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, 1997.
COMMISSION FILE NUMBER 0-23790
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METROBANCORP
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(Name of small business issuer in its charter)
Indiana 35-1712167
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10333 N. Meridian Street, Suite 111, Indianapolis, Indiana 46290
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (317) 573-2400
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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
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(Title of class)
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 or
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: $5,032,000.
State the aggregate market value of the voting and non-voting common stock
held by non-affiliates computed by reference to the price at which the stock
was sold, or the average bid and asked price of such common 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 common
stock of the issuer held by non-affiliates, based upon the price of a share of
common stock as quoted on the Small-Cap Issues Market of NASDAQ on February
27, 1998 was $10,806,008.
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, 1997). The Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held April 23,
1998 is incorporated by reference into Part III hereof, and the Annual Report
of Shareholders for the year ended December 31, 1997 is incorporated by
reference into part II hereof.
Transitional Small Business Disclosure Format: Yes ___ No X
Total number of sequentially numbered pages - 54
Exhibit index on sequentially numbered pages - 14-15
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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. . . . . . . . . . . . . . . . . 8
Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . 9
Item 4 - Submission of Matters to a Vote of Security Holders. . . 9
Part II
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Item 5 - Market for Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . 9
Item 6 - Management's Discussion and Analysis or Results
of Operation . . . . . . . . . . . . . . . . . . . . 9
Item 7 - Financial Statements . . . . . . . . . . . . . . . . . . 9
Item 8 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . 9
Part III
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Item 9 - Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act . . . . . . . . . . . . . . . . . . . . 10
Item 10 - Executive Compensation . . . . . . . . . . . . . . . . . 10
Item 11 - Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . 10
Item 12 - Certain Relationships and Related Transactions . . . . . 10
Item 13 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . 10
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Part I.
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ITEM 1. DESCRIPTION OF BUSINESS
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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
consumer lending and deposit services to its customers located principally in
Hamilton County and northern Marion County, Indiana. The Bank conducts its
business through five banking offices located in Hamilton County. The Bank's
products are principally oriented toward the small-and medium-sized business
and professional community. Beginning in late 1991, the Bank began offering
discount brokerage and mortgage lending services. At December 31, 1997, Metro
had consolidated total assets of $124.7 million, total deposits of $111.2
million and shareholders' equity of $12.1 million, representing annual
increases from 1996 of 10.1 percent, 12.0 percent, and 5.2 percent,
respectively.
The Bank's primary market area consists of Hamilton and northern Marion
Counties. Hamilton County is situated in the north central section of the
Indianapolis Metropolitan Statistical Area (MSA), and is the fastest growing
county in the State of Indiana (35.6 percent increase in population between
1990 and 1996). Hamilton County is also Indiana's most affluent county, with
an estimated median household income, in 1997, of $78,041, and ranks as the
thirty-third most affluent county in the nation. With approximately 148,000
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 1.3 percent unemployment
rate, and a younger than average resident 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 large companies such as USA Group, Inc. ("USA
Group"), Thomson Consumer Electronics, Conseco, Marsh Supermarkets and Charles
Schwab and Co., as well as many large manufacturing service and distribution
operations.
Since liberalization of Indiana's banking laws in 1985, there has been a
consolidation of commercial banks in Hamilton County. As a result, there are
only two commercial banks, including MetroBank, headquartered in Hamilton
County. All other banks in the marketplace are now owned by large out of state
bank holding companies. The strategy of Metro's founding investors and its
management was 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 will prefer to do business with a local
bank with responsive decision making.
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 $124.7 million at
December 31, 1997. 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 fallen to 73.8 percent in 1997 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 and 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 offices of MetroBank include two
facilities which are owned by MB Realty Corporation, a wholly owned subsidiary
of the Bank. The Bank has also deployed numerous automated teller machines
(ATMs) at sites which are leased from the owners of retail businesses in the
market area. The Bank also operates three automated loan machines (ALMs) at
certain branch locations.
MARKET AREA AND COMPETITION. The Bank's primary market area, Hamilton County
and northern Marion County, in 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.
Several competing financial institutions have entered the Bank's market area
in recent years. 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
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competes in the marketplace primarily on the basis of responsible decision
making and personalized service.
THE YEAR 2000 ISSUE. Many of today's computer systems process transactions
using two digits for the year of transaction, rather than a full four digits.
As a result, these systems may not function properly on January 1, 2000. To
address this issue, the Bank established an internal committee who developed a
written Year 2000 plan. The plan incorporates the following commonly
recognized phases of Year 2000 remediation: awareness, assessment, renovation,
validation and implementation.
The majority of the Bank's systems are provided by a third party vendor who
has contractually guaranteed to be fully compliant by the end of the 1998
calendar year. Additional third party vendors will be contacted to provide
Year 2000 Certification for applicable products and services. The Bank
anticipates that certain software upgrades/replacements, hardware purchases
and other modifications to its other internal systems will be necessary to be
fully compliant in the Year 2000. The Bank expects substantial completion of
its Year 2000 Certification process by December 31, 1998. At this time, the
estimated cost of Year 2000 compliance is not expected to be material to the
Bank.
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 portfolio of guaranteed student loans ("GSLs"). These
GSLs are comprised of approximately 1,900 notes made to nearly 900 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,
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, to perform servicing and collection procedures 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 of 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
GSL 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 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, which are enforceable by the Bank.
Commercial lending requires 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 generally 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.
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 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 Board of
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Directors and the Bank's 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 $350,000 must be reported to the Bank's
Management Loan Committee for approval or for informational purposes. Further,
secured loans exceeding $350,000 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 internal 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 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 third full year
of operations in 1997. 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 this
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, Carmel, Indiana.
This facility is similar to the Bank's other full service banking facilities,
with the exception that, due to the equipment 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 leased three ALM machines and has
deployed two of these machines in the following locations: MetroBank's
Automated Branch and MetroBank's Ninth Street Noblesville Branch. The Bank is
planning to redeploy its third ALM in the new Wal-Mart SuperCenter Branch
facility expected to open in the first quarter of 1998. Also see "Description
of Property" following.
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 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 the statute) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate federal banking agency. 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 of the bank holding company.
Metro is prohibited by the BHCA from acquiring direct or indirect control of
more than 5 percent 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 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 percent of the outstanding shares of any
class of voting stock or 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.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The Federal Reserve
is the federal regulatory and examining authority for bank holding companies.
The Federal Reserve 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 of 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 percent.
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 percent in the case of bank holding
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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 percent to 2 percent
above the stated minimum.
Certain regulatory capital ratios for Metro as of December 31, 1997 are shown
below:
Tier 1 Capital to Risk-Weighted Assets.................. 14.33%
Total Risk Based Capital to Risk-Weighted Assets........ 15.53%
Tier 1 Leverage Ratio................................... 9.89%
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 within
specified time periods.
Insured state-chartered banks are prohibited under the FDIC Improvements Act
(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 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.
Certain regulatory capital ratios under the FDIC's risk-based capital
guidelines for the Bank at December 31, 1997 are shown below:
Tier 1 Capital to Risk-Weighted Assets.................... 10.50%
Total Risk-Based Capital to Risk-Weighted Assets.......... 11.71%
Tier 1 Leverage Ratio..................................... 7.40%
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 an effective
management process.
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
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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 percent or more of its total assets, or whose trading
activity equals $1.0 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, calculated risk-weighted assets, calculate market risk
equivalent assets and calculate risk-based capital ratios adjusted for market
risk.
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 common 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.
Under Indiana law, the Bank may 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 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, 1997, 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 percent or
greater, a Tier 1 risk-based capital ratio of 6 percent or greater, and a
leverage ratio of 5 percent or greater.
LENDING LIMITS. Under Indiana law, the total loans and extension of credit by
an Indiana-chartered bank to a borrower outstanding at one time and not fully
secured may not exceed 15 percent of such bank's capital and unimpaired
surplus. An additional amount up to 10 percent 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 bank branches is subject to
approval of the DFI and FDIC. 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.
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.
Beginning on 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 where the branch is located permits such an
acquisition. 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.
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.
