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 June 30, 1999
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 0-22041
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.)
601 W. 1ST AVENUE, SPOKANE, WASHINGTON 99201-5015
(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 July 31, 1999.
Common "B": 0 shares at July 31, 1999.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
As of June 30, 1999 and September 30, 1998 (unaudited)
Condensed Consolidated Statements of Operations
Three and Nine Months Ended June 30, 1999 and 1998 (unaudited)
Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended June 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
______________ ______________
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 23,398,733 $ 31,733,362
Investments
Trading Securities, at market 41,831,752 55,865,875
Available-for-Sale Securities, at
market 142,513,891 25,988,789
Held-to-Maturity Securities, at
amortized cost (market value
$67,367,729 and $86,396,021) 68,239,104 83,036,525
Accrued Interest on Investments _____2,450,859 _____1,646,527
TOTAL CASH AND INVESTMENTS ___278,434,339 __ 198,271,078
Real Estate Contracts and Mortgage
Notes and Other Receivables 650,070,404 692,822,886
Real Estate Contract Securities,
pledged to Bank of America 113,567,707 122,128,970
Real Estate for Sale and Development,
Including Foreclosed Real Estate 89,037,604 89,713,967
______________ ______________
Total Receivables and Real Estate
Assets 852,675,715 904,665,823
Less Allowance for Losses (9,580,827) (11,000,618)
______________ ______________
NET RECEIVABLES AND REAL ESTATE
ASSETS 843,094,888 893,665,205
______________ ______________
Deferred Acquisition Costs, net 67,598,159 71,262,489
Land, Building and Equipment - net
of accumulated depreciation 26,041,473 25,889,102
Mortgage Servicing Rights, net 8,771,874 6,292,375
Other Assets, net 41,114,855 31,284,532
______________ ______________
TOTAL ASSETS $1,265,055,588 $1,226,664,781
============== ==============
</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>
June 30, September 30,
1999 1998
______________ ______________
<S> <C> <C>
LIABILITIES
Life Insurance and Annuity Reserves $ 804,486,492 $ 800,848,929
Debenture Bonds 197,956,335 198,205,294
Advances under line of credit 107,889,322 118,342,972
Other Debt Payable 48,595,520 7,359,339
Accounts Payable and Accrued Expenses 19,290,229 18,687,539
Deferred Income Taxes 13,675,350 22,725,052
Minority Interest in Consolidated
Subsidiaries 2,043,887 1,738,887
______________ ______________
TOTAL LIABILITIES 1,193,937,135 1,167,908,012
______________ ______________
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, B, C, D,
E Cumulative with Variable Rate,
$10 Par Value, Authorized 8,325,000
shares issued 1,948,042 and
1,945,407 shares (Liquidation
Preference $51,173,288 and
$49,200,583, respectively) 19,480,420 19,454,071
Class A Common Stock-Voting, $2,250
par value, authorized 222 shares,
issued 130 shares 293,417 293,417
Additional Paid-In Capital 20,482,170 18,580,051
Retained Earnings 34,321,749 21,109,849
Accumulated Other Comprehensive Loss (3,459,303) (680,619)
______________ ______________
TOTAL STOCKHOLDERS' EQUITY 71,118,453 58,756,769
______________ ______________
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,265,055,588 $1,226,664,781
============== ==============
</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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
REVENUES
Insurance Premiums Earned $ 700,000 $ 700,000 $ 2,050,000 $ 2,100,000
Interest and Earned Discounts 22,867,505 23,295,437 67,143,107 69,225,623
Real Estate Sales 11,190,586 8,182,351 29,489,659 23,220,394
Fees, Commissions, Service and Other
Income 2,175,326 1,827,110 6,189,834 5,275,853
Investment Gains (Losses), Net (570,515) 250,767 (3,703,708) 6,714,001
Realized Gains on Sales of Receivables 239,961 11,663,283 19,906,860 11,974,492
____________ ____________ ____________ ____________
TOTAL REVENUES 36,602,863 45,918,948 121,075,752 118,510,363
____________ ____________ ____________ ____________
EXPENSES
Insurance Policy and Annuity Benefits 11,417,592 11,595,215 34,104,091 36,023,274
Interest Expense 5,363,797 5,031,303 16,087,921 14,189,192
Cost of Real Estate Sold 10,386,467 7,473,116 28,095,061 21,700,779
Provision for Losses on Real Estate
Assets 1,907,510 1,521,818 7,547,318 4,220,621
Salaries and Employee Benefits 5,993,450 5,093,510 16,939,081 13,479,234
Commissions to Agents 2,254,257 2,660,928 5,588,621 6,921,085
Other Operating and Underwriting
Expenses 936,175 1,808,040 4,948,402 5,033,745
Decrease (Increase) in Deferred Acquisition
Costs 1,168,266 (55,920) 4,071,971 595,267
