FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission file number 2-63708
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-0609840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
929 WEST SPRAGUE AVENUE, SPOKANE, WASHINGTON 99201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509)838-3111
Former name, former address and former fiscal year, if changed since last
report: N/A.
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 / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: N/A.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes / / No / / N/A.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common "A": 130 shares at April 30, 1998.
Common "B": 0 shares at April 30, 1998.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
As of March 31, 1998 and September 30, 1997 (unaudited)
Condensed Consolidated Statements of Income
Three and Six Months Ended March 31, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
______________ ______________
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 31,991,298 $ 58,924,958
Investments
Trading Securities, at market 45,416,588 34,477,091
Available-for-Sale Securities, at
Market 30,752,548 36,621,351
Held-to-Maturity Securities, at
Amortized cost (market value
$109,072,753 and $112,711,688) 108,788,268 113,730,535
Accrued Interest on Investments 1,347,678 _____1,516,739
TOTAL CASH AND INVESTMENTS 218,296,380 __ 245,270,674
Real Estate Contracts and Mortgage
Notes and Other Receivables 678,362,731 677,398,455
Pledged Real Estate Contracts and
Mortgage Notes
Nikko Financial Services 93,975,099
Nation's Banc Mortgage Capital 48,686,164
Real Estate for Sale and Development,
Including Foreclosed Real Estate 87,987,130 81,802,266
______________ ______________
Total Receivables and Real Estate
Assets 909,011,124 759,200,721
Less Allowance for Losses (12,310,751) (12,327,098)
______________ ______________
NET RECEIVABLES AND REAL ESTATE
ASSETS 896,700,373 746,873,623
______________ ______________
Deferred Acquisition Costs, Net 72,703,766 72,503,095
Land, Building and Equipment - net
of accumulated depreciation 21,292,198 9,408,578
Other Assets, net of allowance 37,355,586 38,333,490
______________ ______________
TOTAL ASSETS $1,246,348,303 $1,112,389,460
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
______________ ______________
<S> <C> <C>
LIABILITIES
Life Insurance and Annuity Reserves $ 818,675,648 $ 825,368,988
Debenture Bonds 186,493,066 185,213,688
Notes Payable
Nikko Financial Services 92,095,597
Nation's Banc Mortgage Capital 46,695,874
Other Debt Payable 4,927,334 4,917,779
Accounts Payable and Accrued Expenses 18,550,502 19,114,354
Deferred Income Taxes 21,264,126 22,029,778
Minority Interest in Consolidated
Subsidiaries 1,658,939 1,632,139
______________ ______________
TOTAL LIABILITIES 1,190,361,086 1,058,276,726
______________ ______________
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, B, C, D,
E Cumulative with Variable Rate,
$10 Par Value, Authorized 8,325,000,
issued 2,060,962 Shares and
2,095,414 Shares (Liquidation
Preference $51,041,957 and
$50,729,084, respectively) 20,609,621 20,954,141
Class A Common Stock-Voting, $2,250
par value, authorized 222 shares,
issued 130 shares 293,417 293,417
Additional Paid-In Capital 19,259,024 18,596,231
Retained Earnings 16,372,087 14,536,114
Net Unrealized Losses on
Investments, Net of Income Taxes (546,932) (267,169)
______________ ______________
TOTAL STOCKHOLDERS' EQUITY 55,987,217 54,112,734
______________ ______________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,246,348,303 $1,112,389,460
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
REVENUES
Insurance Premiums Earned $ 700,000 $ 750,000 $ 1,400,000 $ 1,500,000
Interest and Earned Discounts 23,706,733 22,774,077 45,930,186 46,879,593
Real Estate Sales 6,014,128 7,305,686 15,038,043 14,152,386
Fees, Commissions, Service and Other
Income 1,667,923 1,177,497 3,448,743 2,385,584
Investment Gains (Losses), Net 2,309,758 43,996 6,463,234 (2,116,159)
Realized Gains on Sales of Receivables 212,819 1,712,582 311,209 11,547,541
____________ ____________ ____________ ____________
TOTAL REVENUES 34,611,361 33,763,838 72,591,415 74,348,945
____________ ____________ ____________ ____________
EXPENSES
Insurance Policy and Annuity Benefits 12,162,952 12,009,603 24,428,059 25,065,014
Interest Expense 5,093,247 3,983,599 9,157,889 9,818,921
Cost of Real Estate Sold 5,769,929 7,702,652 14,227,663 15,142,661
Provision for Losses on Real Estate
Assets 932,769 1,410,613 2,698,803 1,996,834
