<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
------------------
Commission file number 000-21553
----------------------------------------------------------
METROPOLITAN FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6001 Landerhaven Drive, Mayfield Heights, Ohio 44124
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(440) 646-1111
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
As of November 12, 1999, there were 8,061,530 of the Registrant's Common
shares issued and outstanding.
<PAGE>
METROPOLITAN FINANCIAL CORP.
Form 10-Q
Quarter ended September 30, 1999
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition (Unaudited)
as of September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations (Unaudited) for the
Three and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 1999 and 1998 5
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the nine months ended September 30, 1999 6
Notes to Consolidated Financial Statements (Unaudited) 7-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-33
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 33-35
PART II. OTHER INFORMATION 35-36
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURES 37
2
<PAGE>
Item 1. FINANCIAL STATEMENTS
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 25,675 $ 29,086
Securities available for sale 35,818 19,443
Securities held to maturity 16,002 16,217
Mortgage-backed securities 180,441 198,296
Loans held for sale 28,926 15,017
Loans receivable, net 1,205,978 1,018,271
Federal Home Loan Bank stock, at cost 9,327 6,054
Accrued interest receivable 10,198 8,678
Premises and equipment, net 27,541 19,114
Real estate owned, net 9,992 5,534
Intangible assets 2,526 2,724
Loan servicing rights 15,623 13,412
Prepaid expenses and other assets 8,450 11,588
---------- ----------
Total assets $1,576,497 $1,363,434
========== ==========
Liabilities
Noninterest-bearing deposits $ 61,928 $ 63,717
Interest-bearing deposits 1,127,078 987,640
Borrowings 276,654 215,486
Accrued interest payable 4,336 5,511
Other liabilities 16,644 20,686
---------- ----------
Total liabilities 1,486,640 1,293,040
---------- ----------
Guaranteed Preferred Beneficial Interests
In the Corporation's Junior Subordinated
Debentures 43,750 27,750
Shareholders' Equity
Preferred shares, 10,000,000 shares authorized --- ---
Common shares, no par value, authorized 10,000,000 shares, outstanding
8,056,393 in 1999 and 7,756,393 in 1998 --- ---
Additional paid-in capital 20,702 18,505
Retained earnings 27,476 23,660
Accumulated other comprehensive income (2,071) 479
---------- ----------
Total shareholders' equity 46,107 42,644
---------- ----------
Total liabilities and shareholders' equity $1,576,497 $1,363,434
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest income
<S> <C> <C> <C> <C>
Interest and fees on loans $24,877 $18,793 $69,739 $52,291
Interest on mortgage-backed securities 3,104 1,826 9,552 6,559
Interest and dividends on other investments 1,114 747 3,072 2,030
------- ------- ------ -------
Total interest income 29,095 21,366 82,363 60,880
------- ------- ------ -------
Interest expense
Interest on deposits 14,149 10,545 41,281 30,315
Interest on borrowings 3,850 2,338 9,942 6,483
Interest on Junior Subordinated Debentures 998 608 2,419 1,020
------- ------- ------ -------
Total interest expense 18,997 13,491 53,642 37,818
------- ------- ------ -------
Net interest income 10,098 7,875 28,721 23,062
Provision for loan losses 1,800 690 4,050 2,050
------- ------- ------ -------
Net interest income after provision for loan losses 8,298 7,185 24,671 21,012
------- ------- ------ -------
Noninterest income
Gain on sale of loans, net 254 965 1,428 2,490
Loan servicing income, net 278 125 979 604
Service charges on deposit accounts 374 219 963 649
Loan option income --- 111 168 388
Loan credit discount income --- 137 --- 137
Gain (loss) on sale of securities, net --- 32 --- 70
Other operating income 670 335 1,726 1,128
------- ------- ------ -------
Total noninterest income 1,576 1,924 5,264 5,466
------- ------- ------ -------
Noninterest expense
Salaries and related personnel costs 4,598 3,573 12,783 9,691
Occupancy and equipment expense 1,270 922 3,566 2,650
Federal deposit insurance premiums 249 183 682 511
Data processing expense 310 152 866 366
Marketing expense 178 253 536 671
State franchise taxes 248 156 744 467
Amortization of intangibles 66 66 198 197
Other operating expenses 1,601 1,260 4,612 3,758
------- ------- ------ -------
Total noninterest expense 8,520 6,565 23,987 18,311
------- ------- ------ -------
Income before income taxes and extraordinary item 1,354 2,544 5,948 8,167
Provision for income taxes 479 923 2,132 3,008
------- ------- ------ -------
Income before extraordinary item 875 1,621 3,816 5,159
Extraordinary item --- --- --- 245
------- ------- ------ -------
Net Income $ 875 $ 1,621 $3,816 $ 4,914
======= ======= ====== =======
Basic and diluted earnings per share $ 0.11 $ 0.21 $ 0.48 $ 0.63
======= ======= ====== =======
Weighted average shares outstanding for basic
earnings per share 8,056,393 7,756,393 7,913,536 7,756,393
Effect of dilutive options --- 34,759 --- 101,812
--------- --------- --------- ---------
Weighted average shares outstanding for diluted
earnings per share 8,056,393 7,791,152 7,913,536 7,858,205
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
METROPOLITAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities $ (26,635) $ (8,678)
Cash flows from investing activities
Disbursement of loan proceeds (309,909) (274,055)
Purchases of:
Loans (139,218) (196,767)
Mortgage-backed securities (20,081) (18,608)
Securities available for sale (20,040) (20,554)
Securities held to maturity --- (16,214)
Mortgage loan servicing rights (2,764) (1,602)
Premises and equipment (10,440) (5,311)
FHLB stock (2,871) (27)
Proceeds from maturities and repayments of:
Loans 227,065 199,250
Mortgage-backed securities 36,828 42,054
Securities held to maturity 220 4,740
Proceeds from sale of:
Loans 48,380 15,927
Mortgage-backed securities --- 43,211
Securities available for sale --- 10,975
Premises, equipment, and real estate owned --- 1,163
--------- ----------
Net cash used for investing activities (192,830) (215,818)
--------- ----------
Cash flows from financing activities
Net change in deposit accounts 137,615 148,171
Proceeds from borrowings 93,723 189,250
Repayment of borrowings (54,154) (141,370)
Net activity on lines of credit 21,600 13,500
Proceeds from issuance of common stock 2,197 ---
Proceeds from issuance of Guaranteed Preferred Beneficial
Interests in the Corporation's Junior Subordinated Debentures 15,073 27,750
--------- ----------
Net cash provided by financing activities 216,054 237,301
--------- ----------
Net change in cash and cash equivalents (3,411) 12,805
Cash and cash equivalents at beginning of period 29,086 22,511
--------- ----------
Cash and cash equivalents at end of period $ 25,675 $ 35,316
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 54,817 $ 37,518
Income taxes 1,112 2,895
Transfer from loans receivable to real estate owned 4,458 ---
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
METROPOLITAN FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Shares Capital Earnings Income Equity
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1998 $ --- $18,505 $23,660 $479 $42,644
Comprehensive income:
Net income --- --- 3,816 --- 3,816
Change in unrealized gain on
securities --- --- --- (2,550) (2,550)
-----
Total comprehensive income --- --- --- 1,266
-----
Issuance of 300,000 common shares --- 2,197 --- --- 2,197
-----------------------------------------------------------------------------
Balance September 30, 1999 $ --- $20,702 $27,476 $(2,071) $46,107
=============================================================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
METROPOLITAN FINANCIAL CORP.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
Metropolitan Financial Corp. ("Metropolitan" or the "Corporation") is a savings
and loan holding company and an Ohio corporation. Metropolitan's primary
operating subsidiary is Metropolitan Bank & Trust Company (the "Bank").
