U.S. Securities and Exchange Commission
Washington D.C. 20549
Form 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1996.
Commission file number 0-23790
MetroBanCorp
An Indiana Corporation - I.R.S. No. 35-1712167
10333 N. Meridian Street, Suite 111
Indianapolis, Indiana 46290
Issuer's telephone number (317) 573-2400
Securities to be registered under Section 12 (b) of the Act: None.
Securities to be registered under Section 12 (g) of
the Act: Common Shares, No Par Value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's net interest income for its most recent fiscal year:
$4,354,000.
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock as of a
specified date within the past 60 days (See definition of affiliate in
Rule 12b-2 of the Exchange Act): The aggregate market value of the
voting stock of the registrant held by non-affiliates, based upon the
price of a share of common stock as quoted on the NASDAQ Small-Cap
Market on February 28, 1997, was $7,604,228.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,681,291.
DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are
incorporated by reference, briefly describe them and identify the part
of the Form 10-KSB (e.g. Part I, Part II, etc.) into which the document
is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification
purposes (e. g. annual report to security holders for fiscal year ended
December 31, 1996).
Portions of the Registrant's 1996 Annual Report to Shareholders' are
incorporated by reference into parts II and III hereof. Portions of
the Registrant's Definitive Proxy statement dated March 24, 1997,
are incorporated by reference into Part III hereof.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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Form 10-KSB Table of Contents
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Part I Page #
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Item 1 Description of Business 3
Item 2 Description of Property 10
Ite 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of
Security Holders 10
Part II
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Item 5 Market for Common Equity and
Related Stockholder Matters 10
Item 6 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 7 Financial Statements 11
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 11
Part III
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Item 9 Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act 11
Item 10 Executive Compensation 11
Item 11 Security Ownership of Certain Beneficial
Owners and Management 11
Item 12 Certain Relationships and Related
Transactions 12
Item 13 Exhibits and Reports on Form 8-K 12
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Part I.
ITEM 1. DESCRIPTION OF BUSINESS
MetroBanCorp ("Metro") was incorporated under the laws of the State of
Indiana on June 22, 1987 for the purpose of holding all of the shares
of common stock of MetroBank ("Bank"), an Indiana chartered commercial
bank which commenced operations in April, 1988. The Bank offers a
broad range of commercial and personal lending and deposit services to
its customers located principally in Hamilton and northern Marion
Counties, of Indiana, the Bank's primary marketplace. The Bank
conducts its business through five banking offices located in Hamilton
County. The Bank's products are principally oriented toward consumers
and the small- and medium-sized business and professional communities.
Beginning in late 1991, the Bank began offering discount brokerage and
mortgage lending services. At December 31, 1996, Metro had
consolidated total assets of $113.4 million, total deposits of $99.3
million and shareholders' equity of $11.5 million, representing annual
increases from 1995 of 2.25 percent, 4.6 percent, and 3.6 percent,
respectively.
The Bank's primary market area consists of Hamilton County and
northern Marion County, situated in the north central section of the
Indianapolis Metropolitan Statistical Area (MSA). Hamilton County is
the fastest growing county in the State of Indiana (61.9 percent
increase in population between 1980 and 1995). It is also Indiana's
most affluent county, with an estimated median household income in
1995 of $53,380. With over 140,000 residents, Hamilton County is
known for its high quality residential neighborhoods, premier
corporate environment, outstanding public schools and well-developed
infrastructure. These characteristics have contributed to dynamic and
significant population growth, a low 1.85 percent unemployment rate,
and a younger than average resident (33.9 years old) population
employed in predominantly professional, managerial, sales and service
occupations. Hamilton County is the leading suburban location in
greater Indianapolis for headquarters and other office operations of
significant companies such as USA Group, Inc. ("USA Group"), Thomson
Consumer Electronics, Conseco, Marsh Supermarkets, as well as many
large manufacturing and distribution operations.
Since liberalization of Indiana's banking laws in 1985, five of six
commercial banks headquartered in Hamilton County have been acquired
by bank holding companies located either out-of-county or out-of-
state. Those acquirors, with only one exception, have subsequently
been acquired by larger, out-of-state bank holding companies. The
strategy implemented by Metro's founding investors and its management
was designed to capitalize on the customer dissatisfaction which often
accompanies centralization of out-of-state customer servicing and
standardization of financial products. Management believes that
Metro's target customer, i.e. small business owners and professionals,
are not only greater users of financial services but also are the most
sensitive to such centralization and standardization. Further, it is
the belief of management that such users of financial services prefer
to do business with a bank with responsive decision making on a local
level.
Since the end of its first year of operations, Metro's consolidated
total assets have grown from $14.6 million at December 31, 1988 to
$113.4 million at December 31, 1996, representing a 34.9 percent
average annual growth. Metro's acquisition of two branches of
Colonial Central Savings Bank, FSB, in April, 1991, was a contributing
factor in this growth. The Bank's asset growth has put pressure on
earnings, with Metro reporting losses or negligible earnings for its
first four years of operations. The efficiency ratio of 250.8 percent
in 1988 and 117.7 percent in the first full year of operations in 1989
has improved to 76.5 percent in 1996 as Metro has grown into its
infrastructure.
The Bank conducts a general banking business offering various
commercial and consumer banking services. A member of the FDIC, the
Bank currently operates one main branch, four traditional staffed
branch offices and one automated branch. The Bank opened its first
traditional staffed branch office in Noblesville, Indiana in June,
1988, and the Bank became fully operational in its main office,
located in Carmel, Indiana, in August, 1988. The Bank established
additional traditional staffed branch offices in Noblesville and
Carmel, Indiana, as a result of the April, 1991 acquisition of certain
assets of Colonial Central Savings Bank, FSB. The Bank's branch
offices include two facilities which are owned by MB Realty
Corporation, a wholly owned subsidiary of the Bank. The Bank's main
office, two traditional staffed offices and the automated branch are
leased facilities. The Bank has also deployed numerous automated
teller machines (ATM) and automated loan machines (ALM) at sites which
are leased from the owners of retail businesses in the market area.
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MARKET AREA AND COMPETITION. The Bank's market area, Hamilton and
northern Marion Counties, of Indiana, is highly competitive, with
numerous other commercial banks having banking or loan production
offices in the market place. Many of these banks are affiliated with
multi-bank holding companies and have numerous branch offices located
throughout the Bank's market area. Two new competing financial banking
institutions have entered the Bank's market area in recent months. In
addition to competition from commercial banks, competition also exists
from savings and loan associations, credit unions, finance companies,
insurance companies, mortgage companies, securities brokerage firms,
money market and mutual funds, loan production offices and other
providers of financial services in the area. These entities generally
have greater financial resources than Metro or the Bank. The Bank
competes in the marketplace primarily on the basis of responsible
decision making, personal service and, to a lesser degree, price.
LENDING ACTIVITY. The Bank's two principal lending categories are
commercial/business and consumer loans. Commercial or business credits
include, among other things, loans for working capital, machinery and
equipment purchases, commercial real estate acquisitions and other
corporate needs. Consumer loans include, among other things, loans for
purchases of automobiles, homes, home improvements and other consumer
purposes. These loans may be extended by the Bank on a secured or
unsecured basis. The Bank's consumer loans include a substantial
portfolio of federally guaranteed student loans ("GSLs"). These GSLs
are comprised of approximately 6,700 notes made to nearly 1,700
borrowers who are geographically dispersed throughout the United
States. These loans are guaranteed and serviced, pursuant to the
Higher Education Act of 1965, as amended ("HEA"), by USA Group Loan
Services ("Loan Services") and USA Funds, respectively, both
affiliates of USA Group.
The Bank's GSLs are substantially guaranteed by USA Funds, and are
reinsured in various amounts by the federal government. Under HEA and
the regulations thereunder, lenders and their assignees making and
servicing GSLs and guarantors guaranteeing GSLs are required to follow
specified procedures to ensure that the GSLs are properly made and
disbursed and repaid on a timely basis by or on behalf of borrowers.
Loan Services has agreed, pursuant to a servicing agreement with the
Bank, to perform servicing and collection procedures for the GSLs on
behalf of the Bank. However, failure to follow these procedures or
failure of the seller to follow procedures relating to the origination
of any GSL may result either in the federal Department of Education's
refusal to make reinsurance payments to USA Funds or to make interest
subsidy and special allowance payments to the Bank with respect to the
GSLs or in USA Funds refusal to honor its guarantee agreement with the
Bank with respect to the GSLs. Failure of USA Funds to receive
federal reinsurance payments could adversely affect USA Funds ability
or legal obligation to make guarantee payments to the Bank. Loss of
such guarantee payments, interest subsidy payments or special
allowance payments could adversely affect the Bank and the performance
of its GSLs portfolio. The Bank has the right, under certain
circumstances specified in the GSL purchase agreement and the
servicing agreement, to cause the seller or Loan Services, as the case
may be, to reimburse the Bank for accrued interest amounts not
guaranteed by Loan Services or for any lost interest subsidy payments
and special allowance payments with respect to a GSL as a result of a
breach of the seller representations and warranties or Loan Services
covenants, as the case may be, with respect to such GSL. There can be
no assurance, however, that the seller will have the financial
resources, or that Loan Services will have the ability, to do so. The
failure of the seller to repurchase or Loan Services to arrange for
the repurchase of a GSL would constitute a breach of the related GSL
sale agreement or servicing agreement, as the case may be, enforceable
by the Bank.
Commercial lending entails a thorough analysis of the borrower, its
industry, current and projected economic conditions and various other
factors. Depending upon factors such as, but not limited to,
collateral, type of loan, loan maturity, and specific loan terms and
conditions, various loan-to-value ratios are established upon request
for a loan.
The Bank typically requires its commercial/business borrowers to have
annual financial statements prepared by independent accountants and,
to the extent possible, requires such financial statements to be
audited or reviewed by accountants. The Bank requires appraisals in
connection with loans secured by real estate. Such appraisals are
obtained prior to the time funds are advanced. The Bank also typically
requires personal guaranties from principals involved with closely-
held corporate borrowers.
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The Bank requires completed loan applications, including personal
financial information, from all of its consumer borrowers on loans the
Bank originates. With respect to consumer loans that are secured, the
Bank obtains a valuation of the collateral prior to extending such
loans. Loan officers of the Bank are required to complete a debt-to-
income analysis that should meet management established lending
standards prior to loan approval. Depending upon the type and age of
collateral offered, various down payment and equity requirements are
set based upon established guidelines. Loan officers are also
required to follow all other standard underwriting techniques
established by the Bank's management, Board of Directors and primary
federal regulatory agency.
The Bank maintains a loan policy which establishes specific lending
authority for each of its loan officers. Loans exceeding a loan
officer's individual lending authority must be approved by a loan
officer with a higher lending authority. All loans for which the
borrower's aggregate debt to the Bank exceeds $50,000 but is less than
$350,0000 must be reported to the Bank's Management Loan Committee
for approval, or informational purposes. Further, secured loans
exceeding $350,0000 and unsecured loans exceeding $50,000 must be
approved by the Bank's Board of Directors' Loan Committee. The Bank
also has established general guidelines relating to the ratio between
the loan amount and collateral value which must be met before a loan
is approved. All loans are graded prior to being approved using an
internally prepared grading system.
Consumer and commercial loans are made primarily in the Bank's
designated market area. The Bank anticipates loan demand to increase
at a rapid rate in the coming year, but loan balances outstanding to
grow more slowly due to management's conservative lending standards.
Loans are made for portfolio purposes only and not for resale.
The Bank's Residential Mortgage Loan Department completed its second
full year of operations in 1996. The Department offers both
conventional and non-conventional mortgages ,as well as construction
loans and lot financing. The majority of the loans, and their
servicing rights, originated by the Department will be sold in
secondary markets.
During the fourth quarter of 1995, MetroBank established an Automated
Branch in the Meridian Park Shoppes, located at 12440 N. Meridian
Street in Carmel, Indiana. This facility is similar to the Bank's
other full service banking facilities; however, due to the technology
being utilized at this facility, there are no employees on site. Also
during the fourth quarter of 1995, MetroBank became the first
midwestern bank to deploy an ALM. This machine allows the user to
apply for and if approved, receive a complete loan with proceeds in
about ten minutes. The Bank has deployed three of these machines in
the following locations: the Bank's Automated Branch, its Ninth
Street Noblesville Branch, and a locally owned jewelry store located
on the south side of Indianapolis.
BANK HOLDING COMPANY REGULATION. Metro is registered as a bank
holding company and is subject to the regulations of the Board of
Governors of the Federal Reserve System ("Federal Reserve") under the
Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding
companies are required to file periodic reports with and are subject
to periodic examination by the Federal Reserve. The Federal Reserve
has issued regulations under the BHCA requiring a bank holding company
to serve as a source of financial and managerial strength to its
subsidiary banks. It is the policy of the Federal Reserve that,
pursuant to this requirement, a bank holding company should stand
ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity.
Additionally, under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), a bank holding company is required
to guarantee the compliance of any insured depository institution
subsidiary that may become "undercapitalized" (as defined in FDICIA)
with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency up to the
lesser of (i) an amount equal to 5% of the institution's total assets
at the time the institution became undercapitalized, or (ii) the
amount that is necessary (or would have been necessary) to bring the
institution into compliance with all applicable capital standards as
of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the
authority to require a bank holding company to terminate any activity
or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the Federal Reserve's determination that
such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary or the bank holding
company.
Metro is prohibited by the BHCA from acquiring direct or indirect
control of more than 5% of the outstanding shares of any class of
voting stock or substantially all of the assets of any bank, or
merging or consolidating with another bank holding company, without
the prior approval of the Federal Reserve. Metro is also prohibited by
the BHCA from engaging in or from acquiring ownership or control of
more than 5% of the outstanding shares of any class of voting stock of
any company engaged in a non-banking business unless such business is
determined by the Federal Reserve to be so closely related to banking
as to be a proper incident thereto.
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Capital Adequacy Guidelines for Bank Holding Companies. The Federal
Reserve is the federal regulatory and examining authority for bank
holding companies and has adopted capital adequacy guidelines for bank
holding companies.
Bank holding companies with consolidated assets in excess of $150
million or with consolidated assets of less than $150 million which
are engaged in non-bank activity involving significant leverage or
which have a significant amount outstanding debt held by the general
public are required to comply with the Federal Reserve's risk-based
capital guidelines which require a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities
such as standby letters of credit) of 8%. At least half of the total
required capital must be "Tier 1 capital," consisting principally of
common stockholders' equity, noncumulative perpetual preferred stock,
a limited amount of cumulative perpetual preferred stock and minority
interest in the equity accounts of consolidated subsidiaries, less
certain goodwill items. The remainder ("Tier 2 capital") may consist
of a limited amount of subordinated debt and intermediate-term
preferred stock, certain hybrid capital instruments and other debt
securities, cumulative perpetual preferred stock, and a limited amount
of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a Tier 1
(leverage) capital ratio under which the bank holding company must
maintain a minimum ratio of Tier 1 capital to average total
consolidated assets of 3% in the case of bank holding companies which
have the highest regulatory examination ratings and are not
contemplating significant growth or expansion. All other bank holding
companies are expected to maintain a ratio of at least 1% to 2% above
the stated minimum.
