<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9018
METROPOLITAN FINANCIAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 45-0388518
- ------------------------------- -----------------------
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
333 SOUTH 7TH STREET, MINNEAPOLIS, MINNESOTA 55402
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) (612) 399-6000
--------------
Indicate by checkmark 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Common Stock, $.01 Par Value--31,503,617 shares,
excluding shares held in treasury,
as of October 31, 1994
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<PAGE>
<TABLE>
<CAPTION>
INDEX
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PART I. FINANCIAL INFORMATION PAGE
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<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Condition--September 30, 1994 and
December 31, 1993........................................................ 1
Condensed Consolidated Statements of Income--Three and nine months ended
September 30, 1994 and 1993.............................................. 2
Condensed Consolidated Statement of Changes in Shareholders' Equity--
Nine months ended September 30, 1994..................................... 3
Condensed Consolidated Statements of Cash Flows--Nine months ended
September 30, 1994 and 1993.............................................. 4
Notes to Condensed Consolidated Financial Statements--September 30, 1994... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 9
PART II. OTHER INFORMATION PAGE
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Item 1. Legal Proceedings.......................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................... 19
Signatures............................................................... 20
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1994 1993
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<S> <C> <C>
ASSETS
Cash and due from banks $81,845 $85,084
Short-term interest bearing deposits 31,082 82,364
Loans held-for-sale 32,295 60,645
Debt securities available-for-sale 628,912 813,293
Investment securities (market: September 30, 1994-$47,813) 50,000 --
Mortgage-backed securities (market: September 30, 1994-$1,505,841;
December 31, 1993-$954,908) 1,575,514 943,193
Loans (net of allowance: September 30, 1994-$40,425;
December 31, 1993-$42,905) 5,194,381 4,585,410
Federal Home Loan Bank stock, at cost 87,953 59,719
Accrued interest 44,566 36,817
Real estate (net of allowance: September 30, 1994-$5,714;
December 31, 1993-$9,533) 35,830 56,110
Office properties and equipment 101,166 91,632
Goodwill 87,544 61,517
Deferred taxes 58,397 53,089
Other assets 63,609 77,912
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TOTAL ASSETS $8,073,094 $7,006,785
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LIABILITIES
Transaction and passbook deposits $1,476,882 $1,560,667
Certificates 4,029,543 3,793,968
Federal Home Loan Bank advances 1,407,357 921,801
Reverse repurchase agreements 410,000 --
Other borrowings 115,675 133,159
Accrued interest 57,002 42,485
Other liabilities 78,940 50,322
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TOTAL LIABILITIES 7,575,399 6,502,402
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized -
10,000,000 shares; issued - 488,750 shares 5 5
Common stock, par value $.01 per share; authorized -
60,000,000 shares; issued September 30, 1994 - 32,828,413 shares;
December 31, 1993 - 31,992,275 shares 328 320
Additional paid-in capital 241,625 231,881
Retained earnings 292,032 280,813
Net unrealized (losses) gains on securities
available-for-sale (net of tax) (13,404) 4,209
Less cost of common stock in treasury - 1,424,361 shares at
September 30, 1994; 813,522 shares at December 31, 1993 (22,891) (12,845)
TOTAL SHAREHOLDERS' EQUITY 497,695 504,383
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,073,094 $7,006,785
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</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1994 1993
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<S> <C> <C> <C> <C>
INTEREST INCOME
Mortgage-backed securities $ 34,807 $ 31,103 $ 82,089 $ 95,154
Loans 100,069 88,201 301,354 242,096
Investments 5,686 4,273 14,523 14,026
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140,562 123,577 397,966 351,276
INTEREST EXPENSE
Transaction and passbook deposits 7,712 7,379 22,597 22,275
Certificates 51,275 51,994 146,947 153,577
Federal Home Loan Bank advances 19,633 9,827 50,610 20,180
Reverse repurchase agreements 4,112 -- 6,435 --
Other borrowings 2,300 2,296 7,109 8,629
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85,032 71,496 233,698 204,661
NET INTEREST INCOME 55,530 52,081 164,268 146,615
Provision for loan losses 4,000 2,087 9,575 5,987
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 51,530 49,994 154,693 140,628
NONINTEREST INCOME
(Losses)/gains related to mortgage
banking activities (220) 4,025 (126) 8,002
Mortgage loan servicing fees 2,995 1,529 8,080 3,478
Realty commission income 10,294 10,672 27,762 26,952
Title closing fees 2,724 3,884 8,102 10,159
Service charges on deposit accounts 3,170 3,007 9,684 7,849
Financial services income 2,486 1,194 6,471 2,643
Other income 1,011 705 4,755 3,409
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22,460 25,016 64,728 62,492
NONINTEREST EXPENSE
Compensation and related items 21,848 19,257 64,235 57,825
Occupancy 7,415 6,276 20,664 17,995
Data processing 3,149 2,380 9,095 7,733
Advertising 3,493 3,447 10,030 8,938
Deposit insurance premium 2,728 3,085 9,173 7,911
Amortization of goodwill 1,410 1,023 3,855 3,060
Real estate owned 354 1,683 1,667 5,193
Other general and administrative 26,456 11,013 50,627 34,063
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66,853 48,164 169,346 142,718
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INCOME BEFORE INCOME TAXES 7,137 26,846 50,075 60,402
Income tax expense 2,719 9,963 19,032 13,078
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NET INCOME $ 4,418 $ 16,883 $ 31,043 $ 47,324
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EARNINGS PER SHARE:
Primary $0.12 $0.51 $0.93 $1.46
Fully diluted $0.12 $0.51 $0.92 $1.46
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</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
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Net
Unrealized
Gains (Losses)
Additional On Securities Total
Preferred Stock Common Stock Paid-In Retained Available- Treasury Stock Shareholders'
Shares Amount Shares Amount Capital Earnings For-Sale Shares Amount Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER
31, 1993 488,750 $5 31,992,275 $320 $231,881 $280,813 $ 4,209 (813,522) $(12,845) $504,383
Issuance of common
stock 291,214 3 4,577 4,580
Stock options
exercised 289,018 3 3,966 3,969
Warrants exercised 255,906 2 1,201 1,203
Net treasury stock
acquired (610,839) (10,046) (10,046)
Net unrealized losses
on securities
available-for-sale (17,613) (17,613)
Dividends declared:
Preferred (1,056) (1,056)
Common-$.60 per