Metropolitan is engaged in the business of originating multifamily and
commercial real estate loans primarily in Ohio, Pennsylvania, Michigan, and
Kentucky and purchasing 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. All significant intercompany transactions have been
eliminated. In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting only of normal recurring
accruals, which the Corporation considers necessary for a fair presentation of
(a) the results of operations for the three and nine month periods ended
September 30, 1999 and 1998; (b) the financial condition at September 30, 1999
and December 31, 1998; (c) the statement of cash flows for the nine month
periods ended September 30, 1999 and 1998; and (d) the statement of changes in
shareholders' equity for the nine month period ended September 30, 1999. The
results of operations for the nine month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for any other period.
The annual report for Metropolitan for the year ended December 31, 1998,
contains consolidated financial statements and related notes which should be
read in conjunction with the accompanying consolidated financial statements.
2. Accounting Policies
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 sale. Securities
available for sale are carried at fair value with unrealized gains and losses
included as a separate component of shareholders' equity, net of tax. Gains or
losses on dispositions are based on net proceeds and the carrying amount of
securities sold adjusted for amortization of premium and accretion of discount,
using the specific identification method.
Loans: All loans are held for investment unless specifically designated as held
for sale. When the Bank originates or purchases loans, it makes a determination
whether or not to classify loans as held for sale. The Bank re-evaluates its
intention to hold or sell loans at each balance sheet date based on the current
environment and, if
7
<PAGE>
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 September 30, 1999 and
December 31, 1998, management had the intent and the Bank had the ability to
hold all loans being held for investment purposes for the foreseeable future.
Loans held for sale are recorded at the lower of cost or market. When the Bank
purchases real estate loans and simultaneously writes an option giving the
holder the right to purchase those loans, those loans are designated as held for
sale. Gains and losses on the sale of loans are determined by the identified
loan method and are reflected in operations at the time of the settlement of the
sale.
Allowance for Losses on Loans: The allowance for losses on loans is established
by a provision for loan losses charged against income. Increases to the
allowance are recorded by a provision for loan losses charged to expense.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a level
considered adequate to cover possible losses that are currently anticipated
based on past loss experience, general economic conditions, information about
specific borrower situations including their financial position and collateral
values, and other factors and estimates which are subject to change over time.
While management may periodically allocate portions of the allowance for
specific problem loans, the whole allowance is available for any loan charge-
offs that occur. A loan is charged off against the allowance by management as a
loss when deemed uncollectible, although collection efforts continue and future
recoveries may occur.
Loans considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral, by allocating a portion of
the allowance for losses on loans to such loans. If these allocations require an
increase in the allowance for losses on loans, such increase is reported as a
provision for loan losses. Management excludes all consumer loans and
residential single family loans with balances less than $200,000 from its review
for impairment. 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.
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
common shares were calculated assuming the exercise of stock options less
treasury shares assumed to be purchased from the proceeds using the average
market price of the Corporation's stock. All per share information has been
retroactively adjusted to reflect the effect of the stock dividends and stock
splits.
Capitalized Interest: Interest expenses incurred to finance construction of
buildings which take more than six months to build are capitalized as they are
incurred. The amount of capitalized interest included as a portion of the
historical cost of acquiring assets will be depreciated over the useful life of
the asset.
8
<PAGE>
New Accounting Pronouncements: In quarters beginning after June 30, 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 on market price movements.
3. Securities
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at September 30, 1999 and December 31, 1998 are as follows
(In thousands):
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for Sale
Mutual funds $ 824 --- --- $ 824
FreddieMac preferred stock 7,500 --- $(1,350) 6,150
FannieMae medium term notes 19,942 --- (862) 19,080
FreddieMac note 10,000 --- (236) 9,764
Mortgage-backed securities 181,180 $563 (1,302) 180,441
------- --- ----- -------
219,446 563 (3,750) 216,259
Held to Maturity
Tax-exempt municipal bond 14,822 --- --- 14,822
Revenue bond 1,180 --- --- 1,180
------- -------
16,002 --- --- 16,002
------- --- ----- -------
Total $235,448 $563 $(3,750) $232,261
======= === ===== =======
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for Sale
Mutual funds $ 2,059 --- --- $ 2,059
FreddieMac preferred stock 7,500 --- --- 7,500
FannieMae medium term note 9,921 --- $(37) 9,884
Mortgage-backed securities 197,521 $954 (179) 198,296
------- --- ---- -------
217,001 954 (216) 217,739
Held to Maturity
Tax-exempt municipal bond 14,817 --- --- 14,817
Revenue bond 1,400 --- 1,400
------- -------
16,217 --- --- 16,217
------- --- ---- -------
Total $233,218 $954 $(216) $233,956
======= === ==== =======
</TABLE>
9
<PAGE>
4. Loans Receivable
The composition of the loan portfolio at September 30, 1999 and December 31,
1998 is as follows (In thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Real estate loans
Construction loans:
Residential single family $107,565 $ 81,584
Commercial 450 19,129
Land 40,488 34,990
Loans in process (64,359) (46,001)
----------- ---------
Construction loans, net 84,144 89,702
Permanent loans:
Residential single family 246,355 189,182
Multifamily 372,361 337,412
Commercial 259,553 228,824
Other 815 1,320
----------- ---------
Total real estate loans 963,228 846,440
Consumer loans 139,743 96,115
Business and other loans 110,233 82,318
----------- ---------
Total loans 1,213,204 1,024,873
Premium (discount) on loans, net 7,462 5,320
Deferred loan fees, net (5,356) (5,013)
Allowance for losses on loans (9,332) (6,909)
----------- ----------
$1,205,978 $1,018,271
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Activity in the allowance for losses on loans for the periods ended September 30, 1999 and 1998 is as follows
(In thousands):
Nine Months Ended September 30,
<S> <C> <C>
1999 1998
---- ----
Balance at the beginning of the period $6,909 $5,622
Provision for loan losses 4,050 2,050
Net charge-offs (1,627) (613)
----- -----
Balance at end of period $9,332 $7,059
===== =====
</TABLE>
10
<PAGE>
Management analyzes loans on an individual basis and considers a loan to be
impaired when it is probable that all principal and interest amounts will not be
collected according to the terms of the contract. Information regarding impaired
loans at September 30, 1999 and December 31, 1998 is as follows (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Balance of impaired loans $2,638 $10,142
Less portion for which no allowance
For losses on loans is allocated 1,616 9,002
------ -------
Portion of impaired loans for which
An allowance for loan losses is allocated $1,022 $ 1,140
====== =======
Portion of allowance for losses on loans
Allocated to the impaired loan balance $1,022 $ 1,012
====== =======
September 30, September 30,
1999 1998
---- ----
Average investment in impaired loans
During the period $6,637 $9,265
====== =======
Interest income recognized during
Impairment $ 249 $ 190
====== =======
Interest income recognized on a
Cash basis during the period $ 249 $ 190
====== =======
</TABLE>
5. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at September 30, 1999 and December 31, 1998 are summarized as
follows (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Mortgage loan portfolios serviced for:
FreddieMac $ 765,156 $ 794,286
FannieMae 636,569 587,476
Other 171,059 114,585
---------- ----------
Total loans serviced for others $1,572,784 $1,496,347
========== ==========
</TABLE>
Custodial balances maintained in noninterest-bearing checking accounts in
connection with the foregoing loan servicing were approximately $19,690,000 and
$28,066,000 at September 30, 1999 and December 31, 1998, respectively.