____________ ____________ ____________ ____________
TOTAL EXPENSES 39,427,514 35,128,010 117,382,466 102,163,197
____________ ____________ ____________ ____________
Income (Loss) Before Income Taxes and
Minority Interest (2,824,651) 10,790,938 3,693,286 16,347,166
Income Taxes Benefit (Provision) 985,285 (3,696,253) 12,697,277 (5,588,025)
____________ ____________ ____________ ____________
Income (Loss) Before Minority Interest (1,839,366) 7,094,685 16,390,563 10,759,141
Income of Consolidated Subsidiaries
Allocated to Minority Stockholders (16,790) (53,590) (305,000) (99,390)
____________ ____________ ____________ ____________
Net Income (Loss) (1,856,156) 7,041,095 16,085,563 10,659,751
Preferred Stock Dividends (910,479) (930,512) (2,638,929) (2,848,764)
____________ ____________ ____________ ____________
INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS $ (2,766,635) $ 6,110,583 $ 13,446,634 $ 7,810,987
============ ============ ============ ============
Basic and Diluted Income (Loss) per Share
Applicable to Common Stockholders $ (21,282) $ 47,004 $ 103,436 $ 60,085
============ ============ ============ ============
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
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
1999 1998 1999 1998
______________ ______________ ______________ ______________
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ (1,856,156) $ 7,041,095 $ 16,085,563 $ 10,659,751
______________ ______________ ______________ ______________
OTHER COMPREHENSIVE LOSS, BEFORE INCOME
TAXES:
Change in unrealized gains (losses) on
investments 428,199 (167,300) (4,225,279) (468,546)
Less deferred income tax provision
(benefit) 144,586 (56,883) (1,446,595) (78,366)
______________ ______________ ______________ ______________
Net other comprehensive income (loss) 283,613 (110,417) (2,778,684) (390,180)
______________ ______________ ______________ ______________
COMPREHENSIVE INCOME (LOSS) $ (1,572,543) $ 6,930,678 $ 13,306,879 $ 10,269,571
============== ============== ============== ==============
</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>
Nine Months Ended June 30,
1999 1998
______________ ______________
<S> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (13,992,879) $ 13,078,887
______________ ______________
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Real Estate
Contracts and Mortgage Notes and
Other Receivables 93,609,289 93,156,352
Proceeds From Real Estate Sales 22,763,866 14,910,747
Proceeds From Investment Maturities 29,297,583 16,091,098
Proceeds from Sale of Available-for-
Sale Securities 6,853,358 1,769,954
Purchase of Available-for-Sale
Securities (94,152,657) (592,421)
Proceeds From Sale of Real Estate
Contracts and Mortgage Notes and
Other Receivables 420,206,011 212,241,886
Acquisition of Real Estate Contracts
and Mortgage Notes and Other
Receivables (458,333,730) (356,163,115)
Additions to Real Estate Held (12,855,675) (12,802,871)
Capital Expenditures (1,465,756) (16,325,228)
______________ ______________
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 5,922,289 (47,713,598)
______________ ______________
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Short-Term
Borrowings 31,379,850 36,750,713
Receipts From Life and Annuity 83,301,077 60,935,212
Products
Withdrawals on Life and Annuity
Products (78,628,060) (105,084,777)
Ceding of Life and Annuity Products to
Reinsurers, Net (32,544,634) 2,175,181
Repayment to Banks and Others (1,371,939) (274,627)
Issuance of Debenture Bonds 28,463,256 49,170,232
Issuance of Preferred Stock 2,235,096 1,549,430
Repayment of Debenture Bonds (29,918,394) (40,413,961)
Cash Dividends (2,873,663) (2,927,008)
Redemption of Capital Stock (306,628) (2,198,424)
Receipt of Contingent Sale Price for
Subsidiary Sold to Related Party 135,568
______________ ______________
NET CASH USED IN FINANCING ACTIVITIES (264,039) (182,461)
______________ ______________
Net Change in Cash and Cash Equivalents ( 8,334,629) (34,817,172)
Cash and Cash Equivalents at Beginning
Of Period 31,733,362 58,924,958
______________ ______________
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 23,398,733 $ 24,107,786
============== ==============
</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 June 30, 1999, and
the results of operations for the three and nine months ended June 30,
1999 and 1998 and the cash flows for the nine months ended June 30, 1999
and 1998. The results of operations for the three and nine month
periods ended June 30, 1999 and 1998 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, 1998 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 1998
Form 10-K.
