<PAGE>
FORM 10-Q/A
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, 2000
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 ____________
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 /X / 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": 97 shares at July 31, 2000.
Common "B": 0 shares at July 30, 2000.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
As of June 30, 2000 and September 30, 1999 (unaudited)
Consolidated Statements of Operations
Three Months Ended June 30, 2000 and 1999 (unaudited)
Nine Months Ended June 30, 2000 and 1999 (unaudited)
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended June 30, 2000 and 1999 (unaudited)
Nine Months Ended June 30, 2000 and 1999 (unaudited)
Consolidated Statement of Stockholders' Equity
Nine Months Ended June 30, 2000 (unaudited)
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---------------------- -----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $30,199,717 $ 20,406,837
Investments
Trading securities, at market 61,784,716 45,013,522
Available-for-sale securities, at market 199,407,883 156,263,086
Held-to-maturity securities, at amortized cost (market
value $58,607,859 and $65,259,835) 60,384,211 66,441,407
Accrued interest on investments 3,180,240 1,855,352
----------- -----------
TOTAL CASH AND INVESTMENTS 354,956,767 289,980,204
----------- -----------
Real estate contracts and mortgage
notes receivable, net, including real estate contracts
and mortgage notes receivable held for sale of
approximately $144,724,000
and $201,815,000 552,754,988 539,525,957
Real estate held for sale and development,including
foreclosed real estate 75,107,972 85,747,433
-------------- --------------
Total receivables and real estate assets 627,862,960 625,273,390
Less allowance for losses (11,651,391) (9,318,072)
-------------- --------------
NET RECEIVABLES AND REAL ESTATE ASSETS 616,211,569 615,955,318
-------------- --------------
Other receivable investments, net 186,177,952 174,707,840
Deferred acquisition costs, net 66,354,728 66,339,586
Land, building and equipment, net of accumulated
depreciation 33,387,897 26,342,123
Mortgage servicing rights, net 12,315,761 10,898,621
Deferred income taxes, net 1,419,365 -
Other assets, net of allowance,
including receivable from affiliates 32,315,907 46,732,827
-------------- --------------
TOTAL ASSETS $1,303,139,946 $1,230,956,519
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---------------------- -----------------------
<S> <C> <C>
LIABILITIES
Life insurance and annuity reserves $ 787,640,686 $ 795,744,055
Debenture bonds and accrued interest 218,795,531 198,888,779
Advances under line of credit 139,518,724 62,908,030
Other debt payable 86,266,499 74,436,600
Accounts payable and accrued expenses 19,693,029 11,274,411
Deferred income taxes - 13,943,294
Deferred income 1,129,942 -
Minority interest in consolidated subsidiaries 2,036,869 2,056,887
-------------- -------------
TOTAL LIABILITIES 1,255,081,280 1,159,252,056
-------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, series A, B, C, D, E
cumulative with variable rate, $10
par value, authorized 8,325,000,
issued 1,882,052 shares and 1,909,929
shares (liquidation preference
$62,232,482 and $53,094,517,
respectively) 18,820,518 19,099,294
Class A common stock-voting, $2,250 par
value, authorized 222 shares, issued
97 and 129 shares 218,250 291,167
Additional paid-in capital 28,278,181 22,522,036
Retained earnings 12,599,334 33,430,689
Accumulated other comprehensive loss (11,857,617) (3,638,723)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 48,058,666 71,704,463
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,303,139,946 $1,230,956,519
============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Insurance premiums earned $ 189,057 $ 216,912 $ 648,998 $ 519,693
Interest on receivables 10,821,607 12,643,847 32,989,515 37,434,109
Earned discount on receivables 5,004,856 4,688,264 15,946,677 15,175,434
Other investment income 8,116,196 5,521,394 21,673,132 15,241,564
Real estate sales 10,610,080 11,190,586 32,187,906 29,489,659
Fees, commissions, service and other income 3,259,761 2,062,206 9,039,885 6,018,329
Investment losses, net (10,438,381) (570,515) (9,191,656) (3,703,708)
Realized gains on sales of receivables 26,795 239,961 9,698,914 19,906,860
------------ ------------ ------------ ------------
TOTAL REVENUES 27,589,971 35,992,655 112,993,371 120,081,940
------------ ------------ ------------ ------------
EXPENSES
Insurance policy and annuity benefits 10,814,789 10,934,504 33,690,109 32,573,784
Interest expense 6,979,265 5,363,797 19,400,090 16,087,921
Cost of real estate sold 10,624,036 10,386,467 29,693,903 28,095,061
Provision for losses on real estate assets 3,626,780 1,907,510 9,162,875 7,547,318
Provision for losses on other assets 2,664,197 (14,000) 3,618,775 708,000
Servicing rights valuation 1,365,343 (113,120) 1,306,958 (171,505)
Salaries and employee benefits 8,874,031 5,993,450 24,058,548 16,939,081
Commissions to agents 3,440,137 2,254,257 9,261,659 5,588,621
Other operating and underwriting expenses 3,207,154 936,175 7,532,665 4,948,402
Amortization of deferred acquisition costs, net of costs
capitalized 534,056 1,168,266 1,798,066 4,071,971
------------ ------------ ------------ ------------
TOTAL EXPENSES 52,129,788 38,817,306 139,523,648 116,388,654
------------ ------------ ------------ ------------
Income (loss) before income taxes and minority interest (24,539,817) (2,824,651) (26,530,277) 3,693,286
Benefit for income taxes 8,539,711 985,285 9,278,890 12,697,277
------------ ------------ ------------ ------------
Income (loss) before minority interest (16,000,106) (1,839,366) (17,251,387) 16,390,563
Income (loss) of consolidated subsidiaries
allocated to minority stockholders 112,458 (16,790) 20,018 (305,000)
------------ ------------ ------------ ------------
Net income (loss) (15,887,648) (1,856,156) (17,231,369) 16,085,563
Preferred stock dividends (1,146,487) (910,479) (3,374,653) (2,638,929)
------------ ------------ ------------ ------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $(17,034,135) $ (2,766,635) $(20,606,022) $ 13,446,634
============ ============ ============ ============
Basic and diluted income (loss) per share
applicable to common stockholders $(145,591) $ (21,282) $(164,848) $ 103,436
============ ============ ============ ============
Weighted average number of shares of common
stock outstanding 117 130 125 130