Certain regulatory capital ratios for Metro as of December 31, 1996
are shown below:
Tier 1 Capital to Risk-Weighted Assets..................... 16.52%
Total Risk Based Capital to Risk-Weighted Assets........... 17.77%
Tier 1 Leverage Ratio...................................... 10.79%
BANK REGULATION. The Bank is organized under the laws of the State of
Indiana and is subject to the supervision of the Indiana Department of
Financial Institutions ("DFI"), whose examiners conduct periodic
examinations of state banks. The Bank is not a member of the Federal
Reserve System, so its principal federal regulator is the Federal
Deposit Insurance Corporation ("FDIC"), which also conducts periodic
examinations of the Bank. A majority of the Bank's deposits are
insured by the Bank Insurance Fund ("BIF") administered by the FDIC
and are subject to the FDIC's rules and regulations respecting the
insurance of deposits. See "Deposit Insurance" following. The
deposits acquired from Colonial Central Savings Bank, FSB in 1991 are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the federal Office of Thrift Supervision ("OTS").
Both federal and state law extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit
reporting, trading in securities and other aspects of banking
operations. Current federal law also requires banks, among other
things, to make deposited funds available to customers within
specified time periods.
Insured state-chartered banks are prohibited under FDICIA from
engaging as principal in activities that are not permitted for
national banks, unless (i) the FDIC determines that the activity would
pose no significant risk to the appropriate deposit insurance fund,
and (ii) the bank is, and continues to be, in compliance with all
applicable capital standards.
BANK CAPITAL REQUIREMENTS. The Bank is also required to meet capital
adequacy ratios. The FDIC has adopted risk-based capital ratio
guidelines to which the Bank is subject. The guidelines establish a
systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among
banking organizations. Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet commitments to four
risk weighted categories, with higher levels of capital being required
for the categories perceived as representing greater risk.
Like the capital guidelines established by the Federal Reserve for
Metro, these guidelines divide an institution's capital into two
tiers. Depository institutions are required to maintain a total risk-
based capital ratio of 8%, of which 4% must be Tier 1 capital. The
FDIC may, however, set higher capital requirements when a bank's
particular circumstances warrant. Banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.
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In addition, the FDIC has established guidelines prescribing a minimum
Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as
specified in the guidelines) of 3% for banks that meet certain
specified criteria, including that they are in the highest regulatory
rating category and are not experiencing or anticipating significant
growth. All other institutions are required to maintain a Tier 1
leverage ratio of 3% plus an additional cushion of at least 100 to 200
basis points.
Certain regulatory capital ratios under the FDIC's risk-based capital
guidelines for the Bank at December 31, 1996 are shown below:
Tier 1 Capital to Risk-Weighted Assets..................... 11.35%
Total Risk-Based Capital to Risk-Weighted Assets........... 12.61%
Tier 1 Leverage Ratio...................................... 7.58%
The FDIC included, in its evaluations of a bank's capital adequacy, an
assessment of the bank's exposure to declines in the economic value of
the bank's capital due to changes in interest rates. On June 26,
1996, the FDIC, along with the Office of the Comptroller of the
Currency and the Federal Reserve, issued a joint policy statement to
provide guidance on sound practices for managing interest rate risk.
The statement sets forth the factors the federal regulatory examiners
will use to determine the adequacy of a bank's capital for interest
rate risk. These qualitative factors include the adequacy and
effectiveness of the bank's internal interest rate risk management
process and the level of interest rate exposure. Other qualitative
factors that will be considered include the size of the bank, the
nature and complexity of its activities, the adequacy of its capital
and earnings in relation to the bank's overall risk profile, and its
earning exposure to interest rate movements.
The interagency supervisory policy statement describes the
responsibilities of a bank's board of directors in implementing a risk
management process and the requirements of the bank's senior
management in ensuring the effective management process must contain.
In August, 1996, the Federal Reserve and the FDIC issued final
regulations further revising their risk-based capital standards to
include a supervisory framework for measuring market risk. The effect
of the new regulations is that any bank holding company or bank which
has significant exposure to market risk must measure such risk using
its own internal model, subject to the requirements contained in the
regulations, and must maintain adequate capital to support that
exposure. The regulations became effective on January 1, 1997, but
compliance with the regulations is not mandatory until January 1,
1998.
The new regulations apply to any bank holding company or bank whose
trading activity equals 10% or more of its total assets, or whose
trading activity equals $1 billion or more. Examiners may require a
bank holding company or bank that does not meet the applicability
criteria to comply with the capital requirements if necessary for
safety and soundness purposes.
The new regulations contain supplemental rules to determine qualifying
and excess capital, calculate risk-weighted assets, calculate market
risk equivalent assets and calculate risk-based capital ratios
adjusted for market risk.
It is too early to assess the impact or applicability, if any, of
these new rules on Metro and the Bank.
DIVIDEND LIMITATIONS. Under Federal Reserve supervisory policy, a
bank holding company generally should not maintain its existing rate
of cash dividends on common shares unless (i) the organization's net
income available to shareholders over the past year has been
sufficient to fully fund the dividends, and (ii) the prospective rate
or earnings retention appears consistent with the organization's
capital needs, asset quality, and overall financial condition.
Metro's Board of Directors has adopted a policy consistent with these
guidelines. The FDIC also has authority under the Financial
Institutions Supervisory Act to prohibit a bank from paying dividends
if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice in light of the financial condition of the
bank.
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Under Indiana law, the Bank may declare and pay dividends so long as
its capital is unimpaired and it has unimpaired retained surplus equal
to 25% of capital. Dividends may not exceed undivided profits on hand
less losses, bad debts and expenses. The most stringent capital
requirement affecting the Bank, however, are those established by the
prompt corrective action provisions of FDICIA, which are discussed
below. At December 31, 1996, the Bank's capital levels exceeded the
criteria necessary to be designated as a "well capitalized"
institution, which requires a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% or greater.
LENDING LIMITS. Under Indiana law, the total loans and extensions of
credit by an Indiana-chartered bank to a borrower outstanding at one
time and not fully secured may not exceed 15% of such bank's capital
and unimpaired surplus. An additional amount of up to 10% of the
bank's capital and unimpaired surplus may be loaned to the same
borrower if such loan is fully secured by readily marketable
collateral having a market value, as determined by reliable and
continuously available price quotations, at least equal to the amount
of such additional loans outstanding.
BRANCHES AND AFFILIATES. Establishment of branches for the Bank is
subject to approval of the DFI and FDIC and geographic limits
established by state law. Indiana's branch banking law permits a bank
having its principal place of business in the State of Indiana to
establish branch offices in any county in Indiana without geographic
restrictions. A bank may also merge with any national or state
chartered bank located anywhere in the State of Indiana without
geographic restrictions. Also see "Interstate Banking" following.
The Bank is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between
a parent bank holding company and a subsidiary bank and a bank and its
executive officers and affiliates, prescribes terms and conditions for
bank affiliate transactions deemed to be consistent with safe and
sound banking practices, and restricts the types of collateral
security permitted in connection with a bank's extension of credit to
an affiliate.
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, allows for interstate banking and interstate
branching without regard to whether such activity is permissible
under state law. As of September 29, 1995, bank holding companies
may acquire banks anywhere in the United States subject to certain
state restrictions. Beginning June 1, 1997, an insured bank may
merge with an insured bank in another state without regard to
whether such merger is prohibited by state law. Additionally, an
out-of-state bank may acquire the branches on an insured bank in
another state without acquiring the entire bank; provided, however,
that the law of the state in which the branch is located permits such
an acquisition. States may permit interstate branching earlier than
June 1, 1997, where both states involved in a bank or branch
acquisition expressly permit it by statute. Further, bank holding
companies may merge existing bank subsidiaries located in different
states into one bank.
An insured bank subsidiary may now act as an agent for an affiliated
bank or savings association in offering limited banking services
(receive deposits, renew time deposits, close loans, service loans and
receive payments on loan obligations) both within the same state and
across state lines.
FDICIA. FDICIA accomplished a number of sweeping changes in the
regulation of depository institutions. FDICIA requires federal bank
regulatory authorities to take "prompt corrective action" with respect
to banks which do not meet minimum capital requirements. For these
purposes, FDICIA establishes five capital categories: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective
action provisions of FDICIA. Among other things, the regulations
define the relevant capital measures for the five capital categories.
An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater, and a leverage ratio of 5% or greater,
and is not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure.
An institution is deemed to be "adequately capitalized" if it has a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based
capital ratio of 4% or greater, and generally a leverage ratio 4% or
greater. An institution is deemed to be "undercapitalized" if it has
a total risk-based capital ratio of less than 8%, a Tier 1 risk-based
capital ratio of less than 4%, or generally a leverage ratio of less
than 4%, and is "significantly undercapitalized" if it has a total
risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%. An
institution is deemed to be "critically undercapitalized" if it has a
ratio of tangible equity (as defined in the regulations) to total
assets that is equal to or less than 2%.
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"Undercapitalized" banks are subject to growth limitations and are
required to submit a capital restoration plan. A bank's compliance
with such plan is required to be guaranteed by any company that
controls the undercapitalized institution. If an "undercapitalized"
bank fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. "Significantly undercapitalized"
banks are subject to one or more of a number of requirements and
restrictions, including an order by the FDIC to sell sufficient voting
stock to become adequately capitalized, requirements to reduce total
assets and case receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after
becoming "critically undercapitalized", make any payment of principal
or interest on certain subordinated debt or extend credit for a highly
leveraged transaction or enter into any transaction outside the
ordinary course of business. In addition, "critically
undercapitalized" institutions are subject to appointment of a
receiver or conservator.
FDICIA further directs that each federal banking agency prescribe
standards for depository institutions and depository institution
holding companies relating to internal controls, information systems,
internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, management compensation, a
maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book
value of publicly traded shares and such other standards as the agency
deems appropriate.
DEPOSIT INSURANCE. The Bank's deposits are insured up to $100,000 per
insured account, partly by the BIF and partly by the SAIF. As an
institution whose deposits are insured by BIF and SAIF, the Bank is
required to pay deposit insurance premiums to BIF and to SAIF.
The FDIC has adopted rules that implement a transitional risk-based
assessment system whereby a base insurance premium will be adjusted
according to the capital category and subcategory of an institution to
one of three capital categories consisting of (1) well capitalized (2)
adequately capitalized, or (3) under capitalized, and one of three
subcategories consisting of (a) health, (b) supervisory concern, or
(c) substantial supervisory concern. An institution's assessment rate
will depend upon the capital category and supervisory category to
which it is assigned. Assessment rates for banks range from 0.04
percent for an institution in the highest category (i.e. well
capitalized) to 0.31 percent for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern), and for
saving associations the rates range from 0.23 percent for well
capitalized institutions to 0.31 percent for institutions in the
lowest category. The supervisory subgroups to which an institution is
assigned by the FDIC is confidential and may not be disclosed. Deposit
insurance assessments may increase depending upon the category and
subcategory, if any, to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the
earnings of the Bank.
ADDITIONAL MATTERS. In addition to the matters discussed above, Metro
and the Bank are subject to additional regulation of their business
activities, including a variety of consumer protection regulations
affecting their lending, deposit and collection activities and
regulations affecting secondary mortgage market activities.
The earnings of financial institutions, including Metro and the Bank,
are also affected by general economic conditions and prevailing
interest rates, both domestic and foreign, and by the monetary and
fiscal policies of the U.S. Government and its various agencies,
particularly the Federal Reserve.
Additional legislation and administrative actions affecting the
banking industry may be considered by the United States Congress, the
Indiana General Assembly and various regulatory agencies, including
those referred to above. It cannot be predicted with certainty
whether such legislation or administrative action will be enacted or
the extent to which the banking industry in general or Metro and the
Bank in particular would be affected thereby.
EMPLOYEES. At December 31, 1996 the Bank had a total of 43 full-
time equivalent employees. This included 41 full-time and 5 part-time
employees.
page 9
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The principal executive office of Metro and the Bank is located at
Three Meridian Plaza, 10333 North Meridian Street, Suite 111,
Indianapolis, Indiana, and is leased from an unaffiliated third party.
The Bank operates three traditional staffed branch offices and one
automated branch, of which two facilities are owned by MB Realty, a
wholly owned subsidiary of MetroBank. Traditional staffed branches
owned by MB Realty are located at 225 North Ninth Street, Noblesville,
Indiana, and 20 South Rangeline Road, Carmel, Indiana. The Bank
operates a traditional staffed branch, leased from an unaffiliated
third party, located at 255 Sheridan Road, Noblesville, Indiana.
The Bank's automated branch which is leased from an affiliated third
party, is located at 12440 North Meridian Street, Carmel, Indiana.
The Bank has multiple ATM locations throughout its market area that
are leased from unaffiliated retail business owners.
In 1994, MB Realty purchased a parcel of land in Noblesville, Indiana
for possible development of a future branch office. This property
was sold to an unaffiliated party in 1996 and is currently being
developed by the purchaser, into a multi-use building in which the
Bank is constructing a branch office. This branch is scheduled to be
fully operational at the end of first quarter of 1997. This new
branch is located in the Bank's current market area and will provide
additional exposure and greater access within Hamilton and northern
Marion Counties.
In 1994, MB Realty also purchased a parcel of land in a highly visible
Carmel business district for the purpose of relocating its Rangeline
Road branch. After extensive evaluation of impending capital
expenditures to construct a branch facility at this location, this
property is pending sale with an estimated closing date in early 1997.
Management will continue to focus on other locations for possible
branching opportunities in the Carmel area.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings of a material nature to which
Metro or the Bank is a party or in which any of their property is
subject, other than routine litigation incidental to the normal
business of Metro and the Bank. There is no material legal proceeding
in which any director, executive officer, principal shareholder or
affiliate of Metro, or any associate of any such director, executive
officer, principal shareholder or affiliate, is a party and has an
interest adverse to Metro. None of the ordinary routine litigation in
which Metro or the Bank is involved is expected to have a material
adverse impact upon the financial condition or results of operations
of Metro.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996 to a vote
of Metro's shareholders.
Part II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In conjunction with a public offering of common stock completed in the
second quarter of 1994, Metro obtained approval for quotation on the
National Association of Securities Dealers Automated Quotation System
Small-Cap Market ("NASDAQ") under the symbol "METB". Prior to the
public offering there was no active public trading market for shares
of Metro common stock ("Common Stock"). The Common Stock was
previously traded on a limited basis in the over-the-counter market
through brokers and in privately negotiated transactions. Most trades
involved transactions directly with a market maker, inter-dealer
transactions, or privately negotiated transactions. As a result,
Metro was not always aware of the prices at which trades occurred.
At December 31, 1996, there were approximately 344 shareholders of
record of Common Stock.
The following table sets forth the high and low bid prices for shares
of Common Stock for the quarters during the years indicated, as
reported by NASDAQ subsequent to the second quarter for 1994. Such
over-the-counter quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
page 10
<PAGE>
<TABLE>
<CAPTION>
Bid Price Per Share
-----------------------------------
1995 1996
-------------- ---------------
Quarter High Low High Low
--------------- ----- ----- ----- -----
<S> <S> <C> <C> <C> <C>
First Quarter $6.00 $5.00 $7.25 $6.00
Second Quarter 6.00 5.25 6.75 5.75
Third Quarter 6.50 5.50 6.75 5.75
Fourth Quarter 7.25 5.75 6.50 5.25
--------------- -------------- ---------------
</TABLE>
Metro declared and paid two cash dividends on its shares of Common
Stock during 1996. The amount of each dividend was approximately
$168,000 or $0.10 per share. Future dividend payments by Metro will
be largely dependent upon dividends paid by the Bank and subject to
regulatory limitations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pages 4 through 13, inclusive, of Metro's Annual Report
to Shareholders for the year ended December 31, 1996 is
incorporated by reference in regard to this item.