2. The principal amount of receivables as to which payments were in arrears
more than three months was $30,000,000 at June 30, 1999 and $34,000,000
at September 30, 1998.
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. In November, 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. Approximately $194.4 million of receivables,
with $182.4 million provided by the Company and WULA, were sold in the
securitization. The Company and WULA recorded approximately $8.8
million in pre-tax gains from their portion of the sale. In December,
1998, the Company participated as one of the two co-sellers in a
structured settlement securitization sponsored by Select Asset Funding
Corporation, an affiliated company. Approximately $37.7 million in
structured settlements at amortized costs, with $21.8 million provided
by the Company, were sold in the securitization. The Company recorded
approximately $1.4 million in pre-tax gains from its portion of the
sale. In March 1999, the Company and its subsidiary, Western United
Life Assurance Company, participated as co-sellers in a receivable
securitization sponsored by Metropolitan Asset Funding, Inc., II, an
affiliated company. Approximately $124.8 million of receivables were
sold in the securitization. The Company, including its subsidiary,
recorded approximately $8.1 million in pre-tax gains from the sale.
6. The Company's income tax provision for the three and nine months ended
June 30, 1999 reflects the income tax benefit associated with capital
losses generated by an implemented tax strategy which were used to
offset certain tax timing differences. The Company recorded
approximately $14.0 million in income tax benefits associated with this
transaction, which reduced income taxes previously recorded.
7. In October, 1998, Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Banking Enterprise" ("SFAS 134"), was issued.
SFAS 134 requires that after the securitization of mortgage loans held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based
on its ability and intent to sell or hold those investments. This
statement conforms the subsequent accounting for securities retained
after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a non-mortgage banking
enterprise. The Company adopted this statement effective January 1,
1999. Concurrent with the adoption, the Company transferred $46.3
million in mortgage-backed securities from its trading category to its
available-for-sale category.
8. 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
These discussions may contain 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 Third Quarter Transactions:
The Company had no significant or unusual transactions during the
quarter ending June 30, 1999. During the quarter, the Company accumulated
receivables for an anticipated securitization transaction expected to close
during the month of August 1999. The Company financed a majority of these
receivable investments with advances under a line of credit with Bank of
America. The maximum amount available for advances under the line of credit
is $200 million. Advances under the line of credit totaled approximately
$107.9 million at June 30, 1999.
Financial Condition and Liquidity:
As of June 30, 1999, the Company had cash or cash equivalents of $23.4
million and liquid investments (trading or available-for-sale securities) of
$184.3 million compared to $15.7 million and $184.2 million at March 31, 1999,
$106.9 million and $112.8 million at December 31, 1998 and $31.7 million and
$81.9 million at September 30, 1998. Management believes that cash and cash
equivalents and other liquidity provided by investments and available lines of
credit, along with the Company's ability to securitize real estate
collateralized receivables, are adequate to meet planned asset additions, debt
retirements or other business operational requirements during the next twelve
months. Total cash and investments at June 30, 1999, including held-to-
maturity securities, were $278.4 million as compared to $273.8 million at
March 31, 1999, $299.5 million at December 31, 1998 and $198.3 million at
September 30, 1998. During the nine month period ended June 30, 1999,
approximately $14.0 million were used in operating activities. The primary
reason for the use of funds in operating activities was the acquisition of
approximately $42.9 million of trading securities. Funds provided by
investing activities of $5.9 million were primarily the result of sale
proceeds and collections of receivables of $513.8 million, proceeds from the
sale of real estate of $22.8 million and sales and maturities of investments
of $36.2 million, which exceeded the $458.3 million of new receivable
acquisitions, additions to real estate held of $12.9 million, purchase of
available-for-sale securities of $94.2 million and capital expenditures of
$1.5 million. Funds used in financing activities of $0.3 million were
primarily the result of a $1.5 million net outflow from debenture maturities
less sales, payment of cash dividends of $2.9 million, repayments to banks and
others of $1.4 million and the net ceding of annuity products to reinsurers of
$32.5 million, which exceeded the net cash inflow of $4.7 million in life and
annuity products, increases in short-term borrowings of $31.4 million and the
net inflow from the issuance less redemptions of preferred stock of $1.9
million.