share (18,768) (18,768)
Net income 31,043 31,043
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BALANCE SEPTEMBER
30, 1994 488,750 $5 32,828,413 $328 $241,625 $292,032 $(13,404) (1,424,361) $(22,891) $497,695
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</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
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Nine Months Ended
September 30,
1994 1993
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 31,043 $ 47,324
Reconciliation to cash provided by operating
activities:
Net amortization of loan fees, discounts and
premiums 21,501 24,233
Provision for loan losses 9,575 5,987
Decrease in deferred tax asset 10,175 5,672
Depreciation and amortization 8,298 10,161
Amortization of goodwill 3,854 3,060
Net change in trading securities 32,942 79,582
(Increase) decrease in accrued interest
receivable (5,116) 1,839
Increase in accrued interest payable 11,463 6,950
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NET CASH PROVIDED BY OPERATING ACTIVITIES 123,735 184,808
INVESTING ACTIVITIES
Acquisitions, net of cash received (49,793) (6,719)
Increase in loans (696,840) (788,615)
Purchase of:
Loans (466,417) (100,013)
Investment securities available-for-sale (99,951) --
Investment securities held-to-maturity (50,000) --
Mortgage-backed securities held-to-maturity (233,446) (365,887)
Proceeds from the maturity of investment
securities:
Available-for-sale 141,130 --
Held-to-maturity -- 279,079
Proceeds from the sales of:
Mortgage-backed securities available-for-sale 241,467 70,172
Loans held-for-sale 51,031 147,104
Real estate 38,975 25,562
Principal repayments of mortgage-backed
securities:
Available-for-sale 143,887 31,848
Held-to-maturity 240,268 385,124
Other investing activities 1,421 20,635
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NET CASH USED BY INVESTING ACTIVITIES (738,268) (301,710)
FINANCING ACTIVITIES
Net increase (decrease) in:
Short-term borrowings 410,000 --
Deposits (282,255) (415,706)
Purchase of deposits 11,080 --
Proceeds from:
Federal Home Loan Bank advances 1,029,000 670,000
Other Borrowings 110 --
Issuance of common stock 4,580 7,257
Exercise of common stock options and
warrants 4,112 3,326
Purchase of treasury stock (10,046) (4,898)
Repayment of:
Federal Home Loan Bank advances (587,870) (185,914)
Other borrowings (17,594) (30,626)
Cash dividends (19,824) (9,975)
Other financing activities 18,719 (14,338)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 560,012 19,126
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NET DECREASE IN CASH AND CASH EQUIVALENTS (54,521) (97,776)
Cash and Cash equivalents at beginning of year 167,448 252,859
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ENDING CASH AND CASH EQUIVALENTS $ 112,927 $ 155,083
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</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulations S-X. 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, all adjustments (consisting
of normal recurring accruals and periodic changes in estimates) considered
necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1994, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1994. Amounts in 1993 have been reclassified to conform to
the current period presentation. For further information, refer to the
consolidated financial statements and footnotes thereto included in the annual
report on Form 10-K for the year ended December 31, 1993.
NOTE B -- INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
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September 30, September 30,
(In thousands) 1994 1993 1994 1993
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<S> <C> <C> <C> <C>
CURRENT
Federal $ 8 $7,693 $ 6,564 $ 7,766
State 458 1,929 2,293 2,020
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466 9,622 8,857 9,786
DEFERRED
Federal 1,846 715 8,887 1,390
State 407 (374) 1,288 1,902
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2,253 341 10,175 3,292
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$2,719 $9,963 $19,032 $ 13,078
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</TABLE>
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------------
September 30, September 30,
(In thousands) 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax statutory rate $2,499 $9,396 $17,526 $ 21,141
State income taxes, net of federal benefit 562 1,552 2,328 3,427
Change in the deferred tax asset valuation allowance -- (600) -- (10,600)
Tax effect of:
Amortization of goodwill 584 358 1,349 1,071
Other, net (926) (743) (2,171) (1,961)
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$2,719 $9,963 $19,032 $ 13,078
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</TABLE>
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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The components of and changes in the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
Effect of
Deferred Acquisitions
December 31, (Expense) and Other September 30,
(In thousands) 1993 Benefit Transactions 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan fees and discounts $ 5,526 $ (2,469) $ -- $ 3,057
Discounts on loans and mortgage-backed securities 9,377 (2,706) (898) 5,773
Bad debt deduction 7,220 (3,566) 1,159 4,813
Federal Home Loan Bank stock dividends (6,366) 1,461 (1,138) (6,043)
Other 1,878 4,716 11,224 17,818
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Net temporary differences 17,635 (2,564) 10,347 25,418
Carryforwards:
Federal regular tax operating loss carryforwards 15,778 (11,690) 874 4,962
Federal regular tax operating loss carryforwards
acquired in purchase business combinations 1,377 (1,264) 3,701 3,814
State regular tax operating loss carryforwards 3,644 (164) 56 3,536
State regular tax operating loss carryforwards
acquired in purchase business combinations 4,709 (1,016) -- 3,693
Federal AMT credit carryforwards 9,946 6,523 505 16,974
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Total carryforwards 35,454 (7,611) 5,136 32,979
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$53,089 $(10,175) $15,483 $58,397
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</TABLE>
The adjustments to the net deferred tax asset in 1994 identified as the "Effect
of acquisitions and other transactions" result primarily from the acquisition of
Rocky Mountain Financial Corporation, the exercise of compensatory stock
options, and changes in deferred taxes associated with changes in unrealized
gains/losses associated on securities available-for-sale.
A valuation allowance is provided when it is more likely than not, that some
portion of the deferred tax asset will not be realized. The Company previously
established a valuation allowance for a portion of the operating loss
carryforwards as a result of unresolved matters with taxing authorities. During
1993, certain tax issues were resolved which were previously considered in
management's assessment of the valuation allowance. As a result, the Company
reduced the valuation allowance by $10 million during the first quarter of 1993.