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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 annual assessment rate will depend upon the capital category and
supervisory category to which it is assigned. Annual assessment rates for
banks range from 0.00 percent for an institution in the highest category (i.e.
well capitalized) to 0.27 percent for an institution in the lowest category
(i.e. undercapitalized and substantial supervisory concern), and for saving
associations the rates range from 0.00 percent for well capitalized
institutions to 0.27 percent for institutions in the lowest category. The
FDIC Board of Directors also voted to collect an assessment against BIF
assessable deposits to be paid to the Financing Corporation (FICO). The FDIC,
through enactment of the Deposit Insurance Funds Act of 1996, stipulates that
the rate must equal one-fifth of the FICO assessment rate that is applied to
deposits assessable by the SAIF. In 1997, the annual FICO rates ranged from
1.24 percent to 1.26 percent for BIF deposits and 6.22 percent to 6.32 percent
for SAIF deposits. 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, 1997 the Bank had a total of 44 full-time
equivalent employees. This included 42 full-time and 6 part-time employees
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. In addition to the executive
office which includes a banking office, the Bank operates four traditional
staffed branch offices and one automated branch office. Two offices are owned
by MB Realty, a wholly owned subsidiary of the Bank, while the other three
branches are leased facilities. Traditional staffed branches owned by MB
Realty are located at 225 North Ninth Street, Noblesville, Indiana, and 20
South Rangeline Road, Carmel, Indiana. Two traditional staffed branches
located at 255 Sheridan Road and 2025 North Cherry in Noblesville, Indiana are
leased from an unaffiliated third party. The bank also has an automated
branch at 12440 North Meridian Street, Carmel, Indiana that is leased from an
affiliated third party. The Bank has multiple ATM locations throughout its
market area that are leased from unaffiliated retail business owners.
The 2025 North Cherry Street office opened on March 17, 1997. The property
where this new facility is located was purchased by MB Realty during the
fourth quarter of 1994 and sold to an unaffiliated party during the second
quarter of 1996 for the development of a multipurpose office building.
MetroBank only leases a portion of this facility to conduct banking business.
The new branch is located in the Bank's current servicing area and provides
additional exposure and greater access within Hamilton and northern Marion
Counties.
In September, 1997, management of the Bank entered into a lease agreement with
Wal-Mart Stores, Inc. for a 525 square foot bank branch facility to be located
in a new Wal-Mart SuperCenter in Noblesville, Indiana. A first quarter 1998
opening is anticipated.
In December, 1997, management of the Bank notified its landlord of its intent
to terminate the lease of the Automated
Page 8
<PAGE>
Branch effective February 28, 1998 pursuant to its early termination option.
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 1997 to Metro's
shareholders, either through the solicitation of proxies or otherwise.
Part II.
--------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS 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."
At December 31, 1997, there were 319 shareholders of record of Metro common
stock.
The following table sets forth the high and low sale prices for Metro common
stock for the quarters during the years indicated, as reported by NASDAQ. Such
over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
SALE PRICE PER SHARE
--------------------
1996 1997
---- ----
Quarter High Low High Low
------- ---------------- -----------------
<S> <C> <C> <C> <C>
First Quarter $7.25 $6.00 $ 7.25 $5.50
Second Quarter 6.75 5.75 8.25 6.38
Third Quarter 6.75 5.75 9.50 7.13
Fourth Quarter 6.50 5.25 11.22 8.50
</TABLE>
Metro declared and paid on a quarterly basis four cash dividends on its shares
of Common Stock during 1997. The amount of each dividend was approximately
$84,000 or $0.05 per share. Future dividend payments by Metro are subject to
regulatory and legal limitations and may be dependent upon dividends paid by
the Bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATION
------------------------------------------------------------
Pages 17 through 34, inclusive, of Metro's Annual Report to
Shareholders for the year ended December 31, 1997 is incorporated
herein by reference in regard to this item.
ITEM 7. FINANCIAL STATEMENTS
--------------------
Pages 35 through 51, inclusive, of Metro's Annual Report to
Shareholders for the year ended December 31, 1997 is incorporated
herein by reference in regard to this item.
ITEM 8. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
-------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Page 9
<PAGE>
None.
Part III.
---------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
Pages 2 through 5, inclusive, of Metro's Definitive Proxy Statement
for the Annual Meeting of Shareholders, dated March 23, 1998, is
incorporated herein by reference in regard to this item.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Pages 5 through 10, inclusive, of Metro's Definitive Proxy Statement
for the Annual Meeting of Shareholders, dated March 23, 1998, is
incorporated herein by reference in regard to this item.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Pages 2 through 4, inclusive, of Metro's Definitive Proxy Statement
for the Annual Meeting of Shareholders, dated March 23, 1998, is
incorporated herein by reference in regard to this item.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Page 11 through 12, of Metro's Definitive Proxy Statement for the
Annual Meeting of Shareholders, Dated March 23, 1998, is incorporated
herein by reference in regard to this item.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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
Meridian Three 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
Page 10
<PAGE>
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, 1989
10.19* Student Loan Servicing Agreement, dated September 1, 1992
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
10.24***** Lease dated March 18, 1997 between Registrant and
Riverview Hospital, for property at 2025 Cherry Street,
Noblesville, Indiana
10.25****** Sublease dated September 11, 1997 between Registrant and
Wal-Mart Stores, Inc., for property at 16865 Clover Road,
Noblesville, Indiana
10.26****** Amendment No. 1 to Lease Agreement dated September 30,
1997, between the Registrant and Phoenix Home Life Mutual
Insurance Company for property at 10333 North Meridian
Street, Suite 111, Indianapolis, Indiana
13 The Annual Report to Shareholders of the Company for the
year ended December 31, 1997 (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.
Page 11
<PAGE>
*** Incorporated by reference to Registrant's Form 10-QSB for the fiscal
quarter ended June 30, 1994, filed August, 1994.
**** Incorporated by reference to Registrant's Form 10- KSB for the fiscal
year ended December 31, 1995.
***** Incorporated by reference to Registrant's Form 10-QSB for the fiscal
quarter ended March 31, 1997, filed May 12, 1997.
****** Incorporated by reference to Registrant's Form 10-QSB for the fiscal
quarter ended September 30, 1997, filed November 10, 1997.
(b) No Reports on Form 8-K were filed during the last quarter of 1997.
Page 12
<PAGE>
SIGNATURES
In accordance with Section 15 (d) of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf of the
undersigned, there unto duly authorized.
MetroBanCorp
(Registrant)
Date: March 23, 1998 By: /s/ Ike G. Batalis
--------------------------------
Ike G. Batalis, President
Date: March 23, 1998 By: /s/ Charles V. Turean
--------------------------------
Charles V. Turean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: March 23, 1998 By: CHRIS G. BATALIS*
--------------------------------
Chris G. Batalis, Director
Date: March 23, 1998 By: TERRY L. EATON*
--------------------------------
Terry L. Eaton, Director
Date: March 23, 1998 By: EVANS M. HARRELL*
--------------------------------
Evans M. Harrell, Director
Date: March 23, 1998 By: EDWARD G. McMAHON*
--------------------------------
Edward G. McMahon, Director
Date: March 23, 1998 By: ROBERT L. LAUTH, JR. *
--------------------------------
Robert L. Lauth, Jr., Director
Date: March 23, 1998 By: LARRY E. REED*
--------------------------------
Larry E. Reed, Director
Date: March 23, 1998 By: RUSSELL D. RICHARDSON*
--------------------------------
Russell D. Richardson, Director
Date: March 23, 1998 By: EDWARD R. SCHMIDT*
--------------------------------
Edward R. Schmidt, Director
Date: March 23, 1998 By: DONALD F. WALTER*
--------------------------------
Donald F. Walter, Director
*By: /s/ Ike G. Batalis
------------------------
Ike G. Batalis,
Attorney-in-Fact
Page 13
<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, 1992 between N/A
Registrant and Ike G. Batalis
10.02 * Employment Agreement dated July 1, 1991 between N/A
Registrant and Charles V. Turean
10.03 * Employment Agreement dated July 1, 1991 between N/A
Registrant and Andrew E. Illyes
10.04 * Letter of Agreement dated December 31, 1992 between N/A
the Registrant and Heptagon, Inc.