11
<PAGE>
The following is an analysis of the changes in cost of loan servicing rights for
the nine-month period ended September 30, 1999 and 1998 (In thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Balance at the beginning of the period $13,412 $9,224
Acquired or originated 4,417 3,244
Amortization (2,206) (1,938)
------- -------
Balance at the end of the period $15,623 $10,530
======== =======
</TABLE>
6. Deposits
Deposits consist of the following (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Noninterest-bearing checking accounts $ 61,928 $ 63,717
Interest-bearing checking accounts 54,540 54,159
Passbook savings and statement savings 218,349 212,710
Certificates of deposit 854,189 720,771
---------- ----------
Total interest-bearing deposits 1,127,078 987,640
---------- ----------
$1,189,006 $1,051,357
========== ==========
</TABLE>
At September 30, 1999, scheduled maturities of certificates of deposit are as
follows (In thousands):
Year Weighted Average
Ended Amount Interest Rate
----- ------ ----------------
1999 $223,485 5.24%
2000 516,067 5.55
2001 87,653 5.70
2002 7,195 5.88
2003 7,976 5.97
Thereafter 11,813 5.68
--------
$854,189 5.50
========
12
<PAGE>
7. Borrowings
Borrowings consisted of the following at September 30, 1999 and
December 31, 1998 (In thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Federal Home Loan Bank Advances (5.9% and 5.4% at
September 30, 1999 and December 31, 1998, respectively) $176,610 $ 111,236
Reverse repurchase agreements (5.6% at both September 30,
1999 and December 31, 1998) 80,044 82,250
Commercial bank line of credit (7.6% and 7.7% at
September 30, 1999 and December 31, 1998, respectively) 6,000 8,000
Subordinated debt maturing January 1, 2005
(9.625% fixed rate) 14,000 14,000
-------- --------
$276,654 $215,486
======== ========
</TABLE>
At September 30, 1999, scheduled payments on borrowings are as follows
(In thousands):
Weighted Average
Year Ended Amount Interest Rate
---------- ------ ----------------
1999 $58,360 6.01%
2000 40,778 5.51
2001 7,311 6.20
2002 43,730 5.76
2003 38,239 5.58
Thereafter 88,236 6.56
--------
Total $276,654 6.02
========
Federal Home Loan Bank ("FHLB") advances are collateralized by FHLB stock,
residential first mortgage loans, and multifamily loans with an aggregate
carrying value of approximately $273,000,000 and $184,000,000 at September 30,
1999 and December 31, 1998, respectively and mortgage backed securities with a
carrying value of $8.0 million at September 30, 1999.
The Corporation has a commercial line of credit agreement with a commercial
bank. The maximum borrowing under the line is $12,000,000. The balance at
September 30, 1999 was $6,000,000. The line matures annually on May 30. During
the second quarter, by mutual agreement, the line was extended to May 31, 2000.
All other terms remain unchanged. 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.
13
<PAGE>
8. Financial Instruments With Off-Balance-Sheet Risk
The Bank can be a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial commitments include commitments to make loans. The Bank's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to make loans is represented by the contractual
amount of these instruments. The Bank follows the same credit policy to make
such commitments as is followed for those loans recorded in the financial
statements.
As of September 30, 1999, the Bank had fixed and variable rate commitments to
originate and/or purchase loans (at market rates) of approximately $65,877,000
and $91,693,000, respectively. Metropolitan's commitments to originate and
purchase loans are for loans with rates ranging from 5.375% to 16% and
commitment periods up to one year. Also, at quarter-end, the Bank had
commitments to sell loans totaling $25,656,000.
At December 31, 1998, the Bank had outstanding options which gave the holder the
option to purchase certain loans at a specified price within a specified time
period. The Bank collected a non-refundable fee on each option which is
recognized as income at the time the transaction is complete. The options may be
exercised at the carrying value for an initial period. The option price
escalates after the initial period until the option expires. At September 30,
1999, there were no loans held for sale in connection with outstanding purchase
options.
9. Securities Issued
On May 14, 1999, the Corporation issued 1,600,000 shares ($10 liquidation amount
per security), of 9.50% cumulative trust preferred securities (the "Trust
Preferred") through a newly formed, wholly-owned subsidiary, Metropolitan
Capital Trust II (the "Trust Issuer") and 300,000 Common shares of Metropolitan
Financial Corp. The Trust Issuer invested the total proceeds from the sale of
the Trust Preferred in the 9.50% Junior Subordinated Deferrable Interest
Debentures (the "Junior Subordinated Debentures") issued by the Corporation
which mature on June 30, 2029. The Corporation used the net proceeds from the
sale of the Junior Subordinated Debentures and the common shares to repay the
$12.0 million outstanding balance on the commercial bank line of credit and for
a $5 million capital contribution to the Bank to support growth. The remainder
is available for working capital at the Corporation. The Trust Preferred
securities are listed on the NASDAQ Stock Market's National Market under the
symbol "METFO."
The Corporation also issued trust preferred securities in 1998 through its
subsidiary, Metropolitan Capital Trust I. A description of the trust preferred
securities currently outstanding is presented below (Dollars in thousands):
<TABLE>
<CAPTION>
Issuing Date of Shares Interest Maturity Principal Amount
Entity Issuance Issued Rate Date September 30, 1999 December 31, 1998
------- -------- ------ -------- -------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Metropolitan Capital Trust I April 27, 1998 2,775,000 8.60% June 30, 2028 $27,750 $27,750
Metropolitan Capital Trust II May 14, 1999 1,600,000 9.50% June 30, 2029 16,000 ---
------- -------
$43,750 $27,750
======= =======
</TABLE>
14
<PAGE>
10. 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 19 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.
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 (in thousands):
As of or for the nine months ended September 30, 1999
<TABLE>
<CAPTION>
Retail and
Commercial Mortgage Parent
Banking Banking and Other Total
---------- -------- --------- -----
Operating results:
<S> <C> <C> <C> <C>
Net interest income $19,272 $4,121 $5,328 $28,721
Provision for losses on loans 3,652 398 --- 4,050
------ ------ ------ ------
Net interest income after
provision for loan losses 15,620 3,723 5,328 24,671
Noninterest income 3,440 1,849 (25) 5,264
Direct noninterest expense 11,870 4,261 398 16,529
Allocation of overhead 5,157 2,301 --- 7,458
------ ------ ------ ------
Net income before income taxes $ 2,033 $ (990) $4,905 $ 5,948
====== ====== ====== ======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Retail and
Commercial Mortgage Parent
Banking Banking and Other Total
---------- -------- --------- -----
Financial data:
<S> <C> <C> <C> <C>
Segment assets $1,087,323 $375,813 $113,361 $1,576,497
Depreciation and amortization 1,390 2,041 313 3,744
Expenditures for additions
to premises and equipment 9,411 1,029 --- 10,440
</TABLE>
As of or for the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Retail and
Commercial Mortgage Parent
Banking Banking and Other Total
---------- -------- --------- -----
Operating results:
<S> <C> <C> <C> <C>
Net interest income $ 15,350 $ 5,269 $ 2,443 $23,062
Provision for losses on loans 1,891 159 --- 2,050
------ ------ ------ -------
Net interest income after
provision for loan losses 13,459 5,110 2,443 21,012
Noninterest income 2,738 2,591 137 5,466
Direct noninterest expense 9,419 3,448 448 13,315
Allocation of overhead 3,409 1,587 --- 4,996
------ ------ ------ -------
Net income before income taxes
and extraordinary item $ 3,369 $ 2,666 $ 2,132 $ 8,167
====== ====== ====== =======
Financial data:
Segment assets $791,685 $304,921 $74,816 $1,171,422
Depreciation and amortization 1,102 2,055 259 3,416
Expenditures for additions
to premises and equipment 4,860 451 --- 5,311
</TABLE>
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; 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
16
<PAGE>
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.
11. Extraordinary Item
In the second quarter, 1998, earnings were affected by an extraordinary expense
of ($245,000), net of tax, or ($0.03) per common share, pertaining to the
Corporation's early retirement of $4.9 million 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 during
the quarter through the issuance of the 8.60% Guaranteed Preferred Beneficial
Interests in the Junior Subordinated Debentures.