The remaining $6.5 million valuation allowance was eliminated in the last half
of 1993. Approximately $10.6 million of the change in the deferred tax asset
valuation allowance ($10 million in first quarter 1993) was allocated as a
reduction of income tax expense.
At September 30, 1994, the Company had the following net operating loss
carryforwards available for income tax purposes:
<TABLE>
<CAPTION>
Expiration
(Dollars in thousands) Date Amount
- ------------------------------------------------------
<S> <C> <C>
Federal regular tax
operating loss carryforwards
acquired through business
combinations 1995-2002 $10,896
Federal regular tax operating
loss carryforwards from
other than business
combinations 2005 14,178
- ------------------------------------------------------
25,074
- ------------------------------------------------------
Federal AMT operating loss
carryforwards 1995-2002 $11,557
- ------------------------------------------------------
</TABLE>
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE C -- Acquisitions
On March 25, 1994, Metropolitan Federal Bank, fsb (the "Bank") completed the
acquisition of Rocky Mountain Financial Corporation ("RMFC"), and its federally
chartered thrift subsidiary Rocky Mountain Bank, fsb ("Rocky Mountain"),
Cheyenne, Wyoming. Pursuant to the stock purchase agreement, the Bank purchased
all of the outstanding stock of RMFC, which was liquidated and dissolved and
Rocky Mountain was merged into the Bank. Total consideration of $64.2 million
was paid in cash to stockholders of RMFC, after consideration of approximately
$3.0 million of transaction expenses. The transaction was accounted for as a
purchase. Rocky Mountain had assets of $537 million and deposits of $428 million
as of March 25, 1994.
The results of operations of RMFC and Rocky Mountain for the period March 26,
1994 through September 30, 1994 have been included in the Company's consolidated
results for the nine months ended September 30, 1994.
In addition, on March 11, 1994, the Bank completed the acquisition of $11.3
million in deposits of two branches of Pioneer Federal Savings and Loan
Association, a failed thrift in Kansas.
Unaudited pro forma income and income per share information as if RMFC and Rocky
Mountain had been combined with the Company at the beginning of each of the
respective periods is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------------
September 30, September 30,
(Amounts in thousands, except per share data) 1994 1993 1994 1993
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<S> <C> <C> <C> <C>
Net Interest Income $55,530 $56,741 $168,124 $160,285
Net Income 4,418 19,123 31,918 53,886
Per Share Data:
Primary $0.12 $0.58 $0.96 $1.67
Diluted $0.12 $0.58 $0.94 $1.67
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</TABLE>
NOTE D -- Definitive Agreement
On July 21, 1994, the Company announced that it had signed a definitive purchase
agreement to be acquired by First Bank System, Inc. ("FBS"). FBS will exchange
.6803 shares of FBS common stock for each common share of the Company. In
addition, each outstanding share of Series B preferred stock of the Company will
be converted into the right to receive $27.00 (plus accumulated and unpaid
dividends) in cash and the outstanding warrants to purchase 153,108 shares of
common stock of the Company will be converted to warrants to purchase 104,159
shares of FBS common stock at $6.96 per share. The exchange ratio for common
stock of the Company is subject to change based upon changes in FBS stock price
under certain circumstances. The aggregate purchase price is approximately $800
million and either company can terminate the agreement if the average price of
FBS common stock is less than $29.50 during a specified period. In addition, the
Company has issued FBS an option to purchase up to 19.9% of the outstanding
shares of the Company's common stock under certain circumstances. The
transaction is expected to close in the first quarter of 1995, pending
regulatory and shareholder approval, and will be accounted for as a pooling of
interests.
FBS is a regional bank holding company headquartered in Minneapolis with assets
of $26.3 billion. FBS provides complete financial services to individuals and
institutions through nine banks and other financial service companies with 220
offices primarily in Minnesota, Colorado, Illinois, Montana, North Dakota, South
Dakota, and Wisconsin.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE E - Accounting Pronouncements
In October 1994, the Financial Accounting Standards Board issued statement SFAS
No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments." The statement is effective for financial statements
issued for fiscal years ending after December 15, 1994. The statement requires
disclosures relating to derivative financial instruments such as amounts,
nature, and terms of derivative financial instruments. The Company does not
expect the adoption of SFAS No. 119 to have a material effect on the financial
statement disclosures.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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THE COMPANY
Metropolitan Financial Corporation (the "Company") is a regional financial
services holding company. The Company's mission is to be the premier provider
of community financial and home ownership services throughout its markets by
offering exceptional value to its customers, resulting in profitable growth,
fulfilling careers and community enhancement. The primary operations of the
Company are in North Dakota, Minnesota, Nebraska, Iowa, Kansas, South Dakota,
Wisconsin, Wyoming and Arizona.
The Company operates an FDIC insured consumer savings bank, Metropolitan Federal
Bank, fsb (the "Bank"), which concentrates on the traditional thrift business of
soliciting deposits and making residential mortgage and other secured consumer
loans. The Company's residential real estate brokerage subsidiary, Edina
Realty, Inc. ("Edina Realty"), and title company subsidiary, Equity Title
Services ("Equity Title"), are among Minnesota's largest providers of their
respective services. Edina Realty and Equity Title conduct their business in
Minnesota and western Wisconsin. Certain financial services products like
annuities, uninsured investments, such as mutual funds, and insurance are
provided to customers through a subsidiary operating as Metropolitan Financial
Services ("MFS").
RECENT ACQUISITIONS
On March 25, 1994, the Bank completed the acquisition of Rocky Mountain
Financial Corporation ("RMFC") and its bank subsidiary, Rocky Mountain Bank, fsb
("Rocky Mountain"). Rocky Mountain had assets and deposits of approximately
$537 million and $428 million at March 25, 1994, respectively. The Bank paid
RMFC shareholders approximately $64.2 million in cash as consideration after
payment of approximately $3.0 million of transaction expenses.
On March 11, 1994, the Bank completed the acquisition of approximately $11.3
million in deposits of two branches of Pioneer Federal Savings and Loan
Association, a failed thrift in Kansas.