10.05 * Lease dated September 11, 1987 between Registrant N/A
and Western Plaza Company with respect to property
at 255 Sheridan Road, Noblesville, Indiana
10.06 * Lease dated October 11, 1993 between Registrant and N/A
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 N/A
Officers of the 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 Appreciation N/A
Rights Plan
Page 14
<PAGE>
10.13 ** Registrant's Supplemental Executive Retirement Plan N/A
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 Services, N/A
Inc. of Student Loan Purchase and Sale Agreements
Effective April 1, 1993
10.18 * Student Loan Servicing Agreement, dated August 19, N/A
1989
10.19 * Student Loan Servicing Agreement, dated February 1, N/A
1997
10.20 ** Registrant's Employees' Thrift and Retirement Plan N/A
10.20 (a)**** Amendment No. 1, dated October 26, 1995 to the N/A
Registrant's Employees' Thrift and Retirement Plan
10.21 *** Registrant's 1994 Stock Option and Stock Appreciation N/A
Rights Plan
10.22 *** Registrant's 1994 Directors' Stock Option Plan N/A
10.23 **** Lease dated November 1, 1995 between Registrant and N/A
Eaton & Lauth, Meridian Park Shoppes, for property at
12440 North Meridian Street, Carmel, Indiana
10.24 ***** Lease dated March 18, 1997 between Registrant and N/A
Riverview Hospital, for property at 2025 Cherry Street,
Noblesville, Indiana
10.25 ****** Sublease dated September 11, 1997 between Registrant N/A
and Wal-Mart Stores, Inc., for property at 16865
Clover Road, Noblesville, Indiana
10.26 ****** Amendment No. 1 to Lease Agreement, dated September N/A
30, 1997 between the Registrant and Phoenix Home Life
Mutual Insurance Company for property at 10333 North
Meridian Street, Suite 111, Indianapolis, Indiana
13 The Annual Report to Shareholders of the Company for 15
the year ended December 31, 1997 (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 51
27 Financial Data Schedule 52
Page 15
EXHIBIT 13. THE ANNUAL REPORT TO SHAREHOLDERS OF THE COMPANY FOR THE YEAR
ENDED DECEMBER 31, 1997.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
METROBANCORP & SUBSIDIARY
(dollars in thousands, except per share data)
Year ended December 31,
OPERATIONS 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $ 5,032 $ 4,354 $ 4,150 $ 3,556 $ 3,005
Non-Interest Income 877 667 756 520 432
Provision for Loan Losses 200 67 367 165 247
Non-Interest Expense 4,360 3,842 3,489 3,077 2,967
Net Income before Cumulative Effect of Change in
Accounting for Income Taxes 809 624 622 481 135
Cumulative Effect of Change in
Accounting for Income Taxes -- -- -- -- 439
Net Income 809 624 622 481 574
CONSOLIDATED BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 124,718 $ 113,383 $ 110,879 $ 90,665 $ 88,930
Total Deposits 111,234 99,284 94,864 77,198 73,434
Loans, Net 76,297 64,519 59,542 55,898 48,921
Total Investment Securities 28,037 31,216 29,075 26,882 17,418
Shareholders' Equity 12,132 11,501 11,145 10,351 5,118
Weighted Average Shares Outstanding 1,681,291 1,681,291 1,681,291 1,409,874 735,837
GENERAL YEAR END
- -----------------------------------------------------------------------------------------------------------------------------
Number of Employees 44 43 42 43 40
Number of Shareholders of Record 319 344 364 383 269
Number of Shares Outstanding 1,681,291 1,681,291 1,681,291 1,681,291 735,837
PER COMMON SHARE DATA
- -----------------------------------------------------------------------------------------------------------------------------
Net Income before Cumulative Effect of Change
in Accounting for Income Taxes per Common Share $ 0.48 $ 0.37 $ 0.37 $ 0.34 $ 0.18
Cumulative Effect of Change in Accounting for
Income Taxes per Common Share -- -- -- -- $ 0.60
Net Income Per Common Share $ 0.48 $ 0.37 $ 0.37 $ 0.34 $ 0.78
Net Income Per Common Share - Assuming Dilution $ 0.47 $ 0.37 $ 0.37 $ 0.34 $ 0.78
Cash Dividends Per Share $ 0.20 $ 0.20 $ 0.10 -- --
SELECTED PERFORMANCE RATIOS
- -----------------------------------------------------------------------------------------------------------------------------
Return on Average Assets 0.72% 0.60% 0.64% 0.55% 0.77%
Return on Average Equity 6.86% 5.51% 5.71% 5.36% 10.80%
Average Shareholders' Equity to Average Assets 10.45% 10.82% 11.23% 10.24% 7.13%
Dividend Payout Ratio 41.67% 54.05% 27.03% -- --
</TABLE>
Page 16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information is intended to provide an analysis of the
consolidated financial condition and performance of Metro and MetroBank
("Bank") as of December 31, 1997 and 1996 and for each of the three years
ended December 31, 1997, 1996 and 1995. 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 1997 was $809,000, an increase of 29.6 percent from the
$624,000 reported in 1996. Total loans amounted to $77.3 million and $65.4
million at December 31, 1997 and 1996, respectively. The investment portfolio
amounted to $28.0 million and $31.2 million at December 31, 1997 and 1996,
respectively. Total interest income increased by $950,000 or 12.1 percent for
the year, due principally to growth in the Bank's loan portfolio. The Bank
increased its provisions for loan losses from $67,000 in 1996 to $200,000 in
1997. This represents an increase of $133,000 or 198.5 percent over the
amount provided in 1996. The provisions made in 1997 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. This increase is principally due to the growth
experienced in the installment and commercial loan portfolios.
Net income in 1996 was $624,000, a slight increase from the $622,000 reported
in 1995. During 1996, Metro's total loans outstanding increased by $4.9
million or 8.1 percent. During that same period, the investment portfolio
increased $2.1 million or 7.2 percent. These increases allowed interest
income to increase by $540,000 or 7.5 percent during 1996.
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
by 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
also have significant effects on the changes in net interest income from one
period to another.
In 1997, net interest income was $5.0 million, an increase of 15.6 percent
over 1996. In 1997, the net interest margin increased to 4.8 percent of
average earning assets compared to 4.5 percent in 1996. This increase is
primarily a result of growth in the Bank's loan portfolio, combined with an
overall higher loan portfolio yield.
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 matured in 1996 and
repriced at lower prevailing earnings rates.
Page 17
<PAGE>
NET INTEREST INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31, Percentage change from
INTEREST INCOME 1997 1996 1995 1996 to 1997 1995 to 1996
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest and Fees on Loans $7,133 $6,130 $5,707 16.4% 7.4%
Interest on Investment Securities 1,586 1,600 1,483 (0.9) 7.9
Interest on Federal Funds Sold 104 143 217 (27.3) (34.1)
------ ------ ------ ------ ------
Total Interest Income 8,823 7,873 7,407 12.1% 6.3%
------ ------ ------ ------ ------
INTEREST EXPENSE
Interest on Deposits 3,754 3,496 3,229 7.4% 8.3%
Interest on Borrowings 37 23 28 60.9 (17.9)
------ ------ ------ ------ ------
Total Interest Expense 3,791 3,519 3,257 7.7% 8.0%
------ ------ ------ ------ ------
Net Interest Income $5,032 $4,354 $4,150 15.6% 4.9%
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS OF CHANGE IN NET INCOME
(dollars in thousands)
1996 vs. 1997 1995 vs. 1996
------------------------------------------ ----------------------------------------
Interest and Fee Income on: Dollar Attributable Attributable Dollar Attributable Attributable
Change to Volume to Rate Change to Volume to Rate
------ --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans $1,003 $ 859 $ 144 $ 423 $ 407 $ 16
Investment Securities (14) (38) 24 117 180 (63)
Federal Funds Sold (39) (48) 9 (74) (51) (23)
------- ------ ------ ------ ------ ------
Total Interest Income 950 773 177 466 536 (70)
Interest Expense on:
Savings and Time Deposits 258 197 61 267 242 25
Term Borrowings 14 20 (6) (5) (21) 16
------- ------ ------ ------ ------ ------
Total Interest Expense 272 217 55 262 221 41
------- ------ ------ ------ ------ ------
Net Interest Income(1) $ 678 $ 556 $ 122 $ 204 $ 315 $(111)
======= ====== ====== ====== ====== ======
</TABLE>
- -------------------------------
(1) Interest on non-accruing loans is not included
Page 18
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AND INTEREST RATES AND DIFFERENTIAL VARIANCE ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- ----------------------------
Average Yield / Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Earning Assets:
Investment Securities $ 29,595 $1,586 5.36% $ 30,318 $1,600 5.28% $26,918 $1,483 5.51%
Federal Funds Sold 1,824 104 5.70% 2,669 143 5.36% 3,619 217 6.00%
Loans, net(2) 71,997 7,133 9.91% 63,319 6,130 9.68% 59,115 5,707 9.65%
----------------------------- ----------------------------- ----------------------------
Total Earning Assets $103,416 $8,823 8.53% $ 96,306 $7,873 8.17% $89,652 $7,407 8.26%
---------------- ---------------- ----------------
Non-Earning Assets:
Cash and Due from Banks 5,574 4,453 4,783
Premises and
Equipment, net 1,575 1,996 1,736
Other Assets 1,835 1,906 896
-------- -------- -------
Total Assets $112,400 $104,661 $97,067
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Interest Bearing Liabilities:
Savings and Time
Deposits $ 79,748 $3,754 4.70% $ 75,597 $3,496 4.62% $70,328 $3,229 4.59%
Term Borrowings 581 37 6.37% 271 23 8.49% 519 28 5.39%
----------------------------- ----------------------------- ----------------------------
Total Interest Bearing
Liabilities $ 80,329 $3,791 4.72% $ 75,868 $3,519 4.64% $70,847 $3,257 4.60%
---------------- ---------------- ----------------
Non-Interest Bearing
Liabilities:
Demand Deposits 18,993 16,443 14,897
Other Liabilities 1,275 1,027 424
Shareholders' Equity 11,803 11,323 10,899
-------- -------- -------
Total Liabilities and
Shareholders' Equity $112,400 $104,661 $97,067
======== ======== =======
Net Interest Margin $5,032 4.87% $4,354 4.52% $4,150 4.63%
====== ====== ======
</TABLE>
- -------------------------------
(2) Includes principal balances of non-accruing loans. Interest on
non-accruing loans is not included.