12. Capitalized Interest Expense on Construction of New Corporate Headquarters
In the second quarter, 1999, the Corporation started the construction of a new
corporate headquarters building. As a result, interest expenses have been
incurred to finance construction. These costs will be capitalized as they are
incurred while the building is under construction and will be included as a
portion of the historical cost to be depreciated over the useful life of the
building. Interest expense capitalized for the three and nine-month periods
ended September 30, 1999 was $32,000 and $47,000, respectively.
13. Metropolitan Financial Corp. Stock Purchase Plan
In July, 1999, the Board of Directors of Metropolitan Financial Corp. authorized
the adoption of a Stock Purchase Plan permitting directors, officers, and
employees of the Corporation and its subsidiaries and certain affiliated
companies to make purchases of the Corporation's common shares at 95% of the
fair market value. The plan authorized the issuance of an additional 160,000
common shares for purchases made under the plan. The purchases under the plan
commenced in the fourth quarter, 1999.
17
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before extraordinary item (in thousands) $875 $1,621 $3,816 $5,159
Net income (in thousands) $875 $1,621 $3,816 $4,914
Basic earnings per share before
extraordinary item (1) $0.11 $0.21 $0.48 $0.67
Diluted earnings per share before
extraordinary item (1) $0.11 $0.21 $0.48 $0.66
Basic and diluted earnings per share (1) $0.11 $0.21 $0.48 $0.63
Return on average assets 0.23 % 0.61 % 0.35 % 0.65 %
Return on average equity 7.61 % 16.12 % 11.44 % 16.81 %
Noninterest expense to average assets 2.19 % 2.47 % 2.17 % 2.42 %
Efficiency ratio 72.42 % 66.55 % 70.00 % 63.65 %
Net interest margin 2.74 % 3.13 % 2.74 % 3.25 %
</TABLE>
(1) Per share data has been restated for a 10% stock dividend completed in
December, 1998, and the 1999 amounts include the effect of the issuance
of 300,000 additional common shares on May 14, 1999.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Total assets (in thousands) $1,576,497 $1,363,434 $1,171,422
Shareholders' equity (in thousands) 46,107 42,644 40,922
Shareholders' equity to total assets 2.92 % 3.13 % 3.49 %
Shares outstanding 8,056,393 7,756,393 7,756,393
Book value per share $5.72 $5.50 $5.27
Tangible book value per share $5.41 $5.14 $4.91
Market value of common shares $7.38 $10.50 $9.66
Nonperforming assets to total assets (2) 1.18 % 1.34 % 1.31 %
Allowance for losses on loans to total loans (2) 0.75 % 0.66 % 0.72 %
Net charge-offs to average loans 0.19 % 0.16 % 0.10 %
</TABLE>
(2) Ratios are based on period end balances.
18
<PAGE>
OVERVIEW
The reported results of Metropolitan primarily reflect the operations of the
Bank. Our results of operations are dependent on a variety of factors, including
the general interest rate environment, competitive conditions in the industry,
governmental policies and regulations and conditions in the markets for
financial assets. Like most financial institutions, the primary contributor to
our income is net interest income, the difference between the interest we earn
on interest-earning assets, such as loans and securities, and the interest we
pay on interest-bearing liabilities, such as deposits and borrowings. Our
operations are also affected by noninterest income, such as loan servicing fees,
servicing charges on deposit accounts, gains or losses on the sales of loans and
securities and loan option income. Our principal operating expenses, aside from
interest expense, consist of compensation and employee benefits, occupancy
costs, and general and administrative expenses.
Average Balances and Yields. The following tables present the total dollar
amount of interest income from average interest-earning assets and the resulting
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. Net interest
margin is influenced by the level and relative mix of interest-earning assets
and interest-bearing liabilities. All average balances are daily average
balances. Nonaccruing loans are considered in average loan balances. The average
balances of mortgage-backed securities and securities are presented at
historical cost.
19
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------------------------------
1999 1998
-------------------------------------- ----------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $1,220,398 $24,877 8.15% $ 857,612 $18,793 8.77%
Mortgage-backed securities 183,307 3,104 6.77 100,101 1,826 7.30
Other 69,084 1,114 6.45 48,564 747 6.15
---------- ------- ---------- -------
Total interest-earning assets 1,472,789 29,095 7.91 1,006,277 21,366 8.49
------- -------
Nonearning assets 81,303 57,827
---------- ----------
Total assets $1,554,092 $1,064,104
========== ==========
Interest-bearing liabilities:
Deposits $1,120,790 14,149 5.01 $ 778,666 10,545 5.37
Borrowings 262,203 3,882 5.87 148,702 2,338 6.24
Junior Subordinated Debentures 43,750 998 9.12 27,750 608 8.76
---------- ------- ---------- ------
Total interest-bearing liabilities 1,426,743 19,029 5.35 955,118 13,491 5.60
------- ---- ------ ----
Noninterest-bearing liabilities 81,373 68,753
Shareholders' equity 45,976 40,233
---------- ----------
Total liabilities and
shareholders' equity $1,554,092 $1,064,104
========== ==========
Net interest income before
capitalized interest 10,066 7,875
------- ------
Interest rate spread 2.56% 2.89%
==== ====
Net interest margin 2.74% 3.13%
Interest expense capitalized 32 ---
------ ------
Net interest income $10,098 $ 7,875
======= ======
Average interest-earning
assets to average
interest-bearing
liabilities 103.23% 105.36%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------------------------
1999 1998
----------------------------------------- ------------------------------------
(Dollars in thousands)
Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $1,144,454 $69,739 8.12% $790,491 $52,291 8.82%
Mortgage-backed securities 185,824 9,552 6.85 115,375 6,559 7.58
Other 65,233 3,072 6.28 41,505 2,030 6.52
---------- ------- ---------- -------
Total interest-earning assets 1,395,511 82,363 7.87 947,371 60,880 8.57
------- ------
Nonearning assets 77,204 57,628
---------- ----------
Total assets $1,472,715 $1,004,999
========== ==========
Interest-bearing liabilities:
Deposits $1,083,733 41,281 5.09 $749,320 30,315 5.41
Borrowings 225,722 9,989 5.92 136,330 6,483 6.36
Junior Subordinated Debentures 35,893 2,419 8.99 15,520 1,020 8.76
---------- ------- ---------- ------
Total interest-bearing liabilities 1,345,348 53,689 5.34 901,170 37,818 5.61
------- ---- ------ ----
Noninterest-bearing liabilities 82,903 64,961
Shareholders' equity 44,464 38,868
---------- ----------
Total liabilities and
shareholders' equity $1,472,715 $1,004,999
========== ==========
Net interest income before
capitalized interest 28,674 23,062
------- ------
Interest rate spread 2.53% 2.96%
==== ====
Net interest margin 2.74% 3.25%
Interest expense capitalized 47 ---
------- -------
Net interest income $28,721 $23,062
======= =======
Average interest-earning
assets to average
interest-bearing
liabilities 103.73% 105.13%
</TABLE>
21
<PAGE>
Rate and Volume Variances. Net interest income is affected by changes in the
level of interest-earning assets and interest-bearing liabilities and changes in
yields earned on assets and rates paid on liabilities. The following table sets
forth, for the periods indicated, a summary of the changes in interest earned
and interest paid resulting from changes in average asset and liability balances
and changes in average rates. Changes attributable to the combined impact of
volume and rate have been allocated proportionately to change due to volume and
change due to rate.