DEFINITIVE AGREEMENT
On July 21, 1994, the Company announced that it had signed a definitive purchase
agreement to be acquired by First Bank System, Inc. ("FBS"). FBS is a regional
bank holding company headquartered in Minneapolis with assets of $26.3 billion.
The companies had previously announced on July 1, 1994 that they had signed a
letter of intent. FBS will exchange .6803 shares of FBS common stock for each
common share of the Company. In addition, each outstanding share of Series B
preferred stock of the Company will be converted into the right to receive
$27.00 (plus accumulated and unpaid dividends) in cash and the outstanding
warrants to purchase 153,108 shares of common stock of the Company will be
converted into warrants to purchase 104,159 shares of FBS common stock at $6.96
per share. The exchange ratio for common stock of the Company is subject to
change based upon changes in FBS stock price under certain circumstances. The
aggregate purchase price is approximately $800 million. The exchange ratio will
be adjusted if the average of the closing price of FBS common stock is less than
$33.00 for the 20 trading days ending three business days prior to the last date
of both companies' meetings of shareholders. In that event, the exchange ratio
would be multiplied by the quotient of $33.00 divided by the average price. In
addition, if the average price is greater than $40.50, the exchange ratio would
be adjusted by multiplying the ratio by the quotient of $40.50 divided by the
average price. Either company can terminate the agreement if the average price
of FBS common stock is less than $29.50. In addition, the Company has issued
FBS an option to purchase up to 19.9% of the outstanding shares of the Company's
common stock under certain circumstances.
The transaction is expected to close in the first quarter of 1995, pending
regulatory and shareholder approval, and would be accounted for as pooling of
interests.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
(Unaudited)
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
OVERVIEW. The Company earned net income of $4.4 million or $0.12 per share for
the quarter ended September 30, 1994, compared to $16.9 million or $0.51 per
share for the third quarter of 1993. Included in the third quarter of 1994 are
net charges totaling $9.5 million (after tax), or approximately $0.30 per share
related to the planned merger with First Bank System, Inc. and the tentative
settlement of two class action lawsuits. The results of the third quarter of
1993 reflect gains related to mortgage banking activities of $4.0 million
compared to a $220 thousand loss in the third quarter of 1994. The Company
recorded net income of $31.0 million or $0.92 per share for the nine months
ended September 30, 1994, compared with $47.3 million or $1.46 per share during
the same period in 1993. The current year's results are fully taxed while the
prior year results include a tax benefit of $10 million, or $.32 per share,
recognized in the first quarter of 1993 associated with a reduction of the
deferred tax asset valuation allowance. The reduction of the valuation allowance
resulted from the favorable resolution of a number of outstanding tax issues
raised by the Internal Revenue Service for which the Company had previously
established reserves.
NET INTEREST INCOME. The Company earned net interest income of $55.5 million for
the third quarter of 1994, an increase of 6.6 percent from the third quarter of
1993. The improvement in net interest income from the third quarter of 1993
reflects increases in the residential mortgage and consumer loan portfolios from
originations, financial institutions acquisitions and wholesale loan purchases.
Average earning assets in the third quarter of 1994 increased to $7.6 billion,
up from $6.5 billion a year ago. The increase in average earning assets reflects
the completed acquisitions of Eureka Savings Bank in August 1993 and Rocky
Mountain Financial Corporation in March 1994. Single family mortgage loan
production during the third quarter of 1994 totaled $250.5 million compared with
$438.7 million in the third quarter of 1993 reflecting decreased demand for
single family mortgage loans as interest rates have continued to increase.
The net interest margin was 2.92 percent in the third quarter of 1994 which
represents a decrease of 27 basis points from the same period in 1993. The net
interest margin began to narrow a year ago reflecting reduced average yields on
earning assets resulting from the high rate of prepayments in the mortgage-
backed securities and mortgage loan portfolios. During 1994, mortgage loan
prepayments decreased as interest rates rose; however, the cost of retail
deposits and FHLB advances increased faster than the yields on new loan
production resulting in the lower net interest margin.
The weighted average rate paid on interest bearing liabilities increased 9 basis
points to 4.57 percent for the quarter ended September 30, 1994 as compared to
the same period in 1993. The weighted average yields earned on interest bearing
assets for the third quarter of 1994 decreased by 18 basis points to 7.40
percent compared to the same period in 1993.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------------------------
SEPTEMBER 30, 1994 SEPTEMBER 30, 1994
VS. SAME PERIOD IN 1993 VS. SAME PERIOD IN 1993
------------------------------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
(In Thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Mortgage-backed securities $ 2,655 $ 1,049 $ 3,704 $(12,074) $ (991) $(13,065)
Loans 17,069 (5,201) 11,868 84,387 (25,129) 59,258
Investments and other 635 778 1,413 (1,178) 1,675 497
- ------------------------------------------------------------------------------------------
Total Interest Income 20,359 (3,374) 16,985 71,135 (24,445) 46,690
INTEREST EXPENSE
Transaction and passbook
deposits (150) 483 333 1,064 (742) 322
Certificates 1,836 (2,555) (719) 10,936 (17,566) (6,630)
Federal Home Loan Bank
advances 8,910 896 9,806 29,286 1,144 30,430
Reverse repurchase
agreements 4,112 -- 4,112 6,435 -- 6,435
Other borrowings (378) 382 4 (1,373) (147) (1,520)
- ------------------------------------------------------------------------------------------
Total Interest Expense 14,330 (794) 13,536 46,348 (17,311) 29,037
- ------------------------------------------------------------------------------------------
Increase (Decrease) in
Net Interest Income $6,029 $(2,580) $3,449 $24,787 $(7,134) $17,653
- ------------------------------------------------------------------------------------------
</TABLE>
The Rate/Volume Analysis presents the dollar amount of changes in interest
income and interest expense for interest earning assets and interest bearing
liabilities. The table distinguishes between the changes related to average
outstanding balances (changes in volume holding the average interest rate
constant) and changes related to average interest rates (changes in average
interest rates holding the initial balance constant). Changes in rate/volume
(changes in rate times the changes in volume) are allocated ratably between the
rate and volume variances.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Yields Earned and Rates Paid. The following table presents for the periods
indicated average interest earning assets and the related interest income, and
average interest bearing liabilities and the related interest expense, expressed
both in dollars and percentages.