Salaries and Employee Benefits 4,301,927 3,337,224 8,385,724 6,370,158
Commissions to Agents 2,302,027 2,065,315 4,260,157 4,224,085
Other Operating and Underwriting
Expenses 1,677,123 1,517,514 3,225,705 3,817,418
Decrease in Deferred Acquisition Costs 242,085 (5,582) 651,187 232,373
____________ ____________ ____________ ____________
TOTAL EXPENSES 32,482,059 32,020,938 67,035,187 66,667,464
____________ ____________ ____________ ____________
Income Before Income Taxes and
Minority Interest 2,129,302 1,742,900 5,556,228 7,681,481
Provision for Income Taxes (733,190) (595,884) (1,891,772) (2,618,051)
____________ ____________ ____________ ____________
Income Before Minority Interest 1,396,112 1,147,016 3,664,456 5,063,430
Income of Consolidated Subsidiaries
Allocated to Minority Stockholders (15,860) (26,740) (45,800) (62,300)
____________ ____________ ____________ ____________
Net Income 1,380,252 1,120,276 3,618,656 5,001,130
Preferred Stock Dividends (929,981) (1,013,595) (1,918,252) (2,036,960)
____________ ____________ ____________ ____________
INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 450,271 $ 106,681 $ 1,700,404 $ 2,964,170
============ ============ ============ ============
Basic and Diluted Income per Share
Applicable to Common Stockholders $ 3,464 $ 821 $ 13,080 $ 22,801
============ ============ ============ ============
Weighted Average Number of shares of Common
Stock Outstanding 130 130 130 130
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1998 1997
______________ ______________
<S> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 12,798,368 $ (108,186,295)
______________ ______________
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Restricted Cash and Cash
Equivalents 132,652,334
Principal Payments on Real Estate
Contracts and Mortgage Notes and
Other Receivables 69,097,991 67,805,747
Proceeds From Real Estate Sales 9,728,421 3,137,570
Proceeds From Investment Maturities 9,113,052 11,065,918
Proceeds from Sale of Available-for-
Sale Securities 1,769,954 1,266,029
Purchase of Available-for-Sale
Securities (296,213) (46,041,430)
Purchase of Held to Maturity
Securities (99,625)
Proceeds From Sale of Real Estate
Contracts and Mortgage Notes and
Other Receivables 16,173,667 172,200,857
Acquisition of Real Estate Contracts
and Mortgage Notes and Other
Receivables (236,203,708) (185,348,456)
Additions to Real Estate Held (8,317,048) (10,858,716)
Capital Expenditures (12,653,630) (1,061,356)
______________ ______________
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (151,587,514) 144,718,872
______________ ______________
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change Short Term Borrowings From
Brokers and Banks 138,805,971 (25,484,750)
Receipts From Life and Annuity 34,443,890 36,290,797
Products
Withdrawals on Life and Annuity
Products (65,394,799) (54,523,739)
Ceding of Life and Annuity Products to
Reinsurers, Net 1,280,927
Repayment to Banks and Others (716,101) (1,995,409)
Issuance of Debenture Bonds 34,889,197 21,561,718
Issuance of Preferred Stock 1,046,570 1,099,990
Repayment of Debenture Bonds (29,989,189) (26,696,985)
Preferred Stock Dividends (1,918,252) (2,036,960)
Redemption of Capital Stock (728,297) (77,465)
Receipt of Contingent Sale Price for
Subsidiary Sold to Related Party 135,569 249,721
______________ ______________
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 111,855,486 (51,613,082)
______________ ______________
Net Change in Cash and Cash Equivalents (26,933,660) (15,080,505)
Cash and Cash Equivalents at Beginning
Of Period 58,924,958 35,226,746
______________ ______________
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 31,991,298 $ 20,146,241
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the Company's financial position as of March 31, 1998,
and the results of operations for the three and six months ended March
31, 1998 and 1997 and the cash flows for the six months ended March 31,
1998 and 1997. The results of operations for the three and six month
periods ended March 31, 1998 and 1997 are not necessarily indicative of
the results to be expected for the full year. As provided for in
regulations promulgated by the Securities and Exchange Commission, all
financial statements included herein are unaudited; however, the
condensed consolidated balance sheet at September 30, 1997 has been
derived from the audited consolidated balance sheet. These financial
statements should be read in conjunction with the consolidated financial
statements including notes thereto included in the Company's fiscal 1997
Form 10-K.