The receivable portfolio totaled $763.6 million at June 30, 1999
compared to $636.1 million at March 31, 1999, $634.3 million at December 31,
1998 and $815.0 million at September 30, 1998. During the nine months ended
June 30, 1999, the decrease was primarily the result of principal collections
on receivables of $93.6 million, a reduction for the cost basis of receivables
sold of $400.3 million and a reduction due to foreclosed receivables of
approximately $24.8 million, exceeding the acquisition of receivables totaling
$458.3 million, an increase in accrued interest of $1.8 million plus an
additional $6.7 million in loans to facilitate the sale of real estate.
Real estate held for sale and development decreased slightly to $89.0
million at June 30, 1999 from $89.9 million at March 31, 1999, $89.9 million
at December 31, 1998 and $89.7 million at September 30, 1998. For the nine
months ended June 30, 1999, real estate additions of $33.4 million, including
$20.6 million of foreclosed receivables, were offset by costs of real estate
sold of $28.1 million, depreciation of $2.5 million and charge-offs to the
allowance for losses of $3.5 million.
Life insurance and annuity policy reserves increased $3.7 million during
the nine months ended June 30, 1999 to approximately $804.5 million from
$800.8 million at September 30, 1998. This increase was the result of
insurance product receipts in the amount of $83.3 million and credited
earnings of $31.5 million exceeding insurance product withdrawals of $78.6
million and net reinsurance ceded of $32.5 million. For the nine months ended
June 30, 1999, net debenture bonds outstanding decreased by $0.2 million to
$198.0 million from $198.2 million at September 30, 1998. Net cash outflow
from maturities less issuance of debentures was approximately $1.5 million
less an additional $1.2 million increase in credited interest held.
Additionally, the Company had cash flow, net of redemptions, of approximately
$1.9 million from the issuance of preferred stock during the nine months ended
June 30, 1999. During the nine month period ended June 30, 1999, the Company
had a net increase in short-term borrowings of $31.4 million to an approximate
outstanding amount of $154.2 million on June 30, 1999. The increase was
primarily the result of the use of short-term borrowings to finance
accumulation of receivables for an anticipated securitization in August 1999.
Total assets increased by $38.4 million to $1.265 billion at June 30,
1999 from $1.227 billion at September 30, 1998. At June 30, 1999, the Company
had net unrealized losses on securities available-for-sale in the amount of
$3.5 million as compared to unrealized losses of $681,000 at September 30,
1998. Net unrealized losses on securities available-for-sale is presented as
a component of accumulated other comprehensive loss in stockholders' equity.
Results of Operations:
The Company recorded net income before preferred dividends for the nine
months ended June 30, 1999 of $16.1 million compared to $10.7 million in the
prior year's period. Comparing the current year's nine month period with the
prior year's similar period, the increase in gains on the sale of receivables,
an increase in fees, commissions and service income and the benefits of an
implemented income tax strategy completely offset increases in the provision
for losses on real estate assets, increases in salaries, commissions and
benefits, a decrease in the net interest spread, a decrease in gains from the
sale of real estate, a loss on investment securities and increased other
operating expenses.
For the nine-month period ended June 30, 1999, the Company reported a
positive spread on its interest sensitive assets and liabilities of $19.0
million as compared to $21.1 million in the prior year's period. The decrease
was primarily the result of a shift from higher yielding receivable
investments into lower yielding bond investments as a result of recent
securitizations and management's decision to reduce the investment percentage
of its insurance subsidiary in real estate related assets. After
securitizations, it often takes the Company several months to reinvest the
proceeds in new receivable investments along with the fact that the Company
often elects to retain some of the subordinate bonds from the securitizations.
While there has been some contraction in the earnings rate on the investment
portfolio 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
short-term borrowings with a lower interest cost in an effort to maintain its
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 nine months ended June 30, 1999, the Company realized net
gains on sales of receivables of $19.9 million as compared to $12.0 million in
the prior year's period. The current year included gains from real estate
receivable securitizations in November 1998 and March 1999 and a structured
settlement securitization in December 1998. The prior year included gains
from a real estate receivable securitization in April 1998.