<TABLE>
<CAPTION>
Three Months Ended September 30,
1994 1993
-------------------------------------------------------------------------
Yields Yields
(Dollars in thousands) Average and Average and
(Unaudited) Balance Interest Rates Balance Interest Rates
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Mortgage-backed securities $2,037,006 $ 34,807 6.83% $1,880,184 $ 31,103 6.62%
Loans 5,216,551 100,069 7.67 4,338,213 88,201 8.13
Investment securities and other
interest earning assets 345,816 5,686 6.58 303,866 4,273 5.62
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 7,599,373 140,562 7.40 6,522,263 123,577 7.58
Cash and due from banks 76,097 69,207
Other assets 407,431 382,066
---------- ----------
Total Assets $8,082,901 $6,973,536
========== ==========
Liabilities & Shareholders' Equity
Transaction and passbook deposits $1,532,007 $ 7,712 2.01% $1,563,351 $ 7,379 1.89%
Certificates 4,064,412 51,275 5.05 3,922,531 51,994 5.30
Federal Home Loan Bank advances 1,399,015 19,633 5.61 759,525 9,827 5.18
Reverse repurchase agreements 338,185 4,112 4.86 -- -- --
Other borrowings 116,683 2,300 7.88 137,861 2,296 6.66
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 7,450,302 85,032 4.57 6,383,268 71,496 4.48
Other liabilities 127,973 108,416
Shareholders' equity 504,626 481,852
---------- ----------
Total Liabilities & Shareholders' Equity $8,082,901 $6,973,536
========== ==========
Net Interest Income $ 55,530 $ 52,081
Gross Interest Margin 2.83% 3.10%
Net Interest Margin 2.92% 3.19%
Nine Months Ended September 30,
1994 1993
-------------------------------------------------------------------------
Yields Yields
(Dollars in thousands) Average and Average and
(Unaudited) Balance Interest Rates Balance Interest Rates
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Mortgage-backed securities $1,617,336 $ 82,089 6.77% $1,855,032 $ 95,154 6.84%
Loans 5,314,560 301,354 7.56 3,856,367 242,096 8.37
Investment securities and other
interest earning assets 316,323 14,523 6.12 343,951 14,026 5.44
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets 7,248,219 397,966 7.32 6,055,350 351,276 7.73
Cash and due from banks 74,229 64,792
Other assets 400,344 307,405
---------- ----------
Total Assets $7,722,792 $6,427,547
========== ==========
Liabilities & Shareholders' Equity
Transaction and passbook deposits $1,557,831 $ 22,597 1.93% $1,485,332 $ 22,275 2.00%
Certificates 3,967,801 146,947 4.94 3,691,751 153,577 5.55
Federal Home Loan Bank advances 1,256,724 50,610 5.37 528,112 20,180 5.09
Reverse repurchase agreements 192,187 6,435 4.46 -- -- --
Other borrowings 121,731 7,109 7.79 145,203 8,629 7.92
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 7,096,274 233,698 4.39 5,850,398 204,661 4.66
Other liabilities 122,608 121,676
Shareholders' equity 503,910 455,473
---------- ----------
Total Liabilities & Shareholders' Equity $7,722,792 $6,427,547
========== ==========
Net Interest Income $164,268 $146,615
Gross Interest Margin 2.93% 3.07%
Net Interest Margin 3.02% 3.23%
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
(Unaudited)
- -------------------------------------------------------------------------------
ASSET AND LIABILITY MANAGEMENT. The Company is subject to interest rate risk to
the extent that its interest earning assets reprice or mature differently than
its interest bearing liabilities. The Company manages interest rate risk through
production of interest earning assets with repricing or maturity characteristics
similar to its retail deposit funding source, as well as concentrating on the
gathering of retail deposits which match the repricing and maturity
characteristics of the assets produced. This strategy emphasizes the production
of fifteen year fixed rate, five and seven year balloon and adjustable rate
mortgage loans and consumer loans. The Company augments its interest rate risk
management strategy by purchasing assets or borrowing funds with comparable
maturity and repricing characteristics to its loans or deposits. Finally, when
considered necessary and cost effective, the Company uses hedging instruments,
such as interest rate caps and swaps, to reduce its exposure to interest rate
risk.
Interest rate caps are used to minimize the impact of fluctuating interest rates
on earnings by effectively extending the life and placing a ceiling on the
interest rate paid on the Company's short term deposits. The total notional
amount of cap agreements purchased as of September 30, 1994 was $500 million
with an average strike level of 3-month LIBOR at 6.05% and an average remaining
maturity of 1.1 years. The unamortized premuim on caps is amortized over the
life of the cap. The caps decreased net income by $731 thousand during the
quarter ended September 30, 1994.
Likewise, interest rate swaps are used similarly to caps, thereby extending the
maturity of short term deposits. At September 30, 1994 the Company had no swaps
outstanding.
Interest Rate Caps at September 30 ,1994:
<TABLE>
<CAPTION>
(Dollars in Thousands)
- -------------------------------------------------------------------------------
Maturity Notional Strike Unamortized Market
Date Amount Price Premium Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 $250,000 6.0% $ 209 --
1995 50,000 6.5% 117 $ 125
1996 100,000 6.0% 1,109 2,200
1997 100,000 6.0% 2,423 3,500
- -------------------------------------------------------------------------------
$3,858 $5,825
- -------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
(Unaudited)
- -----------------------------------------------------------------------------
An industry gauge of exposure to interest rate risk is the one year interest
rate sensitivity "gap" (the difference between interest earning assets and
interest bearing liabilities maturing or repricing within one year). See table
below.