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $(15,887,648) $ (1,856,156) $(17,231,369) $16,085,563
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized income (loss) on
investments (11,084,753) 428,199 (12,644,185) (4,225,279)
Less deferred income tax provision
(benefit) (3,879,880) 144,586 (4,425,291) (1,446,595)
----------- ------------ ------------ ------------
Net other comprehensive income (loss) (7,204,873) 283,613 (8,218,894) (2,778,684)
----------- ------------ ------------ ------------
Comprehensive income (loss) $(23,092,521) $ (1,572,543) $(25,450,263) $13,306,879
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Class A Additional Other
Preferred Common Paid-In Comprehensive Retained
Stock Stock Capital Income (Loss) Earnings Total
---------- -------- ----------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1999 $ 19,099,294 $ 291,167 $ 22,522,036 $ (3,638,723) $ 33,430,689 $ 71,704,463
Net loss (17,231,369) (17,231,369)
Net change in unrealized losses on
investments, net of taxes (8,218,894) (8,218,894)
Cash dividends, common (225,333) (225,333)
Cash dividends, preferred (variable
rate) (3,374,653) (3,374,653)
Redemption and retirement of common
stock (72,917) (3,139,268) (3,212,185)
Redemption and retirement of
preferred stock (1,334,511) (84,834) (1,419,345)
Sale of variable rate preferred
stock, net 1,055,735 8,980,247 10,035,982
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2000 $ 18,820,518 $ 218,250 $ 28,278,181 $(11,857,617) $ 12,599,334 $ 48,058,666
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
2000 1999
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (17,231,369) $ 16,085,563
Adjustments to reconcile net income (loss) to net cash from operating
activities
Proceeds from sales of trading securities 18,444,597 6,538,788
Proceeds from maturities of trading securities 578,404 381,426
Acquisition of trading securities (38,800,599) (42,892,368)
Earned discounts on receivables (15,946,677) (15,175,434)
Gains on investments and receivables, net (507,258) (16,203,152)
Gains on sales of real estate (2,494,003) (1,394,598)
Provision for losses on real estate assets 9,162,875 7,547,318
Provision for losses on other assets 3,618,775 708,000
Depreciation and amortization 3,679,921 4,564,793
Minority interests (20,018) 305,000
Deferred income tax provision (benefit) (10,973,766) (7,594,572)
Changes in assets and liabilities:
Deferred costs (15,142) 3,664,330
Life insurance and annuity reserves 32,823,855 31,949,156
Compound and accrued interest on debentures and debt payable (3,695,426) 1,516,578
Other assets 12,120,177 (10,589,906)
Accrued interest on receivables and investments (2,179,997) (2,633,910)
Accounts payable and accrued expenses 8,418,618 602,690
Other, net (120,400) (3,628,540)
------------- -------------
Net cash provided used in operating activities (3,137,433) (26,248,838)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on real estate contracts and mortgage notes and other
receivables 135,794,677 108,784,723
Proceeds from real estate sales 24,357,069 22,763,866
Proceeds from investment maturities 13,274,769 29,297,583
Proceeds from sale of available-for-sale securities 11,674,531 6,853,358
Purchase of available-for-sale securities (81,540,232) (94,152,657)
Purchase of held to maturity investments (187,026) --
Proceeds from sale of real estate contracts and mortgage notes and other
receivables 349,656,536 420,206,011
Acquisition of real estate contracts and mortgage notes and other
receivables (495,227,486) (458,333,730)
Additions to real estate held (7,272,460) (12,855,675)
Increase in mortgage servicing rights (1,417,139) (2,479,499)
Capital expenditures (8,788,465) (1,465,756)
------------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (59,675,226) 18,618,224
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in borrowings 88,616,391 31,379,850
Receipts from life and annuity products 83,094,001 86,328,643
Withdrawals on life and annuity products (135,024,374) (82,126,712)
Ceding of life and annuity products to reinsurers (3,891,526) (34,916,336)
Reimbursement of life and annuity products from reinsurers 14,894,676 2,402,812
Repayment of debt payable (491,891) (1,371,939)
Issuance of debenture bonds 68,133,833 28,463,256
Issuance of preferred stock 10,035,982 2,235,096
Repayment of debenture bonds (44,530,037) (29,918,394)
Cash dividends (3,599,986) (2,873,663)
Redemption of preferred stock (1,419,345) (306,628)
Redemption of common stock (3,212,185) --
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 72,605,539 (704,015)
------------- -------------
Net change in cash and cash equivalents 9,792,880 (8,334,629)
Cash and cash equivalents at beginning of period 20,406,837 31,733,362
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,199,717 $ 23,398,733
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of Metropolitan Mortgage & Securities, Inc and
subsidiaries (the "Company) as of June 30, 2000, the results of operations for
the three and nine months ended June 30, 2000 and 1999 and the cash flows for
the nine months ended June 30, 2000 and 1999. The results of operations for the
nine months ended June 30, 2000 and 1999 are not necessarily indicative of the
results to be expected for the full year. These financial statements should be
read in conjunction with the consolidated financial statements including notes
thereto included in the Company's fiscal 1999 Form 10-K.
Certain amounts in the prior year's consolidated financial statements have
been reclassified to conform to the current year's presentation. These
reclassifications had no effect on net income (loss) or retained earnings as
previously reported.
RECENT ACCOUNTING DEVELOPMENTS
In December of 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 adopted this standard effective October 1,
1999 with no material effect on its consolidated financial statements.
In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
on accounting for the costs of computer software by identifying the
characteristics of internal-use software. The Company adopted this standard
effective October 1, 1999 with no material effect on its consolidated financial
statements
In June of 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 Effective Date of SFAS 133" ("SFAS No. 137") was issued. SFAS No.
137 amends SFAS No. 133 to become effective for all quarters of fiscal years
beginning after June 15, 2000, however, earlier application is
<PAGE>
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.