During the nine months ended June 30, 1999, the Company realized net
losses on investments of $3.7 million, including mark-to-market adjustments on
trading securities and losses incurred to implement its tax strategy, compared
to net gains of $6.7 million in the prior year's period. The current period
loss includes both realized gains and mark-to-market losses, as higher
interest rates and increased spreads to treasuries have decreased the
valuation of certain trading securities. Additionally, included in the
current year's period are approximately $2.6 million in investment loss
associated with the implementation of the tax strategy. The prior year's gain
was primarily the result of reduced interest rates and tightening of spreads
to treasuries, thus increasing the value of trading securities. Also, in the
prior year, the Company revalued some of its retained securities from prior
securitizations. The Company realized gains of $1.4 million on sales of $29.5
million of real estate in the current year's period compared to gains of $1.5
million on sales of $23.2 million in the prior year. It is the policy of
management to actively market real estate in order to return the investment to
an earning asset.
In the nine months ended June 30, 1999, the Company made
provisions for losses on receivables and real estate assets of approximately
$7.5 million as compared to $4.2 million in the prior year's period. The
increase in the provision was based upon updated appraisals on delinquent
receivables and appraisals or fair market valuations of newly acquired
repossessed properties.
For the nine months ended June 30, 1999, the Company has incurred
salary, commission and benefits expense of $22.5 million as compared to $20.4
million in the previous year's similar period. Increases were partially the
result of additional employees hired to meet servicing demands related to the
increase in managed assets from prior securitizations. To date, the Company
has retained the servicing of all securitized assets. Partially offsetting
this expense increase has been a $0.9 million increase in fees, service and
commission income with fees of $6.2 million in the current year's period
compared to $5.3 million in the prior year.
In the nine months ended June 30, 1999, the Company has incurred
increases in other operating expenses, including decreases in deferred
acquisition costs related to its insurance business. A $1.4 million reduction
in operating expenses after capitalized contract acquisition costs was almost
entirely offset by additional depreciation and amortization expenses of $1.3
million. Additionally, in the current year's period, the Company experienced
a larger decrease in deferred acquisition costs related to its insurance
business as increased amortization and reduced capitalization resulted in a
$3.5 million increase in expense.
In comparing the three months ended June 30, 1999 with the prior year's
similar period, the Company recorded a net loss before preferred dividends of
$1.9 million as compared to net income of $7.0 million. The loss for the
comparative three months was primarily the result of (1) a decrease in the net
interest spread, (2) increased losses on investments, (3) a decrease in gains
from the sale of receivables, (4) an increase in the provision for losses on
real estate assets, and (5) increases in salaries, commissions, benefits and
other operating expenses, which were only partially offset by (1) an increase
in gains from the sale of real estate, and (2) an increase in fees,
commissions and service income.
For the three months ended June 30, 1999, the net interest spread was
$6.8 million compared to $7.4 million in the prior year. The reduction was
primarily the result of the Company carrying increased balances in cash and
cash equivalents generated from recent receivable securitizations and a
reallocation of investments. Until funds received from the securitizations
can be reinvested in similar receivables, the Company is forced to purchase
short-term investments with lower yields. The reduction was additionally
effected by the lower interest rate market, which affected the yield on new
receivable investments.
During the three months ended June 30, 1999, the Company realized net
losses on investments of $571,000 and realized gains on the sale of
receivables of $240,000. In the prior year, the Company recorded investment
gains of $251,000 and gains on the sale of receivables of $11.7 million. The
prior year's investment gains were primarily the result of reduced interest
rates and the tightening of spreads to treasuries, thus increasing the value
of trading securities. Additionally, in the three months ended June 30, 1999,
the Company did not complete a real estate receivable securitization while the
Company did complete one in April 1998. The Company anticipates its next
securitization to take place in August 1999.
In conjunction with the Company's evaluation of its real estate assets,
the Company provided for loss on real estate assets of $1.9 million in the
current year's three-month period as compared to $1.5 million in the prior
year. The increase was based upon updated appraisals on delinquent
receivables and appraisals or fair market valuations of newly acquired
repossessed properties.