The Company mitigates its exposure to interest rate risk by striving to maintain
a neutral "gap" between the maturities of its interest earning assets and
interest bearing liabilities. This strategy results in a stable net interest
margin in periods of either rising or falling interest rates
<TABLE>
<CAPTION>
Maturing or Repricing in
-----------------------------------------------------------------
1 Year Over 1 to Over 3 to Over 5
(Dollars in thousands) or Less 3 Years 5 Years Years Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Mortgage-backed securities
Fixed rate $226,642 $413,557 $314,012 $581,124 $1,535,335
Adjustable rate 511,063 - - - 511,063
- ---------------------------------------------------------------------------------------------------------------
737,705 413,557 314,012 581,124 2,046,398
Loans
Real estate
Fixed rate 297,749 459,147 374,171 1,020,332 2,151,399
Adjustable rate 972,242 210,813 - - 1,183,055
Consumer and other 846,512 940,687 64,455 80,993 1,932,647
Investment securities and other 268,355 49,552 253 8,903 327,063
- ----------------------------------------------------------------------------------------------------------------
3,122,563 2,073,756 752,891 1,691,352 7,640,562
INTEREST BEARING LIABILITIES
Transaction and savings accounts 700,339 172,143 172,488 431,912 1,476,882
Certificate accounts 2,445,533 1,114,716 150,992 318,302 4,029,543
Borrowings 812,718 649,217 345,617 125,480 1,933,032
- ----------------------------------------------------------------------------------------------------------------
3,958,590 1,936,076 669,097 875,694 7,439,457
- ----------------------------------------------------------------------------------------------------------------
Impact of liability hedging (200,000) 200,000 - - -
- ----------------------------------------------------------------------------------------------------------------
3,758,590 2,136,076 669,097 875,694 7,439,457
- ----------------------------------------------------------------------------------------------------------------
Net Gap (636,027) (62,320) 83,794 815,658 $201,105
- ----------------------------------------------------------------------------------------------------------------
Cumulative Gap $(636,027) $(698,347) $(614,553) $201,105 -
- ----------------------------------------------------------------------------------------------------------------
Cumulative ratio of interest earning
assets to interest bearing liabilities 83.08% 88.15% 90.64% 102.70% -
Cumulative ratio of Gap to total
interest earning assets (8.32)% (9.14)% (8.04)% 2.63% -
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Major balance sheet categories in the preceding table are based on estimated
mortgage loan and mortgage-backed securities prepayment rates ranging from 3% to
40% depending on maturity and yield. Assets available-for-sale are included in
the 1 year or less category if there is a firm sale commitment outstanding.
Assets available-for-sale without a firm commitment are based on their
contractual maturity considering amortization and prepayments. Passbook savings
and checking account balances assume a 10% annual decay rate and money market
demand and tiered rate savings accounts are included in the one year or less
category. Loan balances, which are prior to discounts and the allowance for loan
losses, include non-accrual loans.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
(Unaudited)
- -----------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES. The provision for loan losses reflects management's
estimate of the allowance for loan losses necessary to provide for anticipated
credit losses. The provision for loan losses was $4.0 million in the third
quarter of 1994 compared with $2.1 million in the third quarter of 1993. The
increase in the provision reflects the related growth in the consumer loan
portfolio. The consumer loan portfolio was $1.9 billion at September 30, 1994,
an increase of $552 million, or 41 percent from the same period in 1993. Charge-
offs in the consumer loan portfolio totaled $3.5 million for the three months
ended September 30, 1994 compared to $2.1 million in the period one year ago.
The Company anticipates further growth in the loan portfolio and commensurate
increases in the provision throughout the remainder of 1994. Also, see
Nonperforming Assets and Allowance for Loan Losses.
NONINTEREST INCOME. Noninterest income in the third quarter of 1994 was $22.5
million, compared to $25.0 million a year ago. Included in the third quarter of
1993 are net gains related to the sale of mortgage assets of $4.0 million
compared with net losses of $220 thousand recorded in the current quarter.
Excluding net gains and losses associated with mortgage banking activities,
noninterest income in the third quarter increased $1.7 million or 8.0 percent
for the third quarter of 1993. Mortgage loan servicing fees were $3.0 million,
an increase of $1.5 million from the third quarter of 1993.
Realty commissions from the Company's real estate brokerage subsidiary, Edina
Realty, were $10.3 million, down 3.5 percent from the third quarter of 1993.
Title closing fees from the title service subsidiary, Equity Title, declined to
$2.7 million from $3.9 million a year ago reflecting reduced demand in the real
estate market. Financial services income from the sale of mutual funds and
annuities totaled $2.5 million for the current quarter, up from $1.2 million in
the third quarter of 1993. Service charges on deposit accounts and other income
were $4.2 million for the current quarter, an increase of 12.6 percent from the
same quarter a year ago. The increase of service charges on deposit accounts is
a result of acquisitions and the strategic evaluation of fees and implementation
of a new fee structure for deposit accounts.
NONINTEREST EXPENSE. Noninterest expense in the third quarter of 1994 was $66.9
million compared with $48.1 million in the third quarter of 1993. Included in
the third quarter of 1994 are expenses of $1.4 million related to the planned
merger with First Bank System, Inc. and an accrual of $14 million related to the
tentative settlement of two class action lawsuits against the Company and its
subsidiaries, Edina Realty and Equity Title. The bank-only efficiency ratio,
defined as noninterest expense less amortization of goodwill and real estate
expense as a percent of net interest income before the provision for loan losses
and noninterest income, was 57 percent in the third quarter of 1994, compared
with 53 percent in the third quarter of 1993.
Compensation, occupancy, data processing, advertising and amortization of
goodwill expense increased $4.9 million from the third quarter of 1993 to the
third quarter of 1994, or 15.2 percent, primarily reflecting the acquisitions
during the past year. Deposit insurance premiums decreased $357 thousand from
the third quarter of 1993 to the third quarter of 1994 reflecting one-time
insurance premium credits related to previous acquisitions. Real estate owned
expense declined $1.3 million as a result of improved results from certain
income-producing properties as well as a reduction in these nonperforming
assets. Other general and administrative expenses increased $15.4 million to
$26.5 million reflecting the effect of acquisitions and an increase in
professional fees related to the pre-merger activities and the accrual for the
tentative lawsuit settlement.