Securitizations
Loan securitizations are generally structured as follows: First, the
Company sells a portfolio of mortgage loans to a special purpose entity (SPE)
which has been established for the limited purpose of buying and reselling
mortgage loans. The SPE then transfers the same mortgage loans to a Real Estate
Mortgage Investment Conduit or Owners Trust (the REMIC or Trust), and the Trust
in turn issues interest-bearing asset-backed securities (the Certificates)
generally in an amount equal to the aggregate principal balance of the mortgage
loans. The Certificates are typically sold at face value and without recourse
except that representations and warranties customary to the mortgage banking
industry are provided by the Company to the Trust. One or more investors
purchase these Certificates for cash. The Trust uses the cash proceeds to pay
the Company the cash portion of the purchase price for the mortgage loans. The
Trust also issues a certificate representing a residual interest in the payments
on the securitized loans.
At the closing of each securitization, the Company removes the mortgage
loans sold from its consolidated balance sheet and adds to its consolidated
balance sheet the cash received, and any interest in the mortgage loans retained
from the securitizations in the form of certificates, residuals and servicing
asset. The Company allocates its basis in the mortgage loans between the portion
of the mortgage loans sold through the Certificates to outside investors and any
portion retained (certificates, residuals and servicing assets) based on the
relative fair values of those portions on the date of sale. The excess of the
cash received and the assets retained by the Company over the carrying value of
the loans sold, less transaction costs, equals the net gain on sale of mortgage
loans recorded by the Company.
Occasionally, the Company will participate as Co-sellers in a
securitization with an affiliate, Summit Securities, Inc. and its subsidiaries.
The following tables summarizes the Company's real estate securitization
activity for the nine months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Nine Months Ended June 2000
Principal Contributed Company
Month Securitized By Company Pre-Tax Gain
------------------------- ----------------------- ----------------------- ------------------
<S> <C> <C> <C>
October 1999 $ 51,497,970 $ 51,497,970 $1,304,680
November 1999 153,267,828 153,267,828 3,955,692
March 2000 148,747,859 148,747,859 4,200,320
----------------------- ----------------------- ------------------
Total $353,513,657 $353,513,657 $9,460,692
----------------------- ----------------------- ------------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended June 1999
Principal Contributed Company
Month Securitized By Company Pre-Tax Gain
------------------------- ----------------------- ----------------------- ------------------
<S> <C> <C> <C>
November 1998 $194,442,809 $182,413,958 $ 9,032,676
March 1999 124,753,403 124,753,403 7,644,573
----------------------- ----------------------- ------------------
Total $319,196,212 $307,167,361 $16,677,249
----------------------- ----------------------- ------------------
</TABLE>
<PAGE>
The following table summarizes the Company's securitization activity of
other receivables for the nine months ended June 30, 1999.
<TABLE>
<CAPTION>
Book Value Contributed Company
Month Securitized By Company Pre-Tax Gain
------------------------- ----------------------- ----------------------- ---------------------
<S> <C> <C> <C>
December 1998 $ 37,715,101 $ 21,750,683 $ 1,462,479
</TABLE>
Residuals
Since the Annual Percentage Rate (APR) of the mortgage loans are
greater than the pass-through rate on the certificates, there is more cash
generated from the pool of mortgages than what is needed to reduce the
non-residual certificates to zero. A portion of the total excess cash flow is
used to (i) pay the master servicer a servicing fee for the servicing and
collection of the receivables (ii) pay the trustee for services performed,
and (iii) cover losses incurred on default loans. Any remaining cash flow
will eventually be passed through to the Company over the life of the
securitization. The excess cash flow to be passed through to the Company is
commonly referred to as the Residual.
The Company is not aware of an active market for the purchase or sale of
residuals and, accordingly, the Company determines the estimated fair value
of the residuals by discounting the expected cash flows using a discount rate
commensurate with the risks involved. When determining the expected cash
flow, the Company must estimate the future rates of prepayments, defaults,
and default loss severity (the loss realized upon liquidation of collateral
from repossessed loans) as they affect the amount and timing of the estimated
cash flows. During the quarter ended June 30, 2000, the actual loss severity
and default rates increased over historical rates which had previously been
used to determine the fair value of the residuals. Accordingly, the Company
adjusted its assumptions based on the actual historical performance and
expectations of future performance of the loan pools. The assumptions used
for valuing the residual certificates as of June 30, 2000 were as follows:
Assumptions
Prepayment rates 11% - 18%
Default rate 1.4% - 4.1%
Loss severity 28% - 44%
Discount rate 11% - 12%
The Company may experience changes in the fair value of its residuals,
which are recorded at estimated fair value and accounted for as either
"trading" or "available-for-sale" securities. Changes in the fair value of
residuals that are "trading" are included in earnings. Temporary declines in
the fair value of residuals that are "available-for-sale" are excluded from
earnings and reported as a separate component of shareholders' equity. During
<PAGE>
the quarter ended June 30, 2000, the Company determined that certain
"available-for-sale" residuals had temporary declines in value. And
accordingly, the carrying value of the securities was decreased through a
charge to shareholders' equity. However, the Company subsequently determined
that some of the declines in value were other than temporary and should have
been recorded as a charge to operations. Therefore, the Company restated its
form 10-Q for the quarter ended June 30, 2000 to reflect a pre-tax increase
of $7,160,000 in investment losses and an increase in income tax benefit of
$2,506,000. This change increased the previously reported net loss and net
loss per share by $4,659,000 and $39,825 per share for the three months ended
June 30, 2000 and $4,659,000 and $37,276 per share for the nine months ended
June 30, 2000, respectively.
Mortgage Servicing Rights
At the closing of each securitization, the Company measures the
servicing asset retained at the allocated previous carrying amount based on
relative fair values. Subsequent valuations of the servicing rights are
performed to determine if there has been any impairment to the asset. The
amount of any impairment recognized is the amount by which the carrying
amount of the servicing rights exceed their fair value. The Company
calculates the fair value of the servicing rights by discounting the expected
net cash flow from its servicing activity. The net cash flow is measured as
the amount by which the expected revenues from contractually specified
servicing fees, late charges, and other ancillary sources including "float"
exceeds the estimated cost of servicing the assets. When determining the
expected cash flow, the Company must estimate (i) the future rates of
prepayments (ii) ancillary income and (iii) cost of servicing. During the
quarter ended June 30, 2000, the Company adjusted its assumptions based on
the historical and expected performance of the servicing activity. The
assumptions used for valuing the mortgage servicing rights as of June 30,
2000 were as follows:
Assumptions
-------------
Discount rate 10%
Prepayment rate 12% - 16%
Ancillary income rate 30 basis points,
annually
During the quarter ended June 30, 2000, the Company recorded a $1.3
million charge to operations to reflect a reduction in the fair value of the
mortgage servicing rights.