ITEM 7. FINANCIAL STATEMENTS
Pages 14 through 24, inclusive, of Metro's Annual Report
to Shareholders for the year ended December 31, 1996 is
incorporated by reference in regard to this item.
ITEM 8. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
Part III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Pages 5 through 8, inclusive, of Metro's Definitive Proxy Statement
for the Annual Meeting of Shareholders, dated March 24, 1997, is
incorporated by reference in regard to this item.
ITEM 10. EXECUTIVE COMPENSATION
Pages 8 through 12, inclusive, of Metro's Definitive Proxy Statement
for the Annual Meeting of Shareholders, dated March 24, 1997, is
incorporated by reference in regard to this item.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Pages 5 through 14, inclusive, of Metro's Definitive Proxy Statement
for the Annual Meeting of Shareholders, dated March 24, 1997, is
incorporated by reference in regard to this item.
page 11
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Page 14, of Metro's Definitive Proxy Statement for the
Annual Meeting of Shareholders, dated March 24, 1997,
is incorporated by reference in regard to this item.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are being filed as part of this
Registration Statement:
3(i)* Articles of Incorporation
3(ii)* By-Laws
10.01* Employment Agreement dated December 31,
1992 between Registrant and Ike G.Batalis
10.02* Employment Agreement dated July 1, 1991
between Registrant and Charles V. Turean
10.03* Employment Agreement dated July 1, 1991
between Registrant and Andrew E. Illyes
10.04* Letter of Agreement dated December 31,
1992 between the Registrant and Heptagon, Inc.
10.05* Lease dated September 11, 1987 between
Registrant and Western Plaza Company with
respect to property at 255 Sheridan
Road, Noblesville, Indiana
10.06* Lease dated October 11, 1993 between
Registrant and Three Meridian Plaza Company
with respect to property at 10333 North
Meridian Street, Suite 111, Indianapolis,
Indiana
10.07* Form of indemnification Agreement for
Directors and Officers of Registrant
10.08* Registrant's 1987 Directors' Stock Option
Plan
10.09* Registrant's Incorporators' and Founders'
Stock Option Plan
10.10* Registrant's 1987 Stock Option and Stock
Appreciation Rights Plan
10.11* Registrant's 1991 Directors' Stock Option
Plan
10.12* Registrant's 1991 Stock Option and Stock
Appreciation Rights plan
10.13** Registrant's Supplemental Executive
Retirement Plan
10.15* Student Loan Sale Agreement, dated May 19,
1989
10.16* Student Loan Sale Agreement, dated July 1,
1992
10.17* Consent to Assignment to Secondary Market
Services, Inc. of Student loan purchase
and sale agreements effective April 1, 1993
10.18* Student Loan Guarantee Agreement, dated
August 19, 1998
page 12
<PAGE>
10.19 Student Loan Servicing Agreement, dated
February 1, 1997 (Confidential)
10.20** Registrant's Employees' Thrift and Retirement
Plan
10.20(a)**** Amendment No. 1, dated October 26, 1995 to
the Registrant's Employees' Thrift and
Retirement Plan
10.21*** Registrant's 1994 Stock Option and Stock
Appreciation Rights Plan
10.22*** Registrant's 1994 Directors' Stock Option Plan
10.23**** Lease dated November 1, 1995 between Registrant
and Eaton & Lauth, Meridian Park Shoppes, for
property at 12440 North Meridian Street,
Carmel, Indiana
13 The Annual Report to Shareholders of the
Company for the year ended December 31, 1996.
Except for the pages and information thereof
expressly incorporated by reference in this
Form 10-KSB, the Annual Report to Shareholders
is provided solely for the information of the
Securities and Exchange Commission and is not
deemed "filed" as part of this Form 10-KSB.
21* Subsidiaries of the Registrant
24 Powers of Attorney
27 Financial Data Schedule
* Incorporated by reference to Registrant's Registration Statement
on Form SB-2, File No. 33-75360, filed February 16, 1994.
** Incorporated by reference to Registrant's Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2, File No. 33-75360,
filed March 16, 1994.
*** Incorporated by reference to Registrant's Form 10-QSB for the
fiscal quarter ended June 30, 1994,
filed in August, 1994.
**** Incorporated by reference to Registrant's Form 10-KSB for the
fiscal year ended December 31, 1995.
(b) No Reports on Form 8-K were filed during the last quarter of
1996.
page 13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
MetroBanCorp
Registrant
Date: March 24, 1997 By: /s/Ike G. Batalis
-------------------------------
Ike G. Batalis, President
Date: March 24, 1997 By: /s/Charles V. Turean
-------------------------------
Charles B. Turean
Executive Vice President
Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
Date: March 24, 1997 By: CHRIS G. BATALIS*
-------------------------------
Chris G. Batalis, Director
Date: March 24, 1997 By: TERRY L. EATON*
-------------------------------
Terry L. Eaton, Director
Date: March 24, 1997 By: EVANS M. HARRELL*
-------------------------------
Evans M. Harrell, Director
Date: March 24, 1997 By: EDWARD G. MCMAHON*
-------------------------------
Edward G. McMahon, Director
Date: March 24, 1997 By: ROBERT L. LAUTH, JR.*
-------------------------------
Robert L Lauth, Jr. Director
Date: March 24, 1997 By: LARRY E. REED*
-------------------------------
Larry E. Reed, Director
Date: March 24, 1997 By: RUSSELL D. RICHARDSON*
-------------------------------
Russell D. Richardson, Director
Date: March 24, 1997 By: EDWARD R SCHMIDT*
-------------------------------
Edward R. Schmidt, Director
Date: March 24, 1997 By: DONALD F. WALTER*
-------------------------------
Donald F. Walter, Director
* By: /s/Ike G. Batalis
--------------------------------
Ike G. Batalis, Attorney-in-Fact
page 14
<PAGE>
Index to Exhibits
-----------------
Sequential
Exhibit Page
Number Exhibit Number
- ----------- ----------------------------------------------- ------
3(i)* Articles of Incorporation of the Registrant N/A
3(ii)* By-Laws of the Registrant N/A
10.01* Employment Agreement dated December 31, N/A
1992 between Registrant and Ike G. Batalis
10.02* Employment Agreement dated July 1, 1991 N/A
between Registrant and Charles V. Turean
10.03* Employment Agreement dated July 1, 1991 N/A
between Registrant and Andrew E. Illyes
10.04* Letter of Agreement dated December 31, 1992 N/A
between the Registrant and Heptagon, Inc.
10.05* Lease dated September 11, 1987 between N/A
Registrant and Western Plaza Company with
respect to property at 255 Sheridan Road,
Noblesville, Indiana
10.06* Lease dated October 11, 1993 between N/A
Registrant and Three Meridian Plaza Company
with respect to property at 10333 North Meridian
Street, Suite 111, Indianapolis, Indiana
10.07* Form of indemnification Agreement for Directors N/A
and Officers of Registrant
10.08* Registrant's 1987 Directors' Stock Option Plan N/A
10.09* Registrant's Incorporators' and Founders' Stock N/A
Option Plan
10.10* Registrant's 1987 Stock Option and Stock N/A
Appreciation Rights Plan
10.11* Registrant's 1991 Directors' Stock Option Plan N/A
10.12* Registrant's 1991 Stock Option and Stock N/A
Appreciation Rights Plan
10.13** Registrant's Supplemental Executive N/A
Retirement Plan
page 15
<PAGE>
10.15* Student Loan Sale Agreement, dated May 19, 1989 N/A
10.16* Student Loan Sale Agreement, dated July 1, 1992 N/A
10.17* Consent to Assignment to Secondary Market N/A
Services, Inc. of Student loan purchase and sale
agreements effective April 1, 1993
10.18* Student Loan Guarantee Agreement, dated N/A
August 19, 1998
10.19 Student Loan Servicing Agreement, dated N/A
February 1, 1997 (Confidential)
10.20** Registrant's Employees' Thrift and Retirement N/A
Plan
10.20(a)**** Amendment No. 1, dated October 26, 1995 N/A
to the Registrant's Employees'Thrift and
Retirement Plan
10.21*** Registrant's 1994 Stock Option and Stock N/A
Appreciation Rights Plan
10.22*** Registrant's 1994 Directors' Stock Option Plan N/A
10.23**** Lease dated November 1, 1995 between N/A
Registrant and Eaton & Lauth, Meridian
Park Shoppes, for property at 12440 North
Meridian Street, Carmel, Indiana
13 The Annual Report to Shareholders of the 17
Company for the year ended December 31, 1996.
Except for the pages and information thereof
expressly incorporated by reference in this
Form 10-KSB, the Annual Report to Shareholders
is provided solely for the information of the
Securities and Exchange Commission and is not
deemed "filed" as part of this Form 10-KSB.
21* Subsidiaries of the Registrant N/A
24 Powers of Attorney 57
27 Financial Data Schedule 58
page 16
<PAGE>
EXHIBIT 13. THE ANNUAL REPORT TO SHAREHOLDERS OF THE COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1996.
<TABLE>
Selected Financial Data
MetroBanCorp and Subsidiary
(in thousands, except share data)
<CAPTION>
OPERATIONS 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $4,354 $4,150 $3,556 $3,005 $2,668
Non-Interest Income 667 756 520 432 676
Provision for Loan Losses 67 367 165 247 192
Non-interest Expense 3,842 3,489 3,077 2,967 2,748
Net Income before Cumulative
Effect of Change in
Accounting for Income Taxes 624 622 481 135 404
Cumulative Effect of
Changein Accounting for
Income Taxes - - - 439 -
Net Income 624 622 481 574 404
CONSOLIDATED BALANCE SHEET DATA
- ---------------------------------------------------------------------------
Total Assets $113,383 $110,879 $90,665 $88,930 $62,308
Total Deposits 99,284 94,864 77,198 73,434 54,387
Loans, Net 64,519 59,542 55,898 48,921 44,107
Total Investment Securities 31,216 29,075 26,882 17,418 8,736
Shareholders' Equity 11,501 11,145 10,351 5,118 4,581
Weighted Average
Shares Outstanding 1,681,291 1,681,291 1,409,874 735,837 728,167
GENERAL YEAR END
- ---------------------------------------------------------------------------
Number of Employees 43 42 43 40 36
Number of Shareholders of
Record 344 364 383 269 273
Number of Shares
Outstanding 1,681,291 1,681,291 1,681,291 735,837 735,837
PER SHARE DATA
- ---------------------------------------------------------------------------
Net Income before
Cumulative Effect of Change
in Accounting for Income
Taxes per common share $0.37 $0.37 $0.34 $0.18 $0.55
Cumulative Effect of Change
in Accounting for
Income Taxes per
common share - - - 0.60 -
Net Income Per Share 0.37 0.37 0.34 0.78 0.55
Cash Dividends Per Share 0.20 0.10 - - -
SELECTED PERFORMANCE RATIOS
- --------------------------------------------------------------------------
Return on Average Assets 0.60% 0.64% 0.55% 0.77% 0.65%
Return on Average Equity 5.51% 5.71% 5.36% 10.80% 9.20%
Average Shareholders'
Equity to Average Assets 10.82% 11.23% 10.24% 7.13% 7.11%
</TABLE>
page 17
<PAGE>
The following information is intended to provide an analysis of
the consolidated financial condition and performance of Metro as
of December 31, 1996 and 1995 and for each of the three years
ended December 31, 1996, 1995 and 1994. This information should
be read in conjunction with the Consolidated Financial Statements
and footnotes included elsewhere in this Annual Report.
RESULTS OF OPERATIONS
Net Income
Net income in 1996 was $624,000, a slight increase from the
$622,000 reported in 1995. Total loans amounted to $65.4 million
and $60.5 million at December 31, 1996 and 1995, respectively.
The investment portfolio amounted to $31.2 million and $29.1
million at December 31, 1996 and 1995, respectively. The
growth in these two asset groups increased interest income by
$540,000 or 7.5 percent for the year. The Bank provided
provisions of $67,000 to its loan loss reserve for 1996. This
expense represents a $300,000 decrease from 1995 loan loss
provisions or an 81.7 percent decrease. The provisions made in
1996 were at a level considered necessary by management to absorb
estimated losses in the loan portfolio and is based upon an
assessment of the adequacy of the Bank's loan loss reserve
account.
The increase in net income of $141,000 or 29.3 percent in 1995
compared to 1994 is primarily attributable to the increase in
loan and investment securities during 1995. During 1995, Metro's
total loans outstanding increased by $4.0 million or 7.0 percent.
During that same period the investment portfolio increased $2.2
million or 8.2 percent. These increases allowed interest income
to increase by $1.4 million or 23.4 percent during 1995.
Net Interest Income
Net interest income is the principal source of the Bank's
earnings and represents the difference between interest and fees
on earning assets earned the Bank and the interest cost of
deposits and other borrowed funds paid by the Bank. The net
interest margin is the difference expressed as a percentage of
average earning assets. Factors contributing to the
determination of net interest margin include the volume and mix
of earning assets and interest rates. The Bank can control the
effects of some of these factors through its management of credit
extension and interest rate sensitivity, both of which are
discussed later. External factors such as the overall condition
of the economy, strength of credit demand and Federal Reserve
monetary policy can have significant effects on the changes in
net interest income from one period to another.
In 1996, net interest income was $4.4 million, an increase of 4.9
percent over 1995. In 1996, the net interest margin remained
stable at 4.5 percent of average earning assets compared to 4.6
percent in 1995. This decrease is primarily a result of the
bank's investment portfolio continuing to reprice downward as
several securities in the investment portfolio ended their
initial coupon period and have begun to earn interest based on
current interest rate indices.
In 1995, net interest income was $4.2 million, an increase of
16.7 percent over 1994. This increase resulted from the growth
of average balances in interest earning assets and interest
bearing liabilities, and from the Bank's continued efforts to
restructure its earning asset composition from lower yielding
federal funds sold and guaranteed student loans to higher
yielding commercial and installment loans. As a result of these
effects, the net interest margin increased to 4.6 percent from
4.4 percent in 1994.
page 18
<PAGE>
<TABLE>
Net Interest Income
(dollars in thousands)
<CAPTION>
Percentage Change
-----------------
For year ended 1996 1995
December 31, to to
INTEREST INCOME 1996 1995 1994 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest and
Fees on Loans $6,130 $5,707 $4,457 7.4% 28.0%
Interest on Invest-
ment Securities 1,600 1,483 1,369 7.9% 8.3%
Interest on Federal
Funds Sold 143 217 163 (34.1%) 33.1%
------------------------ ----------------
Total Interest Income 7,873 7,407 5,989 6.3% 23.7%
------------------------ ----------------
INTEREST EXPENSE
Interest on Deposits 3,496 3,229 2,419 8.3% 33.5%
Interest on
Borrowings 23 28 14 (17.9%) 100%
------------------------ ----------------
Total Interest
Expense 3,519 3,257 2,433 8.0% 33.9%
------------------------ ----------------
Net Interest Income $4,354 $4,150 $3,556 4.9% 16.7%
</TABLE>
<TABLE>
Rate/Volume Analysis of Change in Net Income
(dollars in thousands)
<CAPTION>
1996 vs. 1995 1995 vs. 1994
--------------- ---------------
Attributable to Attributable to
--------------------- --------------------
Dollar Dollar
Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest and Fee Income on:
Loans $423 $407 $16 $1,250 $521 $729
Investment Securities 117 180 (63) 114 (10) 124
Federal Funds Sold (74) (51) (23) 54 90 (36)
--------------------- ---------------------
Total Interest Income 466 536 (70) 1,418 601 817
Interest Expense on:
Savings and Time Deposits 267 242 25 810 529 281
Term Borrowing (5) (21) 16 14 (8) 22
--------------------- --------------------
Total Interest Expense 262 221 41 824 521 303
--------------------- --------------------
Net Interest Income(1) $204 $315 ($111) $594 $80 $514
===================== ====================
(1) Interest on non-accruing loans is not included.