2. The principal amount of receivables as to which payments were in arrears
more than three months was $34,600,000 at March 31, 1998 and $36,000,000
at September 30, 1997.
3. The Company had no outstanding legal proceedings other than normal
proceedings associated with receivable foreclosures and/or the general
business activities of the Company.
4. Certain amounts in the prior year's condensed consolidated financial
statements have been reclassified to conform with the current year's
presentation. These reclassifications had no effect on net income or
retained earnings as previously reported.
5. The Company has retained residual interests from its receivable
securitizations. At March 31, 1998, the Company held approximately
$23.7 million in residual certificates at their estimated fair market
value. The Company currently values its residual certificates at an
approximate 12% return which is after considering expected losses and an
approximate 15% prepayment rate.
6. In February 1997, Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share" was issued. SFAS 128 establishes
standards for computing and presenting earnings per share (EPS) and
simplifies the existing standards. This standard replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires the dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods
and requires restatement of all prior-period EPS data presented.
Accordingly, the Company applied this new standard during the quarter
ended December 31, 1997 and all prior-period EPS data has been restated.
The application of this standard did not have a material effect on the
presentation of the Company's EPS disclosures as the Company did not and
does not have potentially dilutive securities.
7. On November 14, 1997, the Company acquired an approximately 200,000
square foot office building located at 601 West First Avenue, Spokane,
Washington, approximately three blocks from the current headquarters.
The purchase price was approximately $11.7 million with remodel costs
estimated at an additional $5 million. Approximately 50% of the
building is currently leased by other tenants. The Company anticipates
moving its headquarters into this building in late June, 1998.
8. In April, 1998, the Company and its subsidiary, Western United Life
Assurance Company (WULA), participated as two of the four co-sellers in
a receivable securitization sponsored by Metropolitan Asset Funding,
Inc. II, an affiliated company. Proceeds from the transaction were
approximately $170.3 million, including the fair market value of
retained certificates and the valuation of retained servicing rights.
The transaction resulted in pre-tax gains of approximately $10.5
million.
9. The Company currently has credit facilities with Nikko Financial
Services for $200 million and with Nation's Banc Mortgage Capital for
$100 million. The advances are secured by pledged real estate contracts
and mortgage notes. As of March 31, 1998, the Company had outstanding
advances of approximately $138.8 million from these credit facilities.
10. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussions may contain some forward-looking statements. A forward-
looking statement may contain words such as "will continue to be," "will be,"
"continue to," "expect to," "anticipates that," "to be," or "can impact."
Management cautions that forward-looking statements are subject to risks and
uncertainties that could cause the Company's actual results to differ
materially from those projected in forward-looking statements.
Significant Transactions:
In November 1996, Metropolitan Mortgage & Securities Co., Inc. (Metro or
the Company) and its subsidiary Western United Life Assurance Company (WULA)
participated as two of the four co-sellers in a receivable securitization
sponsored by Metropolitan Asset Funding, Inc, an affiliated company. The
Company's proceeds from the transaction were approximately $110.4 million
including the fair market value of retained certificates and the valuation of
retained servicing rights. The transaction resulted in approximately $8.9
million in pre-tax gains. As an economic hedge for this receivable
securitization sale, the Company had previously sold short U.S. Treasury
securities of varying maturities. Concurrent with the completion of the
securitization transaction, the Company purchased and delivered the borrowed
securities. The Company lost approximately $2.5 million on this short sale.
Thereby from an economic standpoint, the Company realized an approximate $6.4
million in pre-tax gains on the securitization sale.