The principal amount of real estate receivables as to which payments
were in arrears more than three months was $23.5 million at June 30, 2000 and
$30.0 million at September 30, 1999
The carrying amount of other receivables as to which payments were in
arrears was $7.1 million at June 30, 2000 and $5.3 at September 30, 1999
The Company periodically pledges investments as collateal for borrowings.
As of June 30, 2000, the Company had pledged $73.8 million of its investments.
2. Segment Reporting
The Company principally operates in three industry segments which
encompass: (1) the investing in real estate contracts and mortgage notes
receivable, other receivables and investment securities; (2) insurance and
annuity operations; and (3) property development activities. The insurance
segment also invests a substantial portion of the proceeds from insurance and
annuity operations in real estate contracts and mortgage notes receivables,
other receivables and investment securities. All transactions between segments
are eliminated. The Company allocates certain overhead and operating expenses
amongst its segments.
<PAGE>
Information about the Company's separate business segments and in total
as of and for the nine and three month period ended June 30, 2000 and 1999 is
as follows:
<TABLE>
<CAPTION>
As of and for the nine month period ended June 30, 2000
-------------------------------------------------------------------------------------------------
Property Intersegment
Investing Insurance Development Elimination Total
----------- ------------ ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $52,460,928 $59,916,526 $7,527,475 $(6,911,558) $112,993,371
Income (loss) from
operations (23,734,255) (2,524,836) (271,186) - (26,530,277)
Identifiable assets, net 438,960,220 939,682,477 58,048,035 (133,550,786) 1,303,139,946
Depreciation and
amortization 2,548,264 248,957 882,700 - 3,679,921
Capital expenditures
8,596,073 192,392 - - 8,788,465
</TABLE>
<TABLE>
<CAPTION>
As of and for the three month period ended June 30, 2000
--------------------------------------------------------------------------------------------------
Property Intersegment
Investing Insurance Development Elimination Total
------------ ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $7,805,488 $19,423,068 $3,083,693 $(2,722,278) $27,589,971
Income (loss) from
operations (17,356,606) (7,085,890) (97,321) - (24,539,817)
Identifiable assets, net 438,960,220 939,682,477 58,048,035 (133,550,786) 1,303,139,946
Depreciation and
amortization 1,006,596 85,233 269,900 - 1,361,729
Capital expenditures
3,805,366 4,510 - - 3,809,876
</TABLE>
<TABLE>
<CAPTION>
As of and for the nine month period ended June 30, 1999
------------------------------------------------------------------------------------------------
Property Intersegment
Investing Insurance Development Elimination Total
------------ ------------ ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $54,039,092 $62,696,045 $12,189,730 $(8,842,927) $120,081,940
Income (loss) from
operations 3,587,546 2,547,880 (2,442,140) - 3,693,286
Identifiable assets, net 397,147,363 945,020,096 63,983,174 (141,095,045) 1,265,055,588
Depreciation and
amortization 1,846,913 226,055 2,491,825 - 4,564,793
Capital expenditures 1,427,339 38,417 - - 1,465,756
</TABLE>
<TABLE>
<CAPTION>
As of and for the three month period ended June 30, 1999
-----------------------------------------------------------------------------------------------
Property Intersegment
Investing Insurance Development Elimination Total
----------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues $13,854,177 $19,827,232 $3,809,030 $(1,497,784) $35,992,655
Income (loss) from
operations (3,525,525) 537,262 163,612 (2,824,651)
Identifiable 397,147,363 945,020,096 63,983,174 (141,095,045) 1,265,055,588
assets, net
Depreciation and
amortization 642,501 79,743 391,825 - 1,114,069
Capital expenditures 922,676 9,693 - - 932,369
</TABLE>
<PAGE>
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.
General
Metropolitan was established in 1953. Through growth and acquisitions it
has developed into a diversified institution with assets exceeding $1
billion. Its principal subsidiaries are Western United Life Assurance Company
("Western" or "WULA"), an annuity and life insurance company, and Metwest
Mortgage Services, Inc. ("Metwest"), a receivable servicer and loan
originator.
The Company's (the "Consolidated Group") principal business activity is
investing in cash flowing assets, consisting of obligations collateralized by
real estate, structured settlements, annuities, lottery prizes, equipment
leases and other investments. The receivables primarily consist of real
estate contracts and promissory notes collateralized by first position liens
on real estate. The Company predominantly invests in receivables where the
borrower or the collateral does not qualify for conventional financing or the
seller or the buyer chose to use non-conventional financing. This market is
commonly referred to as the non-conventional market. Obligors on the
Company's real estate receivables include A-, B and C credit quality
obligors. In addition to investing in existing receivables, the Company also
originates non-conventional, A-, B and C credit borrower loans through its
Metwest subsidiary.
Individual Receivable Acquisition Sources
Historically, the majority of the Company's real estate receivables were
acquired as individual receivable acquisitions. The Company's principal
source for private market receivables is independent brokers located
throughout the United States. These independent brokers typically deal
directly with private individuals or organizations that own and wish to sell
a receivable.
Capital Markets Acquisition Sources
In the recent past, the Company acquired pools of real estate
receivables through its capital markets department. These portfolios may be
either seller or institutionally originated. They may be acquired from
brokers, banks, savings and loans organizations, mortgage broker firms or
other financial institutions. However, the investment yields on capital
market acquisitions are generally lower than private market acquisitions.
Therefore, the Company recently scaled-back these acquisition sources.
<PAGE>
Loan Origination Sources
The Company, through its Metwest subsidiary, originates first lien
residential mortgage loans, including both fixed and adjustable interest rate
loans. Metwest is currently licensed for such mortgage loans as a lender or
is exempt from licensing as a wholesale lender in thirty states and as a
retail lender in thirty-four states.
Correspondent Lending Sources
The Company also acquires real estate loans through correspondent
agreements. Under these agreements, the Company agrees to purchase loans at a
specified yield immediately after their origination, so long as the loans
comply with the Company's specified underwriting guidelines. Many of these
loans are insured by a primary mortgage guaranty insurance policy. In
addition, loan correspondents may also submit loans that do not meet
established underwriting guidelines for individual evaluation and pricing,
which is done by Metwest. Each correspondent makes standard representations
and warranties with respect to each loan and has certain limited repurchase
obligations.