Page 19
<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 losses inherent 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 $200,000, $67,000 and $367,000 in
1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, the Bank
had an allowance for loan losses of $998,000 and $866,000, respectively. The
Bank's allowance for loan losses to ending total loans, as a percentage,
amounted to 1.29 percent and 1.32 percent at December 31, 1997 and 1996,
respectively. The increases in the provision during 1997 were commensurate
with the increases in the loan portfolio balances.
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 this portfolio of loans (see "Loan Quality"
discussed hereinafter). The allowance for loan losses as a percentage of the
remaining loan portfolio (excluding guaranteed student loans) amounted to 1.38
percent at December 31, 1997, as compared to 1.55 percent at December 31,
1996.
NON-INTEREST INCOME
In 1997, Metro's non-interest income to average total assets ratio increased
to 0.78 percent from 0.64 percent in 1996, which approximated the 0.78 percent
in 1995. Excluding net securities, losses and gain on the sale of real
estate, non-interest income was $802,000, $644,000 and $754,000 in 1997, 1996
and 1995, respectively. Service charges on deposit accounts increased 5.63
percent while other service charges, commissions and fees increased $141,000
or 41.23 percent in 1997. This increase is due primarily to additional fee
income resulting from transactions performed at the Bank's ATMs by
non-customers. A surcharge for non-customers using the Bank's ATMs was
implemented in April, 1997.
Page 20
<PAGE>
NON-INTEREST INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Percent Change From
For the year ended December 31, 1996 to 1996 to
1997 1996 1995 1997 1996
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Service Charges on
Deposit Accounts $319 $302 $309 5.63% (2.27%)
Other Service Charges,
Commissions & Fees 483 342 445 41.23% (23.15%)
----- ----- ----- ------- ---------
802 644 754 24.53% (14.59%)
Securities Gain/(Loss), Net (15) (12) 2 25.00% (700.00%)
Gain on Sale of Real Estate 90 35 - 157.14% -
----- ----- ----- ------- ---------
Total Non-Interest Income $877 $667 $756 31.48% (11.77%)
===== ===== ===== ======= =========
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense increased $518,000 in 1997, or 13.5 percent over the 1996
level. As a percentage of total average assets, this category was 3.9 percent
in 1997 compared to 3.7 percent in 1996 and 3.6 percent in 1995. Salary and
employee benefits, the largest non-interest expense, increased $225,000 or
14.3 percent in 1997. This reflects an increase in the Bank's staff, combined
with higher employee compensation and benefit costs. The Company's other
expenses increased $139,000 or 20.9 percent from 1996, and is due primarily to
increases in loan expenses, meeting expenses and operating supplies.
Throughout 1995, 1996 and 1997, Metro developed an extensive ATM network.
Metro entered into agreements with several area Shell ETD stores to deploy
ATMs in their facilities. At December 31, 1995, three new off-premise ATMs
had been deployed. In 1996, ten new ATMs were deployed. During 1997, Metro
installed an additional four ATMs. At December 31, 1997, Metro's ATM network
contains twenty-two machines, of which, seventeen are located at off-premise
locations and five are located at Bank branches. Currently the Bank
disburses cash at these sites and intends to allow users to conduct other
paper based transactions in the future.
During 1997, Metro's legal and professional services expense increased to
$258,000 from $137,000 in 1996. This increase is due principally to the
expenses incurred by the Bank for the purpose of starting up a new in-store
banking facility scheduled to open for business during the first quarter of
1998.
Also, during 1997, the Bank's student loan servicing fees decreased from
$108,000 in 1996 to $63,000 in 1997. This decrease is due primarily to the
reduction in the number and balance of loans within the Bank's student loan
portfolio.
In 1997, the Bank's FDIC insurance assessment decreased by 86.7 percent or
$163,000. This decrease 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 in 1996.
Page 21
<PAGE>
Equipment expense increased $138,000 in 1997 or 46.2 percent from 1996. This
increase is due primarily to the addition of five automated teller machines
during 1997 and the additional equipment expense associated with the opening
of a new banking office in the first quarter of 1997.
Non-interest expense increased $353,000 or 10.1 percent in 1996 over the 1995
level. Salaries and employee benefits, the largest non-interest expense,
increased $98,000 or 6.6 percent from 1995. This increase reflects an
increase in the Bank's employee base and higher employee compensation and
benefit costs.
During 1996, advertising and public relations expense decreased $42,000 or
15.44 percent from 1995. This decrease was due primarily to the reduced
number of television and radio commercials during the year.
During 1996, the FDIC insurance assessment increased $71,000 or 60.68 percent
from 1995. This increase is due principally to the recognition of a one-time
recapitalization charge on the Savings Association Insurance Fund (SAIF) of
$134,000 during the third quarter of 1996.
NON-INTEREST EXPENSE
(dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31, Percent Change From
1997 1996 1995 1996 to 1997 1995 to 1996
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits $1,797 $1,572 $1,474 14.31% 6.65%
Net Occupancy Expense 327 265 195 23.40% 35.90%
Equipment Expense 437 299 196 46.15% 52.55%
Advertising and Public Relations 234 230 272 1.74% (15.44%)
Legal and Professional Services 258 137 132 88.32% 3.79%
Data Processing 275 238 179 15.55% 32.96%
FDIC Insurance Assessment 25 188 117 (86.70%) 60.68%
Student Loan Servicing Fees 63 108 133 (41.67%) (18.80%)
Amortization of Core Deposit
Intangible 141 141 141 0.00% 0.00%
Other 803 664 650 20.93% 2.15%
------ ------ ------ ------ ------
Total $4,360 $3,842 $3,489 13.48% 10.12%
====== ====== ====== ====== ======
</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
$540,000 represents an effective tax rate of 40.0 percent in 1997. This
compares to an effective tax rate of 43.9 percent in 1996 and 40.8 percent in
1995.
Details relative to Metro's income tax provisions are discussed in Note 10 of
the Consolidated Financial Statements included in this Annual Report.
Page 22
<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 measure 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, 1997, 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, 1997 (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> <C> <C>
TOTAL CAPITAL
(to Risk Weighted Assets)
Consolidated $12,906 15.53% $6,650 Greater Than or Equal To 8.00% $8,312 Greater Than or Equal To 10.00%
Bank 9,650 11.71% 6,593 Greater Than or Equal To 8.00% 8,241 Greater Than or Equal To 10.00%
TIER 1 CAPITAL
(to Risk Weighted Assets)
Consolidated 11,908 14.33% 3,325 Greater Than or Equal To 4.00% 4,987 Greater Than or Equal To 6.00%
Bank 8,652 10.50% 3,296 Greater Than or Equal To 4.00% 4,944 Greater Than or Equal To 6.00%
TIER 1 CAPITAL
(to Average Assets)
Consolidated 11,908 9.89% 4,815 Greater Than or Equal To 4.00% 6,018 Greater Than or Equal To 5.00%
Bank 8,652 7.40% 4,680 Greater Than or Equal To 4.00% 5,850 Greater Than or Equal To 5.00%
</TABLE>
As of December 31, 1997, 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 Metro's or the Bank's capital
categories.