Three Months ended September 30,
1999 vs. 1998
Increase (Decrease)
-------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ------
(In thousands)
Interest income on:
Loans receivable $6,084 $7,286 $(1,202)
Mortgage-backed securities 1,278 1,399 (121)
Other 367 319 48
------ ------ -------
Total interest income 7,729 $9,004 $(1,275)
------ ====== =======
Interest expense on:
Deposits 3,604 $4,633 $(1,029)
Borrowings 1,544 1,785 (241)
Junior Subordinated Debentures 390 350 40
------ ------ -------
Total interest expense 5,538 $6,768 $(1,230)
------ ====== =======
Increase in net interest income $2,191
======
Nine Months ended September 30,
1999 vs. 1998
Increase (Decrease)
-------------------------------------
Change Change
Total Due to Due to
Change Volume Rate
------ ------ ------
(In thousands)
Interest income on:
Loans receivable $17,448 $21,175 $(3,727)
Mortgage-backed securities 2,993 3,550 (557)
Other 1,042 1,107 (65)
------ ------- -------
Total interest income 21,483 $25,832 $(4,349)
------ ======= =======
Interest expense on:
Deposits 10,966 $12,619 $(1,653)
Borrowings 3,506 3,921 (415)
Junior Subordinated Debentures 1,399 1,372 27
------ ------- -------
Total interest expense 15,871 $17,912 $(2,041)
------ ======= =======
Increase in net interest income $ 5,612
=======
22
<PAGE>
Results of Operations
Net Income. Net income for the third quarter, 1999 was $0.9 million as compared
to net income of $1.6 million for the third quarter, 1998, a decrease of 46.0%.
Net interest income increased $2.2 million, or 28.2%, for the three months ended
September 30, 1999 over the prior year period. The provision for loan losses
increased $1.1 million from the same prior year period. Noninterest income
decreased $0.3 million to $1.6 million from $1.9 million for the prior year
quarter. Noninterest expense increased $1.9 million to $8.5 million for the
quarter from $6.6 million from the prior year quarter.
Net income for the nine-month period ended September 30, 1999 was $3.8 million
as compared to net income of $4.9 million for the first nine months of 1998.
Before the extraordinary item in 1998, net income for the first nine months was
$5.2 million. Net interest income increased $5.7 million, or 24.5%, for the nine
months ended September 30, 1999 over the prior year period. The provision for
loan losses increased $2.0 million from the same prior year period. Noninterest
income decreased $0.2 million to $5.3 million from $5.5 million for the first
nine months of 1999 compared to 1998. Noninterest expense increased $5.7 million
to $24.0 million for the nine-month period ended September 30, 1999 from $18.3
million from the prior year period.
Year-to-date earnings in 1998 were affected by an extraordinary item of
($245,000) in the second quarter pertaining to the early retirement of $4.9
million 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, net of income taxes.
Our net interest margin decreased thirty-nine and fifty-one basis points for the
three and nine-month periods ended September 30, 1999, to 2.74% as compared to
3.13% and 3.25% for the same periods in 1998. The decrease in net interest
margin resulted primarily from the decreased yield on interest-earning assets.
Interest Income. Total interest income increased 36.2% and 35.3% in the three
and nine-month periods ended September 30, 1999, respectively to $29.1 million
and $82.4 million, as compared to $21.4 million and $60.9 million in the same
periods in 1998. This increase primarily resulted from a 46.4% and 47.3%
increase in average interest-earning assets in the three and nine-month periods
ended September 30, 1999 as compared to the prior year. Average earning assets
increased as a result of our strategy of increasing assets as long as assets
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. The decline in the weighted average yield is due mostly to relative mix
of interest-earning assets and the narrowing of spreads on nonresidential real
estate loans caused by competition from other lenders.
Interest Expense. Total interest expense increased 40.8% and 41.8% to $19.0
million and $53.6 million for the three and nine-month periods ended September
30, 1999, respectively, as compared to $13.5 million and $37.8 million for the
same periods in 1998. Interest expense increased due to a higher average balance
of interest-bearing liabilities outstanding which was partially offset by a
decreased cost of funds compared to the same periods in 1998. In accordance with
our strategy to fund growth in assets primarily with deposits, the average
balance of interest-bearing deposits increased 49.4% and 49.3% for the three and
nine-month periods ending September 30,
23
<PAGE>
1999 as compared to the prior year periods. Due to a decrease in the market
interest rates paid to increase deposit balances, our cost of funds decreased to
5.35% and 5.34% for the three and nine-month periods ended September 30, 1999.
Provision for Loan Losses. The provision for loan losses increased
$1.1 million for the third quarter, 1999, and $2.0 million for the nine-month
period ended September 30, 1999 as compared to the same periods in 1998.
Management increased the provision due to the ongoing analysis of the
appropriate allowance for loan losses as the 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. We expect to continue to increase the
allowance for loans losses as the loan portfolio continues to increase and in
response to changes in the portfolio mix. The allowance for losses on loans at
September 30, 1999 was $9.3 million or 0.75% of total loans, as compared to $6.9
million, or 0.66% of total loans at December 31, 1998.
Noninterest Income. Total noninterest income decreased 18.1% and 3.7% to $1.6
million and $5.3 million for the three and nine-month periods ended September
30, 1999, respectively, as compared to $1.9 million and $5.5 million for the
prior year periods.
Gain on sale of loans was $254,000 in the three-month period ended September 30,
1999, as compared to $1.0 million during the same period in 1998. For the nine-
month period ended September 30, 1999, gain on sale of loans was $1.4 million as
compared to $2.5 million for the prior year period. The primary reason for the
decline in the first nine months of 1999 was the decline in the prices available
in the market which was due to the rise in long term interest rates experienced
in 1999 compared to the same period in 1998. The proceeds of residential loan
sales in the first nine months of 1999 were $161.4 million as compared to
$165.4 million in the same period in 1998.
Net loan servicing income increased $153,000 to $278,000 in the three-month
period ended September 30, 1999 as compared to the same period in 1998 and
$375,000 to $979,000 for the nine months ended September 30, 1999 as compared to
the prior year period. The increase in loan servicing fees was a result of the
strategy to increase fee income. The portfolio of loans serviced for others
increased to $1.6 billion at September 30, 1999 as compared to $1.5 billion at
December 31, 1998. Purchases of loan servicing rights and origination of loan
servicing, including the securitization of Metropolitan's loans, more than
offset payoffs and the amortization of existing loans serviced.
Service charges on deposit accounts increased $155,000 to $374,000 in the three-
month period ended September 30, 1999 compared to the same period in 1998 and
$314,000 to $963,000 for the nine months ended September 30, 1999 as compared to
the prior year period. The primary reasons for the increase were the overall
growth in deposit accounts and increases in deposit account prices for fees
during the first nine months of 1999.
Loan option income was $168,000 in the nine-month period ended
September 30, 1999 as compared to $111,000 and $388,000 in the three
and nine-month periods ending September 30, 1998. This income was dependent upon
the amount of loans for which options were written and the price negotiated,
both of which are affected by market conditions. In these transactions,
Metropolitan purchased loans and sold nonrefundable options to a third party to
purchase these same loans at a later date. At the time the transaction is
complete, Metropolitan recognizes a non-refundable fee as income. Metropolitan
has not purchased any of these loans in 1999 and does not expect to purchase any
in the foreseeable future.
24
<PAGE>
There were no gains or losses on sale of securities in the first nine months of
1999 as compared to gains of $32,000 and $70,000 for the three and nine-month
periods ended September 30, 1998, respectively. The net gains in the first nine
months of 1998 were the result of the sale of a mortgage-backed security in the
third quarter and the sale of securities in prior quarters originally purchased
to satisfy regulatory liquidity requirements which were no longer necessary for
that purpose due to revisions to those requirements.
Other noninterest income increased $335,000 and $598,000 in the three and nine-
month periods ended September 30, 1999, respectively, compared to the same
periods in the previous year. This increase was primarily due to increased fee
income generated from the increased level of business, greater trust income, and
increased rental income in the first nine months of 1999.
Noninterest Expense. Total noninterest expense increased to $8.5 million, or
29.8%, and $24.0 million, or 31.0%, in the three and nine-month periods ended
September 30, 1999 as compared to $6.6 million and $18.3 million for the same
periods in 1998.
Personnel related expenses increased $1.0 million and $3.0 million in the three-
month and nine-month periods ended September 30, 1999, respectively, as compared
to the same periods in 1998. These increases were primarily a result of
increased staffing levels to support expanded activities such as trust services,
new retail sales offices locations, and new mortgage origination offices.