Lottery, Structured Settlement, Annuity and Lease Sources
The Company also negotiates the purchase of receivables that are not
collateralized by real estate, such as structured settlements, annuities and
lottery prizes. The lottery prizes generally arise out of state operated
lottery games which are typically paid in annual installments to the prize
winner. The structured settlements generally arise out of the settlement of
legal disputes where the prevailing party is awarded a sum of money, payable
over a period of time, generally through the creation of an annuity. Other
annuities generally consist of investments that cannot be cashed in directly
with the issuing insurance company. The Company's source for these
investments is generally private brokers who specialize in these types of
receivables.
Leases have been acquired through brokers who specialize in these types
of assets, primarily business equipment. Currently, management plans to begin
to establish strategic alliances with other equipment lessors, financial
institutions and equipment vendors to expand its leasing activities. There
can be no assurance that these alliances will materialize or, if entered
into, that they will be successful in expanding the leasing activities.
Securitizations
Loan securitizations are generally structured as follows: First, the
Company sells a portfolio of mortgage loans to a special purpose entity (SPE)
which has been established for the limited purpose of buying and reselling
mortgage loans. The SPE then transfers the same mortgage loans to a Real
Estate Mortgage Investment Conduit or Owners Trust (the REMIC or Trust), and
the Trust in turn issues interest-bearing asset-backed securities (the
Certificates) generally in an amount equal to the aggregate principal balance
of the mortgage loans. The Certificates are typically sold at face value and
without recourse except that representations and warranties customary to the
mortgage banking industry are provided by the Company to the Trust. One or
more investors purchase these Certificates for cash. The Trust uses the cash
proceeds to pay the Company the cash portion of the purchase price for the
mortgage loans. The Trust also issues a certificate representing a residual
interest in the payments on the securitized loans.
At the closing of each securitization, the Company removes the mortgage
loans sold from its consolidated balance sheet and adds to its consolidated
balance sheet the cash received, and any interest in the mortgage loans
retained from the securitizations in the form of certificates, residuals and
servicing asset. The Company allocates its basis in the mortgage loans between
<PAGE>
the portion of the mortgage loans sold through the Certificates to outside
investors and any portion retained (certificates, residuals and servicing
assets) based on the relative fair values of those portions on the date of
sale. The excess of the cash received and the assets retained by the Company
over the carrying value of the loans sold, less transaction costs, equals the
net gain on sale of mortgage loans recorded by the Company.
Occasionally, the Company will participate as Co-sellers in a
securitization with an affiliate, Summit Securities, Inc. and its subsidiaries.
The following tables summarizes the Company's real estate securitization
activity for the nine months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Nine Months Ended June 2000
Principal Contributed Company
Month Securitized By Company Pre-Tax Gain
------------------------------------------------------------------------------
<S> <C> <C> <C>
October 1999 $51,497,970 $51,497,970 $1,304,680
November 1999 153,267,828 153,267,828 3,955,692
March 2000 148,747,859 148,747,859 4,200,320
-------------------------------------------------------------
Total $353,513,657 $353,513,657 $9,460,692
-------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended June 1999
Principal Contributed Company
Month Securitized By Company Pre-Tax Gain
------------------------------------------------------------------------------
<S> <C> <C> <C>
November 1998 $194,442,809 $182,413,958 $9,032,676
March 1999 124,753,403 124,753,403 7,644,573
-------------------------------------------------------------
Total $319,196,212 $307,167,361 $16,677,249
-------------------------------------------------------------
</TABLE>
The following table summarizes the Company's securitization activity of
other receivables for the nine months ended June 30, 1999.
<TABLE>
<CAPTION>
Book Value Contributed Company
Month Securitized By Company Pre-Tax Gain
------------------------------------------------------------------------------
<S> <C> <C> <C>
December 1998 $37,715,101 $21,750,683 $1,462,479
</TABLE>
Residuals
Since the Annual Percentage Rate (APR) of the mortgage loans is greater
than the pass-through rate on the certificates, there is more cash generated
from the pool of mortgages than what is needed to reduce the non-residual
certificates to zero. A portion of the total excess cash flow is used to (i) pay
the master servicer a servicing fee for the servicing and collection of the
receivables (ii) pay the trustee for services performed, and (iii) cover losses
incurred on default loans. Any remaining cash flow will eventually be passed
through to the Company over the life of the securitization. The excess cash flow
to be passed through to the Company is commonly referred to as the Residual.
<PAGE>
The Company is not aware of an active market for the purchase or sale of
residuals and, accordingly, the Company determines the estimated fair value
of the residuals by discounting the expected cash flows using a discount rate
commensurate with the risks involved. When determining the expected cash
flow, the Company must estimate the future rates of prepayments, defaults,
and default loss severity (the loss realized upon liquidation of collateral
from repossessed loans) as they affect the amount and timing of the estimated
cash flows. During the quarter ended June 30, 2000, the actual loss severity
and default rates increased over historical rates which had previously been
used to determine the fair value of the residuals. Accordingly, the Company
adjusted its assumptions based on the actual historical and expected
performance and expectations of future performance of the loan pools. The
assumptions used for valuing the residual certificates as of June 30, 2000
were as follows:
Assumptions
Prepayment rates 11% - 18%
Default rate 1.4% - 4.1%
Loss severity 28% - 44%
Discount rate 11%-12%
The Company may experience changes in the fair value of its residuals,
which are recorded at estimated fair value and accounted for as either
"trading" or "available-for-sale" securities. Changes in the fair value of
residuals that are "trading" are included in earnings. Temporary declines in
the fair value of residuals that are "available-for-sale" are excluded from
earnings and reported as a separate component of shareholders' equity. During
the quarter ended June 30, 2000, the Company determined that certain
"available-for-sale" residuals had temporary declines in value. And
accordingly, the carrying value of the securities was decreased through a
charge to shareholders' equity. However, the Company subsequently determined
that some of the declines in value were other than temporary and should have
been recorded as a charge to operations. Therefore, the Company restated its
form 10-Q for the quarter ended June 30, 2000 to reflect a pre-tax increase
of $7,160,000 in investment losses and an increase in income tax benefit of
$2,506,000. This change increased the previously reported net loss and net
loss per share by $4,659,000 and $39,825 per share for the three months ended
June 30, 2000 and $4,659,000 and $37,276 per share for the nine months ended
June 30, 2000, respectively.