Page 23
<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 investment securities as "available for sale."
Available for sale securities are stated at their current market value.
Unrealized gains and losses associated with available for sale securities, net
of taxes, are excluded from earnings and reported as a net amount in a
separate component of shareholders' equity until realized.
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 24.8 percent of total earning assets at
December 31, 1997. 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 1997, proceeds from sales of investment securities amounted to
$7.8 million.
Total investment securities at December 31, 1997 decreased by $3.2 million or
10.2 percent over the prior year. This decrease is attributable primarily to
funding of growth in the loan portfolio.
Weighted average yields of the investment securities portfolio were 5.44
percent in 1997 and 5.54 percent in 1996.
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, 1997, the derivative securities
amounted to $9.5 million classified as held to maturity and $2.0 million
included in available for sale securities. Although these securities' current
market values are below cost, Metro believes these securities to be only
temporarily impaired due to their interest rate characteristics. Derivative
securities maturing within one year comprise 83.9 percent of total derivative
securities, with the remainder maturing in 6-10 years. The Bank has the
ability to hold these securities until their respective maturity dates, when
significant differences between book value and market value will no longer
exist. 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 $7.5 million at December 31, 1997 compared to
$6.3 million at December 31, 1996, an increase of $1.2 million from year-end
1996. This increase is attributable to the Bank's daily fluctuations in cash
and liquidity requirements.
Page 24
<PAGE>
INVESTMENT SECURITIES PORTFOLIO
(dollars in thousands)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
------- ------- -------- -------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Investment Securities Held to Maturity
- --------------------------------------
Mortgage-Backed Securities $ 33 $ - $ - $ 33
U.S. Government Agencies and Corporations 9,486 - (193) 9,293
------- ------- -------- -------
Total Investment Securities Held to Maturity 9,519 - $ (193) 9,326
------- ------- -------- -------
Investment Securities Available for Sale
- ----------------------------------------
Mortgage-Backed Securities 10,977 55 (26) 11,006
U.S. Government Agencies and Corporations 7,455 89 (32) 7,512
------- ------- -------- -------
Total Investment Securities Available for Sale 18,432 144 (58) 18,518
------- ------- -------- -------
Total Investment Securities $27,951 $ 144 $ (251) $27,844
======= ======= ======== =======
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
------- ------- -------- -------
Total Investment Securities Held to Maturity 10,056 2 (549) 9,509
------- ------- -------- -------
Investment Securities Available for Sale
- ----------------------------------------
Mortgage-Backed Securities 15,913 51 (129) 15,835
U.S. Government Agencies & Corporations 5,401 - (76) 5,325
------- ------- -------- -------
Total Investment Securities Available for Sale 21,314 51 (205) 21,160
------- ------- -------- -------
Total Investment Securities $31,370 $ 53 $ (754) $30,669
======= ======= ======== =======
</TABLE>
Page 25
<PAGE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
(dollars in thousands)
<TABLE>
<CAPTION>
As of December 31, 1997
Held to Maturity Available for Sale
------------------------ -------------------------
Fair Market Fair Market
Cost Value Cost Value
------ ------ ------- -------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities
- -----------------------------------------
Due within One Year $ 33 $ 33 $ - $ -
1 - 5 Years - - 1,999 1,997
5 - 10 Years - - - -
Due After 10 Years - - 8,978 9,009
------ ------ ------- -------
Total Mortgage-Backed Securities 33 33 10,977 11,006
------ ------ ------- -------
U.S. Government Agencies and Corporations
- -----------------------------------------
Due within One Year 7,986 7,893 1,500 1,491
1 - 5 Years - - 1,501 1,494
5 - 10 Years 1,500 1,400 1,171 1,166
Due After 10 Years - - 3,283 3,361
------ ------ ------- -------
Total U.S. Government Agencies and
Corporations 9,486 9,293 7,455 7,512
------ ------ ------- -------
Total Investment Securities $9,519 $9,326 $18,432 $18,518
====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996
Held to Maturity Available for Sale
------------------------ -------------------------
Fair Market Fair 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
5 - 10 Years - - 2,401 2,348
Due After 10 Years - - 11,343 11,312
------- ------ ------- -------
Total Mortgage-Backed Securities 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
5 - 10 Years 1,500 1,290 - -
Due After 10 Years - - - -
------- ------ ------- -------
Total U.S. Governments Agencies and
Corporations 9,462 8,913 5,401 5,325
------- ------ ------- -------
Time Deposit
- -----------------------------------------
Due within One Year 500 500 - -
------- ------ ------- -------
Total Investment Securities $10,056 $9,509 $21,314 $21,160
======= ====== ======= =======
</TABLE>
Page 26
<PAGE>
INVESTMENT SECURITIES WEIGHTED AVERAGE YIELD
<TABLE>
<CAPTION>
Due within Due After 10
One Year 1 to 5 Years 5 to 10 Years Years Overall
-------- ------------ ------------- ----- -------
<S> <C> <C> <C> <C> <C>
1997 3.68% 6.08% 5.11% 6.71% 5.44%
1996 6.24% 4.87% 5.40% 6.62% 5.54%
</TABLE>
LOANS
Total loans increased by 18.2 percent from the prior year to $77.3 million at
December 31, 1997. This increase is due to the growth of both the commercial
portfolio and the installment portfolio, which grew in 1997 by 35.5 percent
and 28.5 percent, respectively. The Bank continued to make a concerted effort
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 1997, the Bank increased the installment loan portfolio by expanding
its indirect lending relationship through a local window manufacturer.
Throughout 1997, the Bank sold approximately $3.5 million of its guaranteed
student loan portfolio to Secondary Market Services, Inc., an affiliate of USA
Group, Inc., for the primary purpose of providing 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. While Guaranteed Student Loans
(GSLs) account for 6.4 percent of the Bank's loan portfolio at December 31,
1997, these loans are comprised of approximately 1,900 promissory notes made
to nearly 900 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, Inc.
<TABLE>
<CAPTION>
LOAN PORTFOLIO AT YEAR-END
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------
Percent change from
December 31, 1996 to 1995 to
1997 1996 1995 1997 1996
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Commercial $47,527 $35,064 $31,122 35.54% 12.7%
Real Estate - Construction 3,689 3,970 2,251 (7.08%) 76.4%
Mortgage 646 787 838 (17.92%) (6.1%)
Installment 20,467 15,933 13,242 28.46% 20.3%
Student Loans 4,966 9,631 12,999 (48.44%) (25.9%)
-------- -------- -------- -------- -------
77,295 65,385 60,452 18.22% 8.2%
-------- -------- -------- -------- -------
Less: Allowance for Loan
Losses (998) (866) (910) 15.24% (4.8%)
-------- -------- -------- -------- -------
Net Loans $76,297 $64,519 $59,542 18.26% 8.4%
======== ======== ======== ======== =======
</TABLE>
The Bank's loan portfolio is comprised primarily of commercial and installment
loans. At December 31, 1997, 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 27
<PAGE>
COMPOSITION OF LOAN BY TYPE
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Commercial 61.5% 53.6% 51.5%
Real Estate - Construction 4.8% 6.1% 3.7%
Mortgage 0.8% 1.2% 1.4%
Installment 26.5% 24.4% 21.9%
Student Loans 6.4% 14.7% 21.5%
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
</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 of Directors reviews
all problem loans and delinquency reports at each Board meeting. The Bank
utilizes a risk system whereby each loan (excluding student loans) 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 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, 1997,
Metro had investments in loans which were impaired in accordance with SFAS
No.'s 114 and 118 of $9,700. Of this amount, $5,900 had no related specific
allowance. The remaining $3,800 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 a loan is
classified as impaired. All payments received for loans which are classified
as impaired are utilized to reduce the principal balance outstanding. Interest
income of $3,200 would have been recorded in 1997 on impaired loans if such
loans had been accruing interest throughout the year in accordance with their
original terms. In 1997, interest income in the amount of $1,600 was recorded
on impaired loans prior to being classified as impaired. The average balance
of impaired loans was $42,500 at December 31, 1997.
