorporation classifying the
Board of Directors and giving the Board of Directors the ability to issue
preferred stock may deter hostile takeovers or delay or prevent changes in
control or management of Metropolitan.
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<PAGE> 91
DESCRIPTION OF THE PREFERRED SECURITIES
The following is a summary of the material terms and provisions of the
preferred securities. This summary is not complete and is subject to, and
qualified in its entirety by reference to, the trust agreement (the "Trust
Agreement") among Metropolitan, as depositor, Wilmington Trust Company, as
property trustee (the "Property Trustee") and the administrative trustees of
Trust II (the "Administrative Trustees"), and the Trust Indenture Act.
Metropolitan has filed the form of the trust agreement as an exhibit to the
registration statement of which this prospectus is a part. Unless we indicate
otherwise, all references to Metropolitan appearing under this caption
"Description of the Preferred Securities" and under the caption "Description of
the Junior Subordinated Debentures" mean Metropolitan Financial Corp. excluding
its consolidated subsidiaries.
DISTRIBUTIONS
The preferred securities represent preferred undivided beneficial interests
in the assets of Trust II. Trust II will pay preferential cumulative cash
distributions ("Distributions") on the preferred securities at the annual rate
of 9.50% of the stated liquidation amount of $10. The Trust will pay the
dividends quarterly in arrears on March 31, June 30, September 30 and December
31 of each year, to the holders of the preferred securities on the relevant
record dates. The record date will be the 15th day of the month in which the
relevant Distribution payment date occurs. Distributions will accumulate from
the date of the initial issuance of the preferred securities and are cumulative.
The first Distribution payment date for the preferred securities will be June
30, 1999. The Trust will compute the amount of Distributions payable for any
period on the basis of a 360-day year of twelve thirty-day months. If
Distributions on the preferred securities are payable on a date that is not a
business day, Trust II will pay such Distributions on the next day that is a
business day. Trust II will not pay any additional Distributions or other
payment as a result of the delay. If, however, that business day is in the next
calendar year, Trust II will make such payment on the immediately preceding
business day. That payment will have the same force and effect as if it were
made on the date the payment was originally payable (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). A "business day" means any day other than a Saturday or a Sunday, or a
day on which banking institutions in the City of New York are authorized or
required by law or executive order to remain closed or a day on which the
principal corporate trust office of the Property Trustee or the trustee under
the Indenture (the "Indenture") between Metropolitan and Wilmington Trust
Company, as trustee, is closed for business.
If Metropolitan is not in default, it may, under the Indenture, defer the
payment of interest on the junior subordinated debentures at any time or from
time to time for a period not exceeding 20 consecutive quarters with respect to
each deferral period (each, an "Extension Period"). No Extension Period may
extend beyond the stated maturity date of the junior subordinated debentures. As
a result of any deferral of interest, Trust II will defer quarterly
Distributions on the preferred securities during the Extension Period.
Distributions to which holders of the preferred securities are entitled will
accumulate additional Distributions at the rate per annum of 9.50%, compounded
quarterly from the relevant payment date for such Distributions. The term
"Distributions" as used in this prospectus includes any such additional
Distributions.
The terms of the Indenture limit Metropolitan's ability to make certain
payments during any Extension Period. Metropolitan may not make any payment of
principal, interest or
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<PAGE> 92
premium, if any, on or repay, repurchase or redeem, any debt securities of
Metropolitan that rank equal in priority with or junior in right of payment to
the junior subordinated debentures. Metropolitan may not make any guarantee
payments under any guarantee by Metropolitan of the debt securities of any of
its subsidiaries if such guarantee ranks equal in priority with or junior in
right of payment to the junior subordinated debentures other than payments
pursuant to the preferred securities guarantee agreement. Metropolitan may not
declare or pay any dividends or distributions on, or redeem, purchase, acquire
or make a liquidation payment relating to, any of Metropolitan's capital stock
other than:
- the reclassification of any class of Metropolitan's capital stock into
another class of capital stock;
- dividends or distributions payable in shares of common stock of
Metropolitan;
- any declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the issuance of shares under any such plan
in the future or the redemption or repurchase of any such rights pursuant
thereto;
- payments under the guarantee; and
- purchases of shares of common stock related to the issuance of shares of
common stock or rights under any of Metropolitan's benefit plans for its
directors, officers or employees.
Additionally, during any Extension Period, Metropolitan may not redeem,
purchase or acquire less than all the outstanding junior subordinated debentures
or any of the preferred securities.
During any Extension Period, interest would continue to accrue and holders
of the preferred securities would be required to accrue interest income for
United States federal income tax purposes, even though such holders would not
receive current cash distributions with which to pay tax, if any, arising with
respect to such accrued interest income. See "Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
Before the termination of any Extension Period, Metropolitan may further
defer the payment of interest on the junior subordinated debentures if no
Extension Period exceeds twenty consecutive quarters or extends beyond the
stated maturity date of the junior subordinated debentures. Upon the termination
of any such Extension Period and the payment of all accrued and unpaid interest
(together with interest thereon at the rate of 9.50%, compounded quarterly, to
the extent permitted by law), Metropolitan may begin a new Extension Period.
There is no limitation on the number of times that Metropolitan may begin an
Extension Period. See "Description of the Junior Subordinated
Debentures -- Right to Defer Interest Payment Obligation" and "Federal Income
Tax Consequences -- Interest Income and Original Issue Discount."
The Trust will invest the proceeds from the issuance and sale of its common
securities and the preferred securities in the junior subordinated debentures.
The revenue available for distribution to holders of Trust II's preferred
securities will be limited to payments under the junior subordinated debentures.
See "Description of the Junior Subordinated Debentures." If Metropolitan does
not make interest payments on the junior subordinated debentures, the Property
Trustee (as defined herein) will not have funds available to pay Distributions
on the preferred securities. Metropolitan will guarantee the payment of
Distributions on a limited basis as described in this prospectus under
"Description of the Guarantee."
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<PAGE> 93
Metropolitan has no current intention of deferring payments of interest on
the junior subordinated debentures.
SUBORDINATION OF TRUST II'S COMMON SECURITIES
Trust II will pay Distributions on, and the Redemption Price (as defined
herein) of, its common securities and the preferred securities, as applicable,
pro rata based on their liquidation amount. However, in general, if Metropolitan
is in default under the Indenture on any Distribution Date or Redemption Date,
Trust II will not make any Distribution on, or pay the Redemption Price of, any
of its common securities, or make any other payment on account of the
redemption, liquidation or other acquisition of its common securities. In the
event of such a default, Trust II may make such payments only under limited
circumstances. In the case of payment of Distributions, Trust II must make
payment in full in cash of all accumulated and unpaid Distributions on all of
the outstanding preferred securities for all Distribution periods terminating on
or prior to the relevant date. In the case of payment of the Redemption Price,
Trust II must pay the full amount of the Redemption Price on all of the
outstanding preferred securities then called for redemption. In addition, the
Property Trustee must first apply all available funds to the payment in full in
cash of all Distributions on, or Redemption Price of, the preferred securities
then due and payable.
If an event of default occurs under the Trust Agreement as a result of an
event of default under the Indenture, Metropolitan, as holder of Trust II's
common securities, will be deemed to have waived any right to act with respect
to any such event of default under the Trust Agreement until the effect of all
such defaults with respect to the preferred securities are cured, waived or
otherwise eliminated. Until all such events of default under the Trust Agreement
are cured, waived or otherwise eliminated, the Property Trustee will act solely
on behalf of the holders of the preferred securities and not on behalf of
Metropolitan as holder of Trust II's common securities, and only the holders of
the preferred securities will be able to direct the Property Trustee to act on
their behalf.
REDEMPTION
The preferred securities are subject to mandatory redemption, in whole or
in part, upon repayment of the junior subordinated debentures at their stated
maturity date or earlier redemption as provided in the Indenture. The Property
Trustee will apply the proceeds from the repayment or redemption to redeem
preferred securities with a liquidation value equal to the principal amount of
the junior subordinated debentures so redeemed. The Property Trustee will give
not less than thirty nor more than sixty days' notice before the date fixed for
repayment or redemption. The Property Trustee will redeem the preferred
securities at a redemption price equal to the aggregate liquidation amount of
the preferred securities plus accumulated and unpaid Distributions thereon (the
"Redemption Price") to the date of redemption (the "Redemption Date"). For a
description of the stated maturity and redemption provisions of the junior
subordinated debentures see "Description of the Junior Subordinated
Debentures -- General" and "-- Redemption or Exchange."
Metropolitan may redeem the junior subordinated debentures before maturity
on or after June 30, 2004, in whole at any time, or in part from time to time.
As a result, Metropolitan can cause a mandatory redemption of an equivalent
liquidation value of the preferred securities. Any time that a Tax Event, an
Investment Company Event or a Capital Treatment Event (each as defined herein)
occurs and continues, Metropolitan may redeem the junior subordinated debentures
in whole but not in part. As a result, Metropolitan can cause a
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<PAGE> 94
mandatory redemption of the preferred securities in whole but not in part. Any
redemption before the stated maturity date of the junior subordinated debentures
will be subject to prior regulatory approval, if then required, under applicable
capital guidelines or regulatory policies, and the restrictions in the 1995
Notes Indenture. See "Description of the Junior Subordinated
Debentures -- Redemption or Exchange" and "Description of the 1995 Notes."
REDEMPTION PROCEDURES
The Trust will redeem preferred securities at the Redemption Price by using
proceeds from the contemporaneous redemption of a liquidation value equal to the
principal amount of the junior subordinated debentures. The Trust will redeem
the preferred securities and pay the Redemption Price on each Redemption Date
only to the extent that Trust II has funds on hand available for the payment of
the Redemption Price.
If Trust II gives a notice of redemption relating to the preferred
securities, then, by 10:00 a.m., New York City time, on the Redemption Date, the
Property Trustee will deposit irrevocably with Depository Trust Company ("DTC")
funds sufficient to pay the applicable Redemption Price. The Property Trustee
will also give DTC irrevocable instructions and authority to pay the Redemption
Price to holders when the holders surrender their certificates evidencing the
preferred securities. Despite any redemption, Trust II will make Distributions
payable on or before the Redemption Date for the preferred securities being
redeemed to recordholders of the preferred securities on the relevant record
dates. If Trust II has given a notice of redemption and deposited funds, then,
upon the date of such deposit, all rights of the holders of preferred securities
being redeemed will terminate, except for their right to receive the Redemption
Price without interest. In addition, upon the date of such deposit, such
preferred securities will cease to be outstanding.
If any date fixed for redemption of the preferred securities is not a
business day, Trust II will pay the Redemption Price on the next day which is a
business day. The Trust will not pay any interest or other payment as a result
of such delay. If that business day falls in the next calendar year, Trust II
will make the payment on the immediately preceding business day. If either Trust
II or Metropolitan improperly withholds or refuses to pay the Redemption Price
on the preferred securities being redeemed, under the guarantee, the
Distributions on the preferred securities will continue to accrue. These
Distributions will accrue at the then applicable rate, from the Redemption Date
originally established by Trust II for such preferred securities to the date
such Redemption Price is actually paid. See "Description of the Guarantee."
Under such circumstances, the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price.
Subject to applicable law, Metropolitan or its subsidiaries may at any time
and from time to time purchase outstanding preferred securities by private
agreement.
Payment of the Redemption Price on the preferred securities and any
distribution of the junior subordinated debentures to holders of the preferred
securities will be made to the recordholders as they appear on the register for
the preferred securities on the relevant record date. The relevant record date
will be one business day before the relevant Redemption Date. However, in the
event the preferred securities do not remain in book entry form, the relevant
record date will be the date at least 15 days before the Redemption Date or
liquidation date, as applicable.
If Trust II redeems less than all of its common securities and the
preferred securities on a Redemption Date, then the aggregate liquidation amount
of Trust II's common securities
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<PAGE> 95
and preferred securities to be redeemed will be allocated pro rata to its common
securities and the preferred securities based upon the relative liquidation
amounts of such classes. The Property Trustee will select the particular
preferred securities to be redeemed within 60 days of the Redemption Date, or,
if the preferred securities are then held in the form of a global preferred
security, in accordance with DTC's customary procedures. The Property Trustee
will promptly notify the trust registrar in writing of the preferred securities
selected for redemption and, in the case of any preferred securities selected
for partial redemption, the liquidation amount to be redeemed. For all purposes
of the Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of the preferred securities will relate, in the case
of the preferred securities redeemed or to be redeemed only in part, to the
portion of the aggregate liquidation amount of the preferred securities which
has been or is to be redeemed.
The Trustee will mail notice of any redemption at least thirty but not more
than sixty days before the Redemption Date to each holder of the preferred
securities to be redeemed at its registered address. Unless Metropolitan
defaults in payment of the Redemption Price on the junior subordinated
debentures, interest will cease to accrue, on and after the Redemption Date, on
the junior subordinated debentures or portions those debentures called for
redemption.
LIQUIDATION OF TRUST II AND DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
TO HOLDERS
Metropolitan may at any time dissolve Trust II. After satisfaction of the
liabilities of creditors of Trust II as provided by law, Metropolitan may cause
junior subordinated debentures to be distributed to the holders of the preferred
securities and Trust II's common securities in exchange for those securities
upon liquidation of Trust II.