In September 1997, Metro and WULA again participated as two of the four
co-sellers in a receivable securitization sponsored by Metropolitan Asset
Funding, Inc. II. The Company's proceeds from the transaction were
approximately $143.0 million including the fair market value of retained
certificates and valuation of retained servicing rights. The transaction
resulted in pre-tax gains of approximately $7.2 million. Additionally, in
September 1997, the Company securitized and sold approximately $29.7 million
of timeshare receivables recording approximately $1.5 million in pre-tax
gains.
The Company has currently negotiated credit facilities with Nikko
Financial Services for $200 million and with Nation's Banc Mortgage Capital
for $100 million. Advances on these credit facilities are secured by pledged
real estate contracts and mortgage notes. As of March 31, 1998, the Company
had outstanding advances of approximately $138.8 million from these credit
facilities.
In April 1998, Metro and WULA participated as two of the four co-sellers
in a receivable securitization sponsored by Metropolitan Asset Funding, Inc.
II, an affiliated company. The Company's proceeds from the transaction were
approximately $170.3 million including the fair market value of retained
certificates and the valuation of retained servicing rights. The transaction
resulted in pre-tax gains of approximately $10.5 million.
WULA entered into a reinsurance agreement with Old Standard Life
Insurance Company (OSL), an affiliated company, whereby WULA reinsured 75% of
the risk on six different annuity products through OSL. This agreement became
effective January 23, 1997 and continued through September 30, 1997, during
which time approximately $28 million in premiums was reinsured through OSL.
Effective October 1, 1997, the agreement was suspended and is expected to be
reinstated in June, 1998 retroactive to April 1, 1998.
On January 31, 1995, the Company concluded an agreement with Summit
Securities, Inc. (Summit), whereby it sold Metropolitan Investment Securities,
Inc. (MIS) to Summit, at a sale price of $288,950, which approximated the
current book value of MIS at date of sale. On May 31, 1995, the Company
concluded an agreement with Summit, whereby it sold OSL to Summit effective
May 31, 1995, at a sale price of $2,722,000, which approximated the current
book value of OSL at date of sale, with future contingency payments based on
earnings of OSL. The sales price plus estimated future contingency payments
approximates the actuarial appraised valuation of OSL. As of March 31, 1998,
the Company has received approximately $385,000 in contingent consideration.
Financial Condition and Liquidity:
As of March 31, 1998, the Company had cash or cash equivalents of $32.0
million and liquid investments (trading or available-for-sale securities) of
$76.2 million compared to $33.4 million and $76.1 million at December 31, 1997
and $58.9 million and $71.1 million at September 30, 1997. Management
believes that cash, cash equivalents and other liquidity provided by
investments are adequate to meet planned asset additions, debt retirements or
other business operational requirements during the next twelve months.
Additionally, the Company has negotiated credit facilities of $300 million to
add additional liquidity for the purchase of real estate contracts and
mortgage notes. Total cash and investments at March 31, 1998, including held-
to-maturity securities, were $218.3 million compared to $222.6 million at
December 31, 1997 and $245.3 million at September 30, 1997. During the six
month period ended March 31, 1998, operating activities provided funds of
approximately $12.8 million. Funds used in investing activities of $151.6
million were primarily the result of $236.2 million of new receivable
acquisitions, plus additions to real estate held of $8.3 million and new
capital expenditures of $12.7 million, which included the purchase of a new
home office headquarters building, exceeding the sale proceeds and collections
of receivables of $85.3 million, proceeds from the sale of real estate of $9.7
million and sales and maturities of investments of $10.9 million. Funds
provided by financing activities of $111.9 million were primarily the result
of increases in short-term borrowings of $138.8 million and a $5.2 million net
cash inflow from debentures sales less maturities and preferred stock sales
less redemption's exceeding the net cash outflow of $31.0 million in life and
annuity products and payment of preferred stock dividends of $1.9 million.
The receivable portfolio totaled $821.0 million at March 31, 1998
compared to $739.1 million at December 31, 1997 and $677.4 million at
September 30, 1997. During the six months ended March 31, 1998, the increase
primarily resulted from the acquisition of receivables totaling $236.2 million
plus an additional $5.3 million in loans to facilitate the sale of real estate
being partially offset by principal collections on receivables of $69.1
million, reduction for the cost basis of receivables sold of $15.9 million and
reductions due to foreclosed receivables of approximately $14.6 million.