Loans are charged off when they are deemed uncollectible. Total charged-off
loans, net of recoveries, were $68,000 in 1997, compared to $111,000 in 1996
and $43,000 in 1995.
Page 28
<PAGE>
The following tables present activity in the allowance for loan losses account
and allocation of the allowance among loan categories:
ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
<TABLE>
<CAPTION>
For the year ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Allowance for Loan Losses, January 1 $ 866 $ 910
-------- --------
Loans Charged-Off:
Commercial - 48
Installment 80 71
-------- --------
Total Charged-Off Loans 80 119
-------- --------
Recoveries on Charged-Off Loans:
Commercial 5 7
Installment 7 1
-------- --------
Total Recoveries on Charged-Off Loans 12 8
Net Charged-Off Loans 68 111
Provision for Loan Losses 200 67
-------- --------
Allowance for Loan Losses, December 31 $ 998 $ 866
======== ========
Average Loans Outstanding $72,893 $64,224
======== ========
Net Charged-Off Loans to Average Loans 0.09% 0.17%
======== ========
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Commercial $ 652 $ 532
Real Estate - Construction 51 60
Mortgage 9 5
Installment 278 263
Student Loans 8 6
------- -------
Total $ 998 $ 866
======= =======
</TABLE>
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, 1997, approximately $992,000 or 20.0 percent of the Bank's
student loan portfolio was disbursed after October 1, 1993.
Page 29
<PAGE>
UNDER-PERFORMING ASSETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Non-Accruing Loans $ 10 $ 157
Renegotiated Loans - -
Ninety (90) Days Past Due 146 445
------ ------
Total Under-Performing Assets $ 156 $ 602
====== ======
Under-Performing Assets as a
Percentage of Total Loans 0.20% 0.92%
====== ======
Past Due Loans (90 Days or More)
Commercial - -
Real Estate - Construction - -
Mortgage - -
Installment - -
Student Loans 146 445
------ ------
Total $ 146 $ 445
====== ======
</TABLE>
In addition to the loans classified as under-performing, management is closely
monitoring loans approximating $1,142,000 as of December 31, 1997 for the
borrowers' ability to continue to comply with contractual terms. For these
loans, 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.
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 denomination
certificates of deposit and securities sold under agreements to repurchase.
The following table presents information with respect to the average balances
of these funding sources.
Page 30
<PAGE>
FUNDING SOURCES-AVERAGE BALANCES
(dollars in thousands)
<TABLE>
<CAPTION>
Percent Change from
For the year ended December 31, ------------------------
------------------------------------ 1996 to 1995 to
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Core Deposits:
Non-Interest Bearing Demand $18,993 $16,443 $13,767 15.51% 19.44%
Savings Accounts 5,354 5,764 5,686 7.11% 1.37%
Money Market and NOW Accounts 31,992 28,760 25,164 11.24% 14.29%
Other Time Deposits 29,963 29,652 30,226 1.05% (1.90%)
------------------------------------ ------ --------
Total Core Deposits $86,302 $80,619 $74,843 7.05% 7.72%
------------------------------------ ------- --------
Time Deposits of $100,000 and Over $12,439 $11,464 $ 9,278 8.50% 23.56%
Federal Funds Purchased and
Securities Sold under
Agreements to Repurchase 510 194 533 162.89% (63.60%)
------------------------------------ ------- --------
Total Funding Sources $99,251 $92,277 $84,654 7.56% 9.00%
==================================== ======= ========
</TABLE>
FUNDING SOURCES - YIELDS
<TABLE>
<CAPTION>
Percent Change from
For the year ended December 31, ------------------------
---------------------------------- 1996 to 1995 to
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Core Deposits
Non-Interest Bearing Demand - - - - -
Savings Accounts 2.72% 2.77% 3.21% (1.81%) (13.71%)
Money Market and NOW Accounts 3.69% 3.40% 3.30% 8.53% 3.03%
Other Time Deposits 5.75% 5.76% 5.65% .17% 1.95%
---------------------------------- ------- --------
Total Core Deposits 3.54% 4.64% 4.61% 23.71% .65%
---------------------------------- ------- --------
Federal Funds Purchased and
Securities Sold Under
Agreements to Repurchase 5.42% 4.88% 5.40% 11.07% (9.63%)
---------------------------------- ------- --------
Total Funding Sources 3.83% 4.64% 4.62% 17.46% .43%
================================== ======= ========
</TABLE>
The Bank's average total core deposits have shown steady growth over the past
several years, increasing by $5.7 million or 7.0 percent in 1997 compared to
7.7 percent in 1996. During 1997, the Bank experienced increases in all
categories of average deposits, except for savings accounts. The daily
average balance of savings, money market and NOW accounts and certificates of
deposit increased 5.5 percent during 1997.
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.
TIME DEPOSIT OF $100,000 AND OVER
(dollars in thousands)
<TABLE>
<CAPTION>
Year End 1 - 90 91 - 180 181 - 366 Beyond
Balance Days Days Days 1 Year
-------- ------ -------- --------- ------
<S> <C> <C> <C> <C> <C>
1997 $12,530 $3,200 $1,259 $4,083 $3,988
1996 $10,800 $1,497 $1,649 $5,435 $2,219
</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 $2.5 million. The average balance of Federal Funds purchased
during 1997 was $3,150.
Page 31
<PAGE>
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, 1997, $41.0 million or 53.1 percent of the loan portfolio are
fixed rate loans, excluding non-accruing loans. Variable rate loans, excluding
non-accruing loans, amounted to $36.3 million or 46.9 percent of the loan
portfolio at December 31, 1997. Fixed and variable rate loans with scheduled
maturities greater than one year amounted to $31.2 million and $13.5 million,
respectively. In the investment securities category, $9.5 million or 33.9
percent of the portfolio matures within one year. The Bank's average
loan-to-deposit ratio, another indication of liquidity, was 72.9 percent in
1997 compared to 69.8 percent for 1996.
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 and assure earnings stability during
periods of adverse fluctuations in market interest rates.
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 ten 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 a one year time frame.
The cumulative GAP ratio of the Bank on December 31, 1997 was 114.2 percent
for interest rate sensitive assets and liabilities of ninety days or less and
107.9 percent for interest rate sensitive assets and liabilities of one year
or less. The ratios fall within the Bank's desired liquidity range for one
year. 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 positive impact on the Bank's net interest margin and earnings.
In the event of a decline in general interest rates, management believes that
such a decline would have a minimal effect on the Bank's earnings.
Page 32
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
1-90 91 - 365 1-5 Beyond 5
Days Days Years Years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Earning Assets:
Investment Securities $ 12,167 $ 9,916 $ 5,954 $ - $ 28,037
Federal Funds Sold 7,500 - - - 7,500
Loans (excluding non-accruing) 34,822 7,726 22,637 12,110 77,295
-------- -------- -------- -------- --------
Total Earning Assets $ 54,489 $ 17,642 $ 28,591 $ 12,110 $112,832
======== ======== ======== ======== ========
Interest-Bearing Liabilities:
Savings and Time Deposits $ 47,723 $ 19,098 $ 15,861 $ - $ 82,682
Borrowed Funds - - - - -
-------- -------- -------- -------- --------
Total Interest-Bearing $ 47,723 $ 19,098 $ 15,861 $ - $ 82,682
======== ======== ======== ======== ========
Liabilities
Interest Rate Sensitivity Gap Per
Period $ 6,766 $ (1,456) $ 12,730 $ 12,110 $ 30,150
Cumulative Interest Rate Gap $ 6,766 $ 5,310 $ 18,150 $ 30,150 $ 30,150
Cumulative Ratio of Interest Rate
Sensitivity 114.2% 107.9% 121.8% 136.5% 136.5%
</TABLE>
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.
THE YEAR 2000 ISSUE
The Company has established an internal committee comprised of several
department heads to address the Year 2000 issue. Through the efforts of the
committee, a written Year 2000 Plan for the Company was developed. The
purpose of the plan is to ensure that the Company's systems are compliant with
processing in the Year 2000. The Year 2000 Plan also identifies and addresses
other internal and external business risks applicable to the Year 2000. The
majority of the Company's systems are provided by a third party vendor who has
contractually guaranteed to be fully compliant by the end of the 1999 calendar
year. The company anticipates that certain software upgrades, hardware
purchases and modifications to its other systems will be necessary to be fully
compliant by the Year 2000. At this time, the estimated cost of the Year
2000 compliance is not expected to be material to the Company.