Included in the nine months ended September 30, 1993 was a one-time charge of
$4.0 million related to the closing of 17 retail bank offices and other
reorganization activities.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Income Taxes. The provision for income taxes was
$2.7 million in the third quarter of 1994 compared
with $10.0 million in the third quarter of 1993. The
provision for income taxes for the first nine months
of 1994 was $19.0 million compared with $13.1
million (which included a $10 million tax benefit for
the same period in 1993). The $10 million benefit in
the first quarter of 1993 resulted from the favorable
resolution of a number of outstanding tax issues
raised by The Internal Revenue Service for which the
Company had earlier established reserves.
Loan Portfolio. The Company's loan portfolio
totaled $5.2 billion at September 30, 1994, an
increase of $609 million from December 31, 1993.
The increase is due to new production of residential
mortgage and consumer loans, as well as the
addition of loans through acquisition offset by the
securitization of approximately $500 million of 15
year fixed rate loans into mortgage-backed securities
during the second quarter of 1994.
Consumer loan origination and origination of first
mortgage loans for the purchase or construction of
one to four family residential property continue to be
the main emphasis of the Company. Of the $609
million increase in loans, $115 million related to
residential real estate mortgage loans and $531
million related to consumer loans. The Company's
current policy is to sell all agency conforming 30-
year fixed rate mortgage loans, thus reducing interest
rate risk.
Single family mortgage loan originations totaled
$250.5 million in the third quarter 1994 compared
with $438.7 million in the third quarter of 1993.
The decrease in single family mortgage originations
is a result of higher interest rates. Consumer
originations totaled $313.1 million in the third
quarter of 1994, an increase of $74.6 million,
compared with $238.5 million during the third
quarter of 1993. Indirect automobile lending has
been a focus product for the Company for the past
few years.
The Company generally maintains the servicing rights
on mortgage loans sold to preserve the customer
relationship, create opportunities to cross sell other
banking services and generate fee income.
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
Real Estate:
Residential (One-to-four-family) $2,814,810 $2,700,214
Commercial 476,881 513,870
Construction 10,468 12,185
Commercial 11,928 6,402
Manufactured home 35,652 41,797
Consumer and other 1,885,067 1,353,847
- ----------------------------------------------------------------------
5,234,806 4,628,315
Less:
Allowance for loan losses 40,425 42,905
- ----------------------------------------------------------------------
$5,194,381 $4,585,410
- ----------------------------------------------------------------------
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Nonperforming Assets and Allowance for Loan
Losses. Nonperforming assets are nonaccruing
loans and real estate owned. The Company places
loans on a nonaccrual status when the loans are
contractually delinquent more than 90 days. The
table below presents a summary of nonperforming
assets at the dates indicated.
Nonperforming assets at September 30, 1994, totaled
$74.6 million, a decrease of $40.8 million, or 35.3
percent from the $115.4 million total reported at
December 31, 1993. The decrease is principally
related to the sale or disposition of commercial real estate.
The allowance for loan losses at September 30, 1994,
remained relatively consistent with year end 1993 at
$40.4 million. The allowance for loan losses as a
percentage of nonperforming loans increased from
70.0 percent at December 31, 1993 to 100.8 percent
at September 30, 1994. Nonperforming loans to
total loans and nonperforming assets to total assets
decreased to .77 percent and .92 percent,
respectively, at September 30, 1994 from 1.32
percent and 1.65 percent at December 31, 1993,
respectively.
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1994 1993
- -------------------------------------------------------------------
<S> <C> <C>
Nonperforming Loans:
Single family $13,835 $ 15,150
Commercial real estate 21,212 42,330
Non real estate 5,069 3,810
- -------------------------------------------------------------------
40,116 61,290
Real Estate Owned:
Single family 4,328 6,857
Commercial real estate 30,181 47,277
- -------------------------------------------------------------------
34,509 54,134
- -------------------------------------------------------------------
$74,625 $115,424
- -------------------------------------------------------------------
</TABLE>
Mortgage-Backed Securities and Available-For-
Sale Securities. Mortgage-backed securities held for
investment totaled $1.6 billion at September 30,
1994, compared to $.9 billion at December 31, 1993.
The increase in mortgage-backed securities relates to
wholesale purchases of mortgage-backed securities
during the first quarter of 1994 and the securitization
of approximately $500 million of fixed rate
residential mortgage loans as FNMA securities.
Securities available-for-sale decreased slightly from
year end 1993 to $0.6 billion at September 30, 1994,
principally as a result of the settlement of certain
sales transactions executed in the fourth quarter of
1993.
Sources of Funds. Deposits at September 30, 1994,
totaled $5.5 billion, an increase of $152 million or
2.8 percent from the December 31, 1993 total of $5.4
billion. The increase in deposits resulted from
acquisitions offset by deposit outflows as depositors
seeking higher yields are reinvesting their funds in
mutual funds and other non FDIC insured
instruments. As interest rates have risen in recent
months, the pace of deposit outflow has diminished.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
Capital Adequacy. Shareholders' equity of $497.7
million at September 30, 1994, is a decrease of $6.7
million from December 31, 1993. The decrease
related to the recording of an unrealized loss
associated with securities available-for-sale as a
result of increasing interest rates and,
correspondingly, decreasing market values of these
securities. Shareholders' equity as a percentage of
assets was 6.2 percent at September 30, 1994.
Common shareholders' equity at September 30, 1994
was $485.5 million or $15.46 per share compared
with $492.2 or $15.79 per share at December 31,
1993. Under minimum regulatory capital regulations
issued by the OTS, thrift institutions are required to
meet the following three capital requirements.
Tangible Capital Requirement. Generally, this
requirement measures capital adequacy after
consideration of the effect of intangibles, purchased
servicing assets and other factors on the financial
statements. Tangible capital must meet or exceed
1.50 percent of tangible assets, as defined in the
regulations.
Core Capital Requirement. This measure permits
thrifts to include in tangible capital supervisory
goodwill (goodwill related to certain acquisitions
prior to 1989) on a declining basis through 1994 and
core deposit intangibles. The core capital of a thrift
must meet or exceed 3.00 percent of tangible assets,
as defined in the regulations.
Risk-Based Capital Requirement. The risk-based
capital ratio measures capital adequacy taking into
account the level of risk of an institution's assets.