</TABLE>
page 19
<PAGE>
<TABLE>
Distribution of Assets, Liabilities and Shareholders'Equity
and Interest Rates and Differential Variance Analysis
(dollars in thousands)
<CAPTION>
for year ended December 31,
--------------------------------------------------------------
1996 | 1995 | 1994
--------------------|---------------------|-------------------
Average| In- |Yield|Average| In- |Yield |Average| In- |Yield
Balance|terest|/Rate|Balance|terest|/Rate |Balance|terest|/Rate
-------|------|-----|-------|------|------|-------|------|----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS | | | | | | | |
Earning | | | | | | | |
Assets: | | | | | | | |
| | | | | | | |
Investment | | | | | | | |
Securities $30,318|$1,600|5.28%|$26,918|$1,483| 5.51%|$24,665|$1,369|5.55%
| | | | | | | |
Federal | | | | | | | |
Funds Sold 2,669| 143|5.36%| 3,619| 217| 6.00%| 4,215| 163|3.87%
| | | | | | | |
Loans, net(2) 63,319| 6,130|9.68%| 59,115| 5,707| 9.65%| 51,563| 4,457|8.64%
-------|------|-----|-------|------|------|-------|------|----
Total Earning | | | | | | | |
Assets $96,306|$7,873|8.17%|$89,652|$7,407| 8.26%|$80,443|$5,989|7.45%
|------|-----| |------|------| |------|----
Non-Earning | | | | | | | |
Assets | | | | | | | |
| | | | | | | |
Cash & Due | | | | | | | |
from Banks 4,453| | | 4,783| | | 5,124| |
| | | | | | | |
Premises & | | | | | | | |
Equipment, | | | | | | | |
net 1,996| | | 1,736| | | 1,183| |
| | | | | | | |
Other Assets 1,906| | | 896| | | 889| |
--------| | |-------| | |-------| |
Total Assets $104,661| | |$97,067| | |$87,639| |
========| | |=======| | |=======| |
| | | | | | | |
Liabilities | | | | | | | |
and | | | | | | | |
Shareholders' | | | | | | | |
Equity | | | | | | | |
--------|------|-----|-------|------|------|-------|------|-----
Interest Bearing | | | | | | | |
Liabilities: | | | | | | | |
Savings & | | | | | | | |
Time Deposits $75,597|$3,496|4.62%|$70,328|$3,229| 4.59%|$64,208|$2,419|3.77%
|------|-----| |------|------| |------|-----
| | | | | | | |
Term | | | | | | | |
Borrowing 271| 23|8.49%| 519| 28| 5.39%| 309| 14|4.53%
| | | | | | | |
Total Interest | | | | | | | |
Bearing | | | | | | | |
Liabilities $75,868|$3,519|4.64%|$70,847|$3,257| 4.60%|$64,517|$2,433|3.77%
| | | | | | | |
| | | | | | | |
Non-Interest | | | | | | | |
Bearing | | | | | | | |
Liabilities: | | | | | | | |
| | | | | | | |
Demand | | | | | | | |
Deposits 16,443| | | 14,897| | | 13,385| |
| | | | | | | |
Other | | | | | | | |
Liabilities 1,027| | | 424| | | 763| |
| | | | | | | |
Shareholders' | | | | | | | |
Equity 11,323| | | 10,899| | | 8,974| |
--------| | |-------| | |-------| |
Total | | | | | | | |
Liabilities | | | | | | | |
and | | | | | | | |
Shareholders' | | | | | | | |
Equity $104,661| | |$97,067| | |$87,639| |
========|------|-----|=======|------|------|=======|------|-----
Net Interest | | | | | | | |
Margin |$4,354|4.52%| |$4,150| 4.63%| |$3,556|4.42%
|======|=====| |======|======| |======|=====
(2) Includes principal balances of non-accuring loans. Interest on
non-accruing loans is not included.
</TABLE>
page 20
<PAGE>
Provision for Loan Losses
The Bank provides for possible loan losses through regular
provisions to the allowance for loan losses. The provisions are
made at a level which is considered necessary by management to
absorb estimated losses in the loan portfolio. A detailed
evaluation of the estimated losses along with an assessment of
the adequacy of the loan loss reserve is completed quarterly by
management. The evaluation includes, but is not limited to,
analysis of risk classification, past due status, historical
write-off experience, type of loan, collateral and other
significant factors as management deems necessary.
The provision for loan losses amounted to $67,000, $367,000 and
$165,000 in 1996, 1995 and 1994, respectively. At December 31,
1996 and 1995, the Bank had an allowance for loan losses of
$866,000 and $910,000, respectively. The Bank's allowance for
loan losses to ending total loans, as a percentage, amounted to
1.32 percent and 1.50 percent at December 31, 1996 and 1995,
respectively. This decrease reflects continued low levels of
under-performing assets and a general improvement in the
condition of the Bank's loan portfolio.
Based upon management's assessment of the guaranteed nature of
its student loan portfolio, including the strength of the
guarantor, a minimal amount of loan loss is allocated for the
Bank's student loan portfolio. See "Loan Quality" discussed
herein after. The allowance for loan losses as a percentage
of the remaining loan portfolio (excluding guaranteed student
loans) amounted to 1.55 percent at December 31, 1996, as compared
to 1.92 percent at December 31, 1995.
During 1995, the Bank initiated two new lending programs; first,
the Bank instituted a new indirect lending program with several
retailers in its marketplace. Second, the Bank deployed three
Automated Loan Machines (ALMs) in its market area, which allow
the user to apply for and, if approved, receive an unsecured
installment loan up to a maximum loan amount of $5,000. The
Bank's ALMs were added in late 1995 and have had little effect on
the loan portfolio. Additionally, the Bank added several
commercial loan officers to increase the Bank's lending volume.
In connection with these new lending programs, management
continues to maintain comparable underwriting standards.
Management's analysis of the loan loss reserve considered these
factors.
Non-Interest Income
In 1996, Metro's non-interest income to average total assets
ratio decreased to 0.64 percent from 0.78 percent in 1995 and
0.59 percent in 1994. Excluding net securities losses and gain
on the sale of real estate, non-interest income was $644,000,
$754,000 and $520,000 in 1996, 1995 and 1994, respectively.
Service charges on deposit accounts decreased 2.3 percent while
other service charges, commissions and fees decreased $103,000 or
23.1 percent in 1996. This decrease is principally due to a
reduced volume of mortgage loan applications processed by the
Bank's Mortgage Loan Division.
page 21
<PAGE>
<TABLE>
Non-Interest Income
(dollars in thousands)
<CAPTION>
Percent
For year ended Change From
December 31, 1996 1995
------------------ to to
1996 1995 1994 1995 1994
------------------ ------------------
<S> <C> <C> <C> <C> <C>
Service Charges on
Deposit Accounts $302 $309 $330 (2.27%) (6.36%)
Other Service Charges,
Commissions and Fees 342 445 190 (23.15%) 134.21%
------------------ ------------------
644 754 520 (14.59%) 45.00%
Securities-Gain/(Loss), Net (12) 2 - (700.00%) -
Gain on Sale of Real Estate 35 - - - -
------------------ ------------------
Total Non-Interest Income $667 $756 $520 (11.77%) 45.38%
================== ==================
</TABLE>
Non-Interest Expense
Non-interest expense increased $353,000 or 10.1 percent in 1996
over the 1995 level. As a percentage of total average assets,
this category was 3.7 percent in 1996 compared to 3.6 percent in
1995 and 3.5 percent in 1994. Salary and employee benefits, the
largest non-interest expense, increased $98,000 or 6.6 percent in
1996. This increase reflects both an increase in the Bank's
employee base, higher employee compensation and benefit costs,
and new staff additions during the year. Also, the Bank's other
expenses increased $255,000 or 12.7 percent for the year ended
December 31, 1996. This increase is primarily attributable to
the Bank's efforts to automate the delivery of its products and
services through the use of its Automated Branch, ALMs, and
numerous off-site ATMs.
During the fourth quarter of 1995, the Bank opened its first
Automated Branch in Carmel, Indiana. This branch can perform
most functions of a traditional branch through the use of an ATM,
ALM and customer kiosk . In addition to the ALM located at the
automated branch, the Bank also operates two other ALMs located
in a jewelry store and at the Bank's Noblesville Ninth Street
branch.
Also during 1995 and 1996, Metro developed an extensive off-
premise ATM network. Metro entered into agreements with several
area convenience store franchises to deploy ATMs in their
facilities. As of December 31, 1995, three new off-premise ATMs
had been deployed. During 1996, Metro deployed an additional ten
ATMs. Currently, the Bank disburses cash at these sites and
intends to include coupons and other paper based products in the
future.
During 1996, Metro's legal and professional services expense
increased to $137,000 from $132,000 in 1995. Also, during 1996
the Bank's student loan servicing fees decreased from $133,000 in
1995 to $108,000 in 1996. This decrease is primarily
attributable to the Bank's efforts to decrease its student loan
servicing fees through student loan sales and swapping of certain
student loans with the guarantor.
In 1996, the Bank's advertising and public relations expense
decreased by $42,000 or 15.4 percent, from the previous year.
This decrease is primarily due to a reduced number of television
and radio commercials for the Bank during 1996.
page 22
<PAGE>
In 1996, the Bank's FDIC insurance assessment increased by 60.7
percent or $71,000. This increase is due principally to the
recognition of a one time recapitalization charge on the Savings
Association Insurance Fund (SAIF) of $134,000 incurred during
the third quarter. The Bank currently has $26.3 million or 26.5
percent of its deposits insured by the Savings Association
Insurance Fund (SAIF).
Non-interest expense increased $412,000 or 13.39 percent in 1995
over the 1994 level. Salaries and employee benefits, the largest
non-interest expense, increased $183,000 or 14.18 percent from
1994. This increase reflected an increase in the Bank's employee
base and higher employee compensation and benefit costs.
Equipment expense increased $103,000 or 52.55 percent from 1995.
This increase was due to increased operating expense of the
Bank's off-site ATMs and ALMs implemented in late 1995 and during
1996.
During 1995, advertising and public relations expense increased
$46,000 or 20.35 percent from 1994. This increase was due
primarily to increased television and radio commercials during
1995.
During 1995, the FDIC insurance assessment decreased $46,000 or
28.2 percent from 1994. This decrease was due primarily to a
reduced premium rate on Bank deposits insured with the FDIC
during the fourth quarter of 1995.
<TABLE>
Non-Interest Expense
(dollars in thousands)
<CAPTION>
For year ended
December 31, Percent Change From
---------------------- 1996 to 1995 to
1996 1995 1994 1995 1994
---------------------- ------------------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits. $1,572 $1,474 $1,291 6.65% 14.18%
Net Occupancy Expense.......... 265 195 197 35.90% (1.02%)
Equipment Expense.............. 299 196 187 52.55% 4.81%
Advertising and
Public Relations........... 230 272 226 (15.44%) 20.35%
Legal and Professional Services 137 132 79 3.79% 67.09%
Data Processing................ 238 179 162 32.96% 10.49%
FDIC Insurance Assessment...... 188 117 163 60.68% (28.22%)
Student Loan Servicing Fees.... 108 133 164 (18.80%) (18.90%)
Amortization of Core
Deposit Intangible......... 141 141 141 0.00% 0.00%
Other.......................... 664 650 467 2.15% 39.19%
----------------------- ------------------
Total $3,842 $3,489 $3,077 10.12% 13.39%
======================= ==================
</TABLE>
Provision for Income Taxes
Metro provides for income taxes under the liability method of
accounting for income taxes. Effective January 1, 1993, Metro
adopted the provisions of SFAS 109, "Accounting for Income
Taxes." Metro's provision for income taxes of $488,000 represents
an effective tax rate of 43.9 percent in 1996. This compared to
an effective tax rate of 40.8 percent in 1995 and 42.3 percent in
1994.
Details relative to Metro's income tax provisions are discussed
in Note 10 to the Consolidated Financial Statements included in
this Annual Report.
page 23
<PAGE>
CAPITAL RESOURCES AND CAPITAL ADEQUACY
Metro is subject to various capital requirements administered by
the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on Metro's
financial statements. Under federal capital adequacy guidelines
and the regulatory framework for prompt corrective action, Metro
must meet specific capital guidelines that involve quantitative
measures of Metro's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices.
Metro's capital amounts and classification are also subject to
qualitative judgments by regulators involving capital components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Metro to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets, and Tier 1 capital to average assets.
Management believes, as of December 31, 1996, that Metro meets
all capital adequacy requirements to which it is subject. The
following table sets forth the actual and minimum capital amounts
and ratios of Metro and the Bank as of December 31, 1996 (dollars
in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted
Assets)
Consolidated $12,150 17.77% $5,570 *8.00% $6,838 *10.00%
Bank 8,514 12.61% 5,404 *8.00% 6,755 *10.00%
Tier 1 Capital
(to Risk Weighted
Assets)
Consolidated 11,295 16.52% 2,735 *4.00% 4,103 * 6.00%
Bank 7,670 11.35% 2,702 *4.00% 4,053 * 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated 11,295 10.79% 4,186 *4.00% 5,233 * 5.00%
Bank 7,670 7.58% 4,046 *4.00% 5,058 * 5.00%
--------------- ---------------- ------------------
* greater than or equal to.
</TABLE>
As of December 31, 1996, the most recent notification from the
FDIC categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be
categorized as "well capitalized", the Bank must maintain minimum
total risk-weighted, Tier 1 and leverage ratios as set forth in
the table. There are no conditions or events since this
notification that management believes have changed its or the
Bank's capital category.
page 24
<PAGE>
USE OF FUNDS
Investment Securities
Investment securities is the second major category of earning
assets for the Bank. This portfolio, together with Federal Funds
Sold, is used to manage the Bank's interest rate sensitivity and
liquidity as other components of the balance sheet change.
Management's objective is to maximize, within quality standards,
its net interest margin while providing a stable source of
liquidity through the scheduled stream of maturities and interest
income.
Metro holds certain of its investment securities as "available
for sale." Unrealized gains and losses, net of taxes, are
excluded from earnings and reported as a net amount in a separate
component of shareholders' equity until realized. Metro
reclassified, at December 31, 1995, $3.8 million of " held to
maturity" securities as "available for sale." The
reclassification had no impact on Metro's earnings, but allows
additional flexibility to adapt as interest rates change.
Metro has the intent and ability to hold securities classified as
held to maturity until their respective maturities. Accordingly,
such securities are stated at cost and are adjusted for
amortization of premiums and accretion of discounts.
Realized gains or losses from the sale of securities are
reflected in income on a specific identification basis. Interest
income and the amortization of the premium and discount arising
at the time of acquisition are included in income.
Investment securities comprise 32.6 percent of total earning
assets at December 31, 1996. The "held to maturity" portfolio is
managed to provide a stable source of liquidity through scheduled
maturities and interest income payments. The "available for
sale" portfolio is managed to maximize investment yields and to
provide liquidity to react timely to the needs of the Bank.
During 1996, proceeds from investment securities consisted of
four sales totaling $4.0 million and scheduled maturing
investments.