New Accounting Rules:
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments for an Enterprise and Related Information" (SFAS
131) was issued. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement
supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. The application of SFAS 131 is not expected to have a material
effect on the Company's consolidated financial statements.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SOP 97-3"). SOP 97-3 applies
to all entities that are subject to guaranty-fund and other insurance-related
assessments. Assessments covered by this SOP include any charge mandated by
statute or regulatory authority that is related directly or indirectly to
underwriting activities (including self-insurance), except for income taxes
and premium taxes. SOP 97-3 is effective for financial statements for fiscal
years after December 15, 1998. The Company does not believe that the
application of SOP 97-3 will have a material effect on its consolidated
financial statements.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
was issued. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as "Derivatives") and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of SFAS 133" ("SFAS 137") was
issued. SFAS 137 amends SFAS 133 to become effective for all quarters of
fiscal years beginning after June 15, 2000, however, earlier application is
encouraged as of the beginning of any fiscal quarter. The Company has not yet
determined the effect of the application of this statement on its consolidated
financial statements.
In October 1998, Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Banking Enterprise" ("SFAS 134"), was issued. SFAS
134 requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interests based on its ability and intent
to sell or hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
by a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. The Company adopted this statement effective January 1,
1999. Concurrent with the adoption, the Company transferred $46.3 million in
mortgage-backed securities for its trading category to its available-for-sale
category.
Year 2000 Disclosure
The Consolidated Group (Metropolitan and its subsidiaries) is aware of
the potential effect that the year 2000 and the new century may have on
computer hardware, computer software and applications and embedded micro-
controllers in non-computer equipment (collectively "Information Technology").
The problem is insuring that the Consolidated Group is "Year 2000 Compliant"
meaning that the Information Technology is able to (i) process date and time
data accurately and (ii) calculate, compare and sequence from, into and
between the twentieth and twenty-first centuries, the years 1999, 2000 and
leap years.
The Consolidated Group and its affiliates share many software, hardware,
facilities and other systems. Therefore, the Consolidated Group's Year 2000
efforts are a combined and coordinated effort among all companies within the
Consolidated Group and its affiliates. The following are statements regarding
the Year 2000 compliance of the Consolidated Group. The information below has
not been independently verified by the Consolidated Group, other than
statements relating to the Consolidated Group.
State of Readiness
The Consolidated Group has established a Year 2000 task force which has
developed an action plan for addressing issues related to the Year 2000.
Management currently contemplates that the plan, with the exception of the
contingency plan, will be substantially completed by August 1, 1999. The
contingency plan is expected to be substantially completed by December 1,
1999, but will continue to be revised thereafter as needed in order to
maintain an effective contingency plan. The action plan includes the
following phases:
Inventory - Identify all internal and external systems and services that
may utilize date sensitive information.
Assessment - Determine whether each system or service meets the
Consolidated Group's definition of Year 2000 Compliance and assess the
potential business impact of non-compliance.
Renovation - Modify and/or replace any systems or services that do not
satisfy the Consolidated Group's definition of Year 2000 Compliance.
Certification - Obtain certification that each system or service meets
the definition of compliance.
Training - Develop and implement any training and procedural changes to
ensure correct data-entry.
Contingency Planning - Develop and implement contingency plans against
possible failures.
The plan includes a timeline for the completion of each of the phases
and components of the work within each phase. Many of the different phases
have overlapping timelines and are therefore progressing simultaneously,
therefore the status of progress on any particular phase is difficult to
assess at any point in time. The Year 2000 task force meets as needed to
coordinate its efforts as well as to monitor progress.
The status of the Consolidated Group's Year 2000 efforts are regularly
monitored by the internal auditor. In addition, during the first quarter of
calendar 1999, the Consolidated Group engaged a third party to provide an
external evaluation of its Year 2000 plan and the status of the preparations
of the Consolidated Group at that time.
The Consolidated Group has completed the testing of its internally
developed and supported software applications, hardware and facilities
systems. Updates and modifications were made to systems if and as needed.
Testing to date has not produced any results which were not able to be
resolved. Testing for newly acquired or upgraded software, hardware and
facilities systems will continue as deemed appropriate through the remainder
of the year.
The Consolidated Group is requesting vendor documentation certifying
Year 2000 compliance with respect to third party software applications, third
party services, equipment and facilities related systems. Certain equipment
and facilities systems which have been identified as higher priority have been
tested for compliance, where testing is possible. Where such testing has
occurred, the tests have not produced any results which were not able to be
resolved. To date, the Consolidated Group has not received any indication
from any third party that a mission critical system or service will not be
able to be certified by them as Year 2000 compliant. The Year 2000 task force
is monitoring and tracking projected certification dates from third party
providers.