Mortgage Servicing Rights
At the closing of each securitization, the Company measures the servicing
asset retained at the allocated previous carrying amount based on relative fair
values. Subsequent valuations of the servicing rights are performed to determine
if there has been any impairment to the asset. The amount of any impairment
recognized is the amount by which the carrying amount of the servicing rights
exceed their fair value. The Company calculates the fair value of the servicing
rights by discounting the expected net cash flow from its servicing activity.
The net cash flow is measured as the amount by which the expected revenues from
contractually specified servicing fees, late charges, and other ancillary
sources including "float" exceeds the estimated cost of servicing the assets.
When determining the expected cash flow, the Company must estimate (i) the
future rates of prepayments (ii) ancillary income and (iii) cost of servicing.
During the quarter ended June 30, 2000, the Company adjusted its assumptions
based on the historical performance of the servicing activity. The assumptions
used for valuing the mortgage servicing rights as of June 30, 2000 were as
follows:
Assumptions
-----------
Discount rate 10%
Prepayment rate 12% - 16%
Ancillary income rate 30 basis points, annually
During the quarter ended June 30, 2000, the Company recorded a $1.3 million
charge to operations to reflect a reduction in the fair value of the mortgage
servicing rights. The Company will continue to periodically assess the
assumptions used in valuing the cash flows and the carrying values of its
servicing rights.
<PAGE>
Liquidity and Capital Resources
In addition to the liquidity provided through internal sources which
include the sale and maturity of receivables and investments; receivable and
portfolio earnings; and the sale of real estate; the following liquidity sources
are available to the Company.
Collateralized Lines of Credit
Bank of America -
The Company obtains funds through the sale and repurchase of receivables in
accordance with a nonrecourse committed facility with Banc of America Securities
LLL ("Banc of America" f/k/a NationsBanc Mortgage Capital Corporation). Pursuant
to the terms of the facility, Metropolitan and Metwest may sell loans in an
aggregate amount not to exceed $200 million from time to time to Banc of America
for an agreed upon advance rate and shall repurchase such receivables at a
specified price on a specified date. The Company's line-of-credit agreement
contains certain financial tests, including a minimum net worth and a maximum
debt to net worth ratio. Violation of these tests is an event of default under
the agreement. As of June 30, 2000, the Company failed to maintain the required
levels. The lender has issued a letter to the Company specifying that it will
not exercise any rights under the agreement with respect to the default through
October 1, 2000. The Company is working with the lender to amend the terms of
the agreement eliminating the default, and believes that the parties will reach
agreement before the date set out in the letter.
Federal Home Loan Bank of Seattle (FHLB)
The Company has secured a line of credit agreement with the FHLB through
its subsidiary, WULA. When an institution becomes a stockholder in the FHLB , it
can borrow from the FHLB at a stock to borrowing ratio of 1 to 20. At June 30,
2000, WULA had a stock investment in the FHLB of $2.9 million, which resulted in
a borrowing capacity of $57 million. The collateral eligible to be used to
secure the borrowing is predefined by the FHLB and generally consists of
eligible securities and mortgage loans. Additionally, each type of collateral
has a minimum pledge requirement that ranges from 100% to 125%. At June 30,
2000, Western had pledged $68.8 million in eligible collateral with a market
value of $70.5 million and a borrowing potential of $56.4 million. At June 30,
2000 Western had borrowed $49 million leaving an unused borrowing potential of
$7.4 million. In the event the Company wanted to increase the borrowing capacity
of the FHLB line of credit, it could purchase additional stock and pledge
additional eligible collateral.
Issuance of Annuity and Life Insurance Products
The Company, through its WULA subsidiary, generates liquidity through the
sale of annuities and to a lesser degree whole life and term insurance. The
Company uses a network of approximately 1,400 independent producers to market
its products in 16 states. Currently, the products that WULA offers are targeted
to the middle income senior market. Generally, younger purchasers direct their
savings and investment dollars to mutual funds and/or variable annuities, in
light of a strong financial market; while senior citizens tend to be more
conservative with their retirement dollars and may favor fixed annuity products.
Nonetheless, Management anticipates that some younger buyers could be inclined
to reallocate their retirement funds if the stock market continues to be
volatile or if the market returns decline.
<PAGE>
The life insurance and annuity business is highly competitive. Western
United competes with other financial institutions including ones with greater
resources and greater name recognition. Premium volumes, annuity crediting rates
and commissions to agents are particularly sensitive to competitive forces. WULA
management believes it is in an advantageous position in this regard because of
its earnings capability through investments in receivables compared to that of
most other life insurance companies. Western United has been assigned a rating
of "B+" ("Very Good") by A.M. Best Co., a nationally recognized insurance
company rating organization. Best bases its ratings on a number of complex
financial analyses, the length of time a company has been in business, the
nature, quality, and liquidity of investments in its portfolio, depth and
experience of management and various other factors. Best's ratings are supplied
primarily for the benefit of policyholders and insurance agents.
WULA prices its new annuity products and renewals in order to achieve a
positive spread between its annuity costs and the income from available
receivable and other investments while also considering current annuity market
rates of interest and competitive pressures. Flexible and single premium
annuities are offered with surrender charges for periods that vary from one year
to ten years. Management believes that the surrender charges in conjunction with
current pricing policies enable the company to manage its insurance lapse rates
and underlying interest rate risk.
Reverse Repurchase Agreements
In order to increase liquidity, the Company may sell a group of securities
to a broker-dealer under the provision that the Company will buy them back by a
predetermined date for a specific price. The difference between the amount the
Company received for the securities and the amount the Company will pay the
broker-dealer when buying them back represents the interest. At June 30, 2000,
the Company had $5.0 million in reverse repurchase agreements outstanding.
Issuance of Debt Securities and Preferred Stock
Metropolitan engages in public offerings of debt securities and preferred
stock. These investments are typically offered to the public on a continuos best
efforts basis through Metropolitan Investment Securities, Inc., an affiliated
company. Currently, the Company has registered $100 million of Series III
Debenture Bonds and 100,000 shares of preferred stock that carry a $100 issue
price for a total preferred stock offering price of $10,000,000. Under these
registrations which expire January 31, 2001, the Company had $73.3 million in
unissued debenture bonds and $2.6 million in unissued preferred stock as of June
30, 2000.