Occupancy costs increased $348,000 and $916,000 in the three and nine-month
periods ended September 30, 1999, respectively, over the same periods in 1998.
This increase was generally the result of two additional full service retail
sales offices and three mortgage origination offices. As part of the plan to
expand mortgage banking operations, residential loan production offices were
opened in the Akron and Canton areas and a residential construction office was
opened in the Columbus market. We expect to continue to open additional loan
production and retail sales offices.
Data processing expense increased $158,000 and $500,000 in the three and nine-
month periods ended September 30, 1999, respectively, as compared to the same
periods in 1998. This increase was the result of expenses incurred for
consulting services and Year 2000 testing, and data processing costs related to
new retail sales and mortgage origination offices.
State franchise taxes increased $92,000 and $277,000 in the three and nine-month
periods ended September 30, 1999, over the same periods in 1998. The primary
reason for this increase is the increase in capital at the Bank, which is the
basis for the tax.
Other operating expenses, which include miscellaneous general and administrative
costs such as loan servicing, loan processing costs, business development, check
processing and ATM expenses, increased $341,000 and $854,000 for the three and
nine-month periods ended September 30, 1999 as compared to the same periods in
1998. These increases were generally the result of increases in expenses
pertaining to increased business activities, real estate owned expenses, and
increased costs for professional services.
Provision for Income Taxes. The provision for income taxes decreased $444,000
and $876,000 for the three and nine-month periods ended September 30, 1999 as
compared to the same periods in 1998. The primary reason for
25
<PAGE>
the decrease in the provision was the decreased level of taxable income over the
prior year. The effective tax rates were 35.4% and 35.8% for the three and nine-
month periods ended September 30, 1999 as compared to 36.3% and 36.8% for the
same periods in 1998.
Asset Quality
Metropolitan's goal is to maintain the asset quality of its loan portfolio
through conservative lending policies and prudent underwriting. Detailed reviews
of the loan portfolio are undertaken regularly to identify potential problem
loans or trends early and to provide for adequate estimates of potential losses.
In performing these reviews, management of Metropolitan considers, among other
things, current economic conditions, portfolio characteristics, delinquency
trends, and historical loss experiences. Metropolitan normally considers loans
to be nonperforming when payments are 90 days or more past due or when the loan
review analysis indicates that repossession of the collateral may be necessary
to satisfy the loan. In addition, Metropolitan considers loans to be impaired
when, in management's opinion, it is probable that the borrower will be unable
to meet the contractual terms of the loan. When loans are classified as
nonperforming, an assessment is made as to the collectibility of the unpaid
interest. Interest determined to be uncollectible is reversed from interest
income and future interest income is recorded only if the loan principal and
interest due is considered collectible and is less than the estimated fair value
of the underlying collateral.
26
<PAGE>
The table below provides information concerning Metropolitan's nonperforming
assets and the allowance for losses on loans as of the dates indicated. All
loans classified by management as impaired were also classified as
nonperforming.
September 30, December 31,
1999 1998
---- ----
(Dollars in thousands)
Nonaccrual loans $8,115 $12,231
Loans past due greater than
90 days or impaired, still accruing 442 460
------- -------
Total nonperforming loans 8,557 12,691
Real estate owned 9,992 5,534
------- -------
Total nonperforming assets $18,549 $18,225
======= =======
Allowance for losses on loans $ 9,332 $ 6,909
======= =======
Nonperforming loans to total loans 0.69% 1.23%
Nonperforming assets to total assets 1.18% 1.34%
Net charge-offs to average loans 0.19%(1) 0.16%(1)
Provision for loan losses to
average loans 0.47%(1) 0.31%(1)
Allowance for losses on loans to
total nonperforming loans at
end of period 109.06% 54.44%
Allowance for losses on loans to
Total loans at end of period 0.75% 0.66%
(1) Annualized for comparative purposes.
Nonperforming assets at September 30, 1999 increased $0.3 million to
$18.5 million as compared to $18.2 million at December 31, 1998. This slight
increase in nonperforming assets was consistent with growth in the various loan
categories. The increase was spread among most loan categories, with the
greatest increase being experienced in consumer loans. The decrease in
nonaccrual loans and related increase in real estate owned was the result of the
transfer of a $4.0 million loan for a waterpark in Southern California to real
estate owned during the second quarter of 1999. An agreement involving the sale
of the waterpark was negotiated in October, 1999 and the transaction is expected
to close prior to year end.
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 $2.3 million of loans in this category at September 30, 1999, a decrease of
$0.8 million from December 31, 1998. Management believes the Bank is well
secured against loss.
27
<PAGE>
Financial Condition
Total assets amounted to $1.6 billion at September 30, 1999, as compared to $1.4
billion at December 31, 1998, an increase of $213.1 million, or 15.6%. The
increase in assets was concentrated in loans and was funded primarily with
deposit growth of $137.6 million, increased borrowings of $61.2 million, and the
Trust Preferred of $16.0 million.
Securities available for sale increased $16.4 million, or 84.2%, to
$35.8 million at September 30, 1999 compared to $19.4 million at
December 31, 1998. The increase was primarily due to the purchase of a
$10.0 million FreddieMac note and a $10.0 million FannieMae medium term note
in the first quarter to meet regulatory liquidity requirements, and was
partially offset by a decline in market prices during 1999.
Loans receivable, including loans held for sale, increased $201.6 million, or
19.5%, to $1.2 billion at September 30, 1999 from $1.0 billion at December 31,
1998. This increase was primarily due to increases in residential single family
loans of $57.2 million, multifamily loans of $34.9 million, consumer loans of
$43.6 million, and business loans of $27.9 million. These increases resulted
from increases in the demand for adjustable rate loans as interest rates have
risen during the first three quarters of 1999.
Premises and equipment, net increased $8.4 million to $27.5 million at September
30, 1999. This increase was the result of the acquisition of land to be used for
the new corporate headquarters, architectural costs associated with the design
of the new headquarters, the purchase of computer equipment to accommodate
continued growth, and office expansion. The new corporate headquarters is
expected to completed in the fourth quarter, 2000.
Real estate owned, net increased to $10.0 million at September 30, 1999, an
increase of $4.5 million from December 31, 1998. This increase was primarily the
result of the transfer of a $4.0 million loan to real estate owned from loans in
the second quarter. This loan is secured by a waterpark in Southern California.
As discussed above, this property is under contract for sale and the transaction
is expected to close prior to year end.
Other assets include an investment in a limited partnership which services
residential real estate loans. The loans in the partnership's servicing
portfolio prepaid more quickly than anticipated in 1998 due to the lower level
of long-term interest rates. The general partner of the limited partnership
advised the Bank that, as a result of this prepayment activity and to comply
with certain debt covenants financing the partnership, it restructured the
underlying portfolio in April of 1999. As a result of these events, the Bank's
investment has been permanently impaired and a writedown of $180,000 was taken
during the period ended September 30, 1999. The Bank continues to monitor its
investment in this asset, however there can be no guarantee that the remaining
value of $820,000 can be fully realized.
Total deposits were $1.2 billion at September 30, 1999, an increase of
$137.6 million, or 13.1%, over the balance of $1.1 billion at
December 31, 1998. The increase resulted primarily from management's marketing
efforts, continued growth at newer retail sales offices, increased custodial
checking balances, and payment of competitive rates to increase certificate of
deposit balances. In addition, $61.2 million of this increase was attributable
to a greater balance of out-of-state time deposits. The use of out-of-state time
deposits is a strategy management has
28
<PAGE>
employed to fund the opportunistic acquisitions of assets. The strategy is to
eventually replace time deposits with retail deposits.
Borrowings increased $61.2 million, or 28.4%, from December 31, 1998 to
September 30, 1999. The increase was the result of increases in FHLB advances
which were utilized in addition to deposits to fund the asset growth discussed
previously.