Real estate held for sale and development increased to $88.0 million at
March 31, 1998 compared to $83.3 million at December 31, 1997 and $81.8
million at September 30, 1997. For the six months ended March 31, 1998, real
estate additions of $22.9 million, including $14.6 million of foreclosed
receivables, were offset by costs of real estate sold of $14.2 million,
depreciation of $1.0 million and charge-offs to the allowance for losses of
$1.5 million.
Life insurance and annuity policy reserves decreased $6.7 million during
the six months ended March 31, 1998 to approximately $818.7 million from
$820.9 million at December 31, 1997 and $825.4 million at September 30, 1997.
This decrease was the result of withdrawals in the amount of $65.4 million
exceeding credited earnings of $23.0 million, receipts from sales of new life
and annuity products of $34.4 million and $1.3 million in net reinsurance
ceded. For the six months ended March 31, 1998, net debenture bonds
outstanding increased by $1.3 million to $186.5 million from $185.9 million at
December 31, 1997 and $185.2 million at September 30, 1997. Net cash inflow
from issuance less maturities of debentures was approximately $4.9 million
less a $3.6 million decrease in credited interest held. Additionally, the
Company had cash flow, net of redemptions, of approximately $.3 million from
the sale of preferred stock and reinvestment of preferred stock dividends
during the six months ended March 31, 1998. During the six month period ended
March 31, 1998, the Company increased its short-term borrowings by $138.8
million to an approximate outstanding amount of $141.7 million. At March 31,
1998, the Company had a total of $161.2 million in unused credit lines
available to pledge real estate contracts and mortgage notes against.
Total assets increased by $133.9 million to $1,246.3 million at March
31, 1998 from $1,112.4 million at September 30, 1997. During the six-month
period ended March 31, 1998, the Company primarily used existing cash and cash
flow from short-term borrowings to increase its receivable investment
portfolio and to purchase a new home office headquarters. At March 31, 1998,
the Company had net unrealized losses on securities available-for-sale in the
amount of $547,000 as compared to unrealized losses of $267,000 at September
30, 1997. Net unrealized losses on securities available-for-sale is presented
as a separate component of stockholders' equity.
Results of Operations:
The Company recorded net income before preferred dividends for the six
months ended March 31, 1998 of $3.6 million compared to $5.0 million in the
prior year's period. Comparing the current year's six month period with the
prior year's similar period, a decrease in gains on the sale of receivables,
an increase in the provision for losses on real estate assets, and increased
salaries, commissions and benefits were only partially offset by an increase
in the net interest spread, increased gains from the sale of real estate,
increased gains on investments, an increase in other fees and commission
revenues and a reduction in other operating expenses along with a reduction in
the related provision for income taxes.
For the six-month period ended March 31, 1998, the Company reported a
positive spread on its interest sensitive assets and liabilities of $13.7
million as compared to $13.5 million in the prior year's period. The increase
was primarily the result of an increase in the receivable portfolio funded by
increases in short-term borrowings. It has been the strategy of management to
finance receivable portfolio increases with short-term borrowings in
anticipation of its next receivable securitization sale. The Company
completed its most recent securitization in April 1998. While there has been
some contraction in portfolio investment earnings rates in the current year's
period, the Company has also experienced reduced renewal rates on some of its
life and annuity policies and has used lower interest costing short-term
borrowings resulting in the improved net interest spread. Currently, the
Company continues to control life and annuity policy surrenders by maintaining
current market credited rates. Normally, the Company's investment earnings
rates are not as sensitive to market conditions as is its life and annuity
policy rates and thus a sustained rise in interest rates could have a negative
impact on its net interest spread as its liabilities reprice faster than its
assets.
During the six months ended March 31, 1998, the Company realized net
gains on investments of $6.5 million compared to net losses of $2.1 million in
the prior year's period. The current period gain includes both gains on sales
of investments and mark-to-market gains as lower interest rates have improved
the valuation of the Company's trading securities. The prior year's period
loss was primarily the result of a short sale of U.S. Treasury securities.