After the liquidation date for any distribution of the junior subordinated
debentures for preferred securities, those preferred securities will no longer
be deemed to be outstanding. DTC or its nominee, as the registered holder of
preferred securities, will receive a registered global certificate or
certificates representing the junior subordinated debentures to be delivered
upon the distribution with respect to preferred securities held by DTC or its
nominee. Any certificates representing the preferred securities not held by DTC
or its nominee will be deemed to represent junior subordinated debentures having
a principal amount equal to the stated liquidation amount of the preferred
securities and bearing accrued and unpaid interest in an amount equal to the
accumulated and unpaid Distributions on such series of the preferred securities
until such certificates are presented to the Administrative Trustees or their
agent for transfer or reissuance.
Under United States federal income tax law and interpretations, a
distribution of the junior subordinated debentures should not be a taxable event
to holders of the preferred securities. However, if there is a change in law, a
change in legal interpretation, a Tax Event or other circumstances, the
distribution could be a taxable event to holders of the preferred securities.
See "Federal Income Tax Consequences -- Distribution of the Junior Subordinated
Debentures to Holders of the Preferred Securities."
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LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Trust Agreement, Trust II will automatically dissolve at
the end of its term. Trust II will also dissolve if any of the following events
occurs:
- the entry of an order for the dissolution of Trust II by a court of
competent jurisdiction;
- certain events of bankruptcy, dissolution or liquidation of Metropolitan,
subject in certain instances to any such event remaining in effect for a
period of ninety consecutive days;
- the distribution of a liquidation value equal to the principal amount of
the junior subordinated debentures to the holders of its preferred
securities, if Metropolitan, as depositor, has given written direction to
the Property Trustee to dissolve Trust II (which direction is optional
and wholly within the discretion of Metropolitan, as depositor); and
- redemption of all of the preferred securities as described under
"-- Redemption."
If an early dissolution occurs as described in one of the first three
clauses listed above, the Trust II trustees will liquidate Trust II as quickly
as possible by first satisfying the liabilities to creditors of Trust II, if
any, as provided by law, and then by distributing to the holders of the
preferred securities an equivalent liquidation value of the junior subordinated
debentures. If the Administrative Trustees determine this distribution is not
practical, after satisfaction of liabilities to creditors of Trust II, if any,
as provided by law, holders of the preferred securities will receive out of the
assets of Trust II available for distribution to holders, an amount equal to the
liquidation amount plus accrued and unpaid Distributions to the date of payment
(such amount being the "Liquidation Distribution"). If the Liquidation
Distribution can be paid only in part because Trust II has insufficient assets
available to pay the Liquidation Distribution in full, then Trust II will pay
the amounts due on a pro rata basis. Metropolitan, as the holder of Trust II's
common securities, will receive distributions upon any such liquidation pro rata
with the holders of the preferred securities. However, if Metropolitan is in
default under the Indenture, the preferred securities will have a priority over
Trust II's common securities with respect to any such distributions.
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement (an "Event of Default") with respect to the preferred securities
and Trust II's common securities issued under the Trust Agreement. Each event
constitutes an Event of Default regardless of the reason for the Event of
Default and whether it is voluntary or involuntary or effected by operation of
law or pursuant to any judgment, decree or order of any court or any order, rule
or regulation of any administrative or governmental body:
- the occurrence of an event of default under the Indenture (see
"Description of the Junior Subordinated Debentures -- Debenture Events of
Default"); or
- default in the payment of any Distribution when it becomes due and
payable, and the continuation of the default for a period of 30 days; or
- default in the payment of any Redemption Price when it becomes due and
payable; or
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- default in the performance, or breach, in any material respect, of any
covenant or warranty of any trustee under the Trust Agreement (other than
a covenant or warranty a default in the performance of which or the
breach of which is dealt with in the clauses listed above), and
continuation of such default or breach for a period of 60 days after
there has been given, by registered or certified mail, to the defaulting
trustee or trustees by the holders of at least 25% in aggregate
liquidation amount of the outstanding preferred securities, a written
notice specifying such default or breach and requiring it to be remedied
and stating that such notice is a "Notice of Default" under the Trust
Agreement; or
- the occurrence of certain events of bankruptcy or insolvency with respect
to the Property Trustee and the failure by Metropolitan to appoint a
successor Property Trustee within 60 days of such event of bankruptcy or
insolvency.
Within 90 days after the occurrence of any Event of Default actually known
to the Property Trustee, the Property Trustee will send notice of the Event of
Default to the holders of the preferred securities, the Administrative Trustees
and Metropolitan, as depositor, unless the Event of Default has been cured or
waived. Metropolitan, as depositor, and the Administrative Trustees are required
to file annually with the Property Trustee a certificate stating whether or not
they are in compliance with all the conditions and covenants applicable to them
under the Trust Agreement.
If an event of default under the Indenture has occurred and is continuing,
the preferred securities will have a preference over Trust II's common
securities as described above. See "-- Subordination of Trust II's Common
Securities." The holders of the preferred securities cannot accelerate the
payment of the preferred securities due to an event of default.
REMOVAL OF TRUST II TRUSTEES
Unless an event of default under the Indenture has occurred and is
continuing, the holder of Trust II's common securities may remove any trustee
under the Trust Agreement at any time. If an event of default under the
Indenture has occurred and is continuing, the holders of a majority in
liquidation amount of the outstanding preferred securities may remove the
Property Trustee at such time. The holders of the preferred securities will not
have the right to vote to appoint, remove or replace the Administrative
Trustees. The voting rights of the Administrative Trustees are vested
exclusively in Metropolitan as the holder of Trust II's common securities. No
resignation or removal of any trustee under the Trust Agreement and no
appointment of a successor trustee will be effective until the successor trustee
accepts its appointment in accordance with the provisions of the Trust
Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default has occurred and is continuing, for the purpose
of meeting the legal requirements of the Trust Indenture Act, if applicable, or
of any jurisdiction where part of the property and assets of Trust II are
located, Metropolitan, as the holder of Trust II's common securities, may
appoint one or more persons either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of that Trust Property, or to act as
separate trustee of any of that property. The co-trustee or separate trustee
will have the powers described in the instrument of appointment. Metropolitan
may vest in the person or persons in such capacity any property, title, right or
power deemed necessary or desirable, subject to
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the provisions of the Trust Agreement. If an event of default under the
Indenture has occurred and is continuing, the Property Trustee alone may make
the appointment.
MERGER OR CONSOLIDATION OF THE PROPERTY TRUSTEE
Provided such entity shall be otherwise qualified and eligible, the
successor of the Property Trustee under the Trust Agreement will be:
- Any entity into which the trustee that is not a natural person may be
merged or converted,
- Any entity with which the trustee may be consolidated,
- Any entity resulting from any merger, conversion or consolidation to
which the trustee will be a party, or
- Any entity succeeding to all or substantially all the corporate trust
business of the trustee.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF TRUST II
Trust II may not merge with or into, consolidate, amalgamate, be replaced
by, convey, transfer or lease its properties and assets substantially as an
entirety to any entity or other person, except as described below or as
otherwise described in the Trust Agreement. Trust II may, at the request of
Metropolitan, with the consent of the Administrative Trustees and without the
consent of the holders of the preferred securities or the Property Trustee,
merge with or into, consolidate, amalgamate, be replaced by, convey, transfer or
lease its properties and assets substantially as an entirety to, a trust
organized as such under the laws of any state if certain conditions are met.
These conditions are:
- the successor entity either (a) expressly assumes all of the obligations
of Trust II with respect to the preferred securities or (b) substitutes
for the preferred securities other securities having substantially the
same terms as the preferred securities (the "Successor Securities") so
long as the Successor Securities rank the same as the preferred
securities in priority with respect to Distributions and payments upon
liquidation, redemption and otherwise,
- Metropolitan expressly appoints a trustee of the successor entity
possessing the same powers and duties as the Property Trustee as the
holder of the junior subordinated debentures,
- the Successor Securities are registered or listed, or any Successor
Securities will be registered or listed upon notification of issuance, on
any national securities exchange or other organization on which the
preferred securities are then registered or listed (including, if
applicable, the Nasdaq Stock Market's National Market), if any,
- such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the preferred securities (including any
Successor Securities) to be downgraded by any nationally recognized
statistical rating organization,
- the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the preferred securities (including any
Successor Securities) in any material respect,
- the successor entity has a purpose substantially identical to that of
Trust II,
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- before the transaction, Metropolitan receives an opinion from independent
counsel experienced in such matters to the effect that (a) the
transaction does not adversely affect the rights, preferences and
privileges of the holders of the preferred securities (including any
Successor Securities) in any material respect and (b) following the
transaction, neither Trust II nor such successor entity will be required
to register as an investment company under the Investment Company Act of
1940, as amended (the "Investment Company Act"), and
- Metropolitan or any permitted successor or assignee owns all of the
common securities or its equivalent of the successor entity and
guarantees the obligations of the successor entity under the Successor
Securities at least to the extent provided by the guarantee.
Even if these conditions are met, if the consolidation, amalgamation,
merger, replacement, conveyance, transfer or lease would cause Trust II or the
successor entity to be classified as other than a grantor trust for United
States federal income tax purposes, Trust II will not enter into such
transaction without the consent of holders of 100% in liquidation amount of the
preferred securities.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the preferred securities will have no voting
rights.
The Trust Agreement may be amended from time to time by Metropolitan, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the preferred securities:
- with respect to acceptance of appointment of a successor trustee,
- to cure any ambiguity, correct or supplement any provisions in the Trust
Agreement that may be inconsistent with any other provision or to make
any other provisions with respect to matters or questions arising under
the Trust Agreement, which will not be inconsistent with the other
provisions of the Trust Agreement, or
- to modify, eliminate or add to any provisions of the Trust Agreement to
the extent necessary to ensure that Trust II will be classified for
United States federal income tax purposes as a grantor trust at all times
that the preferred securities are outstanding or to ensure that Trust II
will not be required to register as an "investment company" under the
Investment Company Act.
If Metropolitan, the Property Trustee and the Administrative Trustees amend
the Trust Agreement to cure an ambiguity, the action may not adversely affect in
any material respect the interests of any holder of the preferred securities.
Any amendments of the Trust Agreement described above will become effective when
notice of the amendment is given to the holders of the preferred securities.
The Trust Agreement may be amended by the Trust trustees and Metropolitan
with:
- the consent of holders representing not less than a majority (based upon
liquidation amounts) of the outstanding preferred securities, and
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- receipt by the Trust II trustees of an opinion of counsel to the effect
that such amendment or the exercise of any power granted to the Trust II
trustees in accordance with such amendment will not affect Trust II's
status as a grantor trust for United States federal income tax purposes
or Trust II's exemption from status as an "investment company" under the
Investment Company Act.
Some of the provisions in the Trust Agreement may not be amended without
the consent of each affected holder of the preferred securities. Consent is
required to amend the Trust Agreement to:
- change the amount or timing of any Distribution on the preferred
securities or otherwise adversely affect the amount of any Distribution
required to be made in respect of the preferred securities as of a
specified date, and
- restrict the right of a holder of the preferred securities to institute
suit for the enforcement of any such payment on or after such date.
If the junior subordinated debentures are held by the Property Trustee, the
Trust II trustees will not take any of the following actions without obtaining
the prior approval of the holders of a majority in aggregate liquidation amount
of all outstanding preferred securities:
- direct the time, method and place of conducting any proceeding for any
remedy available to the trustee under the Indenture or executing any
trust or power conferred on the Property Trustee with respect to the
junior subordinated debentures,
- waive any past default that is waivable under the Indenture,
- exercise any right to rescind or annul a declaration that the principal
of all the junior subordinated debentures will be due and payable, or
- consent to any amendment, modification or termination of the Indenture or
the junior subordinated debentures, where such consent is required.
If a consent under the Indenture would require the consent of each holder
of the junior subordinated debentures affected by the actions described above,
the Property Trustee will not give that consent without the prior consent of
each holder of the preferred securities. The Trust trustees will not revoke any
action previously authorized or approved by a vote of the holders of the
preferred securities except by subsequent vote of the holders of the preferred
securities. The Property Trustee will notify each holder of the preferred
securities of any notice of default with respect to the junior subordinated
debentures. In addition to obtaining the approval of the holders of the
preferred securities, before taking any of the foregoing actions, Trust II
trustees will obtain an opinion of counsel experienced in such matters to the
effect that Trust II will not be classified as an association taxable as a
corporation for United States federal income tax purposes on account of such
action.
Any required approval of holders of the preferred securities may be given
at a meeting of holders of the preferred securities called for such purpose or
by written consent. The Property Trustee will cause a notice of any meeting at
which holders of the preferred securities are entitled to vote to be given to
each holder of record of the preferred securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of the preferred securities will be
required for Trust II to redeem and cancel the preferred securities in
accordance with the Trust Agreement.
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Notwithstanding that holders of the preferred securities are entitled to
vote or consent under any of the circumstances described above, any of the
preferred securities that are owned by Metropolitan, the Trust II trustees or
any affiliate of Metropolitan or the Trust II trustees will, for purposes of
such vote or consent, be treated as if they were not outstanding.