The OTS has also issued a rule which adds, under
certain circumstances, an interest rate risk
component which increases the risk-based capital
requirement. The Bank is currently not subject to
any additional risk-based capital requirements
related to the recently effective interest rate risk
component. As of December 31, 1993, a thrift's
risk-based capital must meet or exceed 8.00 percent
of risk adjusted assets.
The Bank, including its subsidiaries, exceeded the fully
phased-in capital requirements at September 30, 1994
as detailed below.
<TABLE>
<CAPTION>
Metropolitan
Federal Bank, fsb July 1, 1994
and Subsidiaries Requirement
Capital Measure Consolidated (Fully Phased In)
- ----------------------------------------------------------
<S> <C> <C>
Tangible Capital 5.55% 1.50%
Core Capital 5.92% 3.00%
Risk Based Capital 10.56% 8.00%
- ----------------------------------------------------------
</TABLE>
18
<PAGE>
Part II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Pending Litigation.
Edina Realty, Inc. ("Edina"), Equity Title Services, Inc. ("Equity
Title") and the Company along with executives from each entity have been
named in three class action suits (two Federal and one in Minnesota
State Court) alleging that Edina failed to adequately disclose dual
agency in instances where Edina represented both buyer and seller in
real estate transactions and forced its customers to close their real
estate transactions at its affiliate, Equity Title. A definitive
settlement of a non-material amount has been reached with respect to the
class action suit in Minnesota State Court (Dismuke vs. Edina Realty).
On September 13,1994 the Company announced a tentative settlement in the
total amount of $14 million with respect to the two class action suits
in Federal Court (Bokusky et al. vs. Edina Realty and Nitti et al. vs.
Edina Realty). Class members will receive a distribution in that amount,
less amounts paid for expert fees, and costs and expenses of the
litigation, including attorneys fees to be determined by the court. On
September 15, 1994, a judge entered an order granting preliminary
approval to the settlement and scheduled a hearing for January 20, 1995
to determine whether the court should grant final approval to the
settlement.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11.1 Computation of Net Income Per Common Share
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, dated July 25, 1994,
reporting Item 5 "Other Events" relating to the definitive merger
agreement and stock option agreement signed by the Company and
First Bank System, Inc. on July 21, 1994.
19
<PAGE>
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METROPOLITAN FINANCIAL CORPORATION
Date 11/10/94 /s/ William P. Bartkowski
-------- ----------------------------------
WILLIAM P. BARTKOWSKI
Executive Vice President and Chief
Administrative Officer
(Principal Administrative Officer)
Date 11/10/94 /s/ Steven B. Dewald
-------- ----------------------------------
STEVEN B. DEWALD
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
METROPOLITAN FINANCIAL CORPORATION
Exhibit Index to 10-Q
For Quarter Ended September 30, 1994
Item No. Item Method of Filing
- -------------------------------------------------------------------------
11.1 Computation of Per Share Earnings........Filed herewith.
27.1 Financial Data Schedule..................Filed herewith.
<PAGE>
Exhibit 11.1
METROPOLITAN FINANCIAL CORPORATION: COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------
September 30, September 30,
(Amounts in thousands, except per share data) 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY:
Average number of common shares outstanding 31,324 31,056 31,159 30,154
Net effect of dilutive stock options/warrants--
based on the treasury stock method
using average market price 1,390 1,152 1,156 1,454
- --------------------------------------------------------------------------------------------------------------
32,714 32,208 32,315 31,608
- --------------------------------------------------------------------------------------------------------------
Net Income $4,418 $16,883 $31,043 $47,324
Dividends on preferred stock (351) (351) (1,054) (1,054)
- --------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $4,067 $16,532 $29,989 $46,270
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $0.12 $0.51 $0.93 $1.46
==============================================================================================================
FULLY DILUTED:
Average number of common shares outstanding 31,324 31,056 31,159 30,154
Net effect of dilutive stock options/warrants--
based on the treasury stock method using closing
market price if higher than average market price 1,420 1,409 1,525 1,542
- --------------------------------------------------------------------------------------------------------------
32,744 32,465 32,684 31,696
- --------------------------------------------------------------------------------------------------------------
Net income $4,418 $16,883 $31,043 $47,324
Dividends on nonconvertible preferred stock (351) (351) (1,054) (1,054)
- --------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $4,067 $16,532 $29,989 $46,270
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $0.12 $0.51 $0.92 $1.46
==============================================================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE METROPOLITAN FINANCIAL CORPORATION SEPTEMBER 30, 1994, 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 81,845
<INT-BEARING-DEPOSITS> 31,082
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 628,912
<INVESTMENTS-CARRYING> 1,625,514
<INVESTMENTS-MARKET> 1,553,654
<LOANS> 5,267,101
<ALLOWANCE> 40,425
<TOTAL-ASSETS> 8,073,094
<DEPOSITS> 5,506,425
<SHORT-TERM> 795,618
<LIABILITIES-OTHER> 135,942
<LONG-TERM> 1,137,414
<COMMON> 328
0
5
<OTHER-SE> 497,362
<TOTAL-LIABILITIES-AND-EQUITY> 8,073,094
<INTEREST-LOAN> 301,354
<INTEREST-INVEST> 91,872
<INTEREST-OTHER> 4,740
<INTEREST-TOTAL> 397,966
<INTEREST-DEPOSIT> 169,544
<INTEREST-EXPENSE> 233,698
<INTEREST-INCOME-NET> 164,268
<LOAN-LOSSES> 9,575
<SECURITIES-GAINS> (126)
<EXPENSE-OTHER> 169,346
<INCOME-PRETAX> 50,075
<INCOME-PRE-EXTRAORDINARY> 31,043
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,043
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.92
<YIELD-ACTUAL> 3.02
<LOANS-NON> 31,556
<LOANS-PAST> 0
<LOANS-TROUBLED> 16,218
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 42,905
<CHARGE-OFFS> 17,145
<RECOVERIES> 2,136<F1>
<ALLOWANCE-CLOSE> 40,425
<ALLOWANCE-DOMESTIC> 40,425
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 27,947
<FN>
<F1> NOT INCLUDED IN RECOVERIES BUT AN ADDITION TO ALLOWANCES FOR LOANS WERE
ACQUISITION RESERVES OF $2,136
</FN>
</TABLE>