Page 33
<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, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows, for each of the three years in the period ended
December 31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 28, 1998.
Page 34
<PAGE>
CONSOLIDATED STATEMENT OF CONDITION
METROBANCORP & SUBSIDIARY
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Banks $ 9,595 $ 7,475
Federal Funds Sold 7,500 6,300
----------------------------
Total Cash and Cash Equivalents 17,095 13,775
----------------------------
Investment Securities Held to Maturity - at Amortized
Cost (Market Value: 1997 - $9,326 and 1996 - $9,509) 9,519 10,056
Investment Securities Available for Sale - at Market Value 18,518 21,160
----------------------------
Total Investment Securities 28,037 31,216
----------------------------
Loans 77,295 65,385
Allowance for Loan Losses (998) (866)
----------------------------
Loans, net 76,297 64,519
----------------------------
Premises and Equipment, net 1,406 1,821
Accrued Interest Receivable 834 871
Core Deposit Intangible, net of Accumulated
Amortization of $944 in 1997 and $804 in 1996 182 322
Deferred Tax Asset 419 360
Other Assets 448 499
----------------------------
TOTAL ASSETS $ 124,718 $ 113,383
============================
LIABILITIES
- ---------------------------------------------------------------------------------------------------------
Deposits:
Non-Interest Bearing Demand $ 28,552 $ 23,141
Interest Bearing:
Savings and NOW Accounts 40,500 35,507
Time Deposits of $100,000 and over 12,530 10,800
Other Time Deposits 29,652 29,836
----------------------------
Total Deposits 111,234 99,284
----------------------------
Securities Sold Under Agreements to Repurchase - 1,500
Accrued Interest Payable 426 419
Other Liabilities 926 679
----------------------------
TOTAL LIABILITIES 112,586 101,882
----------------------------
COMMITMENTS AND CONTINGENCIES (Note 11) - -
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Preferred Stock: 1,000,000 authorized;
none outstanding - -
Common Stock: 3,000,000 authorized;
1,681,291 issued and outstanding in 1997 and 1996 11,210 11,210
Accumulated Earnings 880 407
Net Unrealized Gain/(Loss) on Investment Securities Available for Sale 42 (116)
----------------------------
TOTAL SHAREHOLDERS' EQUITY 12,132 11,501
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 124,718 $ 113,383
============================
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these
Page 35
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
METROBANCORP & SUBSIDIARY
(dollars in thousands, except per share)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 7,133 $ 6,130 $ 5,707
Interest on Investment Securities 1,586 1,600 1,483
Interest on Federal Funds Sold 104 143 217
----------- ----------- -----------
TOTAL INTEREST INCOME 8,823 7,873 7,407
----------- ----------- -----------
INTEREST EXPENSE:
Interest on Deposits 3,754 3,496 3,229
Interest on Term Borrowings 37 23 28
----------- ----------- -----------
TOTAL INTEREST EXPENSE 3,791 3,519 3,257
----------- ----------- -----------
NET INTEREST INCOME 5,032 4,354 4,150
Provision for Loan Losses 200 67 367
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,832 4,287 3,783
----------- ----------- -----------
NON-INTEREST INCOME:
Service Charges on Deposit Accounts 319 302 309
Net Securities Gain/(Loss) (15) (12) 2
Other Service Charges, Commissions and
and Fees 483 342 445
Gain on Sale of Real Estate 90 35 -
----------- ----------- -----------
TOTAL NON-INTEREST INCOME 877 667 756
----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 1,797 1,572 1,474
Net Occupancy Expense 327 265 195
Equipment Expense 437 299 196
Advertising and Public Relations 234 230 272
Legal and Professional Services 258 137 132
Data Processing 275 238 179
FDIC Insurance Assessment 25 188 117
Student Loan Servicing Fees 63 108 133
Amortization of Core Deposit Intangible 141 141 141
Other 803 664 650
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 4,360 3,842 3,489
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,349 1,112 1,050
Applicable Income Taxes 540 488 428
----------- ----------- -----------
NET INCOME $ 809 $ 624 $ 622
=========== =========== ===========
NET INCOME PER COMMON SHARE $ 0.48 $ 0.37 $ 0.37
NET INCOME PER COMMON SHARE - ASSUMING DILUTION $ 0.47 $ 0.37 $ 0.37
WEIGHTED AVERAGE SHARES OUTSTANDING 1,681,291 1,681,291 1,681,291
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING-ASSUMING DILUTION 1,714,836 1,681,291 1,681,291
----------- ----------- -----------
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Page 36
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
METROBANCORP & SUBSIDIARY
(dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 809 $ 624 $ 622
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 200 67 367
Deferred Income Tax Benefit (164) (62) (71)
Depreciation and Amortization 517 394 293
Gain on Sale of Real Estate (90) (35) -
(Gain)/Loss on Sale of Securities 15 12 (2)
(Increase)/Decrease in Accrued Interest Receivable 37 82 (156)
(Increase)/Decrease in Other Assets 51 (12) (180)
Increase/(Decrease) in Accrued Interest Payable 7 (47) 113
Increase in Other Liabilities 247 175 141
--------- --------- ---------
TOTAL ADJUSTMENTS 820 574 505
--------- --------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 1,629 1,198 1,127
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------
Proceeds from Maturities of Investment Securities Held
to Maturity 500 233 66
Proceeds from Maturities of Investment Securities
Available for Sale 400 2,348 194
Proceeds from Sales of Investment Securities Available
for Sale 10,997 3,954 1,588
Purchases of Investment Securities Available for Sale (8,483) (8,483) (4,380)
Purchase of Student Loans - - (2,020)
Proceeds from Sales of Student Loans 3,546 1,178 4,005
Proceeds from the Repayment of Student Loans 1,119 2,190 1,002
Net Loans made to Customers (16,643) (8,412) (6,264)
Purchases of Premises and Equipment (320) (526) (531)
Proceeds from the Sale of Real Estate 461 409 -
--------- --------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (8,423) (7,189) (6,340)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Demand Deposits, NOW and Savings
Accounts 10,404 2,699 14,651
Net Increase in Time Deposits 1,546 1,721 3,015
Net Increase/(Decrease) in Securities Sold under
Agreements to Repurchase (1,500) (2,400) 1,500
Cash Dividends Paid (336) (336) (167)
--------- --------- ---------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 10,114 1,684 18,999
--------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 3,320 (4,307) 13,786
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,775 18,082 4,296
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,095 $ 13,775 $ 18,082
--------- --------- ---------
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year for Interest Expense $ 3,767 3,584 3,101
Cash Paid During the Year for Income Taxes 612 483 131
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Page 37
<PAGE>
CONSOLIDATED STATEMENT OF
SHAREHOLDERS' EQUITY
METROBANCORP & SUBSIDIARY
(dollars in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gains/(Loss) on
Common Shares Common Accumulated Investment Securities
Outstanding Stock Earnings/(Deficit) Available for Sale Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net Income - - 809 - 809
Dividend Paid - - (336) - (336)
Net Unrealized Gain on Investment
Securities Available for Sale - - - 158 158
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 1,681,291 $11,210 $ 880 $ 42 $12,132
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Page 38
<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 part 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 the
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. Available for sale securities are stated at their
current market value. Unrealized gains and losses associated with
available for sale securities, net of taxes, are excluded from earnings
and reported as a net amount in a separate component of shareholders'
equity until realized.
Net income reflects realized gains or losses from the sale of
investment securities on a specific identification basis. Interest
income and the amortization of the premium and discount arising at
acquisition are included in net income.
Allowance for Loan Losses - The allowance for loan losses is maintained
at a level believed adequate by management to absorb losses inherent 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. 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 are 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.
Page 39
<PAGE>
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 $1.5 million during the
year. The daily average outstanding balance of securities sold under
agreements to repurchase amounted to $3,150 for the year ended December
31, 1997.