LIQUIDATION VALUE
The amount payable on the preferred securities in the event of any
liquidation of Trust II is $10 per preferred security plus accumulated and
unpaid Distributions. This amount may be paid in the form of a distribution in
junior subordinated debentures, subject to certain exceptions. See
"-- Liquidation Distribution Upon Dissolution."
EXPENSES AND TAXES
In the Indenture, Metropolitan, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the preferred securities) and
all costs and expenses of Trust II including costs and expenses relating to the
organization of Trust II, the fees and expenses of the trustees under the Trust
Agreement and the costs and expenses relating to the operation of Trust II.
Metropolitan has also agreed to pay any and all taxes and all costs and expenses
with respect thereto (other than United States withholding taxes) to which Trust
II might become subject. These obligations of Metropolitan under the Indenture
are for the benefit of, and will be enforceable by, any person to whom any such
debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or
not that Creditor has received notice thereof. Any Creditor may enforce the
obligations of Metropolitan directly against Metropolitan. Metropolitan has
irrevocably waived any right or remedy to require that a Creditor take any
action against Trust II or any other person before proceeding against
Metropolitan. Metropolitan has also agreed in the Indenture to execute any
additional agreements necessary or desirable to give full effect to the
foregoing.
BOOK ENTRY, DELIVERY AND FORM
The Trust will issue the preferred securities in the form of one or more
fully registered global securities. The global securities will be deposited
with, or on behalf of, DTC and registered in the name of DTC's nominee. Unless
and until a global security is exchangeable in whole or in part for the
preferred securities in definitive form, the global security may not be
transferred except as a whole by:
- DTC to a nominee of DTC;
- a nominee of DTC to DTC or another nominee of DTC; or
- DTC or any such nominee to a successor of such depository or a nominee of
such successor.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with DTC or its nominee ("Participants") or persons
that may hold interests through Participants. Metropolitan expects that, when a
global security is issued, DTC will credit, on its book-entry registration and
transfer system, the Participants' accounts with their respective principal
amounts of the preferred securities represented by the global security.
Ownership of beneficial interests in the global security will be shown on, and
the transfer of such ownership interests will be effected only through, records
maintained by DTC (with respect to interests of Participants) and on the records
of Participants (with respect to
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interests of persons held through Participants). Beneficial owners will not
receive written confirmation from DTC of their purchase. However, Metropolitan
expects the beneficial owner to receive written confirmations from the
Participants through which the beneficial owner entered into the transaction.
Transfers of ownership interests will be accomplished by entries on the books of
Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the preferred securities represented by the global security
for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a global security will not be entitled to receive
physical delivery of the preferred securities in certificated form and will not
be considered the owners or holders of the preferred securities under the
Indenture. Accordingly, to exercise any rights of a holder of preferred
securities under the Indenture, each person owning a beneficial interest in such
a global security must rely on the procedures of DTC and, if such person is not
a Participant, on the procedures of the Participant through which such person
owns its interest. Metropolitan understands that, under DTC's existing
practices, if Metropolitan requests any action of holders, or an owner of a
beneficial interest in such a global security desires to take any action which a
holder is entitled to take under the Indenture, DTC would authorize the
Participants holding the relevant beneficial interests to take such action. In
turn, those Participants would authorize beneficial owners owning through the
Participants to take the action or would otherwise act upon the instructions of
beneficial owners owning through them. Redemption notices will also be sent to
DTC. If less than all of the preferred securities are being redeemed,
Metropolitan understands that it is DTC's existing practice to determine by lot
the amount of the interest of each Participant to be redeemed.
Trust II will make Distributions on the preferred securities registered in
the name of DTC or its nominee to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such preferred securities.
None of Metropolitan, the Trust II trustees, any Paying Agent (as defined
herein) or any other agent of Metropolitan or the Trust II trustees will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such preferred securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests. DTC will
be responsible for the Disbursements of Distributions to Participants. DTC's
practice is to credit Participants' accounts on a payable date in accordance
with their respective holdings shown on DTC's records unless DTC believes that
it will not receive payment on the payable date. Standing instructions and
customary practices will govern payments by Participants to beneficial owners,
as is the case with securities held for the accounts of customers in bearer form
or registered in "street name." The Participants will be responsible for such
payments, not DTC, Metropolitan, the Trust II trustees, the Paying Agent or any
other agent of Metropolitan, subject to any statutory or regulatory requirements
as may be in effect from time to time.
DTC may discontinue providing its services as securities depository with
respect to the preferred securities at any time by giving reasonable notice to
Metropolitan or the Trust II trustees. If DTC notifies Metropolitan or the Trust
II trustees that it is unwilling to continue as depository, or if it is unable
to continue or ceases to be a clearing agency registered under the Securities
Exchange Act of 1934 and a successor depository is not appointed by Metropolitan
within ninety days after receiving such notice or becoming aware that DTC is no
longer so registered, Metropolitan will issue the preferred securities in
definitive form
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upon registration of transfer of, or in exchange for, a global security. In
addition, Trust II may, at any time and in its sole discretion, determine not to
have the preferred securities represented by one or more global securities.
Under these and certain other circumstances, Metropolitan will issue preferred
securities in definitive form in exchange for all of the global securities
representing such preferred securities.
DTC has advised Metropolitan and Trust II of the following information. DTC
is a limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Securities and Exchange Act of
1934. DTC was created to hold securities for its Participants and to facilitate
the clearance and settlement of securities transactions between Participants
through electronic book entry changes to accounts of its Participants. The use
of electronic book entry changes eliminates the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include other organizations. Some of
the Participants (or their representatives), together with other entities, own
DTC. Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through, or maintain a custodial
relationship with, a Participant, either directly or indirectly.
The information in this section concerning DTC and book-entry systems has
been obtained from sources that Metropolitan and Trust II believe to be
reliable. However, neither Metropolitan nor Trust II take responsibility for the
accuracy of this information.
PAYMENT AND PAYING AGENCY
DTC will credit payments in respect of the preferred securities to the
relevant accounts at DTC on the applicable Distribution Dates. If the preferred
securities are not held by DTC, the Paying Agent will make such payments by
check mailed to the address of the holder entitled to such payments at the
address appearing on the securities register for the preferred securities and
Trust II's common securities. The initial paying agent (the "Paying Agent") will
be the Property Trustee and any co-Paying Agent chosen by the Property Trustee
and acceptable to the Administrative Trustees. The Paying Agent may resign as
Paying Agent upon thirty days' written notice to the Trust II trustees. If the
Property Trustee is no longer the Paying Agent, the Property Trustee will
appoint a successor to act as Paying Agent. The successor must be a bank or
trust company reasonably acceptable to the Administrative Trustees.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent for
the preferred securities. Registration of transfers of preferred securities will
be effected without charge by or on behalf of Trust II, except for the payment
of any tax or other governmental charges that may be imposed in connection with
any transfer or exchange. Upon any redemption, Trust II will not be required to
issue, register the transfer of, or exchange any preferred securities during a
period beginning at the opening of business fifteen days before the date of
mailing of a notice of redemption of any preferred securities called for
redemption and ending at the close of business on the day of such mailing. Trust
II will also not be required to register the transfer of or exchange any
preferred securities selected for redemption, in whole or in part, except the
unredeemed portion of any such preferred securities being redeemed in part.
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INFORMATION CONCERNING THE PROPERTY TRUSTEE
Other than upon the occurrence and during the continuance of an Event of
Default, the Property Trustee undertakes to perform only such duties as are
specifically set forth in the Trust Agreement. After an Event of Default, the
Property Trustee must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the Property Trustee is under no obligation to exercise any
of the powers vested in it by the Trust Agreement at the request of any holder
of preferred securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement, or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of preferred
securities are entitled under the Trust Agreement to vote, then the Property
Trustee will take such action as it deems advisable and in the best interests of
the holders of the preferred securities. The Property Trustee will have no
liability for such action except for its own negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are to conduct the affairs of and to operate
Trust II in such a way that Trust II will not be deemed to be an "investment
company" required to be registered under the Investment Company Act or
classified as an association taxable as a corporation for United States federal
income tax purposes and so that the junior subordinated debentures will be
treated as indebtedness of Metropolitan for United States federal income tax
purposes. Metropolitan and the Administrative Trustees are authorized to take
any action, not inconsistent with applicable law, the certificate of trust of
Trust II or the Trust Agreement, that Metropolitan and the Administrative
Trustees determine in their discretion to be necessary or desirable for such
purposes.
Holders of the preferred securities have no preemptive or similar rights.
The Trust Agreement and the preferred securities will be governed by, and
construed in accordance with, the laws of the State of Delaware.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
Metropolitan is to issue the junior subordinated debentures under the
Indenture. The Indenture will be qualified as an indenture under the Trust
Indenture Act. This summary of material terms and provisions of the junior
subordinated debentures and the Indenture is not complete and is subject to, and
is qualified in its entirety by reference to, the Indenture, and to the Trust
Indenture Act. Metropolitan has filed the form of the Indenture as an exhibit to
the Registration Statement of which this prospectus forms a part.
GENERAL
At the same time Trust II issues the preferred securities, Trust II will
invest the proceeds from their sale, along with the consideration paid by
Metropolitan for Trust II's common securities, in the junior subordinated
debentures. The junior subordinated debentures will bear interest at the annual
rate of 9.50%, payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year (each, an "Interest Payment Date"),
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commencing June 30, 1999. Metropolitan will pay interest to the person in whose
name each Junior Subordinated Debenture is registered, subject to certain
exceptions, at the close of business on the business day immediately prior to
the Interest Payment Date. It is anticipated that, until the liquidation, if
any, of Trust II, the Property Trustee will hold the junior subordinated
debentures in trust for the benefit of the holders of the preferred securities.
Metropolitan will compute the amount of interest payable for any period on the
basis of a 360-day year of twelve thirty-day months. If interest on the junior
subordinated debentures is payable on a date that is not a business day,
Metropolitan will pay that interest on next day that is a business day.
Metropolitan will not pay any additional interest or other payment as a result
of the delay. If that business day is in the next calendar year, Metropolitan
will make that payment on the immediately preceding business day. This payment
will have the same force and effect as if it were made on the date the payment
was originally payable. Accrued interest that is not paid on the applicable
Interest Payment Date will bear additional interest at the rate per annum of
9.50% thereof, compounded quarterly from the relevant Interest Payment Date. The
term "interest" as used in this section includes quarterly interest payments,
interest on quarterly interest payments not paid on the applicable Interest
Payment Date and Additional Interest (as defined herein), as applicable.
The junior subordinated debentures have a stated maturity date of June 30,
2029.
The junior subordinated debentures will be unsecured and will rank junior
and be subordinate in right of payment to all indebtedness of Metropolitan
senior in right of payment to them. The junior subordinated debentures will rank
equal in right of payment to the $27.8 million aggregate principal amount of
debentures Metropolitan sold during the second quarter of 1998 to Metropolitan
Capital Trust I. Because Metropolitan is a holding company, the right of
Metropolitan to participate in any distribution of assets of any subsidiary,
including Metropolitan Bank, upon such subsidiary's liquidation or
reorganization or otherwise, is subject to the prior claims of creditors of that
subsidiary, except to the extent that Metropolitan may itself be recognized as a
creditor of that subsidiary. Accordingly, the junior subordinated debentures
will be effectively subordinated to all existing and future liabilities of
Metropolitan's subsidiaries, and holders of the junior subordinated debentures
should look only to the assets of Metropolitan for payments on the junior
subordinated debentures. The Indenture does not limit Metropolitan's ability to
incur or issue other secured or unsecured debt, including indebtedness senior in
right of payment to the junior subordinated debentures, whether under the
Indenture or any existing or other indenture that Metropolitan may enter into in
the future or otherwise.
RIGHT TO DEFER INTEREST PAYMENT OBLIGATION
If Metropolitan is not in default under the Indenture, Metropolitan may,
under the Indenture at any time or from time to time during the term of the
junior subordinated debentures, defer the payment of interest on the junior
subordinated debentures for a period not exceeding twenty consecutive quarters
with respect to each Extension Period. No Extension Period may extend beyond the
stated maturity date of the junior subordinated debentures. At the end of each
Extension Period, Metropolitan must pay all interest then accrued and unpaid on
the junior subordinated debentures (together with interest on such unpaid
interest at the annual rate of 9.50%, compounded quarterly from the relevant
Interest Payment Date, to the extent permitted by applicable law, referred to
herein as "Compounded Interest"). During an Extension Period, interest would
continue to accrue and holders of the junior subordinated debentures would be
required to accrue interest income for United States
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federal income tax purposes even though such holders would not receive current
cash distributions with which to pay tax, if any, arising with respect to such
accrued interest income. See "Federal Income Tax Consequences -- Interest Income
and Original Issue Discount."
During any Extension Period, Metropolitan may not taken certain actions.
Metropolitan may not make any payment of principal, interest or premium, if any,
on or repay, repurchase or redeem any debt securities of Metropolitan that rank
equal in priority with or junior in right of payment to the junior subordinated
debentures. Metropolitan may not make any guarantee payments with respect to any
guarantee by Metropolitan of the debt securities of any subsidiary of
Metropolitan if such guarantee ranks equal in priority with or junior in right
of payment to the junior subordinated debentures other than payments pursuant to
the guarantee. Metropolitan may not declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of Metropolitan's capital stock other than:
- the reclassification of any class of Metropolitan's capital stock into
another class of capital stock,
- dividends or distributions in shares of common stock of Metropolitan,
- any declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the issuance of shares under any such plan
in the future or the redemption or repurchase of any such rights pursuant
thereto,
- payments under the guarantee, and
- purchases of common shares related to the issuance of common shares or
rights under any of Metropolitan's benefit plans for its directors,
officers or employees.