Total investment securities at December 31, 1996 increased by
$2.1 million or 7.4 percent over the prior year. This increase
is attributable to funds received from several sources, including
the liquidation of guaranteed student loans and the overall
increase in the Bank's core deposit base.
Weighted average yields of the investment securities portfolio
were 5.54 percent in 1996 and 5.20 percent in 1995.
Investment securities consist primarily of U.S. government
agency and corporation bonds, derivative securities with both
fixed and indexed interest rates, and mortgage backed securities
with both fixed and floating interest rates. The derivative
securities are subject to interest rate risk due to their dual
index feature and are comprised of deleveraged bonds and
structured agency and corporation notes. At December 31, 1996,
the derivative securities amounted to $9.5 million classified as
held to maturity and $2.9 million included in available for sale
securities. Although these securities' current market values are
below cost, Metro does not believe these securities to be other
than temporarily impaired due to the creditworthiness of the
issuers (primarily the Federal Home Loan Bank), the shorter term
maturities of the notes (approximately three years), current
interest rate yields of the securities and Metro's intent and
ability to hold such securities to maturity. The mortgage backed
securities are subject to both prepayment and interest rate risk
and have been classified primarily as available for sale.
Federal funds sold amounted to $6.3 million at December 31, 1996
compared to $6.7 million at December 31, 1995, a decrease of
$400,000 from year-end 1995. This decrease is attributable to
the Bank's daily fluctuations in cash and liquidity requirements.
page 25
<PAGE>
<TABLE>
Investment Securities Portfolio
(dollars in thousands)
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Investment Securities Held to
Maturity
Mortgage Backed Securities $94 $2 $- $96
U.S. Government Agencies and
Corporations 9,462 - (549) 8,913
Time Deposits 500 - - 500
--------- --------- ---------- --------
$10,056 $2 ($549) $9,509
========= ========= ========== ========
Investment Securities Available
For Sale
Mortgage-Backed Securities $15,913 $51 ($129) $15,835
U.S. Government Agencies and
Corporations 5,401 - (76) 5,325
--------- --------- ---------- -------
$21,314 $51 ($205) $21,160
========= ========= ========== =======
DECEMBER 31, 1995
Investment Securities Held to
Maturity
Mortgage-Backed Securities $328 $5 $- $333
U.S. Government Agencies and
Corporations 9,438 - (753) 8,685
Time Deposits 500 - - 500
-------- --------- --------- --------
$10,266 $5 ($753) $9,518
======== ========= ========= ========
Investment Securities Available
For Sale
Mortgage-Backed Securities $9,466 $30 ($148) $9,348
U.S. Treasury Security and
Obligations of U.S. Government
Agencies and Corporations 9,599 17 (155) 9,461
--------- -------- --------- ---------
$19,065 $47 ($303) $18,809
========= ======== ========= =========
</TABLE>
page 26
<PAGE>
<TABLE>
Maturity Distribution of Investment Securities
(dollars in thousands)
<CAPTION>
As of December 31, 1996
------------------------------------
Held to Available
Maturity for Sale
-------------- ---------------
Fair Fair
Market Market
Cost Value Cost Value
---- ------ ---- ------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities
- ----------------------------
Due within one Year $49 $50 $- $-
1 - 5 Years 45 46 2,169 2,175
6 - 10 Years - - 2,401 2,348
Due After 10 Years - - 11,343 11,312
---- ------ ------- -------
Total $94 $96 $15,913 $15,835
==== ====== ======= =======
U.S. Government Agencies and
Corporations
- ----------------------------
Due within One Year $ - $ - $400 $400
1 - 5 Years 7,962 7,623 5,001 4,925
6 - 10 Years 1,500 1,290 - -
Due After 10 Years - - - -
------ ------ ------ ------
Total $9,462 $8,913 $5,401 $5,325
====== ====== ====== ======
Time Deposits
- ----------------------------
Due within One Year $500 $500 $ - $ -
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1995
--------------------------------------
Held to Available
Maturity for Sale
---------------- ----------------
Fair Fair
Market Market
Cost Value Cost Value
---- ------ ---- ------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities
- --------------------------
Due within One Year $198 $199 $ - $ -
1 - 5 Years - - - -
6 - 10 Years 130 134 1,759 1,734
Due After 10 Years $ - $ - 7,707 7,614
---- ---- ------ ------
Total $328 $333 $9,466 $9,348
==== ==== ====== ======
U.S. Treasury Security and
Obligations of U.S. Government
and Corporations
- ------------------------------
Due within One Year $ - $ - $1,999 $1,998
1 - 5 Years 7,938 7,394 6,611 6,458
6 - 10 Years 1,500 1,291 - -
Due After 10 Years - - 989 1,005
------ ------ ------ ------
Total $9,438 $8,685 $9,599 $9,461
====== ====== ====== ======
Time Deposit
- -----------------------------
Due within One Year $500 $500 $ - $ -
====== ====== ====== =====
</TABLE>
page 27
<PAGE>
<TABLE>
Investment Securities Weighted Average Yield
<CAPTION>
Due 1 to Less 5 to Less Due
within than 5 than 10 After
One Years Years 10
Year Years Overall
------ --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
1996 6.24% 4.87% 5.40% 6.62% 5.54%
1995 5.75% 4.30% 5.08% 6.61% 5.20%
</TABLE>
Loans
Total loans increased by 8.2 percent to $65.4 million at
December 31, 1996 from the prior year. The increase is due to
the growth of both the commercial portfolio and the installment
portfolio, which grew in 1996 by 12.7 percent and 20.3 percent,
respectively. The Bank continued to make a concerted effort
during the year to increase its commercial and installment loan
portfolio through the use of an extensive loan officer calling
program aimed at the Bank's target market. During 1996, the Bank
increased the installment loan portfolio by expanding its
indirect lending relationship through a local window
manufacturer. Throughout 1996, the Bank sold approximately $1.2
million of its guaranteed student loan portfolio to Secondary
Market Services, Inc., an affiliate of USA Group. The primary
reason for this transaction was to provide the Bank with
additional cash to fund its internally generated loan growth.
The Bank's growth in commercial and other loans is centered
around short- and intermediate-term maturities. The bank has
maintained a competitive approach toward high quality loans in
its marketplace. The Bank's loan portfolio is well diversified
with no significant concentration of loans in any single
industry. While Guaranteed Student Loans (GSLs) account for 14.7
percent of the Bank's loan portfolio at December 31, 1996, these
loans are comprised of approximately 6,700 notes made to nearly
1,700 borrowers who are geographically dispersed throughout the
United States. These loans are serviced and guaranteed pursuant
to the Higher Education Act of 1965, as amended ("HEA"), by USA
Group Loan Services and USA Funds, respectively, affiliates of
USA Group.
<TABLE>
Loan Portfolio at Year-End
(dollars in thousands)
<CAPTION>
Percent
change from
December 31, 1995 1994
to to
1996 1995 1994 1996 1995
------------------------- --------------
<S> <C> <C> <C> <C> <C>
Commercial $35,064 $31,122 $25,950 12.7% 19.9%
Real Estate -
Construction 3,970 2,251 2,208 76.4% 1.9%
Mortgage 787 838 1,022 (6.1%) (18.0%)
Installment 15,933 13,242 9,748 20.3% 35.8%
Student Loans 9,631 12,999 17,556 (25.9%) (26.0%)
------------------------- ---------------
Total Loans 65,385 60,452 56,484 8.2% 7.0%
===============
Less: Allowance for
Loan Losses (866) (910) (586)
-------------------------
Net Loans $64,519 $59,542 $55,898
=========================
</TABLE>
The Bank's loan portfolio is comprised primarily of commercial
and installment loans. At December 31, 1996, the Bank did not
have any significant outstanding loan concentration in similar
industries that could cause an adverse impact during an economic
downturn in any one industry segment.
page 28
<PAGE>
<TABLE>
Composition of Loan Portfolio by Type
<CAPTION>
December 31,
-----------------------
1996 1995 1994
-----------------------
<S> <C> <C> <C>
Commercial 53.6% 51.5% 45.9%
Real Estate -
Construction 6.1% 3.7% 3.9%
Mortgage 1.2% 1.4% 1.8%
Installment 24.4% 21.9% 17.3%
Student Loans 14.7% 21.5% 31.1%
-----------------------
</TABLE>
Loan Quality
The primary responsibility and accountability for the day-to-day
lending activities of the Bank rest with each loan officer. Bank
management has established specific lending authority for each
loan officer based upon the loan officer's experience and
performance. The Bank also has a management loan committee and a
director loan committee which meet weekly and semi-monthly,
respectively. These committees provide for continuous
communication through the collective knowledge, judgment and
experience of its members. Additionally, they offer valuable
input to lending personnel, act as a loan approval body and
monitor the overall quality of the Bank's loan portfolio.
The Bank maintains a comprehensive loan review program. The
purpose of the program is to evaluate credit quality and loan
documentation. Bank management uses this program to evaluate the
loan portfolio against its credit quality standards and its
assessment of the adequacy of the allowance for loan losses.
The Bank's Board of Directors meets monthly to review and approve
the activity of the loan committees. Additionally, the Bank's
Board reviews all problem loans and delinquency reports at each
Board meeting.
The Bank utilizes a risk system whereby each commercial,
financial, real estate-construction, mortgage and installment
loan is assigned a risk rating, with the individual ratings
monitored on an ongoing basis. Each week, reports of problem
loans are prepared and reviewed by the Bank's loan committees.
In addition to under-performing loans, these reports include
loans where a customer's cash flow or net worth may be
insufficient with regard to loan repayment, loans which have been
criticized in a regulatory examination and any other loans where
either the ultimate collectibility of the loan is in question or
the loan has characteristics requiring special monitoring.
Assets considered to be under-performing are monitored closely by
Bank management. Under-performing assets are defined as: 1) non-
accrual loans where the ultimate collectibility of interest is
uncertain, but the principal is considered collectible; 2) loans
past due ninety days or more as to principal or interest; 3)
loans which have been renegotiated to provide a reduction or
deferral of interest or principal because of deterioration in the
financial condition of the borrower; and 4) other real estate
owned.
Metro adopted the Statement of Financial Accounting Standard No.
114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement of Financial Accounting Standard No. 118, on
January 1, 1995. As of December 31, 1996, Metro had investments
in loans which were impaired in accordance with SFAS No's. 114
and 118 of $157,000. Of this amount, $148,000 had no related
specific allowance. The remaining $9,000 of impaired loans were
fully reserved.
The Bank's policy for recognizing income on impaired loans is to
accrue interest until a loan is classified as impaired. For
loans which receive the classification of impaired during the
current period, interest accrued to date is charged against
current earnings. No interest is accrued after any loan is
classified impaired. All payments received for loans which are
classified as impaired are utilized to reduce the principal
balance outstanding. Interest income of $28,000 would have been
recorded in 1996 on impaired loans if such loans had been
accruing interest throughout the year in accordance with their
original terms. In 1996, interest income in the amount of
$10,000 was recorded on impaired loans prior to being classified
as impaired. The average balance of impaired loans was $161,000
at December 31, 1996.
page 29
<PAGE>
Loans are charged off when they are deemed uncollectible. Total
charged-off loans, net of recoveries, were $111,000 in 1996,
compared to $43,000 in 1995 and $29,000 in 1994.
The following tables present activity in the allowance for loan
losses account and allocation of the allowance among loan
categories:
<TABLE>
Allowance for Loan Losses
(dollars in thousands)
<CAPTION>
For year ended December 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Allowance for Loan Losses,
January 1, $910 $586
---- ----
Loans Charged Off:
Commercial 48 28
Installment 71 26
---- ----
Total Charge-Off 119 54
---- ----
Recoveries on Charged-Off Loans:
Commercial 7 1
Installment 1 10
---- ----
Total Recoveries 8 11
---- ----
Net Charge-Off 111 43
---- ----
Provision for Loan Losses 67 367
---- ----
Allowance for Loan Losses,
December 31 $866 $910
---- ----
Average Loans Outstanding $64,224 $59,115
======= =======
Net Charge-Off to Average Loans 0.17% 0.07%
======= =======
</TABLE>
<TABLE>
Allocation of Allowance for Loan Losses
(dollars in thousands)
<CAPTION>
December 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Commercial $532 $590
Real Estate -
Construction 60 38
Mortgage 5 17
Installment 263 259
Student Loans 6 6
---- ----
Total $866 $910
==== ====
</TABLE>
page 30
<PAGE>
The student loan portfolio is fully guaranteed by a third party
for all loans which were first disbursed prior to October 1,
1993. For those loans disbursed on or after October 1, 1993 (or
consolidated on or after that date), the guarantee is 98 percent
of the principal and interest due, provided that the lender did
not incur violations sufficient to cause the assessment of an
interest penalty or the loss of guarantee on the loan. All
guaranteed student loans are re-insured in various amounts by the
federal government. As of December 31, 1996, approximately
$704,000 or 7.31 percent of the Bank's student loan portfolio was
disbursed after October 1, 1993.
<TABLE>
Under-Performing Assets
(dollars in thousands)
<CAPTION>
December 31,
---------------
1996 1995
---------------
<S> <C> <C>
Non-Accruing Loans $157 $37
Renegotiated Loans - -
Ninety (90) Days Past Due 445 792
--------------
Total Under-Performing Assets $602 $829
==============
Under-Performing Assets as a
Percentage of Total Loans 0.92% 1.37%
Past Due Loans (90 Days or More)
Commercial $- $-
Real Estate - Construction - -
Mortgage - -
Installment - -
Student Loans 445 792
--------------
Total $445 $792
==============
</TABLE>
In addition to the loans classified as under-performing, managment is closely
monitoring loans approximately $31,000 as of December 31, 1996 for the
borrowers' ability to continue to comply with contractual terms. For these
loans, the existing conditions do not warrant either a partial charge-off or
classification as non-accrual. Management believes it has taken a
conservative approach in its evaluation of under-performing credits and the
loan portfolio in general, both in acknowledging the general condition of the
portfolio and in establishing the allowance for loan losses.
page 31
<PAGE>
SOURCES OF FUNDS
The Bank's primary funding source is its base of core customer deposits, which
includes non-interest bearing demand deposits, regular savings and money
market accounts, and small denomination (under $100,000) certificates of
deposit. Other shorter term sources of funds are large denomimation
certificates of deposit and securites sold under agreements to repurchase.
The following table represents information with respect to average balances
of these funding sources.