The Consolidated Group has begun the development of a Year 2000
contingency plan to address potential Year 2000 related failures. A
contingency planning task force has developed preliminary contingency plans
which will be further refined and tested during the remainder of the year.
There can be no assurance that this contingency plan or that the Year 2000
action plan will be able to prevent a material disruption of the Consolidated
Group's business.
Expected Costs of Remediation
Prior to fiscal 1998, the Consolidated Group did not track Year 2000
related costs. The Consolidated Group and its affiliates had developed a Year
2000 budget of approximately $1.3 million for the fiscal year commencing
October 1, 1998. Certain of these costs will be charged to or reimbursed by
the affiliated companies, and certain of these costs will be paid by the
Consolidated Group with respect to their respective costs associated with the
Year 2000 action plan. The predominant components of both past and future
costs consist of soft costs related to employee time and resource allocations
rather than direct costs such as the acquisition of new software.
Risks
The Consolidated Group, as a financial institution, relies heavily upon
computers and information technology systems to acquire, service and sell
Receivables as well as for its securities and insurance sales activities. The
Consolidated Group faces extensive Year 2000 related risks. The order within
which these risks are presented is not intended as a prioritization of the
potential risks nor an exhaustive identification of the risks. These risks
include, but are not limited to the following:
unavailability of electrical power or telecommunication systems supplied
by third parties;
inability of obligors on the Receivables to access their funds to make
required payments;
inability of the mail systems or wire transfer systems performed by
third parties to deliver such payments;
inability of banks to process those payments;
failure of any of the software/hardware systems which the Consolidated
Group uses to track insurance products, securities products or acquire,
service and sell Receivables;
inability of the Consolidated Group to access its own funds or to make
wire transfers or otherwise make payments on its obligations due to
internal or third party (generally banking) system failures; and
inability of the Consolidated Group to process data accurately or timely
for general business management purposes, regulatory reporting purposes
or other purposes.
Contingency Plans
The Consolidated Group has commenced the development of a contingency
plan but has not finalized such a plan to date. Development of contingency
plans for mission critical items is the first and top priority of the
contingency planning phase. Where appropriate and feasible, the plan will
also address alternatives for internally developed systems as well as
externally developed ones, and will include steps to implement transition to
an alternative system. The plan will include trigger dates for implementing
alternative solutions prior to the Year 2000, where system testing or third
party documentation indicates that a system is not and will not be compliant.
There can be no assurance that this contingency plan, or that the Year 2000
action plan will be able to prevent a material disruption of the Consolidated
Group's business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is in a "liability sensitive" position in that it interest
sensitive liabilities reprice or mature more quickly than do its interest
sensitive assets. Consequently, in a rising interest rate environment, the
net return from interest sensitive assets and liabilities will tend to
decrease, thus rising interest rates will have a negative impact on results of
operations. Conversely, in a falling interest rate environment, the net
return from interest sensitive assets and liabilities will tend to improve,
thus falling interest rates will have a positive impact on results of
operations. As with the impact on operations from changes in interest rates,
the Company's Net Present Value ("NPV") of financial assets and liabilities is
subject to fluctuations in interest rates. The Company continually monitors
the sensitivity of net interest income and NPV to changes in interest rates.
NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided
by independent broker quotations and other public sources. Any computation of
forecasted effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, loan
prepayments and redemptions of certificates, and should not be relied upon as
indicative of actual future results.
The Company believes that there has not been a material change in its
market risk since the end of its last fiscal year.
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
No 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). Restated Bylaws as amended to December 26, 1995
(Exhibit 3(e) to Metropolitan's Annual Report on
Form 10-K for fiscal 1995).
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 &
Securities Co., Inc. and Bruce Blohowiak (Exhibit
10(a) to Form 10-K filed January 8, 1998).
10(b). Employment Agreement between Metropolitan Mortgage &
Securities Co., Inc. and Michael Kirk (Exhibit 10(b)
to Form 10-K filed January 8, 1998).
10(c). Employment Agreement between Metropolitan Mortgage &
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) for the fiscal year ended
September 30, 1998.)
10(e). Employment Agreement between Metropolitan Mortgage &
Securities Co., Inc. and William D. Snider (Exhibit
10(e) to Form 10-Q filed May 20, 1999).
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 12th day of
August, 1999 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/ WILLIAM D. SNIDER
______________________________________________
William D. Snider
Chief Financial Officer
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