Additionally, during any Extension Period, Metropolitan will not redeem,
purchase or acquire less than all the outstanding junior subordinated debentures
or any of the preferred securities.
Before the termination of any Extension Period, Metropolitan may further
defer the payment of interest on the junior subordinated debentures if no
Extension Period exceeds twenty consecutive quarters or extends beyond the
stated maturity date of the Junior Subordinated Debentures. Upon the termination
of any such Extension Period and the payment of all Compounded Interest,
Metropolitan may begin a new Extension Period subject to the above requirements.
No interest will be due and payable during an Extension Period, except at the
end of such Extension Period. Metropolitan must give the Property Trustee, the
Administrative Trustees and the trustee under the Indenture notice of its
election to begin an Extension Period at least one Business Day before the
earlier of:
- the date interest on the junior subordinated debentures would have been
payable except for the election to begin such Extension Period or
- the date the Administrative Trustees are required to give notice of the
record date, or the date such Distributions are payable, to the Nasdaq
Stock Market's National Market or other applicable self-regulatory
organization or to holders of the preferred securities as of the record
date or the date such Distributions are payable, but in any event not
less than one Business Day before such record date.
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The trustee under the Indenture will give notice of Metropolitan's election
to begin a new Extension Period to the holders of the preferred securities.
There is no limitation on the number of times that Metropolitan may begin an
Extension Period.
ADDITIONAL INTEREST
If Trust II or the Property Trustee is required to pay any additional
taxes, duties or other governmental charges as a result of a Tax Event,
Metropolitan will pay such additional amounts on the junior subordinated
debentures as required. The Trust will not reduce the Distributions payable by
it as a result of any such additional taxes, duties or other governmental
charges.
REDEMPTION OR EXCHANGE
The junior subordinated debentures will not be subject to any sinking fund.
Metropolitan may redeem the junior subordinated debentures before maturity
on or after June 30, 2004, in whole at any time or in part from time to time, or
at any time in whole (but not in part) within ninety days following the
occurrence and continuation of a Tax Event, an Investment Company Event or a
Capital Treatment Event. In each case, the redemption price shall equal the
accrued and unpaid interest on the redeemed junior subordinated debentures to
the date fixed for redemption, plus 100% of the principal amount of such junior
subordinated debentures. Any redemption before the stated maturity date of the
junior subordinated debentures will be subject to prior regulatory approval, if
then required under applicable capital guidelines or regulatory policies, and
the restrictions in the 1995 Notes Indenture.
Metropolitan will mail notice of any redemption at least thirty but not
more than sixty days before the redemption date to each holder of the junior
subordinated debentures to be redeemed. Metropolitan will mail notice to such
holder's registered address. Unless Metropolitan defaults in payment of the
redemption price, on and after the redemption date interest ceases to accrue on
the junior subordinated debentures or portions thereof called for redemption.
"Additional Interest" means the additional amounts necessary so that the
amount of Distributions then due and payable by Trust II on its outstanding
preferred securities and common securities shall not be reduced as a result of
any additional taxes, duties and other governmental charges to which Trust II
has become subject as a result of a Tax Event.
"Investment Company Event" means the receipt by Trust II of an Opinion of
Counsel to the effect that, as a result of a change in law or regulation or a
change in interpretation or application of law or regulation by any legislative
body, court, governmental agency or regulatory authority, Trust II is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act and that the change becomes effective on or after the
date of original issuance of the preferred securities.
"Capital Treatment Event" means the receipt by Trust II of an Opinion of
Counsel to the effect that as a result of any amendment to, or change (including
any proposed change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or such proposed change, pronouncement, action or decision is
announced
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on or after the date of original issuance of the preferred securities, there is
more than an insubstantial risk that the preferred securities would not
constitute Tier 1 Capital (or the then equivalent thereof) applied as if
Metropolitan (or its successor) were a bank holding company for purposes of the
capital adequacy guidelines of the Federal Reserve (or any successor regulatory
authority with jurisdiction over bank holding companies), or any capital
adequacy guidelines as then in effect and applicable to Metropolitan. There are
currently no capital adequacy guidelines applicable to savings and loan holding
companies such as Metropolitan.
"Tax Event" means the receipt by Trust II of an Opinion of Counsel to the
effect that, as a result of any amendment to, or change (including any announced
prospective change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the preferred securities under the Trust Agreement, there is more
than an insubstantial risk that:
- Trust II is, or will be within ninety days of the date of such opinion,
subject to United Stated federal income tax with respect to income
received or accrued on the junior subordinated debentures,
- interest payable by Metropolitan on the junior subordinated debentures is
not, or within ninety days of the date of such opinion will not be,
deductible by Metropolitan, in whole or in part, for United States
federal income tax purposes or
- Trust II is, or will be within ninety days of the date of such opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
"Opinion of Counsel" means an opinion in writing of independent legal
counsel experienced in matters being opined upon, that is delivered to Trust II
trustees.
AUTHENTICATION
A junior subordinated debenture will not be valid until authenticated
manually by an authorized signatory of the trustee under the Indenture, or by an
authenticating agent. That signature will be conclusive evidence that the junior
subordinated debenture has been duly authenticated and delivered under the
Indenture and that the holder is entitled to the benefits of the Indenture. Each
junior subordinated debenture will be dated the date of its authentication by
the trustee under the Indenture.
REGISTRATION, DENOMINATION AND TRANSFER
The junior subordinated debentures will initially be registered in the name
of Cede & Co., as nominee of DTC, on behalf of Trust II. If the junior
subordinated debentures are distributed to holders of preferred securities,
Metropolitan anticipates that the depository arrangements for the junior
subordinated debentures will be substantially identical to those in effect for
the preferred securities. See "Description of the Preferred Securities -- Book
Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, DTC is under no
obligation to perform or continue to perform such procedures. DTC may
discontinue such procedures at any time. If DTC is at any time unwilling or
unable to continue as depository and a successor depository is not appointed by
Metropolitan within ninety days of receipt of
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notice from DTC, and in other circumstances, including at Metropolitan's option,
Metropolitan will cause the junior subordinated debentures to be issued in
certificated form.
Metropolitan will make payments on junior subordinated debentures
represented by a global security to Cede & Co., the nominee for DTC, as the
registered holder of the junior subordinated debentures, as described under
"Description of the Preferred Securities -- Book Entry, Delivery and Form." If
junior subordinated debentures are issued in certificated form, principal and
interest will be payable, the transfer of the junior subordinated debentures
will be registrable, and junior subordinated debentures will be exchangeable for
junior subordinated debentures of other authorized denominations of a like
aggregate principal amount, at the corporate trust office of Wilmington Trust
Company, the trustee under the Indenture, in Wilmington, Delaware or at the
offices of any Paying Agent or transfer agent appointed by Metropolitan.
However, at the option of Metropolitan, payment of any interest may be made:
- by check mailed to the address of the person entitled to such payment
that appears in the securities register for the junior subordinated
debentures; or
- by wire transfer of immediately available funds upon written request to
the trustee under the Indenture no later than fifteen calendar days
before the date on which the interest is payable by a holder of $1
million or more in aggregate principal amount of the junior subordinated
debentures.
Junior subordinated debentures will be exchangeable for other junior
subordinated debentures of like tenor, of any authorized denominations and of a
like aggregate principal amount.
A holder of junior subordinated debentures may present for exchange as
provided above, and may present for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), that holder's junior subordinated debentures. The holder of
junior subordinated debentures takes such action at the office of the securities
registrar appointed under the Indenture or at the office of any transfer agent
designated by Metropolitan without service charge and upon payment of any taxes
and other governmental charges as described in the Indenture. Metropolitan will
appoint the trustee under the Indenture as securities registrar under the
Indenture. Metropolitan may at any time designate additional transfer agents
with respect to the junior subordinated debentures.
In the event of any redemption, neither Metropolitan nor the trustee under
the Indenture will be required to issue, register the transfer of, or exchange
junior subordinated debentures during a period beginning at the opening of
business fifteen days before the day of mailing of notice for redemption of the
junior subordinated debentures to be redeemed (if less than all are to be
redeemed) and ending at the close of business on the day of mailing of the
relevant notice of redemption. In addition, neither Metropolitan nor the trustee
under the Indenture will be required to transfer or exchange any junior
subordinated debentures selected for redemption, except, in the case of any
junior subordinated debentures being redeemed in part, any portion thereof not
to be redeemed.
Any monies deposited with the trustee under the Indenture or any Paying
Agent, and any monies held by Metropolitan in trust, for the payment of the
principal of (and premium, if any) or interest on any junior subordinated
debenture that remains unclaimed for two years after such principal (and
premium, if any) or interest has become due and payable will, at the request of
Metropolitan, be repaid to Metropolitan. After that repayment, the holder of the
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junior subordinated debenture will look, as a general unsecured creditor, only
to Metropolitan for payment of principal or interest.
RESTRICTIONS ON CERTAIN PAYMENTS
Metropolitan will also covenant, as to the junior subordinated debentures,
that, during any Extension Period, it will not take certain actions.
Metropolitan will not make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities of Metropolitan that
rank equal in priority with or junior in right of payment to the junior
subordinated debentures. Metropolitan will not make any guarantee payments with
respect to any guarantee by Metropolitan of the debt securities of any
subsidiary of Metropolitan if such guarantee ranks equal in priority with or
junior in right of payment to the junior subordinated debentures other than
payments pursuant to the guarantee. Metropolitan will not declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of Metropolitan's capital stock other
than:
- the reclassification of any class of Metropolitan's capital stock into
another class of capital stock;
- dividends or distributions payable in shares of common stock of
Metropolitan;
- any declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the issuance of shares under any such plan
in the future or the redemption or repurchase of any such rights pursuant
thereto;
- payments under the guarantee; and
- purchases of common shares related to the issuance of common shares or
rights under any of Metropolitan's benefit plans for its directors,
officers or employees.
Additionally, Metropolitan will not redeem, purchase or acquire less than
all the outstanding junior subordinated debentures or any of the preferred
securities if at such time:
- there shall have occurred an event of default under the Indenture,
- Metropolitan shall be in default with respect to its obligations under
the guarantee relating to such preferred securities, or
- Metropolitan shall have given notice of its selection of an Extension
Period as provided in the Indenture with respect to the junior
subordinated debentures and shall not have rescinded such notice, or such
Extension Period, or any extension thereof, shall be continuing.
MODIFICATION OF INDENTURE
From time to time Metropolitan and the trustee under the Indenture may,
without the consent of the holders of the junior subordinated debentures, amend,
waive or supplement the Indenture for specified purposes. These purposes
include, among other things, curing ambiguities, defects or inconsistencies,
changes that do not materially adversely affect the interest of the holders of
the junior subordinated debentures and changes to qualify, or maintain the
qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting Metropolitan and the trustee under the Indenture,
with the consent of the holders of not less than a majority in principal amount
of the junior
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subordinated debentures affected, to modify the Indenture in a manner affecting
the rights of the holders of the junior subordinated debentures. However, no
such modification may, without the consent of the holder of each outstanding
junior subordinated debenture so affected,
- extend the stated maturity date of the junior subordinated debentures,
reduce the principal amount thereof or reduce the rate or extend the time
of payment of interest thereon, or
- reduce the percentage of principal amount of the junior subordinated
debentures, the holders of which are required to consent to any such
modification of the Indenture.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following events with
respect to the junior subordinated debentures that has occurred and is
continuing constitutes a "Debenture Event of Default":
- failure for thirty days to pay interest (including Additional Interest or
Compounded Interest, if any) on the junior subordinated debentures when
due (subject to the deferral of certain due dates in the case of an
Extension Period); or
- failure to pay any principal on the junior subordinated debentures when
due, whether at stated maturity, upon declaration of acceleration of
maturity or otherwise; or
- failure to observe or perform certain other covenants contained in the
Indenture for ninety days after written notice to Metropolitan from the
trustee under the Indenture or the holders of at least 25% in aggregate
outstanding principal amount of the outstanding junior subordinated
debentures; or
- certain events in bankruptcy, insolvency or reorganization of
Metropolitan, subject in certain instances to any such event remaining in
effect for a period of sixty consecutive days.
The holders of a majority in aggregate outstanding principal amount of the
junior subordinated debentures may direct the time, method and place of
conducting any proceeding for any remedy available to the trustee under the
Indenture. The trustee under the Indenture or the holders of not less than 25%
in aggregate outstanding principal amount of the junior subordinated debentures
may declare the principal due and payable immediately upon a Debenture Event of
Default. The holders of a majority in aggregate outstanding principal amount of
the junior subordinated debentures may annul such declaration and waive the
default if the default (other than the non-payment of the principal of the
junior subordinated debentures which has become due solely by such acceleration)
and all other Debenture Events of Default have been cured and Metropolitan has
deposited with the trustee under the Indenture a sum sufficient to pay all
matured installments of interest and principal due otherwise than by
acceleration.