The short sale was used by the Company as an economic hedge of its receivable
securitization in November 1996. Additionally, in the prior year's period,
the Company realized gains of $11.5 million from the sale of approximately
$160.7 million of receivable investments, while in the current year, sales of
approximately $15.9 million of receivable investments produced realized gains
of $311,000. The Company realized gains of $810,000 on sales of $15.0 million
of real estate in the current year's period compared to losses of $990,000 on
sales of $14.2 million in the prior year. It has been the policy of
management to actively sell its real estate in order to return the investment
to an earning asset. In addition to returning these assets to earning status,
the Company has been able to reduce other operating expenses associated with
its real estate, such as insurance, taxes, maintenance and amenities.
In the six months ended March 31, 1998, the Company recorded other fees
and commission revenues of $3.4 million as compared to $2.4 million in the
prior year. The increase in the current year is primarily the result of net
servicing revenues related to the retained servicing rights from receivable
securitizations.
In the six months ended March 31, 1998, the Company made provisions for
losses on receivables and real estate assets of approximately $2.7 million as
compared to $2.0 million in the prior year's period. The increased provision
is the result of the increase in the receivable portfolio and the real estate
asset portfolio. As an offset to the portfolio increases, the Company has
experienced improved receivable delinquency rates and a stable to improving
real estate market.
In comparing the three months ended March 31, 1998 with the prior year
similar period, the Company recorded net income before preferred dividends of
$1.4 million as compared to $1.1 million. The increase in net income for the
comparative three months was primarily the result of improvements from (1)
increased gains on investments, (2) increased gains on sale of real estate,
(3) a decrease in the provision for losses on real estate assets, and (4) an
increase in other fees and commissions which were partially offset by (1) a
decrease in gains on the sale of receivables, (2) a decrease in the net
interest spread, and (3) increases in salaries, commissions, benefits and
other operating expenses
For the three months ended March 31, 1998, the net interest spread was
$7.2 million compared to $7.5 million in the prior year. The reduction was
primarily the result of the lower interest rate market, which affected the
yield on new receivable investments and a slightly higher incremental cost of
funds when using short-term borrowings to finance the increase in the
receivable portfolio in preparation for the next receivable securitization.
During the three months ended March 31, 1998, the Company recorded gains
on the sale or valuation of investments of $2.3 million and $213,000 on the
sale of receivables. In the prior year, the Company recorded gains on the
sale of investments of $44,000 and $1.7 million on the sale of receivables.
During the three months ended March 31, 1998, the Company generated
approximately $1.7 million of fee revenues as compared to $1.2 million in the
prior year. The increase is primarily service fee income associated with the
retained servicing rights from the receivable securitizations.
The Company realized gains of $244,000 on real estate sales of $6.0
million in the current year's three-month period as compared to losses of
$397,000 on sales of $7.3 million in the prior year. The Company continues to
actively sell its real estate in order to return the investment to an earning
asset and reduce operating expenses associated with the holding of real
estate.
In conjunction with the Company's evaluation of its real estate assets,
the Company provided for loss on these assets of $933,000 in the current
year's three-month period as compared to $1.4 million in the prior year.
Improvement in the Company's delinquency rates and improvements in real estate
resale market has allowed the Company to reduce its current provision.
.
New Accounting Rules:
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No.130, "Comprehensive Income" (SFAS No.130). SFAS No.130 becomes
effective for fiscal years beginning after December 31, 1997 and requires
reclassifications of earlier financial statements for comparative purposes.
SFAS No.130 requires that amounts of certain items, including foreign currency
translation adjustments and gains and losses on certain securities, be
included in comprehensive income in the financial statements. SFAS No.130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. Management has not
yet determined the effects of SFAS No.130 on the consolidated financial
statements.