In December 1999, the Company successfully completed a $25 million publicly
traded note offering listed with the Pacific Exchange. With the issuance of the
publicly traded notes, the Company is no longer subject to the State of
Washington regulations that previously imposed limits on the amount of
debentures and preferred stock that the Company could have outstanding at any
one time.
For the nine month period ended June 30, 2000, $799.5 million in funds
provided by the Company's various liquidity sources were used to (1) invest
$594.4 million primarily in receivables, investments and capital expenditures,
(2) fund $192.2 million in debt maturities, life and annuity product surrenders,
and the payment of dividends and (3) fund $3.1 million in operating activities.
For the nine month period ended June 30, 1999, $738.7 million in funds
provided by the Company's various liquidity sources were used to (1) invest
$569.3 million primarily in receivables, investments and capital expenditures,
(2) fund $151.5 million in debt maturities, life and annuity product surrenders,
and the payment of dividends and (3) fund $26.2 million in operating activities
Management believes that cash, cash equivalents and liquidity provided
through the Company's liquidity sources will be adequate to meet planned asset
additions, debt retirements and other business operational requirements during
the next twelve months.
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30, 1999
The net loss before income taxes and minority interest for the nine month
period ended June 30, 2000 was $26.5 million on $113.0 million in revenues
compared to $3.7 million in net income on $120.1 million in revenues for the
nine month period ended June 30, 1999. The net loss after income taxes and
minority interest for the nine months ended June 30, 2000 was $17.2 million
compared to net income of $16.1 million for the nine months ended June 20, 1999.
The June 30, 1999 net income included a $14.0 million in tax benefits from the
disposition of an investment strategy that also generated additional losses for
income tax purposes. These losses were used to offset certain income tax
temporary differences.
The increase in net loss before income taxes and minority interest of
$30.2 million was primarily due to:
- a decrease in gains on sales of receivables of $10.2 million,
- an increase in provisions on losses for real estate and other assets
of $4.5 million,
- an increase in losses on investments of $5.5 million,
- an increase in salaries and employee benefits of $7.1 million, and
- an increase in other operating and underwriting expenses of $2.6
million.
These changes were partially offset by higher fees, commissions, service
and other income and a decrease in net amortization of deferred acquisitions
costs.
<PAGE>
During the nine month period ended June 30, 2000, the excess of interest
sensitive income over interest sensitive expense was approximately $18.2 million
in 2000, compared to $19.8 million in the prior year's period.
Management monitors interest sensitive income and expenses as it manages
the objectives for the Company's results of operations. Interest sensitive
income consists of interest and earned discounts on receivables, insurance
revenues and other investment interest. Interest sensitive expense consists of
interest expense on borrowed money and insurance policy and annuity benefits.
The Company is in a "liability sensitive" position in that its 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.
Conversely, in a falling interest rate environment, the net return from interest
sensitive assets and liabilities will tend to improve.
During the nine months ended June 30, 2000, the Company recorded net losses
on investments of $9.2 million, including mark-to-market adjustments on trading
securities, compared to a net loss of $3.7 million for the nine month period
ended June 30, 1999. The current period losses were primarily the result of
$10.0 million in mark-to-market and residual valuation losses that exceeded $0.8
million in realized gains on the sale of investments. The Company values its
residual interests in securitizations using a discounted cash flow method.
During the quarter ended June 30, 2000, the Company determined that certain
"available-for-sale" residuals had other than temporary declines in value.
Accordingly, the carrying value of the securities was decreased by approximately
$7.5 million representing the amount permanently impaired, through a charge to
operations. Additionally, the Company recorded valuation writedowns to certain
held-for-trading residual and subordinated securities of $1.6 million. The
Company will continue to periodically assess the assumptions used in valuing the
cash flows and the related carrying value of its residuals and subordinated
securities. On other investments, the company has experienced mark to market
losses in both periods as higher interest rates and increased spreads to
treasuries decreased the valuation of certain trading securities. As part of a
strategy to add additional diversification to the investment portfolio, the
Company has contracted with an outside portfolio manager to establish an equity
securities portfolio. The mark-to-market gains on the equity portfolio for the
nine-month period ended June 30, 2000 were $0.2 million. Included in the prior
year's period are approximately $2.6 million in investment loss associated with
the implementation of a tax strategy.
Gains on sales of real estate increased $1.1 million from $1.4 million for
the nine months ended June 30, 1999 to $2.5 million for the nine months ended
June 30, 2000. The Company is in the real estate market primarily due to its
repossession of properties following receivable default. The Company is also
engaged in the development of various properties acquired in the course of its
business through repossession or as an investment property. The development or
improvement of properties is undertaken for the purpose of enhancing values to
increase stability and to maximize profit potential. The increase in gains on
real estate was primarily the result of an increase in development property
gains of $1.3 million from $0.3 million to $1.6 million.
During the nine months ended June 30, 2000, the Company experienced a
growth in fees, commissions and other income. The increase in income was
primarily the result of an increase in the securitization portfolio in addition
to the growth in operating lease activity of its subsidiary Metwest.
<PAGE>
Additionally, securitization gains decreased from $18.1 million on $328.9
million of receivables securitized for the nine month period ended June 30, 1999
to gains of $9.5 million on $354 million of receivables securitized for the nine
month period ended June 30, 2000. The decrease in securitization gains resulted
mainly from increased yields in line with competing financial instruments
demanded by the investors in the Company's mortgage-backed securities. There has
been no indication that there will be a change in this market in the near term.
Additionally, market changes, including competition with larger companies that
have greater access to lower costs of funds, has also reduced the yields at
which the Company can acquire securitizable product. These reduced yields have
also contributed to the decrease in securitization gains. To help mitigate the
Company's exposure to the shrinking spreads that the securitization market has
experienced, the Company has been proactive in pursuing a different mix of
receivables that will enable them to maintain a level of profitability in the
securitization market given the Company's cost of liquidity. The other $1.0
million decrease in gains on receivables was the result of receivable sales to
affiliates and other third parties in the prior year.