Metropolitan is required to file annually with the trustee under the
Indenture a certificate as to whether or not Metropolitan is in compliance with
all the conditions and covenants applicable to it under the Indenture.
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ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing due to the
failure of Metropolitan to pay interest or principal on the junior subordinated
debentures when payable, a holder of the preferred securities may institute a
legal proceeding directly against Metropolitan. That holder may institute such a
proceeding to enforce payment to the holder of the principal of or interest on
such junior subordinated debentures having a principal amount equal to the
aggregate liquidation amount of the preferred securities of such holder.
Metropolitan may not amend the Indenture to remove the right to bring such a
legal proceeding without the prior written consent of the holders of all of the
preferred securities. If the right to bring such a legal proceeding is removed,
Trust II may become subject to the reporting obligations under the Securities
and Exchange Act of 1934. Metropolitan may under the Indenture set-off any
payment made to such holder of the preferred securities by Metropolitan in
connection with such a legal proceeding.
The holders of the preferred securities will not be able to exercise
directly any remedies other than those described in the above paragraph
available to the holders of the junior subordinated debentures. See "Description
of the Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that Metropolitan will not consolidate with or merge
into any other entity or convey, transfer or lease its properties and assets
substantially as an entirety to any entity, and no entity will consolidate with
or merge into Metropolitan or convey, transfer or lease its properties and
assets substantially as an entirety to Metropolitan unless certain conditions
prescribed in the Indenture are met. In the event Metropolitan consolidates with
or merges into another entity or conveys or transfers its properties and assets
substantially as an entirety to any entity, these conditions include that the
successor entity is organized under the laws of the United States or any state
or the District of Columbia, and that the successor entity expressly assumes
Metropolitan's obligations on the junior subordinated debentures issued under
the Indenture. In addition, immediately after giving effect to the transaction,
no Debenture Event of Default, and no event which, after notice or lapse of time
or both, would become a Debenture Event of Default, shall have occurred and be
continuing.
The general provisions of the Indenture do not afford holders of the junior
subordinated debentures protection in the event of a highly leveraged or other
change in control transaction involving Metropolitan that may adversely affect
holders of the junior subordinated debentures.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to
Metropolitan's obligations to pay all other sums due pursuant to the Indenture
and to provide the officers' certificates and opinions of counsel described
therein), and Metropolitan will be deemed to have satisfied and discharged the
Indenture when certain events occur. These events include when all of the junior
subordinated debentures not previously delivered to the trustee under the
Indenture for cancellation
- have become due and payable, or
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- will become due and payable at their stated maturity date or will be
called for redemption within one year,
and Metropolitan deposits or causes to be deposited with the trustee under the
Indenture funds, in trust. The deposited funds are for the purpose and in an
amount in the currency or currencies in which the junior subordinated debentures
are payable sufficient to pay and discharge the entire indebtedness on the
junior subordinated debentures not previously delivered to the trustee under the
Indenture for cancellation, for the principal and interest to the date of the
deposit or to the stated maturity date or redemption, as the case may be.
SUBORDINATION
In the Indenture, Metropolitan has covenanted and agreed that the junior
subordinated debentures issued under the Indenture will be subordinate and
junior in right of payment to all indebtedness of Metropolitan senior in right
of payment to them to the extent provided in the Indenture. Upon any payment or
distribution of assets to creditors upon the liquidation, dissolution,
winding-up, reorganization, assignment for the benefit of creditors, marshaling
of assets or any bankruptcy, insolvency, debt restructuring or similar
proceedings in connection with any insolvency or bankruptcy proceeding of
Metropolitan, the holders of indebtedness of Metropolitan senior in right of
payment to the junior subordinated debentures will first receive payment in full
of principal of (and premium, if any) and interest, if any, on such senior
indebtedness. The holders of indebtedness senior in right of payment to the
junior subordinated debentures will receive such payment before the holders of
the junior subordinated debentures, or the Property Trustee on behalf of the
holders, receive or retain any payment in respect of the principal of or
interest, if any, on the junior subordinated debentures.
In the event of the acceleration of the maturity of any of the junior
subordinated debentures, the holders of all indebtedness senior in right of
payment to them outstanding at the time of such acceleration will receive
payment in full of all amounts due (including any amounts due upon acceleration)
before the holders of the junior subordinated debentures receive or retain any
payment in respect of the principal of or interest, if any, on the junior
subordinated debentures.
No payments on account of principal or interest, if any, in respect of the
junior subordinated debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to indebtedness senior in right
of payment to the junior subordinated debentures, or an event of default with
respect to any such senior indebtedness resulting in the acceleration of the
maturity of the senior indebtedness, and any payments so received may be
required to be paid over to the holders of the senior indebtedness.
The Indenture places no limitation on the amount of indebtedness senior in
right of payment to the junior subordinated debentures that may be incurred by
Metropolitan. Metropolitan may from time to time incur indebtedness constituting
such senior indebtedness.
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent:
- every obligation of such person for money borrowed;
- every obligation of such person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
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- every reimbursement obligation of such person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the account
of such person;
- every obligation of such person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business);
- every capital lease obligation of such person;
- all indebtedness of such person whether incurred on or before the date of
the Indenture or thereafter incurred, for claims in respect of derivative
products, including interest rate, foreign exchange rate and commodity
forward contracts, options and swaps and similar arrangements; and
- every obligation of the type referred to in the clauses above of another
person and all dividends of another person the payment of which, in
either case, such person has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise.
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to Metropolitan whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or before the date of the Indenture or thereafter incurred,
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such obligations are not superior
in right of payment to the junior subordinated debentures or to other Debt which
is equal in priority with, or subordinated to, the junior subordinated
debentures. However, Senior Debt does not include:
- any Debt of Metropolitan which when incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code of
1978, as amended, was without recourse to Metropolitan;
- any Debt of Metropolitan to any of its subsidiaries; and
- any Debt to any employee of Metropolitan.
"Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Metropolitan whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or before the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other Debt of Metropolitan (other than the junior subordinated debentures),
except that Subordinated Debt shall not include the junior subordinated
debentures or the $27.75 million aggregate principal amount of debentures
Metropolitan sold during the second quarter of 1998 to Metropolitan Capital
Trust I.
GOVERNING LAW
The Indenture and the junior subordinated debentures will be governed by
and construed in accordance with the laws of the State of Delaware, without
regard to conflicts of laws principles thereof.
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INFORMATION CONCERNING THE TRUSTEE UNDER THE INDENTURE
The trustee under the Indenture will have and be subject to all the duties
and responsibilities specified with respect to an indenture trustee under the
Trust Indenture Act. Subject to such provisions, the trustee under the Indenture
is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of the junior subordinated debentures,
unless offered reasonable indemnity by such holder against the costs, expenses
and liabilities which might be incurred thereby. The trustee under the Indenture
is not required to expend or risk its own funds or otherwise incur personal
financial liability in the performance of its duties if it reasonably believes
that repayment or adequate indemnity is not reasonably assured to it.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES
Under certain circumstances involving the termination of Trust II, after
satisfaction of liabilities to creditors of Trust II as provided by applicable
law, junior subordinated debentures may be distributed to the holders of the
preferred securities in exchange for their preferred securities upon liquidation
of Trust II. See "Description of the Preferred Securities -- Liquidation of
Trust II and Distribution of the Junior Subordinated Debentures to Holders." Any
distribution will be subject to receipt of prior regulatory approval if then
required. If the junior subordinated debentures are distributed to the holders
of preferred securities upon the liquidation of Trust II, Metropolitan will use
its best efforts to list the junior subordinated debentures on the Nasdaq Stock
Market's National Market or such stock exchanges, if any, on which the preferred
securities are then listed. Metropolitan can make no assurance as to the market
price of any junior subordinated debentures that may be distributed to the
holders of the preferred securities.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the junior subordinated
debentures will be made at the offices of Wilmington Trust Company, trustee
under the Indenture in the city of Wilmington, Delaware or at the offices of
such Paying Agent or Paying Agents as Metropolitan may designate from time to
time. However, at the option of Metropolitan, payment of any interest may be
made
- by check mailed to the address of the person entitled to such payment
that appears in the securities register for the junior subordinated
debentures, or
- by wire transfer of immediately available funds upon written request to
the trustee under the Indenture no later than fifteen calendar days
before the date on which the interest is payable by a holder of $1
million or more in aggregate principal amount of the junior subordinated
debentures.
Payment of any interest on the junior subordinated debentures will be made to
the person in whose name the Junior Subordinated Debenture is registered at the
close of business on the regular record date for such interest, except in the
case of interest due and payable, but not timely paid. Metropolitan may at any
time designate additional Paying Agents or rescind the designation of any Paying
Agent.
Any monies deposited with the trustee under the Indenture or any Paying
Agent, or any monies held by Metropolitan in trust, for the payment of the
principal of or interest on the junior subordinated debentures and remaining
unclaimed for two years after such principal or
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interest has become due and payable will be repaid to Metropolitan upon written
request of Metropolitan on May 31 of each year or (if then held in trust by
Metropolitan) will be discharged from such trust. After that repayment, the
holders of the junior subordinated debentures will look, as general unsecured
creditors, only to Metropolitan for payment of such principal and interest.
REGISTRAR AND TRANSFER AGENT
The trustee under the Indenture will act as the registrar and the transfer
agent for the junior subordinated debentures. Junior subordinated debentures may
be presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed) at the
office of the registrar. Metropolitan may at any time rescind the designation of
any such transfer agent or approve a change in the location through which any
such transfer agent acts if Metropolitan maintains a transfer agent in the place
of payment. Metropolitan may at any time designate additional transfer agents
with respect to the junior subordinated debentures. In the event of any
redemption, neither Metropolitan nor the trustee under the Indenture will be
required to issue, register the transfer of or exchange junior subordinated
debentures during a period beginning at the opening of business fifteen days
before the day of mailing of notice of redemption of junior subordinated
debentures (if less than all are to be redeemed) and ending at the close of
business on the day of mailing of the relevant notice of redemption. In
addition, neither Metropolitan nor the trustee under the Indenture will be
required to transfer or exchange any junior subordinated debentures selected for
redemption, except, in the case of any junior subordinated debentures being
redeemed in part, any portion thereof not to be redeemed.
DESCRIPTION OF THE GUARANTEE
Metropolitan will execute and deliver the guarantee at the same time Trust
II issues the preferred securities. Wilmington Trust Company will hold the
guarantee as the trustee under the guarantee for the benefit of the holders of
the preferred securities. The guarantee will be qualified under the Trust
Indenture Act. This summary of material provisions of the guarantee is not
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the guarantee and the Trust Indenture Act. Metropolitan has
filed the form of the guarantee as an exhibit to the Registration Statement of
which this Prospectus forms a part.
GENERAL
To the extent described below, Metropolitan will irrevocably agree to pay
in full, on a subordinated basis, the guarantee Payments (as defined herein) to
the holders of the preferred securities, as and when due, regardless of any
defense, right of set-off or counterclaim that Trust II may have or assert other
than the defense of payment. If not paid by or on behalf of Trust II, the
following payments that relate to the preferred securities (the "guarantee
Payments") will be subject to the guarantee:
- any accrued and unpaid Distributions required to be paid on the preferred
securities, to the extent that Trust II has funds on hand available for
such Distributions at such time;
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- the Redemption Price, including unpaid Distributions to the date of
redemption, with respect to any preferred securities called for
redemption, to the extent that Trust II has funds on hand available to
pay such Redemption Price at such time; or
- upon a voluntary or involuntary dissolution, winding-up or termination of
Trust II (unless the junior subordinated debentures are distributed to
holders of the preferred securities or all preferred securities are
redeemed), the lesser of:
- the liquidation amount and all accrued and unpaid Distributions on the
preferred securities, to the extent that Trust II has funds available
for such a payment at such time; and
- the amount of assets of Trust II remaining available for distribution
to holders of the preferred securities after satisfaction of
liabilities to creditors of Trust II as required by applicable law.
Metropolitan may satisfy its obligation to make a guarantee Payment by
directly paying the required amounts to the holders of the preferred securities
or by causing Trust II to pay such amounts to such holders.
If Metropolitan does not make interest payments on the junior subordinated
debentures held by Trust II, Trust II will not be able to pay Distributions on
the preferred securities and will not have funds available for such
Distributions. The guarantee will rank subordinate and junior in right of
payment to all indebtedness of Metropolitan senior in right of payment to the
junior subordinated debentures. See "Description of the Guarantee -- Status of
the Guarantee." Because Metropolitan is a holding company, the right of
Metropolitan to participate in any distribution of assets of any subsidiary upon
that subsidiary's liquidation or reorganization or otherwise is subject to the
prior claims of creditors of that subsidiary, except to the extent Metropolitan
may itself be recognized as a creditor of that subsidiary. Accordingly,
Metropolitan's obligations under the guarantee will be effectively subordinated
to all existing and future liabilities of Metropolitan's subsidiaries, and
claimants should look only to the assets of Metropolitan for payments under the
guarantee. The guarantee does not limit Metropolitan's ability to incur or issue
other secured or unsecured debt, including indebtedness senior in right of
repayment to the junior subordinated debentures, whether under the Indenture,
any other indenture that Metropolitan may enter into in the future, or
otherwise. Metropolitan may from time to time incur indebtedness constituting
such senior indebtedness.