In addition, Trust Preferred securities increased $16.0 million in the second
quarter, 1999. Metropolitan used the net proceeds from the Trust Preferred
offering and the offering of common shares to repay the $12.0 million
outstanding balance on the commercial bank line of credit and for a $5.0 million
capital contribution to the Bank to support growth. The remainder is available
for working capital at the Corporation.
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.
The Corporation's primary sources of funds currently are dividends from the
Bank, which are subject to restrictions imposed by federal bank regulatory
agencies and debt and equity offerings. The Corporation's primary use of funds
is for interest payments on its existing debt. At September 30, 1999, the
Corporation, excluding the Bank, had cash and readily convertible investments of
$1.6 million. In addition, the Corporation has available the $6.0 unused balance
on its commercial line of credit agreement.
The Bank is required by regulation to maintain a liquidity ratio (average daily
balance of liquid assets to average daily balance of net withdrawable accounts
and short-term borrowings) of 4%. The Bank's liquidity ratio for September, 1999
was 4.53%. Historically, Metropolitan has maintained its liquidity close to the
required minimum since the yield available on qualifying investments is lower
than alternative uses of funds and is generally not at an attractive spread over
incremental cost of funds.
While principal repayments and FHLB advances are fairly stable sources of funds,
deposit flows and loan prepayments are greatly influenced by prevailing interest
rates, economic conditions, and competition. Metropolitan regularly reviews cash
flow needed to fund its operations and believes that the existing resources are
adequate for its foreseeable requirements.
At September 30, 1999, $165.2 million, or 13.9%, of Metropolitan's deposits were
in the form of certificates of deposit of $100,000 and over. If a large number
of these certificates of deposits matured at approximately the same time and
were not renewed, there could be an adverse effect on Metropolitan's liquidity.
Metropolitan monitors maturities to attempt to minimize the potential adverse
effect on liquidity.
29
<PAGE>
When evaluating sources of funds, we consider the cost of various alternatives
such as local retail deposits, FHLB advances and other wholesale borrowings. One
option considered and utilized in the past has been the acceptance of out-of-
state time deposits from individuals and entities, predominantly credit unions.
These deposits typically have balances of $90,000 to $100,000 and have a term of
one year or more. They are not accepted through brokers. At September 30, 1999,
approximately $227.5 million, or 19.1% of our accounts were held by these
individuals and entities. If we were unable to replace these deposits upon
maturity, there could be an adverse effect on our liquidity. We monitor
maturities to attempt to minimize any potential adverse effect on liquidity.
We have access to wholesale borrowings based on the availability of eligible
collateral. The FHLB makes funds available for housing finance based upon the
blanket or specific pledge of certain one- to four-family loans and various
types of investment and mortgage-backed securities. The Bank had borrowing
capacity at the FHLB under its blanket pledge agreement of approximately $182
million at September 30, 1999, of which $176.6 million was utilized. The
financial market makes funds available through reverse repurchase agreements by
accepting various investment and mortgage-backed securities as collateral. The
Bank had borrowings through reverse repurchase agreements of approximately $80.0
million at September 30, 1999, which utilized substantially all of the Bank's
eligible collateral.
Capital. The Office of Thrift Supervision ("OTS") imposes capital requirements
on savings associations. Savings associations are required to meet three minimum
capital standards: (i) a leverage requirement, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. Such standards must be
no less stringent than those applicable to national banks. In addition, the OTS
is authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The Bank's regulatory capital ratios at September 30, 1999 were in excess of the
capital requirements specified by OTS regulations as shown by the following
table:
<TABLE>
<CAPTION>
Tangible Capital Core Capital Risk-based Capital
---------------- ------------ ------------------
(Dollars in thousands)
Capital amount:
<S> <C> <C> <C> <C> <C> <C>
Actual $104,735 6.64% $104,830 6.64% $111,438 8.70%
Required 23,671 1.50 63,125 4.00 102,512 8.00
------- ---- ------- ---- ------- ----
Excess $ 81,064 5.14% $ 41,705 2.64% $ 8,926 0.70%
======== ==== ======== ==== ======= ====
</TABLE>
The Bank is also subject to capital adequacy requirements under the Federal
Deposit Insurance Corporation Improvement Act of 1991. The additional capital
adequacy ratio imposed on the Bank in this evaluation is the Tier 1 risk-based
capital ratio which at September 30, 1999 was 8.18%, compared to the required
ratio of 4%.
We anticipate that under the current regulations, the Bank will continue to meet
its minimum capital requirements in the foreseeable future. However, events
beyond the control of the Bank, such as increased interest rates or a downturn
in the economy, could adversely affect future earnings and consequently, the
ability of the Bank to meet its future capital requirements.
In 1999, the Board of Directors of Metropolitan Financial Corp. authorized the
adoption of a Stock Purchase Plan permitting directors, officers, and employees
of the Corporation and its subsidiaries and certain affiliated
30
<PAGE>
companies to make purchases of the Corporation's common shares stock at 95% of
the fair market value. The purchases made under the plan will result in
increased capital for the Corporation.
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 have completed the assessment, planning, and remediation phases of our year
2000 program. We have also completed the testing of our internal equipment and
software. 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. We
have completed our testing and remediation of our interface systems with third
parties. We believe that all of these internal components will be adequate to
provide quality service to our customers without interruption by January 1,
2000. We continue to test our non-critical systems and expect to retest our
interface systems with third parties during the remainder of 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 year 2000 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 whom we do business will adequately address their year 2000 issues. If our
suppliers and customers are not year 2000 compliant by January 1, 2000, their
noncompliance could materially affect our business, results of operations and
financial condition.
We have developed a contingency plan that focuses 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
31
<PAGE>
and test a business resumption plan. This plan was in place and tested by June
30, 1999. We expect to continue testing this plan throughout the remainder of
1999.
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.
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 $54,000 for incremental services directly related
to ensuring year 2000 readiness. In addition, we have spent $206,000 to upgrade
computer hardware and software which was necessary to ensure year 2000
readiness. We do not expect future expenditures to upgrade computer hardware and
software to be material.
Recent Accounting Developments
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") 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 was to be effective for all fiscal years beginning after June 15,
1999. The adoption date of Statement No. 133 was subsequently deferred by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133." Under Statement No. 137 issued
in June of 1999, the effective date was delayed to all fiscal quarters beginning
after June 15, 2000.
In October, 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 will, in 1999,
allow mortgage loans held for sale that are subsequently securitized to be
classified as trading, available for sale, or in certain circumstances held to
maturity. Currently, these securitized mortgage loans must be classified as
trading. We do not expect these statements to have a material effect on the
Corporation's consolidated financial position or results of operation.
Forward Looking Statements
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to Metropolitan or its management are
intended to identify such forward looking statements. Metropolitan's actual
results, performance or achievements may materially differ from those expressed
or implied in the forward looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment,
32
<PAGE>
competitive conditions in the financial services industry, changes in law,
governmental policies and regulations, and rapidly changing technology affecting
financial services.
Item 3. 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. 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.
Interest rate risk can be measured directly by forecasting changes in net
interest income under a variety of interest rate scenarios or indirectly by
monitoring the level of and the changes in certain ratios and benchmarks which
are indicators of interest rate risk. Indirect methods include forecasting
changes in net interest income as rates change, forecasting the net market value
of all financial assets and financial liabilities (known as net portfolio value
or NPV), comparing assets and liabilities maturing or pricing within a given
period of time (known as gap analysis) and by measuring the duration of
financial assets and liabilities.
The Office of Thrift Supervision ("OTS") currently looks to the Thrift Bulletin
TB 13a, issued December 1, 1998, to evaluate interest rate risk at institutions
they supervise. They categorize interest rate risk as minimal, moderate,
significant, or high based on a combination of the projected NPV level after a
200 basis change in interest rates and the size of that change in NPV due to a
200 basis point change in interest rates.