<TABLE>
Funding Sources-Average Balances
(dollars in thousands)
<CAPTION>
Percent
Change from
For year ended -----------------
December 31, 1995 1994
--------------------------- to to
1996 1995 1994 1996 1995
--------------------------- -----------------
<S> <C> <C> <C> <C> <C>
Core Deposits:
Non-Interest Bearing Demand $16,443 $13,767 $13,664 19.44% .75%
Savings Accounts 5,764 5,686 5,727 1.37% (.72%)
Money Market and NOW Accounts 28,760 25,164 22,123 14.29% 13.75%
Other Time Deposits 29,652 30,226 28,868 (1.90%) 4.70%
--------------------------- -----------------
Total Core Deposits $80,619 $74,843 $70,382 7.72% 6.34%
--------------------------- -----------------
Time Deposits of
$100,000 and Over $11,464 $9,278 $7,491 23.56% 23.86%
Federal Funds Purchased
and Securities Sold under
Agreements to Repurchase 194 533 114 (63.60%) 367.54%
--------------------------- -----------------
Total Funding Sources $92,277 $84,654 $77,987 9.00% 8.55%
=========================== =================
</TABLE>
<TABLE>
Funding Sources - Yields
<CAPTION>
Percent
Change from
For year ended ----------------
December 31, 1995 1994
--------------------------- to to
1996 1995 1994 1996 1995
--------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Core Deposits:
Non-Interest Bearing Demand - - - - -
Savings Accounts 2.77% 3.21% 2.83% (13.71%) 13.43%
Money Markets & NOW Accounts 3.40% 3.30% 2.53% 3.03% 30.43%
Other Time Deposits 5.76% 5.65% 4.69% 1.95% 20.47%
--------------------------- -----------------
Total Core Deposits 4.64% 4.61% 3.78% .65% 21.96%
--------------------------- -----------------
Federal Funds Purchased and
Securities Sold under
Agreements to Repurchase 4.88% 5.40% 3.17% (9.63%) 70.35%
--------------------------- -----------------
Total Yield 4.64% 4.62% 3.78% .43% 22.22%
=========================== =================
</TABLE>
The Bank's average core deposits have shown steady growth over
the past several years, increasing by $2.8 million or 3.6 percent
in 1996 compared 10.6 percent in 1995. During 1996, the Bank
experienced increases in all categories of average deposits. The
daily average balance of savings, money market and NOW accounts
and certificates of deposit increased 4.6 percent during 1996.
page 32
<PAGE>
No one category of deposits dominated the growth experienced by
the Bank. This growth was generated primarily by the Bank's loan
calling program which produced a number of new commercial
deposits. Also, the Bank continues to service a number of bank
accounts which relate to the real estate title services industry.
Due to the nature of the title services industry, these deposits
are short-term and usually deposited in the Bank during the last
week of each month and withdrawn during the first week of the
following month. This typically increases the Bank's deposits at
the end of each month.
<TABLE>
Certificates of Deposit of $100,000 and Over
(dollars in thousands)
<CAPTION>
Year 91 - 181 - Beyond
End 1 - 90 180 366 1 Year
Balance Days Days Days
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
1996 $10,800 $1,497 $1,649 $5,435 $2,219
1995 $8,697 $2,250 $2,115 $1,410 $2,922
</TABLE>
Currently, the Bank has available separate agreements with two
regional banks which provide for the purchase of Federal funds to
meet short-term liquidity needs. The total amount of Federal
funds available to the Bank under these agreements is $2.4
million. The average balance of Federal funds purchased during
1996 was $133,000.
LIQUIDITY AND RATE SENSITIVITY
The primary function of liquidity and interest rate sensitivity
management is to provide for and assure an ongoing flow of funds
that is adequate to meet all current and future financial needs
of the Bank. Such financial needs include funding credit
commitments, satisfying deposit withdrawal requests, purchasing
property and equipment and paying operating expenses. The
funding sources of liquidity are principally the maturing assets
and short-term and long-term borrowings. The purposes of
liquidity management are to match sources of funds with
anticipated customer borrowings and withdrawals and other
obligations and to ensure a dependable funding base. Rate
sensitivity analysis places each of the Bank's balance sheet
components in its appropriate maturity category according to its
repricing frequency, thus enabling management to measure the
exposure to changes in interest rates.
The Bank's Asset/Liability and Investment Committee, which sets
forth the guidelines under which the Bank manages its deposits
and its investment and loan portfolios, is responsible for
monitoring the Bank's investment portfolio. The objective of
this committee is to provide for the maintenance of an adequate
net interest margin and adequate level of liquidity to keep the
Bank sound and profitable during all stages of an interest rate
cycle. Metro utilizes the services of an external investment
consultant and widely recognized research firm. These outside
consultants provide Metro with decision support information
necessary to monitor, analyze and track the performance of the
Bank's investment portfolio.
At December 31, 1996, $32.0 million or 49.1 percent of the loan
portfolio are fixed rate loans, excluding non-accruing loans.
Variable rate loans, excluding non-accruing loans, amounted to
$33.2 million or 50.9 percent of the loan portfolio at
December 31, 1996. Fixed and variable rate loans with a
scheduled maturity date greater than one year amounted to $27.0
million and $8.1 million, respectively, at December 31, 1996. In
the investment securities category, $17.1 million or 54.8
percent of the portfolio matures within one year. The Bank's
average loan-to-deposit ratio, another indication of liquidity,
was 69.8 percent in 1996 compared to 70.3 percent for 1995.
Management also monitors the Bank's balance between interest rate
sensitive assets and liabilities to ensure that changes in
interest rates will not adversely affect earnings. Management of
these sensitive items is important to protect the net interest
margin from adverse fluctuations in market interest rates and
assure earnings stability.
page 33
<PAGE>
Interest rate sensitivity occurs when assets and liabilities are
subject to rate and yield changes within a designated time
horizon. An interest rate sensitivity gap ("GAP") is determined
by the differential of interest-earning assets and interest-
bearing liabilities. For an institution with a negative GAP for
a given period, the amount of its interest-bearing liabilities
maturing or otherwise repricing within such period exceeds the
amount of the interest-earning assets repricing within the same
period. Accordingly, in a rising interest rate environment,
institutions with a negative GAP will generally experience
greater increases in costs of their interest-bearing liabilities
than in yields on their interest-earning assets. Conversely, the
yields on interest-earning assets of institutions with a negative
GAP will generally decrease less than the cost of their interest-
bearing liabilities during declining interest rate environments.
Changes in interest rates will generally have the opposite effect
on institutions with a positive GAP.
In the first nine years of the Bank's operations, management has
closely monitored its liquidity and interest rate sensitivity.
Management's objective in interest rate sensitivity management is
to reduce the Bank's vulnerability to future interest rate
fluctuations while providing for growth of the net interest
margin. Management's goal is to maintain a GAP ratio of rate-
sensitive assets to rate-sensitive liabilities within a range of
0.70 to 1.30 for the one year time frame.
The cumulative GAP ratio of the Bank on December 31, 1996 was
74.4 percent for expected maturities of ninety days or less and
69.4 percent for maturities of one year or less. These ratios
fall near or within the Bank's desired liquidity range for one
year. Management recognized that the Bank is within a liability
sensitive position at December 31, 1996 and will consider
strategies to maintain its desired position. Management will
continue to maximize its net interest margin while managing
interest rate risk within prudent boundaries. Based upon the
current balance sheet structure of the Bank, any future increase
in interest rates could have a negative impact on the Bank's net
interest margin and earnings. Given current economic conditions,
management expects any increase in general interest rates to have
a minimal effect on the Bank's earnings.
<TABLE>
Interest Rate Sensitivity Analysis
(dollars in thousands)
<CAPTION>
1 - 90 91 - 1 - 5 Beyond
Days 365 Years 5 Total
Days Years
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities $ - $949 $15,107 $15,160 $31,216
Federal Funds Sold 6,300 - - - 6,300
Loans (excluding non-
accruing) 26,272 11,957 15,929 11,070 65,228
------- ------- ------- ------- --------
Total Earning Assets $32,572 $12,906 $31,036 $26,230 $102,744
======= ======= ======= ======= ========
Interest-Bearing Liabilities:
Savings and Time Deposits $42,268 $21,694 $11,993 $186 $76,141
Borrowed Funds 1,500 - - - 1,500
------- ------- ------- ------- -------
Total Interest-Bearing
Liabilities $43,768 $21,694 $11,993 $186 $77,641
======= ======= ======= ======= =======
Interest Rate Sensitivity
Gap Per Period ($11,196) ($8,788) $19,043 $26,044 $25,103
Cumulative Gap ($11,196) ($19,984) ($941) $25,103 $25,103
Cumulative Ratio of Interest
Rate Sensitivity 74.4% 69.4% 98.9% 132.3% 132.3%
</TABLE>
page 34
<PAGE>
EFFECTS OF INFLATION
The assets and liabilities of a banking entity are unlike
companies with investments in inventory, plant and equipment.
Being primarily monetary in nature and, in this respect,
different from most non-financial services companies, the
performance of a bank is affected more by changes in interest
rates than by inflation.
Over the past five years, the rate of inflation has been
relatively low. As a result, the impact upon the Bank's balance
sheet and levels of income and expense has been minimal.
page 35
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and the Shareholders of MetroBanCorp:
We have audited the accompanying consolidated statement of
condition of MetroBanCorp (an Indiana Corporation) and
subsidiary as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity and cash flows, for
each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of MetroBanCorp and subsidiary as of December
31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Indianapolis, Indiana,
January 29, 1997.
page 36
<PAGE>
<TABLE>
Consolidated Statement of Condition
MetroBancorp & Subsidiary
(in thousands)
<CAPTION>
December 31,
------------------------
1996 1995
------ ------
<S> <C> <C>
ASSETS
Cash and Due from Banks........................... $7,475 $11,432
Federal Funds Sold................................ 6,300 6,650
------ ------
Total Cash and Cash Equivalents.............. 13,775 18,082
------ ------
Investment Securities Held to Maturity -
at Amortized Cost (Market Value:
1996 - $9,509 and 1995 - $9,518)................ 10,056 10,266
Investment Securities Available
for Sale - at Market Value...................... 21,160 18,809
------ ------
Total Investment Securities.................. 31,216 29,075
------ ------
Loans 65,385 60,452
Allowance for Loan Losses......................... (866) (910)
------ ------
Loans, net........................................ 64,519 59,542
------ ------
Premises and Equipment, net....................... 1,821 1,910
Accrued Interest Receivable....................... 871 953
Core Deposit Intangible, net of Accumulated
Amortization of $804 in 1996 and $664 in 1995.... 322 463
Deferred Tax Asset................................ 360 365
Other Assets...................................... 499 489
------- -------
Total Assets................................ $113,383 $110,879
======= =======
LIABILITIES
Deposits:
Non-Interest Bearing Demand......................$23,141 $17,983
Interest Bearing:
Savings and NOW Accounts..................... 35,507 37,966
Time Deposits of $100,000 and over........... 10,800 8,697
Other Time Deposits.......................... 29,836 30,218
------ ------
Total Deposits.................................... 99,284 94,864
Securities Sold Under Agreements to Repurchase.... 1,500 3,900
Accrued Interest Payable.......................... 419 466
Other Liabilities................................. 679 504
------- ------
Total Liabilities........................... 101,882 99,734
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock: 1,000,000 authorized;
none outstanding.............................. - -
Common Stock: 3,000,000 authorized;
1,681,291 Issued and Outstanding
in 1996 and 1995.............................. 11,210 11,210
Accumulated Earnings.............................. 407 119
Net Unrealized Loss on Investment
Securities Available for Sale................. (116) (184)
------ ------
Total Shareholders' Equity....................... 11,501 11,145
-------- --------
Total Liabilities and Shareholders' Equity $113,383 $110,879
======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
</TABLE>
page 37
<PAGE>
<TABLE>
Consolidated Statement of Operations
MetroBanCorp & Subsidiary
(in thousands, except share data)
<CAPTION>
Years ended December 31
-------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans.................... $6,130 $5,707 $4,457
Interest on Investment Securities............. 1,600 1,483 1,369
Interest on Federal Funds Sold................ 143 217 163
----- ----- -----
Total Interest Income........................... 7,873 7,407 5,989
----- ----- -----
INTEREST EXPENSE:
Interest on Deposits.......................... 3,496 3,229 2,419
Interest on Term Borrowings.................. 23 28 14
----- ----- -----
Total Interest Expense.......................... 3,519 3,257 2,433
----- ----- -----
Net Interest Income............................. 4,354 4,150 3,556
Provision for Loan Losses..................... 67 367 165
----- ----- -----
Net Interest Income after Provision
for Loan Losses............................. 4,287 3,783 3,391
----- ----- -----
NON-INTEREST INCOME:
Service Charges on Deposit Accounts............ 302 309 330
Net Securities Gain/(Loss)..................... (12) 2 -
Other Service Charges, Commissions and Fees.... 377 445 190
----- ----- -----
Total Non-Interest Income....................... 667 756 520
----- ----- -----
NON-INTEREST EXPENSE:
Salaries and Employee Benefits.................. 1,572 1,474 1,291
Net Occupancy Expense........................... 265 195 197
Equipment Expense............................... 299 196 187
Advertising and Public Relations................ 230 272 226
Legal and Professional Services................. 137 132 79
Data Processing................................. 238 179 162
FDIC Insurance Assessment....................... 188 117 163
Student Loan Servicing Fees..................... 108 133 164
Amortization of Core Deposit Intangible......... 141 141 141
Other........................................... 664 650 467
----- ----- -----
Total Non-Interest Expense...................... 3,842 3,489 3,077
Income Before Income Taxes...................... 1,112 1,050 834
Applicable Income Taxes...................... 488 428 353
----- ----- -----
NET INCOME...................................... $624 $622 $481
===== ===== =====
NET INCOME PER COMMON SHARE...................... $0.37 $0.37 $0.34
===== ===== =====
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,681,291 1,681,291 1,409,874
--------- --------- ---------
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
</TABLE>
page 38
<PAGE>
<TABLE>
Consolidated Statement of Cash Flows
MetroBanCorp & Subsidiary
(in thousands)
<CAPTION>
Years ended December 31,
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income......................................... $624 $622 $481
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Provision for Loan Losses...................... 67 367 165
Deferred Income Tax Provision/(Benefit)........ (62) (71) 184
Depreciation and Amortization.................. 394 293 316
Gain on Sale of Real Estate.................... (35) - -
(Gain)/Loss on Sale of Securities.............. 12 (2) -
(Increase)/Decrease in Accrued Interest
Receivable..................................... 82 (156) (64)
(Increase)/Decrease in Other Assets............ (12) (180) 15
Increase/(Decrease) in Accrued Interest Payable (47) 113 65
Increase in Other Liabilities.................. 175 141 39
- ---------------------------------------------------------------------------
Total Adjustments.................................. 574 505 720
- ---------------------------------------------------------------------------
Net Cash Flows Provided by Operating Activities.... 1,198 1,127 1,201
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities of Investment
Securities Held to Maturity................ 233 66 117
Proceeds from Maturities of Investment
Securities Available for Sale.............. 2,348 194 1,727
Proceeds from Sales of Investment
Securities Available for Sale.............. 3,954 1,588 -
Purchases of Investment Securities
Available for Sale......................... (8,563) (4,380) (12,029)
Purchase of Student Loans..................... - (2,020) (3,092)
Proceeds from Sales of Student Loans.......... 1,178 4,005 884
Proceeds from the Repayment of
Student Loans.............................. 2,190 1,002 -
Net Loans made to Customers................... (8,412) (6,264) (4,934)
Purchases of Premises and Equipment........... (526) (531) (472)
Proceeds from the Sale of Real Estate......... 409 - -
- ----------------------------------------------------------------------------
Net Cash Flows Used in Investing Activities (7,189) (6,340) (17,799)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the Issuance of Common Stock.... - - 5,239
Net Increase in Demand Deposits, NOW
and Savings Accounts....................... 2,699 14,651 3,554
Net Increase in Time Deposits................. 1,721 3,015 210
Net Increase/(Decrease) in Securities Sold
under an Agreement to Repurchase........... (2,400) 1,500 (6,600)
Repayment of Long-Term Borrowings............. - - (750)
Repayment of Short-Term Borrowings............ - - (16)
Cash Dividend Paid............................ (336) (167) -
- ----------------------------------------------------------------------------
Net Cash Flows Provided by Financing Activities 1,684 18,999 1,637
- ----------------------------------------------------------------------------
Net Increase/(Decrease) in Cash and
Cash Equivalents............................... (4,307) 13,786 (14,961)
Cash and Cash Equivalents at Beginning
of Period...................................... 18,082 4,296 19,257
- ----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period........$13,775 $18,082 $4,296
==========================
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year for Interest Expense $3,584 $3,101 $2,368
Cash Paid During the Year for Income Taxes 483 131 10
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
</TABLE>
page 39
<PAGE>
<TABLE>
Consolidated Statement of Shareholders' Equity
MetroBanCorp & Subsidiary
(in thousands, except share data)
<CAPTION>
Net
Unrealized
Gains/(Loss)
on
Investment
Accumulated Securities
Common Shares Common Earnings Available
Outstanding stock /(Deficit) for Sale Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993.. 735,837 $5,971 ($817) ($36) $5,118
Net Income................... - - 481 - 481
Issuance of Stock............ 945,454 5,436 - - 5,436
Offering Cost................ - (197) - - (197)
Net Unrealized Loss on
Investment Securities
Available for Sale........... - - - (487) (487)
- -------------------------------------------------------------------------------
Balances, December 31, 1994 1,681,291 11,210 (336) (523) 10,351
Net Income................... - - 622 - 622
Dividend Paid................ - - (167) - (167)
Net Unrealized Gain on
Investment Securities
Available for Sale........... - - - 339 339
- -------------------------------------------------------------------------------
Balances, December 31, 1995 1,681,291 11,210 119 (184) 11,145
Net Income................... - - 624 - 624
Dividend Paid................ - - (336) - (336)
Net Unrealized Gain on
Investment Securities
Available for Sale........... - - - 68 68
- -------------------------------------------------------------------------------
Balances, December 31, 1996 1,681,291 $11,210 $407 ($116) $11,501
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
</TABLE>
page 40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
METROBANCORP & SUBSIDIARY
1. BACKGROUND OF CORPORATION
MetroBanCorp ("Metro") was incorporated in the State of
Indiana in 1987 for the purpose of holding all of the shares
of common stock of MetroBank ("Bank"), an Indiana-chartered
commercial bank which commenced operations in April, 1988.