Metropolitan and Trust II believe that, taken together, the obligations of
Metropolitan under the guarantee, the Trust Agreement, the junior subordinated
debentures, the Indenture and the Expense Agreement (as defined herein),
constitute, in the aggregate, a full, irrevocable and unconditional guarantee,
on a subordinated basis, of all of Trust II's obligations under the preferred
securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of Trust II's obligations under the
preferred securities. See "Relationship Among the preferred securities, the
Junior Subordinated Debentures, the Expense Agreement and the Guarantee."
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STATUS OF THE GUARANTEE
The guarantee will constitute an unsecured obligation of Metropolitan and
will rank subordinate and junior in right of payment to all indebtedness of
Metropolitan senior in right of repayment to the junior subordinated debentures.
The guarantee ranks equal to the guarantee agreement executed by Metropolitan in
respect of the 8.60% preferred securities sold during the second quarter of 1998
by Metropolitan Capital Trust I.
The guarantee will constitute a guarantee of payment and not of collection.
As a result, the guaranteed party may institute a legal proceeding directly
against Metropolitan to enforce its rights under the guarantee without first
instituting a legal proceeding against any other person or entity. The trustee
under the guarantee will hold the guarantee for the benefit of the holders of
the preferred securities.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the preferred securities (in which case no vote will be
required), the guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate liquidation amount of such
outstanding preferred securities. The manner of obtaining any such approval will
be as set forth under "Description of the Preferred Securities -- Voting Rights;
Amendment of the Trust Agreement." All guarantees and agreements contained in
the guarantee will bind the successors, assigns, receivers, trustees and
representatives of Metropolitan and will inure to the benefit of the holders of
the preferred securities then outstanding.
EVENTS OF DEFAULT
An event of default under the guarantee will occur upon the failure of
Metropolitan to perform any of its payments or other obligations thereunder. The
holders of not less than a majority in aggregate liquidation amount of the
preferred securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee under the
guarantee in respect of such guarantee or to direct the exercise of any trust or
power conferred upon the trustee under the guarantee.
Metropolitan, as guarantor, is required to file annually with the trustee
under the guarantee a certificate as to whether or not Metropolitan is in
compliance with all the conditions and covenants applicable to it under the
guarantee.
INFORMATION CONCERNING THE TRUSTEE UNDER THE GUARANTEE
The trustee under the guarantee, other than during an event of default by
Metropolitan in the performance of the guarantee, undertakes to perform only
such duties as are specifically set forth in the guarantee. After an event of
default under the guarantee, the trustee must exercise the same degree of care
and skill as a prudent person would exercise or use in the conduct of his or her
own affairs. Subject to this provision, the trustee under the guarantee is under
no obligation to exercise any of the powers vested in it by the guarantee at the
request of any holder of the preferred securities unless it is offered
reasonable indemnity by such holder against the costs, expenses and liabilities
that might be incurred thereby. The trustee under the guarantee is not required
to expend or risk its own funds or otherwise incur personal financial liability
in the performance of its duties if the it reasonably believes repayment or
adequate indemnity is not reasonably assured to it.
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TERMINATION OF THE GUARANTEE
The guarantee will terminate and be of no further force and effect upon:
- full payment of the Redemption Price of the preferred securities;
- full payment of the amounts payable upon liquidation of Trust II; or
- distribution of the junior subordinated debentures to the holders of the
preferred securities in exchange for their preferred securities.
The guarantee will continue to be effective or will be reinstated, as the case
may be, if at any time any holder of the preferred securities must restore
payment of any sums paid under the preferred securities or the guarantee.
GOVERNING LAW
The guarantee will be governed by and construed in accordance with the laws
of the State of Delaware, without regard to conflicts of laws principles
thereof.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by Metropolitan under the
Trust Agreement (the "Expense Agreement"), Metropolitan will irrevocably and
unconditionally guarantee to each person or entity to whom Trust II becomes
indebted or liable, the full payment of any costs, expenses or liabilities of
Trust II, other than obligations of Trust II to pay to the holders of the
preferred securities the amounts due such holders pursuant to the terms of the
preferred securities. Third party creditors of Trust II may proceed directly
against Metropolitan under the Expense Agreement, regardless of whether such
creditors had notice of the Expense Agreement.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES,
THE EXPENSE AGREEMENT AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the preferred securities
(to the extent Trust II has funds available for the payment of such
Distributions) are irrevocably guaranteed by Metropolitan as and to the extent
set forth under "Description of the Guarantee." Taken together, 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, of all of Trust II's obligations under the preferred
securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of Trust II's obligations under the
preferred securities. If and to the extent that Metropolitan does not make
payments on the junior subordinated debentures, Trust II will not pay
Distributions or other amounts due on its preferred securities. The guarantee
does not cover payment of Distributions when Trust II does not have sufficient
funds to pay such Distributions. In such event, the remedy of a holder of the
preferred securities is to institute a legal proceeding against Metropolitan for
enforcement of payment of such Distributions to such holder. The obligations of
Metropolitan under the guarantee are subordinate and junior in right of payment
to all indebtedness senior in right of payment to the junior subordinated
debentures.
SUFFICIENCY OF PAYMENTS
If payments of interest and other payments are made when due on the junior
subordinated debentures, such payments will be sufficient to cover Distributions
and other payments due on the preferred securities. Such payments are sufficient
primarily because:
- the aggregate principal amount of the junior subordinated debentures will
be equal to the sum of the aggregate stated liquidation amount of the
preferred securities and Trust II's common securities;
- the interest rate and interest and other payment dates on the junior
subordinated debentures will match the distribution rate and Distribution
and other payment dates for the preferred securities;
- Metropolitan will pay for all and any costs, expenses and liabilities of
Trust II except Trust II's obligations to holders of its preferred
securities; and
- The Trust Agreement further provides that Trust II will not engage in any
activity that is not consistent with the limited purposes of Trust II.
Notwithstanding anything to the contrary contained in the Indenture,
Metropolitan has the right to set-off any payment it is otherwise required to
make under the Indenture if, and to the extent, Metropolitan has made, or is
concurrently making, a payment under the guarantee.
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ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES
A holder of a preferred security may institute a legal proceeding directly
against Metropolitan to enforce its rights under the guarantee without first
instituting a legal proceeding against the trustee under the guarantee the Trust
Agreement or any other person or entity.
A default or event of default under any indebtedness of Metropolitan senior
to the junior subordinated debentures would not constitute a default or event of
default under the Indenture. However, in the event of payment defaults under, or
acceleration of, any such senior indebtedness, the subordination provisions of
the Indenture provide that no payments may be made in respect of the junior
subordinated debentures until such senior indebtedness has been paid in full or
any payment default thereunder has been cured or waived. Failure to make
required payments on the junior subordinated debentures would constitute an
event of default under the Indenture.
LIMITED PURPOSE OF TRUST II
The preferred securities evidence preferred undivided beneficial interests
in Trust II. Trust II exists for the sole purpose of issuing its preferred
securities and common securities and investing the proceeds of such issuance in
junior subordinated debentures. A principal difference between the rights of a
holder of a preferred security and a holder of a junior subordinated debenture
is that a holder of a junior subordinated debenture is entitled to receive from
Metropolitan the principal amount of and interest accrued on junior subordinated
debentures held, while a holder of the preferred securities is entitled to
receive Distributions from Trust II (or from Metropolitan under the guarantee)
if, and to the extent, Trust II has funds available for the payment of such
Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
Trust II involving the liquidation of the junior subordinated debentures, after
satisfaction of liabilities to creditors of Trust II, if any, as provided by
applicable law, the holders of the preferred securities will receive, out of
assets held by Trust II, the Liquidation Distribution in cash. See "Description
of the Preferred Securities -- Liquidation Distribution Upon Dissolution." Upon
any voluntary or involuntary liquidation or bankruptcy of Metropolitan, the
Property Trustee, as holder of the junior subordinated debentures, would be a
subordinated creditor of Metropolitan. As a result, the Property Trustee would
be subordinated in right of payment to all indebtedness of Metropolitan senior
in right of payment to the junior subordinated debentures as set forth in the
Indenture, but entitled to receive payment in full of principal and interest
before any shareholders of Metropolitan receive payments or distributions. Since
Metropolitan is the guarantor under the guarantee and has agreed to pay for all
costs, expenses and liabilities of Trust II (other than Trust II's obligations
to the holders of its preferred securities), the positions of a holder of such
preferred securities and a holder of the junior subordinated debentures relative
to other creditors and to shareholders of Metropolitan in the event of
liquidation or bankruptcy of Metropolitan are expected to be substantially the
same.
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DESCRIPTION OF THE 1995 NOTES
In December 1995, we issued $14.0 million of the 1995 Notes in a public
offering pursuant to the 1995 Notes Indenture. The 1995 Notes will mature on
January 1, 2005. Interest on the 1995 Notes accrues at the rate of 9.625% per
annum and is payable monthly. We may redeem the 1995 Notes according to the
following schedule:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE REDEMPTION
12 MONTHS BEGINNING PRICE
---------------------- ----------
<S> <C>
December 1, 1998............................................ 103.00%
December 1, 1999............................................ 101.50%
December 1, 2000 and thereafter............................. 100.00%
</TABLE>
We may also repurchase the 1995 Notes in privately negotiated or open
market transactions.
The 1995 Notes Indenture governs the terms of the 1995 Notes. The 1995
Notes Indenture limits the amount of our and our subsidiaries' Funded
Indebtedness, other than Junior Indebtedness, to 80% of Consolidated Net Worth.
"Funded Indebtedness," "Consolidated Net Worth" and "Junior Indebtedness" are
defined in the 1995 Notes Indenture. As of March 31, 1999, the amount of Funded
Indebtedness we could incur under the 1995 Notes Indenture was $8.5 million. The
1995 Notes Indenture permits the incurrence of junior indebtedness, which is
defined as the principal amount of, and interest on, any Funded Indebtedness
whether now outstanding or created, incurred, assumed or guaranteed in the
future. The instrument creating or evidencing Funded Indebtedness or pursuant to
which Funded Indebtedness is outstanding must provide that:
- the indebtedness is junior in right of payment to the 1995 Notes,
- no payments on such indebtedness may be made at any time that an
Event of Default (as defined in the 1995 Notes Indenture) has
occurred and continues, and
- no payments other than the payment of interest may be made on such
indebtedness at any time the 1995 Notes are Outstanding (as defined
in the 1995 Notes Indenture).
In addition, the 1995 Notes Indenture prohibits us from paying dividends on our
equity securities (except in the form of those securities) unless our ratio of
tangible equity to total assets is in excess of 7.0%. For purposes of the 1995
Notes Indenture, "tangible equity" is Consolidated Net Worth (as defined in the
1995 Notes Indenture) less goodwill.
The terms of the 1995 Notes Indenture further state that in the event of a
Fundamental Structural Change or a Significant Subsidiary Disposition (both as
defined in the 1995 Notes Indenture), each holder of the 1995 Notes will have
the right to have us purchase the holder's 1995 Notes at the outstanding
principal amount plus accrued interest. The right of the holders is not
exercisable if within 40 days after the occurrence of such event the 1995 Notes
have received a specified rating from a nationally recognized statistical rating
organization. This offering does not constitute a Fundamental Structural Change
for purposes of the 1995 Notes Indenture.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material United States federal income
tax consequences of the purchase, ownership and disposition of the preferred
securities. This discussion addresses only the tax consequences to a person that
acquires preferred securities on their original issue at the stated offering
price. It does not address the tax consequences to persons that may be subject
to special treatment under United States federal income tax law, such as banks,
insurance companies, thrift institutions, regulated investment companies, real
estate investment trusts, employee benefit plans, tax-exempt organizations,
dealers in securities or currencies, persons that will hold preferred securities
as part of a position in a "straddle" or as part of a "synthetic security,"
"hedging", "conversion" or other integrated investment transaction for federal
income tax purposes, persons whose functional currency is not the United States
dollar, or persons that do not hold preferred securities as capital assets. This
discussion also does not address tax consequences to shareholders, partners or
beneficiaries of a holder of the preferred securities. Further, it does not
include any description of any alternative minimum tax consequences or the tax
laws of any state or local government or of any foreign government that may be
applicable to the preferred securities. Accordingly, each prospective investor
should consult and should rely exclusively on, such investor's own tax advisors,
in light of the investor's own particular situation, in analyzing the federal,
state, local and foreign tax consequences of the purchase, ownership or
disposition of the preferred securities.