Also, in June 1997, the FASB issued SFAS No.131, "Disclosures about
Segments for an Enterprise and Related Information" (SFAS No.131). This
Statement will change the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued
to shareholders. It also requires entity-wide disclosures about the products
and services an entity provides, the material countries in which it holds
assets and reports revenues, and its major customers. The Statement is
effective for fiscal years beginning after December 15, 1997. Management has
not yet determined the effect, if any, of SFAS No.131 on the consolidated
financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not currently applicable. Pursuant to General Instructions to Item 305,
disclosures are applicable to the registrant in filings with the commission
that include financial statements for fiscal years ended after June 15, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or threatened
against Metropolitan Mortgage & Securities Co., Inc. or to which its property
is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 23, 1998, the Annual Meeting of Stockholders was held
wherein the stockholders unanimously elected the following Directors to serve
until the next annual meeting:
C. Paul Sandifur, Jr., Bruce Blohowiak, Harold Erfurth, Irv Marcus,
Charles H. Stolz, Reuel Swanson, John Trimble and Neal Fosseen, Honorary
Director.
No other matters were submitted to a vote of security holders during the
reporting period.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a). Restated Articles of Incorporation, as amended,
dated November 30, 1987 (Exhibit 3(a) to
Metropolitan's Annual Report on Form 10-K for fiscal
1987).
3(b). Amendment to Articles of Incorporation dated
November 5, 1991 (Exhibit 3(c) to Registration No.
33-40220).
3(c). Amendment to Articles of Incorporation dated
September 20, 1992 (Exhibit 3(c) to Metropolitan's
Annual Report on Form 10-K for fiscal 1992).
3(d). Bylaws as amended to October 31, 1988 (Exhibit 3(b)
to Metropolitan's Annual Report on Form 10-K for
fiscal 1988).
4(a). Indenture, dated as of July 6, 1979, between
Metropolitan and Seattle-First National Bank,
Trustee (Exhibit 3 to Metropolitan's Annual Report
on Form 10-K for fiscal 1979).
4(b). First Supplemental Indenture, dated as of October 3,
1980, between Metropolitan and Seattle-First
National Bank, Trustee (Exhibit 4 to Metropolitan's
Annual Report on Form 10-K for fiscal 1980).
4(c). Second Supplemental Indenture, dated as of November
12, 1984, between Metropolitan and Seattle-First
National Bank, Trustee (Exhibit 4(d) to Registration
No. 2-95146).
4(d). Third Supplemental Indenture, dated as of December
31, 1997 between Metropolitan and First Trust
(Exhibit 4(d)) to Form 10-K filed January 8, 1998).
4(e). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
C (Exhibit 4(g) to Registration No. 33-2699).
4(f). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series D (Exhibit
4(a) to Registration No. 33-25702).
4(g). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-1 (Exhibit
4(a) to Registration No. 33-19238).
4(h). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-2 (Exhibit 4(a) to Registration No. 33-25702).
4(i). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-3 (Exhibit
4(a) to Registration No. 33-32586).
4(j). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-4
(Exhibit 4(h) to Registration No. 33-40221).
4(k). Form of Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-5 (Exhibit 4(i) to Registration No. 33-57396).
4(l). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-6
(Exhibit 4(1) to Registration No. 333-19755).
4(m). Statement of Rights, Designations and Preferences of
Variable Rate Cumulative Preferred Stock, Series E-7
(Exhibit 4(d) to Amendment 1 to Registration No. 333-
19755).
10(a). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Bruce Blohowiak
(Exhibit 10(a) to Form 10-K filed January 8, 1998).
10(b). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Michael Kirk (Exhibit
10(b) to Form 10-K filed January 8, 1998).
10(c). Employment Agreement between Metropolitan Mortgage
and Securities Co., Inc. and Jon McCreary (Exhibit
10(c) to Form 10-K filed January 8, 1998).
10(d). Reinsurance Agreement between Western United Life
Assurance Company and Old Standard Life Insurance
Company (Exhibit 10(d) to Form 10-K filed January 8,
1998).
11. Statement indicating Computation of Per-Share
Earnings (see Condensed Consolidated Financial
Statements).
*27. Financial Data Schedule
*Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on this 20th day of May,
1998 on its behalf by the undersigned, thereunto duly authorized.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
/s/ BRUCE J. BLOHOWIAK
______________________________________________
Bruce J. Blohowiak
Executive Vice President, Chief Operating Officer and
Director
/s/ STEVEN CROOKS
______________________________________________
Steven Crooks
Vice President, Principal Accounting Officer
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
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<SECURITIES> 186,305
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20,610
<OTHER-SE> 35,084
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