The Bank's primary market and service area is Hamilton County
and Northern Marion County, which are together considered
parts of the Northside Suburban Indianapolis metropolitan
area. The Bank's primary mission is to provide commercial
and individual banking services in the previously defined
service area.
2. SUMMARY OF ACCOUNTING AND REPORTING POLICIES
BASIS OF ACCOUNTING - The accompanying consolidated financial
statements include the accounts of Metro and the Bank. The
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and
conform with general practices in the banking industry. Such
principles require management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities and disclosures of contingent assets and
liabilities at the date of financial statements and the
amounts of income and expenses during the reporting period.
Actual results could differ from those estimated. All
significant intercompany balances and transactions have been
eliminated.
CASH EQUIVALENTS - For purposes of the Consolidated Statement
of Cash Flows, cash and cash equivalents include cash on
hand, amounts due from banks and overnight Federal funds
sold.
INVESTMENT SECURITIES - Metro has the intent and ability to
hold securities classified as held to maturity until their
respective maturities. Accordingly, such securities are
stated at cost and are adjusted for amortization of premiums
and accretion of discounts.
All securities not classified as held to maturity are
considered available for sale. Unrealized gains and losses,
net of taxes, are excluded from earnings and reported as a
net amount in a separate component of shareholders' equity
until realized.
Realized gains or losses from the sale of securities are
reflected in income on a specific identification basis.
Interest income and the amortization of the premium and
discount arising at acquisition are included in income.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is
maintained at a level believed adequate by management to
absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the reserve is based upon an
evaluation of the portfolio, a review of loan delinquencies,
current economic conditions, volume, growth and composition
of the loan portfolio, and other relevant factors. The
reserve is increased by provisions for loan losses charged
against income.
LOANS - Interest income on all loans is calculated using the
simple interest method on the daily balances of the principal
amount outstanding. The Bank's policy is to place loans on
non-accrual status when management believes the collection of
interest to be doubtful.
page 41
<PAGE>
Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized
as an adjustment to the related loan's yield. The Bank is
generally amortizing these amounts over the contractual life
of the related loans.
PREMISES AND EQUIPMENT - Premises and equipment are stated at
cost less accumulated depreciation and amortization.
Depreciation and amortization included in non-interest
expense is computed using the straight-line method over the
estimated useful lives of the related assets ranging from 3
to 30 years. Routine maintenance, repairs and minor
improvements are charged to non-interest expense as incurred.
CORE DEPOSIT INTANGIBLE - The core deposit intangible
represents the excess of acquisition costs over the fair
value of net assets acquired and is being amortized on the
straight-line basis over a period of eight years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - These
securities are generally treated as collateralized financing
transactions and are recorded at the amount at which the
securities were sold plus accrued interest. It is Metro's
policy to relinquish control of securities sold under the
agreements to repurchase. Metro also monitors its exposure
with respect to securities borrowed transactions. The
maximum amount of outstanding agreements at any month-end was
$3.0 million during the year. The average outstanding
balance of securities sold under agreements to repurchase
amounted to $53,000 for the year ended December 31, 1996.
PER SHARE DATA - Per share data included in Metro's
consolidated statement of operations is based upon the
weighted average number of common shares outstanding.
Outstanding stock options during 1996 and 1995 did not have a
dilutive effect on earnings per share.
RECLASSIFICATIONS - Certain 1994 and 1995 amounts in the
consolidated financial statements have been reclassified to
conform with the 1996 presentation. Such reclassifications
had no effect on net income.
IMPACT OF ACCOUNTING CHANGES - The Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing
Rights," which modifies the accounting for mortgage servicing
rights to allow the recognition of servicing assets whether
they are purchased or originated. Metro adopted the
provisions of this statement effective January 1, 1996, and
there was no material impact to its consolidated financial
condition or results of operations.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Metro adopted the provisions of this
statement effective January 1, 1996, and there was no
material impact to its consolidated financial condition or
results of operations.
3. INVESTMENT SECURITIES
Investment securities consist primarily of U.S. government
agency and corporation bonds, derivative securities with both
fixed and indexed interest rates, and mortgage backed
securities with both fixed and floating interest rates. The
derivative securities are subject to interest rate risk due
to their dual index feature and are comprised of deleveraged
bonds, and structured agency and corporation notes. At
December 31, 1996, the derivative securities amounted to $9.5
million classified as held to maturity and $2.9 million
included in available for sale securities. Although these
securities' current market values are below cost, Metro does
not believe these securities to be other than temporarily
impaired due to the creditworthiness of the issuers
(primarily the Federal Home Loan Bank), the shorter term
maturities of the notes (approximately three years), current
interest rate yields of the securities and Metro's intent and
ability to hold such securities to maturity. The mortgage
backed securities are subject to both prepayment and interest
rate risk and have been classified primarily as available for
sale. The amortized cost and estimated market values of
investment securities are as follows:
page 42
<PAGE>
<TABLE>
Investment Securities
(dollars in thousands)
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Investment Securities Held to
Maturity
Mortgage-Backed Securities $94 $2 $ - $96
U.S. Government Agencies and
Corporations 9,462 - (549) 8,913
Time Deposits 500 - - 500
--------- --------- ---------- ---------
$10,056 $2 ($549) $9,509
========= ========= ========== =========
Investment Securities Available
for Sale
Mortgage-Backed Securities $15,913 $51 ($129) $15,835
U.S. Government Agencies and
Corporations 5,401 - (76) 5,325
--------- --------- ---------- --------
$21,314 $51 ($205) $21,160
========= ========= ========== ========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Investment Securities Held
to Maturity
Mortgage-Backed Secutities $328 $5 $ - $333
U.S. Government Agencies and
Corporations 9,438 - (753) 8,685
Time Deposits 500 - - 500
--------- ---------- ---------- ---------
$10,266 $5 ($753) $9,518
========= ========== ========== =========
Investment Securities Available
For Sale
Mortgage-Backed Securities $9,466 $30 ($148) $9,348
U.S. Treasury Securities and
Obligations of U.S. Government
Agencies and Corporations 9,599 17 (155) 9,461
--------- ---------- ---------- ---------
$19,065 $47 ($303) $18,809
========= ========== ========== =========
</TABLE>
page 43
<PAGE>
The carrying value of U.S. government agencies, corporation
securities, and mortgaged-backed securities at December 31,
1996 and 1995 are shown below by the contractual maturity
date. Actual maturities will differ because borrowers may
have the right to call or prepay obligations with or without
call or prepayment penalties (dollars in thousands):
<TABLE>
<CAPTION>
As of December 31, 1996
--------------------------------------
Held to Available
Maturity for Sale
---------------- ----------------
Fair Fair
Market Market
Cost Value Cost Value
---- ------ ---- ------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities
- ----------------------------
Due within one Year $49 $50 $- $-
1 - 5 Years 45 46 2,169 2,175
6 - 10 Years - - 2,401 2,348
Due After 10 Years - - 11,343 11,312
---- ----- ------- -------
Total $94 $96 $15,913 $15,835
==== ===== ======= =======
U.S. Government Agencies and
Corporations
- ----------------------------
Due within One Year $- $- $400 $400
1 - 5 Years 7,962 7,623 5,001 4,925
6 - 10 Years 1,500 1,290 - -
Due After 10 Years - - - -
------ ------ ------ ------
Total $9,462 $8,913 $5,401 $5,325
====== ====== ====== ======
Time Deposits
- ----------------------------
Due within One Year $500 $500 $ - $ -
====== ====== ====== ======
</TABLE>
page 44
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1995
----------------------------------------
Held to Available
Maturity for Sale
------------------ ------------------
Fair Fair
Market Market
Cost Value Cost Value
------ ------ ----- ------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities
- ----------------------------
Due within One Year $198 $199 $ - $ -
1 - 5 Years - - - -
6 - 10 Years 130 134 1,759 1,734
Due After 10 Years - - 7,707 7,614
------ ----- ------ ------
Total $328 $333 $9,466 $9,348
====== ===== ====== ======
U.S. Treasury Securities and
Obligations of U.S.
Government Agencies and
Corporations
- ----------------------------
Due within One Year $ - $ - $1,999 $1,998
1 - 5 Years 7,938 7,394 6,611 6,458
6 - 10 Years 1,500 1,291 - -
Due After 10 Years - - 989 1,005
------ ----- ----- -----
Total $9,438 $8,685 $9,599 $9,461
====== ====== ====== ======
Time Deposits
- ---------------------------
Due within One Year $500 $500 $ - $ -
====== ====== ====== ======
</TABLE>
Proceeds from sales of investments in debt securities were
$4.0 million in 1996 as compared to $1.6 million in 1995. Net
realized loss on sale of investment securities amounted to
$12,000 during 1996 compared to a $2,000 gain for the same
period in 1995.
page 45
<PAGE>
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Value of Financial Instruments."
SFAS 107 requires entities to disclose the fair market value
of financial instruments, both assets and liabilities
recognized and not recognized in the consolidated balance
sheet, for which it is practicable to estimate fair value.
The following methods and assumptions were used to estimate
the fair value of each type of financial instrument:
CASH AND CASH EQUIVALENTS - For these instruments, the
carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For investment securities, fair
values are based on quoted market prices, if available. For
securities where quoted prices are not available, fair value
is estimated based on market prices of similar securities.
LOANS - The fair value of loans is estimated by discounting
future cash flows using current rates at which similar loans
would be made to borrowers with similar credit ratings and
for the same remaining maturities.
DEPOSITS - The fair value of non-interest bearing demand
deposits and savings and NOW accounts is the amount payable
as of the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using rates currently
offered for deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Securities
sold under agreements to repurchase generally have an
original term to maturity of 30 days or less and, therefore,
their carrying amount is a reasonable estimate of fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - Loan commitments
and standby letters of credit are generally of a short-term
nature and, therefore, their carrying amount is a reasonable
estimate of their fair value.
The estimated carrying and fair values of Metro's financial
instruments as of December 31, 1996, are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Value Value
-------------------------
<S> <C> <C>
Financial Assets:
Cash & Cash Equivalents $13,775 $13,775
Investment Securities 31,216 30,669
Loans, Net 64,519 65,481
Deposits 99,284 99,495
Securities Sold Under
Agreements to Repurchase 1,500 1,500
Off-Balance Sheet
Financial Instruments 10,228 10,228
-------------------------
</TABLE>
page 46
<PAGE>
5. LOANS
Total loans at December 31, 1996 and December 31, 1995 by
major loan categories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Commercial $35,064 $31,122
Real Estate -
Construction 3,970 2,251
Mortgage 787 838
Installment 15,933 13,242
Student Loans 9,631 12,999
------- -------
Total Loans $65,385 $60,452
------- -------
Allowance for Loan Losses (866) (910)
------- -------
Loans, Net $64,519 $59,542
======= =======
</TABLE>
Transactions in the allowance for loan losses for the years
indicated were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at Beginning of year $910 $586 $450
Provision for Loan Losses 67 367 165
Charged-Off Loans (119) (54) (32)
Recoveries 8 11 3
---- ---- ----
Balance at End of Year $866 $910 $586
==== ==== ====
</TABLE>
As of December 31, 1996, Metro had investments in loans which
are impaired in accordance with SFAS No's 114 and 118 of
$157,000. Of this amount, $148,000 had no related specific
allowance. The remaining $9,000 of impaired loans were
fully reserved.
Metro's policy for recognizing income on impaired loans is to
accrue interest until a loan is classified as impaired. For
loans which receive the classification of impaired during the
current period, interest accrued to date is charged against
current earnings. No interest is accrued after a loan is
classified as impaired. All payments received for loans
which are classified as impaired are utilized to reduce the
principal balance outstanding.
For the year ended December 31, 1996, the average balance of
impaired loans was $161,000; additionally, no interest income
was earned on these loans during the year ended December 31,
1996.
page 47
<PAGE>
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 consist
of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and Improvements $605 $980
Building and Improvements 954 942
Furniture and Equipment 1,344 1,006
----- -----
Total 2,903 2,928
Less: Accumulated
Depreciation and
Amortization (1,082) (1,018)
------ -----
Total, Net $1,821 $1,910
</TABLE>
7. BENEFIT PLANS
EMPLOYEES' THRIFT AND RETIREMENT PLAN - Metro maintains a
trusteed contributory thrift and retirement plan (Employees'
Thrift and Retirement Plan) covering all employees who have
attained the age of twenty-one and work a minimum of one
thousand hours per calendar year. Salary redirection or
"401(k)" contributions are made to the Employees' Thrift and
Retirement Plan pursuant to a Salary Redirection Agreement
between each eligible employee and the Bank. Eligible
employees may contribute up to 10 percent of their pre-tax
compensation, limited by the amount allowed by the IRS.
Effective January 1, 1995, Metro increased the amount of
employee contributions it matches from 75 percent to 100
percent of the first 6 percent of the employee's
compensation, provided the employee contributes at least 2
percent of their compensation to the Plan. Metro may make
additional profit sharing contributions to the Plan as
determined and approved by the Board of Directors. Employees
vest 100 percent in Metro's matching and discretionary profit
sharing contributions at the end of five years of Plan
participation. Metro's contribution expense related to the
Employees' Thrift and Retirement Plan amounted to $51,000,
$64,000, and $36,000, in 1996, 1995, and 1994, respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - Effective January 1,
1993, Metro established the Supplemental Executive Retirement
Plan (SERP), a non-qualified deferred compensation plan, for
certain executives of Metro. The provisions of the SERP
allow the Plan's participants who are also participants of
the Employees' Thrift and Retirement Plan to defer
compensation from Metro or receive contributions without
regard to the amounts limited by the IRS under the Employee's
Thrift and Retirement Plan. SERP participants' salary
deferrals, however, are limited to amounts not to exceed 25
percent of the participant's compensation, including amounts
contributed to the Employees' Thrift and Retirement Plan.