The Company establishes an allowance for expected losses on real estate and
other asset. The Company periodically evaluates its real estate and other asset
reserves to determine their adequacy. Provisions for losses on real estate and
other assets were $12.8 million and $8.3 million for the nine-month periods
ended June 30, 2000 and 1999, respectively. During the quarter ended June 30,
2000, the Company adjusted its loss reserve assumptions based on historical
experience. The increase in loss provisions reflects an increase in real estate
and other assets held for investment purposes and the changes in reserve
assumptions.
Servicing rights retained after each securitization are recorded based on
their relative fair values. Subsequent valuations of servicing rights are
performed to determine if there has been any impairment to the asset. During the
quarter ended June 30, 2000, the Company recorded a $1.3 million charge to
operations to reflect a reduction in the fair value of the mortgage servicing
rights. The Company will continue to periodically assess the assumptions used in
valuing the cash flows and the carrying values of its servicing rights.
During the nine month period ended June 30, 2000, the Company has
experienced a growth in salaries and employee benefits and other operating and
underwriting expenses in comparison to the nine-month period ended June 30,
1999. This increase resulted primarily from the Company's investment into new
areas of business such as leasing, commercial lending, and loan origination, in
addition to the administrative and technical support needed to support the new
areas of business. The increase in agent commission expense reflects the growth
in the insurance annuity and life production and also contributed to the
reduction in deferred acquisition cost amortization.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
The loss before income taxes and minority interest for the three month
period ended June 30, 2000 was $24.5 million on $27.6 million in revenues
compared to a loss of $2.8 million on $36.0 million in revenues for the three
month period ended June 30, 1999. The increase in loss was primarily due to an
increase over the prior year's comparable period in:
- reserves on real estate and other assets of $4.4 million,
- investment losses of $9.9 million,
- salaries and employee benefits of $2.9 million,
- other operating and underwriting expenses of $2.3 million, and
- servicing rights valuations of $1.5 million.
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During the three month period ended June 30, 2000, the excess of interest
sensitive income over interest sensitive expense was approximately $6.3 million
in 2000, compared to $6.8 million in the prior year's period.
Management monitors interest sensitive income and expenses as it manages
the objectives for the Company's results of operations. Interest sensitive
income consists of interest and earned discounts on receivables, insurance
revenues and other investment interest. Interest sensitive expense consists of
interest expense on borrowed money and insurance policy and annuity benefits.
The Company is in a "liability sensitive" position in that its 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.
Conversely, in a falling interest rate environment, the net return from interest
sensitive assets and liabilities will tend to improve.
Gains on sales of real estate decreased from $0.8 million for the three
months ended June 30, 1999 to near breakeven for the three months ended June 30,
2000. The Company is in the real estate market primarily due to its repossession
of properties following receivable default. The Company is also engaged in the
development of various properties acquired in the course of its business through
repossession or as an investment property. The development or improvement of
properties is undertaken for the purpose of enhancing values to increase
stability and to maximize profit potential.
During the three months ended June 30, 2000, the Company experienced a
growth in fees, commissions and other income. The increase in income was
primarily the result of an increase in the securitization portfolio in addition
to the growth in operating lease activity of its subsidiary Metwest.
During the three months ended June 30, 2000, the Company recorded net
losses on investments of $10.4 million, including mark-to-market adjustments
on trading securities, compared to a net loss of $0.6 million for the nine
month period ended June 30, 1999. The current period losses were primarily
the result of $11.4 million in mark-to-market and residual valuation losses
which exceeded $0.9 million in realized gains on the sale of investments. The
Company values its residual interests in securitizations using a discounted
cash flow method. During the quarter ended June 30, 2000, the Company
determined that certain "available-for-sale" residuals had other than
temporary declines in value. Accordingly, the carrying value of the
securities was decreased by approximately $7.5 million representing the
amount permanently impaired, through a charge to operations. Additionally,
the Company recorded valuation writedowns to certain held-for-trading
residual and subordinated securities of $1.6 million. The Company will
continue to periodically assess the assumptions used in valuing the cash
flows and the related carrying value of its residuals and subordinated
securities. On its other investments, the company has experienced mark to
market losses in both periods as higher interest rates and increased spreads
to treasuries decreased the valuation of certain trading securities. As part
of a strategy to add additional diversification to the investment portfolio,
the Company has contracted with an outside portfolio manager to establish an
equity securities portfolio. The mark-to-market losses on the equity
portfolio for the three-month period ended June 30, 2000 were $0.9 million.
Year to date, the mark to market gains are $0.2 million. Additionally,
included in the prior year's period are approximately $2.6 million in
investment loss associated with the implementation of a tax strategy.
The Company establishes an allowance for expected losses on real estate
and other asset. The Company periodically evaluates its real estate and other
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asset reserves to determine their adequacy. Provisions for losses on real
estate and other assets were $6.3 million and $1.9 million for the
three-month periods ended June 30, 2000 and 1999, respectively. During the
quarter ended June 30, 2000, the Company adjusted its loss reserve
assumptions based on historical experience. The increase in loss provisions
reflects an increase in real estate and other assets held for investment
purposes and the changes in reserve assumptions.
Servicing rights retained after each securitization are recorded based on
their relative fair values. Subsequent valuations of servicing rights are
performed to determine if there has been any impairment to the asset. During the
quarter ended June 30, 2000, the Company recorded a $1.3 million charge to
operations to reflect a reduction in the fair value of the mortgage servicing
rights. The Company will continue to periodically assess the assumptions used in
valuing the cash flows and the carrying values of its servicing rights.
During the three month period ended June 30, 2000, the Company has
experienced a growth in salaries and employee benefits and other operating and
underwriting expenses in comparison to the three-month period ended June 30,
1999. This increase resulted primarily from the Company's investment into new
areas of business such as leasing, commercial lending, and loan origination, in
addition to the administrative and technical support needed to support the new
areas of business. The increase in agent commission expense reflects the growth
in the insurance annuity and life production and also contributed to the
reduction in deferred acquisition cost amortization.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
*27. Financial Data Schedule
*Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on this 15th day of January,
2001 on its behalf by the undersigned, thereunto duly authorized.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
/s/ C. PAUL SANDIFUR, JR.
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C. Paul Sandifur, Jr.
Chairman, President, Chief Executive Officer
/s/ WILLIAM SNIDER
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William Snider
Vice President, Chief Financial Officer,
Principal Accounting Officer