We manage interest rate risk on a day to day basis as we make decisions about
the acquisition of assets and liabilities and supplement this with a formal
process to monitor interest rate risk.
On a weekly basis, management reviews:
o deposit activity by maturity category;
o market rates for deposit products; and
o market rates for loan products.
On a monthly basis, management reviews:
o analysis of rate and volume changes in historic net interest
income;
o forecast of balance sheet activity;
o historic deposit breakdowns by product type and maturity;
o liability breakdowns by maturity date;
o effect of rate shock on NPV;
o effect of rate shock on net interest income; and
o level of regulatory capital.
33
<PAGE>
On a quarterly basis, management reviews:
o OTS calculation of effect of rate shock on NPV; and
o upcoming deposit maturities by day.
Annually, or more often if necessary, management reviews:
o complete budget under most likely interest rate scenario.
Interest rate risk is monitored by an asset and liability committee. 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 the
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.
The asset and liability committee focuses on the effect of a rate shock on net
interest income as a short-term measure of interest rate risk and the effect of
a rate shock on NPV as a long-term measure of interest rate risk. The following
table shows the change in net interest income for immediate sustained parallel
shifts of 1% and 2% in market interest rates for year-end 1998 and the most
recent quarter.
Expected change in
net interest income
-------------------
Change in Interest Rate September 30, 1999 December 31, 1998
- ----------------------- ------------------ -----------------
+2% -18.6% -19.1%
+1% -9.2% -9.6%
-1% +8.8% +8.8%
-2% +17.7% +17.7%
The results above indicate that there has been a small decrease in short-term
interest rate risk during the first nine months of 1999.
The following table shows the net portfolio value for immediate sustained
parallel shifts of 1% and 2% in market interest rates for year-end 1998 and the
most recent quarter.
Net portfolio value
-------------------
Change in Interest Rate September 30, 1999 December 31, 1998
- ----------------------- ------------------ -----------------
+2% 3.6% 4.6%
+1% 5.2% 5.9%
0% 6.7% 7.2%
-1% 8.1% 8.8%
-2% 9.5% 10.6%
34
<PAGE>
The results above indicate that the post-shock NPV has declined over the first
nine months of 1999. This was primarily due to the fact that we have an exposure
to declines in NPV as interest rates rise and interest rates have risen during
1999.
Under TB 13a, Metropolitan falls in the significant interest rate risk category
as of September 30, 1999, based on current sensitivity to interest rate changes
and the current level of regulatory capital.
We are aware that any method of measuring interest rate risk including the three
used above has certain shortcomings. For example, certain assets and liabilities
may have similar maturities or repricing dates but their repricing rates may not
follow the general trend in market interest rates. Also, as a result of
competition, the interest rates on certain assets and liabilities may fluctuate
in advance of changes in market interest rates while rates on other assets and
liabilities may lag market rates. In addition, any projection of a change in
market rates requires that prepayment rates on loans and early withdrawal of
certificates of deposits be projected and those projections may be inaccurate.
We focus on the change in net interest income and the 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.
Based on the current level of interest rate risk indicated by these three
measures, significant interest rate risk exists. The asset and liability
committee has implemented a program to reduce interest rate risk over the next
15 months. Features of this plan include:
o originate one-to four family adjustable rate loans for the
portfolio;
o originate one-to four family fixed rate loans for sale;
o originate the majority of business loans to float with prime
rates;
o securitize and sell at least $70 million of fixed rate
multifamily loans;
o originate commercial real estate and multifamily loans with
predominantly adjustable rates;
o increase the proportion of certificates of deposit over one
year;
o increase borrowings in the 2-15 year maturity area; and
o seek long-term fixed rate financing to finance the corporate
headquarters building currently under construction.
The goal of this program is to decrease interest rate risk whether measured by
change in net interest income, change in NPV, or by the classifications used by
the OTS. We plan to reduce interest risk so that we fall into the moderate risk
category rather than the significant risk category, as defined by the OTS, by
December 31, 2000.
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.
PART II. OTHER INFORMATION
Items 1-5 are not applicable.
35
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of
Metropolitan Financial Corp. (filed as Exhibit 2 to
Metropolitan's Form 8-A filed October 15, 1996 and
incorporated herein by reference).
3.2 Amended and Restated Code of Regulations of
Metropolitan Financial Corp. (filed as Exhibit 3 to
Metropolitan's Form 8-A filed October 15, 1996 and
incorporated herein by Reference).
4.1 Indenture of the Corporation relating to the Junior
Subordinated Debentures dated May 14, 1999
(Incorporated by reference to Exhibit 4.1 to
Metropolitan's Form 10-Q filed May 17, 1999).
4.2 Amended and Restated Trust Agreement of Metropolitan
Capital Trust I dated May 14, 1999 (Incorporated by
reference to Exhibit 4.2 to Metropolitan's Form 10-Q
filed May 17, 1999).
4.3 Guarantee of the Corporation relating to the Trust
Preferred Securities dated May 14, 1999 (Incorporated
by reference to Exhibit 4.3 to Metropolitan's Form
10-Q filed May 17, 1999).
4.4 Agreement as to Expenses and Liabilities dated May 14,
1999 (Incorporated by Reference to Exhibit 4.4 to
Metropolitan's Form 10-Q filed May 17, 1999).
10.1 The Restated Loan Agreement by and between the
Huntington National Bank and the Corporation dated as
of May 28, 1999 (incorporated herein by reference to
Exhibit 99.1 To Metropolitan's Form 10-Q filed May 14,
1998).
10.2 Metropolitan Financial Corp. Stock Purchase Plan
(incorporated herein by reference by To Metropolitan's
Form S-8 filed August 30, 1999)
27 Financial Data Schedule /1/
/1/ Filed only in electronic format pursuant to item
601(b)(27) of Regulation S-K.
b. Reports on Form 8-K - No reports on Form 8-K were
filed by Metropolitan during the Third quarter of 1999.
36
<PAGE>
METROPOLITAN FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METROPOLITAN FINANCIAL CORP.
By: /s/ Kenneth T. Koehler
---------------------------
Kenneth T. Koehler,
President,
Assistant Secretary and
Assistant Treasurer,
(principal financial
and accounting officer)
Date: November 15, 1999
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
METROPOLITAN FINANCIAL CORP. SEPTEMBER 30, 1999 FORM 10-Q, INCLUDING THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF
OPERATIONS, CONSOLIDATED STATEMENTS OF CASH FLOWS, AND THE ACCOMPANYING NOTES.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,135
<INT-BEARING-DEPOSITS> 3,540
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 216,259
<INVESTMENTS-CARRYING> 16,002
<INVESTMENTS-MARKET> 16,002
<LOANS> 1,244,236
<ALLOWANCE> 9,332
<TOTAL-ASSETS> 1,576,497
<DEPOSITS> 1,189,006
<SHORT-TERM> 58,200
<LIABILITIES-OTHER> 20,980
<LONG-TERM> 218,454
0
0
<COMMON> 0
<OTHER-SE> 46,107
<TOTAL-LIABILITIES-AND-EQUITY> 1,576,497
<INTEREST-LOAN> 69,739
<INTEREST-INVEST> 12,624
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 82,363
<INTEREST-DEPOSIT> 41,281
<INTEREST-EXPENSE> 53,642
<INTEREST-INCOME-NET> 28,721
<LOAN-LOSSES> 4,050
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 23,987
<INCOME-PRETAX> 5,948
<INCOME-PRE-EXTRAORDINARY> 3,816
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,816
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 2.74
<LOANS-NON> 8,115
<LOANS-PAST> 442
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,342
<ALLOWANCE-OPEN> 6,909
<CHARGE-OFFS> 1,648
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 9,332
<ALLOWANCE-DOMESTIC> 9,332
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