The following discussion constitutes the opinion of Thompson Hine & Flory,
LLP, special tax counsel to Metropolitan and Trust II. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service rulings and pronouncements and judicial
decisions now in effect, all of which are subject to change at any time. Such
changes may be applied retroactively in a manner that could cause the tax
consequences to vary substantially from the consequences described below,
possibly adversely affecting a beneficial owner of the preferred securities. The
authorities on which this discussion is based are subject to various
interpretations, and it is therefore possible that the United States federal
income tax treatment of the purchase, ownership and disposition of the preferred
securities may differ from the treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE UNITED STATES FEDERAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
CLASSIFICATION OF TRUST II AND THE JUNIOR SUBORDINATED DEBENTURES
Based in part upon certain factual assumptions and upon certain factual
representations made by Metropolitan, which representations Thompson Hine has
relied upon and assumed to be true, correct and complete, for United States
federal income tax purposes under current law, Trust II will not be classified
as an association taxable as a corporation, and the junior subordinated
debentures will be classified as indebtedness. As a result, each beneficial
owner of preferred securities (a "Securityholder") will be required to include
in its gross income its pro rata share of the interest (or accrued original
issue discount) in addition to any interest and other income (if any) with
respect to the junior subordinated debentures. See "-- Interest Income and
Original Issue Discount." No amount included in income with respect to the
preferred securities will be eligible for the dividends-received deduction. If
Metropolitan's representations are inaccurate, this opinion could be adversely
affected.
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INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations, currently Section 1.1275-2(h) (the
"Regulations"), if the terms and conditions of a debt instrument make the
likelihood that stated interest will not be timely paid a "remote" contingency,
such contingency will be ignored in determining whether the debt instrument is
issued with original issue discount ("OID"). Metropolitan believes that the
likelihood of its exercising its option to defer payments of interest on the
junior subordinated debentures is remote, because exercising that option would
(a) prevent it from declaring dividends on any class of its shares and (b)
likely cause a significant reduction in the market price of its stock. Based on
the foregoing, Metropolitan intends to take the position that the junior
subordinated debentures were not issued with OID. Accordingly, a Securityholder
purchasing the preferred securities at the stated price should be required to
include in gross income only such Securityholder's pro rata share of stated
interest on the junior subordinated debentures in accordance with such
Securityholder's method of tax accounting.
Under the Regulations, if Metropolitan were to exercise its option to defer
payments of interest after treating the junior subordinated debentures as issued
without OID, or if the likelihood of Metropolitan exercising its option to defer
payments of interest on the junior subordinated debentures is determined not to
be remote by the Internal Revenue Service ("IRS"), the junior subordinated
debentures would be treated as re-issued with OID at that time. In addition, all
stated interest (and de minimis OID, if any) on the junior subordinated
debentures would thereafter be treated as OID if the junior subordinated
debentures remained outstanding. In such event, all of a Securityholder's
interest income with respect to the junior subordinated debentures would be
accounted for as OID on an economic accrual basis regardless of such
Securityholder's method of tax accounting, and actual distributions of stated
interest related thereto would not be includable in gross income. Consequently,
a Securityholder would be required to include OID in gross income even though
Metropolitan would not make and the Securityholder would not receive any actual
cash payments during an Extension Period.
The Regulations have not yet been addressed in any rulings or other
published interpretations by the IRS. In the event that Metropolitan does not
make a deferral election, and based upon Metropolitan's representations, the IRS
should treat the deferral election as a remote contingency. However, it is
possible the IRS could take the position that the likelihood of deferral was not
a remote contingency within the meaning of the Regulations.
A Securityholder that disposed of preferred securities before the record
date for the payment of Distributions following an Extension Period would
include OID in gross income but would not receive any cash related thereto from
Trust II. Any amount of OID included in a Securityholder's gross income (whether
or not during an Extension Period) would increase such Securityholder's tax
basis in its preferred securities, and the amount of Distributions not
includable in gross income would reduce such Securityholder's tax basis in its
preferred securities.
DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF THE PREFERRED
SECURITIES
Under current United States federal income tax law and provided that Trust
II is not subsequently treated as an association taxable as a corporation, a
distribution by Trust II of the junior subordinated debentures as described
under the caption "Description of the Preferred Securities -- Liquidation of
Trust II and Distribution of the Junior Subordinated
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Debentures to Holders" will be nontaxable to the Securityholders. Such
distribution will also result in a Securityholder receiving its pro rata share
of the junior subordinated debentures previously held indirectly through Trust
II, with a holding period and aggregate tax basis equal to the holding period
and aggregate tax basis such Securityholder had in its preferred securities
before such distribution. A Securityholder will account for interest in respect
of the junior subordinated debentures received from Trust II in the manner
described above under " -- Interest Income and Original Issue Discount,"
including any accrual of OID (if any) attributed to the junior subordinated
debentures upon the distribution.
SALES OR REDEMPTION OF THE PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on the sale of
preferred securities (including a redemption for cash or other consideration) in
an amount equal to the difference between the amount realized on the sale (or
redemption) and the Securityholder's adjusted tax basis in the preferred
securities sold or so redeemed. Gain or loss recognized by a Securityholder on
preferred securities held for more than one year will generally be taxable as
long-term capital gain or loss. Preferred securities constituting a capital
asset which are acquired by an individual and held for more than one year are
accorded a maximum United States federal capital gains tax rate of 20% (or a
rate of 10%, if the individual taxpayer is in the 15% tax bracket). Effective in
2001, the 20% rate drops to 18% (and the 10% rate drops to 8%) for capital
assets acquired after the year 2000 and held more than five years. However, the
requirement that the capital asset be acquired after the year 2000 does not
apply to the 8% rate.
If Metropolitan were to exercise its option to defer payments of interest
on the junior subordinated debentures, or if the likelihood of Metropolitan
exercising its option to defer payments of interest on the junior subordinated
debentures was determined not to be remote by the IRS, the preferred securities
might trade at a price that did not fully reflect the value of accrued but
unpaid interest with respect to the underlying junior subordinated debentures. A
Securityholder that disposed of its preferred securities between record dates
for payments of Distributions (and consequently did not receive a Distribution
from Trust II for the period before such disposition) would nevertheless be
required to include in income as ordinary income accrued but unpaid interest on
the junior subordinated debentures through the date of disposition. In addition,
such Securityholder would be required to add such amount to its adjusted tax
basis in its disposed of preferred securities. Such Securityholder would
recognize a capital loss on the disposition of its preferred securities to the
extent the selling price (which might not fully reflect the value of accrued but
unpaid interest) was less than the Securityholder's adjusted tax basis in the
preferred securities (which would include accrued but unpaid interest). In the
case of individual taxpayers, capital losses can be applied to offset capital
gains plus up to $3,000 ($1,500 for married individuals filing separate returns)
of ordinary income for United States federal income tax purposes.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership or a non-resident fiduciary of a foreign estate or trust.
Under current United States federal income tax law, payments by Trust II or
any of its Paying Agents to any Securityholder who or which is a United States
Alien Holder will not
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be subject to United States federal withholding tax provided that the following
three conditions are met. First, the Securityholder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of shares of Metropolitan entitled to vote. Second, the Securityholder is not a
controlled foreign corporation that is related to Metropolitan through share
ownership. Third, either the Securityholder certifies to Trust II or its agent,
under penalties of perjury, that it is not a United States holder and provides
its name and address or a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "Financial Institution") certifies to Trust II or its
agent, under penalties of perjury, that such statement has been received from
the Securityholder by it or by a Financial Institution holding such security for
the Securityholder and furnishes Trust II or its agent with a copy thereof.
Under current United States federal income tax law, a United States Alien Holder
of a Preferred Security generally will not be subject to United States federal
withholding tax on any gain realized upon the sale or other disposition of a
preferred security.
In October 1997, final Treasury Regulations (the "Withholding Tax
Regulations") effective for payments of interest after December 31, 1999, were
issued that provide alternative methods for satisfying the certification
requirements described in the third condition above. The Withholding Tax
Regulations also require, in the case of preferred securities held by a foreign
partnership, that the certification described in the third condition above be
provided by the partners rather than by the foreign partnership. A look-through
rule would apply in the case of tiered partnerships. Prospective investors are
urged to consult their tax advisors with respect to the effect of the
Withholding Tax Regulations. Trust II will issue a Form 1042 or 1042-S, where
appropriate.
PROPOSED TAX LAW CHANGES
Legislation has been introduced in the United States Congress in the past
that, if enacted, would have denied an interest deduction to issuers of
instruments such as the junior subordinated debentures that were issued after
the date such legislation was proposed. No such legislation is currently
pending. We cannot assure you, however, that similar legislation will not
ultimately be enacted into law, possibly with retroactive effect, or that there
will not be other developments that would adversely affect the tax treatment of
the junior subordinated debentures and could result in the occurrence of Tax
Event, possibly leading to the redemption of the junior subordinated debentures.
See "Description of the Junior Subordinated Debentures -- Redemption or
Exchange."
Metropolitan is aware of at least one case, involving Enron Corporation,
now pending before the United States Tax Court where the IRS initially sought to
disallow the deduction for interest expense on securities that are similar to,
although different in a number of respects from, the junior subordinated
debentures. Such securities were issued in 1993 and 1994 to partnerships that,
in turn, issued "monthly income preferred securities." In a recently filed
stipulation in the United States Tax Court, the IRS conceded that Enron was
entitled to deduct its interest expense on the securities. Although the IRS has
apparently conceded the interest deductibility issue in the Enron case, there
can be no assurance that the IRS will not challenge the interest deductions of
other taxpayers (such as Metropolitan) which issue similar types of preferred
securities.
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INFORMATION REPORTING TO SECURITYHOLDERS
Generally, income on the preferred securities will be reported to
Securityholders on Forms 1099-INT (Forms 1099-OID if interest is accounted for
under the OID rules), which will be mailed to securityholders by January 31
following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, preferred securities may
be subject to a "backup" withholding tax of 31% unless the Securityholder
complies with certain certification requirements. Any withheld amounts will be
allowed as a credit against the Securityholder's United States federal income
tax, provided the required information is provided to the Internal Revenue
Service on a timely basis.
ERISA CONSIDERATIONS
Metropolitan and certain affiliates of Metropolitan may each be considered
a "party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or a "disqualified person" within
the meaning of Section 4975 of the Code with respect to many employee benefit
plans ("Plans") that are subject to ERISA. The purchase of the preferred
securities by an employee benefit plan that is subject to the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
Section 4975(e)(1) of the Code and with respect to which Metropolitan, or any
affiliate of Metropolitan, is a service provider (or otherwise is a party in
interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless the preferred
securities are acquired pursuant to and in accordance with an applicable
exemption. Any pension or other employee benefit plan proposing to acquire any
preferred securities should consult with its counsel.
UNDERWRITING
SALE OF THE COMMON STOCK
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), dated May 11, 1999, among Metropolitan, Trust II and
Ryan, Beck & Co., Metropolitan has agreed to sell to Ryan, Beck & Co., and Ryan,
Beck & Co. has agreed to purchase from Metropolitan, 300,000 shares of common
stock. The Underwriting Agreement provides that the obligations of Ryan, Beck &
Co. are subject to certain conditions precedent. Ryan, Beck & Co. has agreed to
purchase and pay for all shares of common stock (other than those shares subject
to the over-allotment described below) if any are purchased.
Metropolitan has been advised by Ryan, Beck & Co. that Ryan, Beck & Co.
proposes to offer the shares of common stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $0.33 per share. Ryan,
Beck & Co. may allow, and such dealers may reallow, a concession not in excess
of $0.10 per share to certain other dealers. After the initial offering to the
public, the offering price and other selling terms may be changed by the
underwriter.
Metropolitan has granted to Ryan, Beck & Co. an option, exercisable not
later than thirty days after the date of this Prospectus, to purchase up an
additional 45,000 shares of common stock at the public offering price per share.
To the extent that Ryan, Beck & Co.
125
<PAGE> 128
exercises such option, Metropolitan will be obligated, pursuant to the option,
to sell such shares of common stock to Ryan, Beck & Co. Ryan, Beck & Co. may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of common stock.
Metropolitan, its directors and officers have agreed not to offer, sell or
otherwise dispose of any shares of the common stock or any securities
convertible into or exchangeable for shares of common stock of Metropolitan for
180 days after the date of this prospectus without the prior written consent of
the underwriter except for:
- the issuance by Metropolitan of common stock pursuant to the exercise of
stock options under Metropolitan's option plans as disclosed in this
prospectus;
- the granting by Metropolitan of stock options after the date of this
prospectus under the option plans;
- as a bona fide gift to a third party or as a distribution to the partners
or stockholders of a Metropolitan shareholder, provided the recipient(s)
thereof agree to be bound by the terms of the lock-up arrangement to
which such shareholder is bound.
SALE OF THE PREFERRED SECURITIES
Subject to the terms and conditions of the Underwriting Agreement, Trust II
has agreed to sell to Ryan, Beck & Co., and Ryan, Beck & Co. has agreed to
purchase from Trust II, $15.0 million aggregate liquidation amount of preferred
securities at the public offering price subject to the underwriting commissions
set forth on the cover page of this Prospectus. The Underwriting Agreement
provides that the obligations of Ryan, Beck & Co. are subject to certain
conditions precedent and that Ryan, Beck & Co. will purchase all of the
preferred securities offered hereby if any of such preferred securities are
purchased.
Metropolitan has been advised by Ryan, Beck & Co. that Ryan, Beck & Co.
proposes to offer the preferred securities to the public and other dealers at
the public offering price set forth on the cover page of this Prospectus and
will share with certain dealers from its commission a concession not in excess
of $0.20 per preferred security. Ryan, Beck & Co. may allow, and such dealers
may reallow, a concession not in excess of $0.10 per preferred security to
certain other dealers. After the public offering, the offering price and other
selling terms may be changed by Ryan, Beck & Co.