Metro may make matching contributions in percentage amounts
as described under the Employees' Thrift and Retirement Plan.
Also, Metro may make discretionary contributions to the SERP
as determined and approved by the Board of Directors.
Metro's contribution expense related to the SERP was $12,000,
$5,000, and $1,000 in 1996, 1995, and 1994, respectively.
8. STOCK AND CAPITAL ADEQUACY
For information on capital adequacy, see section entitled
"Capital Resources and Capital Adequacy," in Management's
Discussion and Analysis section of the annual report.
page 48
<PAGE>
9. STOCK OPTION PLANS
Prior to 1991, Metro had three stock option plans: the 1987
Stock Option and Stock Appreciation Rights Plan for officers
and key employees of Metro and the Bank, the 1987 Directors'
Stock Option Plan for those persons who serve as directors of
Metro and the Bank, and the Incorporators' and Founders'
Stock Option Plan. During 1991, shareholders of Metro
approved the repricing of all outstanding options and stock
appreciation rights (SARs) granted under these plans to a
then current fair market price of $6.75 per share, and
shareholders approved extending, until December 31, 2000, the
term of each outstanding option and SAR. Shareholders also
approved termination of all three of these plans. All
options and SARs granted under such plans prior to their
termination may be exercised until the newly approved
expiration date.
During 1991, shareholders of Metro adopted the 1991 Stock
Option and Stock Appreciation Rights Plan for officers and
key employees of Metro and the Bank and the 1991 Directors'
Stock Option Plan for directors of Metro and the Bank.
Options and SARs under these plans are fully vested at the
grant date, except for options granted to the directors of
the Bank which vest at 20 percent per year. All options
granted under these plans have an exercise price of $ 6.75
per share.
During 1994, shareholders of Metro adopted the 1994 Stock
Option and Stock Appreciation Rights Plan for officers and
key employees of Metro and the Bank, and the 1994 Directors'
Stock Option Plan for directors of Metro. Options and SARs
under these plans are fully vested at the grant date.
Options granted under these plans have exercise prices
ranging from $5 to $7 per share.
As of December 31, 1996, there were 206,650 shares of common
stock reserved for issuance under these plans. Stock option
activity under these plans was as follows:
<TABLE>
<CAPTION>
Number Weighted
of Average
Options Shares Exercise
Price
-----------------------------------------------
<S> <C> <C>
December 31, 1993 75,450 $6.75
Granted 60,900 6.23
Cancelled 100 6.75
-----------------------------------------------
December 31, 1994 136,250 6.52
Granted 13,100 6.37
Cancelled 100 6.75
----------------------------------------------
December 31, 1995 149,250 6.51
Granted 13,500 6.12
----------------------------------------------
December 31, 1996 162,750 6.48
Shares Exercisable 162,750 =====
=======
</TABLE>
page 49
<PAGE>
Metro accounts for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent
with FASB Statement No. 123, Metro's net income would have
been reduced to $608,000 ($0.36 per share) in 1996, and
$603,000 ($0.36 per share) in 1995. Because the Statement
No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro-forma
compensation cost may not be representative of that to be
expected in future years.
Options outstanding at December 31, 1996, have a weighted
average remaining life of 5.9 years. The weighted average
fair value of the options granted was $2.27 per share in 1996
and $2.39 per share in 1995. The fair value of each option
is estimated on the date of grant using a risk-free interest
rate of 6.49 percent in 1996 and 6.06 percent in 1995;
expected dividend yields of 3.00 percent; expected lives of
8.5 years in 1996 and 7.5 years in 1995; and expected
volatility of 37.0 percent.
10.INCOME TAXES
Metro and the Bank file a consolidated income tax return.
Deferred tax assets and liabilities are recorded based on
differences between the financial statement and tax bases of
assets and liabilities and income tax rates expected to be in
effect when the amounts related to such differences are
realized or settled. The provision (benefit) for income taxes
consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------
<S> <C> <C> <C>
Federal - Current $442 $375 $75
- Deferred (54) (47) 197
-------------------------
$388 $328 $272
-------------------------
State - Current $108 $124 $94
- Deferred (8) (24) (13)
-------------------------
$100 $100 $81
-------------------------
$488 $428 $353
=========================
</TABLE>
A reconciliation between Metro's effective tax rate and the
U.S. federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------
<S> <C> <C> <C>
U.S. Federal Statutory Rate 35.0% 35.0% 35.0%
State Income Taxes, Net of
U.S. Federal Income Tax Benefit 6.5 6.2 6.5
Effect of Graduated Income (1.0) (1.0) (1.6)
Other 3.4 0.6 2.4
----------------------
43.9% 40.8% 42.3%
======================
</TABLE>
page 50
<PAGE>
The significant components of Metro's net deferred tax asset
as of December 31, 1996 and 1995 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Book over Tax Depreciation $43 $10
Provision for Loan Losses 265 281
Accrual to Cash Adjustment (26) (53)
Net Unrealized Loss on
Investment Securities
Available for Sale 67 135
Other 11 (8)
---- ----
$360 $365
==== ====
</TABLE>
Metro did not record a valuation allowance against the
deferred tax assets as management expects to fully realize
all tax benefits in the future.
11.COMMITMENTS AND CONTINGENCIES
Metro has entered into non-cancelable operating leases for
its main office and two branch offices. All operating leases
for branch offices will expire in 1998. Metro has the option
of extending two of these leases into future years. Rental
expense for all three offices was $105,000, $93,000 and
$111,000 in 1996, 1995 and 1994 respectively. Future
aggregate minimum annual rentals (not considering renewal
options) are payable as follows:
1999
and
1997 1998 After
----------------------------
$97,800 $37,700 $ -
Metro is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial
instruments include commitments to extend credit under lines
of credit, real estate draw note arrangements and standby
letters of credit. These instruments involve varying degrees
of credit risk in excess of the amount recognized in the
consolidated statement of condition.
Metro's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for commitment to extend credit and standby letters of credit
is represented by the contractual amount of these
instruments. Metro uses the same credit policies in making
commitments and conditional obligations as it does for on-
balance sheet instruments.
page 51
<PAGE>
Metro's financial instruments where contract amounts
represent credit risk are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Standby Letters of Credit $120 $127
Unused Commercial Lines of
Credit & Real Estate Draw Notes 7,905 3,574
Unused Home Equity & Personal
Lines of Credit 2,203 2,008
------- ------
Total Commitments $10,228 $5,709
======= ======
</TABLE>
Commitments to extend credit under lines of credit are
agreements to lend to a customer as long as there is no
violation of any condition established in the contract.
These commitments generally have fixed expiration dates or
other termination clauses and typically require the payment
of fees. The total commitment amounts do not necessarily
represent future cash requirements. Commitments sometimes
expire before being drawn upon while others may not be drawn
upon to the full amount available. Metro evaluates each
customer's creditworthiness on a case-by-case basis. The
amount of collateral required, if deemed necessary, by Metro
upon extension of credit is based upon management's credit
evaluation of the borrower. The type of collateral typically
involves a mortgage position in the underlying property
collateralized by the loan, but may include accounts
receivable, inventory, fixtures and equipment, general
intangibles and personal guarantee of the borrower.
Standby letters of credit are conditional commitments issued
by Metro to guarantee the performance of a customer to a
third party. These guarantees are primarily issued to
support private borrowing arrangements. Substantially all
guarantees expire in less than one year. The credit risk
involved in issuing standby letters of credit is essentially
the same as that involved in extending credit under line of
credit arrangements. Metro may require cash, marketable
securities, property and/or mortgage positions as collateral
supporting these commitments in those instances in which
collateral is deemed necessary.
Metro's investment in off-balance sheet derivative financial
instruments, as defined by Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," are
limited to fixed and variable interest rate loan commitments.
Fixed rate loan commitments are generally extended for no
longer than six months. Interest rates on the variable rate
loan commitments are adjustable on either a daily or monthly
basis.
12.RELATED PARTY TRANSACTIONS
Certain directors of Metro and companies with which they are
affiliated, and certain principal officers of the Bank, are
customers of, and have banking transactions with, the Bank in
the ordinary course of business. All such loans and
commitments for loans included in such transactions have been
made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and, in the
opinion of management, did not involve more than a normal
risk of collectibility or present other unfavorable features.
Loan transactions with directors and their affiliates and
principal officers of Metro for 1996 were as follows (dollars
in thousands):
Balance at Beginning of Year $573
Loans Made 1,032
Loan Repayment (393)
------
Balance at End of Year $1,212
======
page 52
<PAGE>
Certain directors and the companies with which they are
affiliated also provide services to Metro. Metro had
commitments under operating lease arrangements with a
director-affiliated company to lease certain office space.
Total lease payments made in 1996 and 1995 under such lease
agreements were $10,500 and $2,000, respectively. Metro did
not lease space from these directors in 1994. Certain
advertising and public relations services are also provided
by a director-affiliated company. The amount paid for these
services was $213,000 in 1996, $209,000 in 1995, and $231,000
in 1994.
The Bank purchased student loans from a company of which
certain executive officers serve as directors of Metro and
the Bank. The loans are serviced by the seller and are also
guaranteed by the seller. Loan servicing fees paid to the
seller were $108,000, $133,000 and $164,000, in 1996, 1995
and 1994, respectively. The loans are purchased on the same
terms as those offered by the seller to other institutions.
There were no purchases of student loans in 1996. Student
loan purchases were $2.0 million and $3.1 million in 1995
and 1994, respectively. In 1996, 1995 and 1994 the Bank sold
$1.2 million, $4.0 million, $0.9 million, respectively, of
student loans back to the seller.
13.PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed statements of the parent
company.
<TABLE>
MetroBanCorp (Parent Company Only) Condensed Statement of
Condition as of December 31, 1996 and 1995 (dollars in
thousands):
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents $13 $37
Investment Securities
Available for Sale
- Market Value 3,073 3,394
Investment in MetroBank 7,873 7,199
Other 558 539
------- -------
Total Assets $11,517 $11,169
======= =======
LIABILITIES AND SHAREHOLDERS
EQUITY
Other Liabilities $16 $24
Shareholders' Equity 11,501 11,145
------- -------
Total Liabilities and
Shareholders' Equity $11,517 $11,169
======= =======
</TABLE>
page 53
<PAGE>
MetroBanCorp (Parent Company Only) Condensed Statement of
Operations for the years ended December 31, 1996 and 1995
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest Income $199 $200
Non-Interest Income
Gain on Sale of
Securities 10 -
Non-Interest Expenses (189) (165)
---- ----
Income Before Income Taxes
and Equity in Undistributed
Earnings of MetroBank 20 35
Income Tax Expense (8) (14)
---- ----
Income Before Equity in
Undistributed Earnings
of MetroBank 12 21
Equity in Undistributed
Earnings of MetroBank 612 601
---- ----
Net Income $624 $622
==== ====
</TABLE>
page 54
<PAGE>
<TABLE>
MetroBanCorp (Parent Company Only) Condensed Statement of
Cash Flows for the years ended December 31, 1996 and 1995
(dollars in thousands):
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $624 $622
---- ____
Adjustments to Reconcile Net Income
to Cash used in Operating Activities
Equity in undistributed Earnings of MetroBank (612) (601)
Depreciation and Amortization 12 12
Gain on Sale of Investment Securities (10) -
Increase in Other Assets (35) (316)
Increase/(Decrease) in Other Liabilities (8) 2
---- ----
Total Adjustments (653) (903)
---- ----
Net Cash Flows from Operating Activities (29) (281)
---- ----
Cash Flows From Investing Activities:
Proceeds from the Sale of Investment
Securities 3,010 -
Proceeds from Maturity of Investment
Securities 332 -
Purchases of Investment Securities (3,001) -
---- ----
Net Cash Flows Provided by Investing
Activities 341 -
---- ----
Cash Dividend Paid (336) (167)
---- ----
Net Decrease in Cash and Cash Equivalents (24) (448)
Cash and Cash Equivalents at Beginning of Year 37 485
---- ----
Cash and Cash Equivalents at End of Year $13 $37
==== ====
</TABLE>
page 55
<PAGE>
14. RESTRICTION ON TRANSFERS FROM METROBANK
According to banking regulations, the Bank is restricted as
to the amount of dividends that can be paid to Metro without
prior regulatory approval. Indiana chartered banks are
limited in the amount of dividends they may pay to the
undivided profits of the bank adjusted for statutorily
defined bad debts.
page 56
<PAGE>
EXHIBIT 24. POWER OF ATTORNEY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that the person whose signature
apprears below constitutes and appoints Ike G. Batalis and Charles
V. Turean, or either individually, his true and lawful attorney-
in-fact and agent, with full power of substitution and resubstitu-
tion, for him and in his name, place and stead, in any and all
capacities to sign MetroBanCorp's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, and any and all
amendments thereto, to be filed with the Securities and Exchange
Commission pursuant to the requirements of Section 15(d) of the
Securities Exchange Act of 1934, as amended, granting unto said
attorney-in-fact and agent, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his
substitute, may lawfully do or cause to be done by virtue hereof.
By: /s/Chris G. Batalis February 28, 1997
-------------------------------
Chris G. Batalis, Director
By: /s/Terry L. Eaton February 28, 1997
-------------------------------
Terry L. Eaton, Director
By: /s/Evans M. Harrell February 28, 1997
-------------------------------
Evans M. Harrell, Director
By: /s/Edward G. McMahon February 28, 1997
-------------------------------
Edward G. McMahon, Director
By: /s/Robert L. Lauth, Jr. February 28, 1997
-------------------------------
Robert L. Lauth Jr., Director
By: /s/Larry E. Reed February 28, 1997
-------------------------------
Larry E. Reed, Director
By: /s/Russell D. Richardson February 28, 1997
-------------------------------
Russell D. Richardson, Director
By: /s/Edward R. Schmidt February 28, 1997
-------------------------------
Edward R. Schmidt, Director
By: /s/Donald F. Walter February 28, 1997
-------------------------------
Donald F. Walter, Director
page 57
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,475
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,160
<INVESTMENTS-CARRYING> 31,216
<INVESTMENTS-MARKET> 30,669
<LOANS> 65,385
<ALLOWANCE> 866
<TOTAL-ASSETS> 113,383
<DEPOSITS> 99,284
<SHORT-TERM> 1,500
<LIABILITIES-OTHER> 1,098
<LONG-TERM> 0
0
0
<COMMON> 11,210
<OTHER-SE> 291
<TOTAL-LIABILITIES-AND-EQUITY> 113,383
<INTEREST-LOAN> 6,130
<INTEREST-INVEST> 1,600
<INTEREST-OTHER> 143
<INTEREST-TOTAL> 7,873
<INTEREST-DEPOSIT> 3,496
<INTEREST-EXPENSE> 3,519
<INTEREST-INCOME-NET> 4,354
<LOAN-LOSSES> 67
<SECURITIES-GAINS> (12)
<EXPENSE-OTHER> 3,842
<INCOME-PRETAX> 1,112
<INCOME-PRE-EXTRAORDINARY> 624
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 624
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.52
<LOANS-NON> 157
<LOANS-PAST> 445
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 829
<ALLOWANCE-OPEN> 910
<CHARGE-OFFS> 119
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 866
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