Metropolitan has granted to Ryan, Beck & Co. an option, exercisable not
later than thirty days after the date of this prospectus, to purchase up to an
additional $2.3 million aggregate liquidation amount of the preferred securities
at the public offering price plus accrued Distributions, if any, from May 14,
1999. To the extent that Ryan, Beck & Co. exercises such option, Metropolitan
will be obligated, pursuant to the option, to sell such preferred securities to
Ryan, Beck & Co. Ryan, Beck & Co. may exercise such option only to cover
over-allotments made in connection with the sale of the preferred securities
offered hereby. If purchased, the underwriter will offer such additional
preferred securities on the same terms as those on which the $15.0 million
aggregate liquidation amount of the preferred securities are being offered.
In view of the fact that the proceeds from the sale of the preferred
securities will be used to purchase the junior subordinated debentures issued by
Metropolitan, the Underwriting Agreement provides that Metropolitan will pay as
compensation for Ryan, Beck & Co.'s arranging the investment therein of such
proceeds an amount of $0.375 per preferred security
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<PAGE> 129
(or $562,500 ($646,875 if the over-allotment option is exercised in full) in the
aggregate). Metropolitan has also agreed to reimburse Ryan, Beck & Co. for its
reasonable out-of-pocket expenses, including legal fees (not to exceed $75,000
(excluding "blue sky" work) without the prior written consent of Metropolitan)
and expenses relating to the offering of the preferred securities.
Because the National Association of Securities Dealers, Inc. (the "NASD")
is expected to view the preferred securities as interests in a direct
participation program, the offering of the preferred securities is being made in
compliance with the applicable provisions of Rule 2810 of the NASD's Conduct
Rules.
The preferred securities are a new issue of securities with no established
trading market. Metropolitan and Trust II have been advised by Ryan, Beck & Co.
that it intends to make a market in the preferred securities. However, Ryan,
Beck & Co. is not obligated to do so and such market making may be interrupted
or discontinued at any time without notice at the sole discretion of Ryan, Beck
& Co. Application has been made to list the preferred securities on the Nasdaq
National Market. However, three market makers for the preferred securities are
required for original listing, and two are required for continued listing
thereafter. The presence of a second or a third market maker cannot be assured.
Accordingly, no assurance can be given as to the development or liquidity of any
market for the preferred securities.
GENERAL
Although the common stock is listed on the Nasdaq Stock Market's National
Market and Trust II intends to list the preferred securities on the Nasdaq Stock
Market's National Market, Metropolitan can make no assurances as to the
liquidity of the common stock and the preferred securities. See "Risk
Factors -- Risk Factors Relating to the Common Stock -- You may have difficulty
selling your common stock because of the limited trading volume for our common
stock" and " -- Risk Factors Relating to the Preferred Securities -- You may
have difficulty selling your preferred securities if an active trading market
does not develop." The offering price of the common stock and the offering price
and distribution rate of the preferred securities have been determined by
negotiations among representatives of Metropolitan, Trust II and Ryan, Beck &
Co. Such offering prices may not be indicative of the market price of the common
stock or the preferred securities following the offering.
In connection with the offering, Ryan, Beck & Co. and any selling group
members and their respective affiliates may engage in transactions effected in
accordance with Rule 104 of the Securities and Exchange Commission's Regulation
M that are intended to stabilize, maintain or otherwise affect the market price
of the common stock and the preferred securities. Such transactions may include
over-allotment transactions in which Ryan, Beck & Co. creates a short position
for its own account by selling more common stock or preferred securities than it
is committed to purchase. In such a case, to cover all or part of the short
position, Ryan, Beck & Co. may exercise either or both of the over-allotment
option described above to purchase additional common stock or preferred
securities or may purchase common stock or preferred securities in the open
market following completion of the initial offering. Ryan, Beck & Co. also may
engage in stabilizing transactions in which it bids for, and purchases, common
stock or preferred securities at a level above that which might otherwise
prevail in the open market for the purpose of preventing or retarding a decline
in the market price of the common stock or the preferred securities. Ryan, Beck
& Co. also may reclaim any selling concessions allowed to an underwriter or
dealer if Ryan, Beck & Co. repurchases shares distributed by Ryan, Beck & Co. or
dealer. Any of the foregoing
127
<PAGE> 130
transactions may result in the maintenance of a price for the common stock or
the preferred securities at a level above that which might otherwise prevail in
the open market. Neither Metropolitan nor Ryan, Beck & Co. makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the common stock or
the preferred securities. Ryan, Beck & Co. is not required to engage in any of
the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
Metropolitan and Trust II have agreed to indemnify Ryan, Beck & Co. against
certain liabilities, including liabilities under the Securities Act of 1933.
VALIDITY OF SECURITIES
Richards, Layton & Finger, P.A., special Delaware counsel to Metropolitan
and Trust II will pass upon the following legal matters:
- the due authorization and valid issuance of the preferred securities by
Trust II;
- the validity of the Trust Agreement and its binding obligation on and
enforceability against Metropolitan and Trust II;
- the due creation and valid existence of Trust II, and its trust power and
authority to own its property and conduct its business; and
- the due authorization, execution and delivery of the underwriting
agreement by Trust II.
Thompson Hine will pass upon the following legal matters for Metropolitan:
- the due authorization and valid issuance of the common stock by
Metropolitan;
- the due authorization, execution and delivery of the Guarantee by, and
its binding obligation on, Metropolitan; and
- the due authorization, execution and delivery of the junior subordinated
debentures and the underwriting agreement by Metropolitan.
Patton Boggs LLP will pass upon the following legal matters for Ryan, Beck
& Co.:
- the due creation and valid existence of Trust II;
- the due authorization, execution and delivery of the underwriting
agreement, the Trust Agreement, the Guarantee, and the Indenture; and
- the due authorization and valid issuance of the preferred securities by
Trust II, and the junior subordinated debentures by Metropolitan.
Thompson Hine will also pass upon issues relating to United States federal
income tax considerations for Metropolitan as set forth in "Federal Income Tax
Consequences -- Classification of Trust II and the Junior Subordinated
Debentures."
Malvin E. Bank, a partner of Thompson Hine, is Secretary, Assistant
Treasurer and a Director of Metropolitan and a Director of Metropolitan Bank.
Mr. Bank owns 16,500 shares of common stock of Metropolitan. Other partners of
Thompson Hine own a total of 660 shares of common stock of Metropolitan and 600
of Metropolitan's 8.60% preferred securities.
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<PAGE> 131
EXPERTS
The consolidated financial statements of Metropolitan as of December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998, included in this prospectus and Registration Statement have been included
in reliance upon the report of Crowe, Chizek and Company LLP, as set forth in
its report thereon, appearing elsewhere in this Prospectus. The financial
statements audited by Crowe, Chizek and Company LLP have been included in
reliance upon such report given upon their authority as an expert in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Metropolitan files annual, quarterly, and current reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). You can read and copy such reports, proxy statements and other
information at the following locations of the Commission:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661
</TABLE>
You may also obtain copies of this information by mail at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can obtain further information on the operation of
the Commission's Public Reference Room in Washington, D.C. by calling the
Commission at 1-800-SEC-0330.
The Commission also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers like Metropolitan
who file electronically with the Commission. The address of that site is
http://www.sec.gov.
Metropolitan and Trust II have filed with the Commission a Registration
Statement on Form S-1 (together with all amendments, the "Registration
Statement") that relates to the common stock, the preferred securities, the
junior subordinated debentures and the guarantee. This prospectus is only part
of the Registration Statement. It does not contain all of the information in the
Registration Statement. The rules and regulations of the Commission permit us to
omit certain portions of the Registration Statement from the prospectus. For
more information regarding Metropolitan, Trust II, the preferred securities, the
junior subordinated debentures and the guarantee, you should refer to the
Registration Statement, including the attached exhibits.
This prospectus contains a description of the material terms and features
of all material contracts, reports or exhibits to the Registration Statement
required to be disclosed. The descriptions of such documents are brief and are
not necessarily complete. As a result, we urge you to refer to the copy of each
material contract, report and exhibit attached to the Registration Statement for
a more complete description of such document. Each such statement in this
prospectus is qualified in its entirety by reference to the complete document.
You may read the Registration Statement without charge at the principal office
of the Commission in Washington, D.C., and you may obtain copies of all or part
of it from the Commission by paying the prescribed fees.
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<PAGE> 132
Metropolitan will provide to the holders of the common stock and the
preferred securities annual reports containing financial statements audited by
Metropolitan's independent auditors. Metropolitan will also furnish annual
reports on Form 10-K free of charge to holders of the common stock and the
preferred securities who so request in writing addressed to the Secretary of
Metropolitan.
No separate financial statements of Trust II have been included herein.
Metropolitan does not consider that such financial statements would be material
to holders of preferred securities because (i) all of the voting securities of
Trust II will be owned by Metropolitan, a reporting company under the Securities
and Exchange Act of 1934, (ii) Trust II has no independent operations but exists
for the sole purpose of issuing securities representing undivided beneficial
interests in the assets of Trust II and investing the proceeds thereof in junior
subordinated debentures issued by Metropolitan, and (iii) taken together, 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, of all of Trust II's obligations under the preferred
securities. See "Description of the Junior Subordinated Debentures" and
"Description of the Guarantee." Metropolitan does not expect that Trust II will
file reports, proxy statements and other information under this Act with the
Commission.
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<PAGE> 133
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 134
METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES
MAYFIELD HEIGHTS, OHIO
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS.............................. F-2
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION............ F-3
CONSOLIDATED STATEMENTS OF OPERATIONS..................... F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY................................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS..................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................ F-7
</TABLE>
F-1
<PAGE> 135
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
F-2
<PAGE> 136
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.
F-3
<PAGE> 137
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.
F-4
<PAGE> 138
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.
F-5
<PAGE> 139
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.
F-6
<PAGE> 140
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.
F-7
<PAGE> 141
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
Metropolitan 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.
F-8
<PAGE> 142
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
F-9
<PAGE> 143
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
F-10
<PAGE> 144
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.
F-11
<PAGE> 145
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>
F-12
<PAGE> 146
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.
F-13
<PAGE> 147
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>
F-14
<PAGE> 148
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>
F-15
<PAGE> 149
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.
F-16
<PAGE> 150
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.
F-17
<PAGE> 151
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>
F-18
<PAGE> 152
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>
F-19
<PAGE> 153
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.
F-20
<PAGE> 154
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 Issuer'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
F-21
<PAGE> 155
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>
F-22
<PAGE> 156
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.
F-23
<PAGE> 157
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>
F-24
<PAGE> 158
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
F-25
<PAGE> 159
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.
F-26
<PAGE> 160
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.
F-27
<PAGE> 161
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.
F-28
<PAGE> 162
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.
F-29
<PAGE> 163
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.
F-30
<PAGE> 164
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>
F-31
<PAGE> 165
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.
F-32
<PAGE> 166
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>
F-33
<PAGE> 167
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>
F-34
<PAGE> 168
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.
F-35
<PAGE> 169
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>
F-36
<PAGE> 170
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR OTHER
INFORMATION TO WHICH THIS PROSPECTUS REFERS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE UNDER THIS PROSPECTUS SHOULD CAUSE YOU TO IMPLY,
UNDER ANY CIRCUMSTANCES, THAT THE AFFAIRS OF METROPOLITAN OR TRUST II HAVE NOT
CHANGED SINCE THE DATE OF THIS PROSPECTUS OR THAT THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS CORRECT AS OF ANY TIME AFTER THE DATE OF THIS PROSPECTUS.
THIS PROSPECTUS IS NOT AN OFFER TO SELL AND IT IS NOT SOLICITING AN OFFER TO BUY
ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS NOT PERMITTED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................ 1
Summary of Recent Developments......... 8
Risk Factors........................... 11
Forward-Looking Statements............. 17
Price Range of Common Stock and
Dividends............................ 17
Market for the Preferred Securities.... 18
Use of Proceeds........................ 19
Accounting Treatment................... 19
Ratio of Earnings to Fixed Charges..... 19
Capitalization......................... 20
Selected Consolidated Financial and
Other Data........................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 43
Regulation and Supervision............. 69
Management............................. 79
Executive Compensation and Other
Information.......................... 85
Description of the Capital Stock....... 87
Description of the Preferred
Securities........................... 89
Description of the Junior Subordinated
Debentures........................... 102
Description of the Guarantee........... 114
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures, the Expense Agreement and
the Guarantee........................ 118
Description of the 1995 Notes.......... 120
Federal Income Tax Consequences........ 121
ERISA Considerations................... 125
Underwriting........................... 125
Validity of Securities................. 128
Experts................................ 129
Where You Can Find More Information.... 129
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[Metropolitan Logo]
300,000 SHARES OF COMMON STOCK
METROPOLITAN
FINANCIAL CORP.
$7.875 PER SHARE
------------------------
$15,000,000
METROPOLITAN
CAPITAL TRUST II
9.50% TRUST PREFERRED SECURITIES
GUARANTEED BY
METROPOLITAN FINANCIAL CORP.
-------------------
PROSPECTUS
-------------------
[RYAN, BECK LOGO]
MAY 11, 1999
- ------------------------------------------------------
- ------------------------------------------------------