Per Share Data - Basic net income per common share is computed by
dividing net income by the weighted average number of common shares
outstanding during each year. Net income per common share, assuming
full dilution, is computed as above except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the dilutive potential common shares (stock
options) had been issued. Below is a table reconciling basic net income
per common share and net income per common share - assuming full
dilution:
<TABLE>
<CAPTION>
For the Year Ended 1997
-----------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
NET INCOME PER COMMON SHARE
Income available to common
stockholders $809,000 1,681,291 $0.48
=========
EFFECTS OF DILUTIVE OPTIONS
Stock options - 33,545
----------- -------------
NET INCOME PER COMMON SHARE-ASSUMING DILUTION $809,000 1,714,836 $0.47
=========== ============= =========
</TABLE>
Per share data included in Metro's consolidated statement of operations
for 1997, 1996 and 1995 was based on 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 for those
years.
Reclassifications - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 1997
presentation. Such reclassifications had no effect on net income.
Impact of Accounting Changes - Effective January 1, 1997, Metro adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement provides accounting
standards for sales, securitization, and servicing of receivables, and
other financial assets, secured borrowing and collateral transactions,
and the extinguishment of liabilities. Certain other provisions of this
statement are not effective until January 1, 1998. Adoption of this
provision had no material impact on Metro's consolidated financial
statements.
The Financial Accounting Standards Board (FASB) issued SFAS No. 128,
"Earnings per Share." Metro adopted the provisions of this statement
effective December 31, 1997. This statement established standards for
computing and presenting earnings per share. The impact of this
adoption is presented on the consolidated statement of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and display of
comprehensive income and its components. The FASB also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," which established standards for reporting information on
operating segments. These statements are effective for fiscal years
beginning after December 15, 1997. Metro does not expect the impact of
these statements to be material to its disclosures.
Page 40
<PAGE>
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, 1997, the derivative securities amounted to $9.5 million
classified as held to maturity and $2.0 million included in available
for sale securities. Although these securities' current market values
are below cost, Metro believes these securities to be only temporarily
impaired due to their interest rate characteristics. The Bank has the
ability to hold these securities until their respective maturity dates,
when differences between book value and market value will no longer
exist. 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:
INVESTMENT SECURITIES PORTFOLIO
(dollars in thousands)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
DECEMBER 31, 1997 Cost Gains Losses Values
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Investment Securities Held to Maturity
- --------------------------------------
Mortgage-Backed Securities $ 33 $ - $ - $ 33
U.S. Government Agencies and Corporations 9,486 - (193) 9,293
--------- ---------- ---------- ---------
Total Investment Securities Held to Maturity 9,519 - (193) 9,326
--------- ---------- ---------- ---------
Investment Securities Available for Sale
- ----------------------------------------
Mortgage-Backed Securities 10,977 55 (26) 11,006
--------- ---------- ---------- ---------
U.S. Government Agencies and Corporations 7,455 89 (32) 7,512
--------- ---------- ---------- ---------
Total Investment Securities Available for Sale 18,432 144 (58) 18,518
--------- ---------- ---------- ---------
Total Investment Securities $27,951 $144 $(251) $27,844
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
DECEMBER 31, 1996 Cost Gains Losses Values
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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
--------- ---------- ---------- ---------
Total Investment Securities Held to
Maturity 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
--------- ---------- ---------- ---------
Total Investment Securities Available for Sale 21,314 51 (205) 21,160
--------- ---------- ---------- ---------
Total Investment Securities $31,370 $ 53 $(754) $30,669
========= ========== ========== =========
</TABLE>
Page 41
<PAGE>
The carrying value of U.S. government agencies, corporation securities,
and mortgaged-backed securities at December 31, 1997 and 1996 are shown
below by their 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, 1997
Held to Maturity Available for Sale
--------------------------- ----------------------------
Fair Market Fair Market
Cost Value Cost Value
------ ----------- ------- -----------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities
- -----------------------------------------
Due within One Year $ 33 $ 33 $ - $ -
1 - 5 Years - - 1,999 1,997
5 - 10 Years - - - -
Due After 10 Years - - 8,978 9,009
------ ------ ------- -------
Total Mortgage-Backed Securities 33 33 10,977 11,006
------ ------ ------- -------
U.S. Government Agencies and Corporations
- -----------------------------------------
Due within One Year 7,986 7,893 1,500 1,491
1 - 5 Years - - 1,501 1,494
5 - 10 Years 1,500 1,400 1,171 1,166
Due After 10 Years - - 3,283 3,361
------ ------ ------- -------
Total U.S. Government Agencies and
Corporations 9,486 9,293 7,455 7,512
------ ------ ------- -------
Total Investment Securities $9,519 $9,326 $18,432 $18,518
====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
Held to Maturity Available for Sale
--------------------------- ----------------------------
Fair Market Fair 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
5 - 10 Years - - 2,401 2,348
Due After 10 Years - - 11,343 11,312
------- ------- -------- -------
Total Mortgage-Backed Securities 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
5 - 10 Years 1,500 1,290 - -
Due After 10 Years - - - -
------- ------- -------- -------
Total U.S. Government Agencies and
Corporations 9,462 8,913 5,401 5,325
------- ------- -------- -------
Time Deposits
- -----------------------------------------
Due within One Year 500 500 - -
------- ------- -------- -------
Total Investment Securities $10,056 $ 9,509 $21,314 $21,160
======= ======= ======== =======
</TABLE>
Proceeds from sales of investments in debt securities were $11.0 million
in 1997 as compared to $4.0 million in 1996. Net realized loss on sale
of investment securities amounted to $15,000 during 1997 compared to a
$12,000 loss for the same period in 1996.
Page 42
<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.
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, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Carrying Value Fair Value
-------------- ----------
<S> <C> <C>
Financial Assets:
Cash & Cash Equivalents $ 17,095 $ 17,095
Investment Securities 28,037 27,844
Loans, Net 76,297 77,954
Deposits 111,234 111,444
Off-Balance Sheet Financial
Instruments 14,506 14,506
</TABLE>
5. LOANS
Total loans at December 31, 1997 and 1996 by major loan categories are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial $47,527 $35,064
Real Estate - Construction 3,689 3,970
Mortgage 646 787
Installment 20,467 15,933
Student Loans 4,966 9,631
-------- --------
Total Loans $77,295 $65,385
Allowance for Loan Losses (998) (866)
-------- --------
Loans, Net $76,297 $64,519
======== ========
</TABLE>
Page 43
<PAGE>
Transactions in the allowance for loan loss account for the years
indicated were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at Beginning of Year $866 $910 $586
Provision for Loan Losses 200 67 367
Charged-Off Loans (80) (119) (54)
Recoveries 12 8 11
------ ------ ------
Balance at End of Year $998 $866 $910
====== ====== ======
</TABLE>
As of December 31, 1997, Metro had investments in loans which were
impaired in accordance with SFAS No.'s 114 and 118 of $9,700. Of this
amount, $5,900 had no related specific allowance. The remaining $3,800
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 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, 1997, the average balance of impaired
loans was $42,500; additionally, no interest income was earned on these
loans during the year ended December 31, 1997.
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 consist of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and Improvements $ 200 $ 605
Building and Improvements 999 954
Furniture and Equipment 1,683 1,344
-------- --------
Total 2,882 2,903
Less: Accumulated Depreciation and
Amortization (1,476) (1,082)
-------- --------
Total, Net $1,406 $1,821
======== ========
</TABLE>
Page 44
<PAGE>
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 $57,600, $51,000, and
$64,000 in 1997, 1996, and 1995, 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 executive officers
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 $13,000, $12,000, and $5,000 in 1997,
1996, and 1995, 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.
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 (SAR's) 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 SAR's granted under such
plans prior to their termination may be exercised until the 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 SAR's under these plans are fully vested at the
grant date. Options granted under these plans have exercise prices
ranging from $5 to $9 per share.
Page 45
<PAGE>
As of December 31, 1997, there were 384,150 shares of common stock
reserved for issuance under these plans. Stock option activity under
these plans was as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Options Shares Exercise Price
- ------------------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 41,400 6.67
- ------------------------------------------------------------------------------------------
DECEMBER 31, 1997 204,150 $6.51
=====
SHARES EXERCISABLE 204,150
=======
</TABLE>
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 $734,000 ($0.44 per share) in
1997, $608,000 ($0.36 per share) in 1996, and $603,000 ($0.36) 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.
The Black Scholes Model was utilized to calculate the assumptions
regarding the information that follows. Options outstanding at December
31, 1997, have a weighted average remaining life of 5.1 years. The
weighted average fair value of the options granted was $3.03 per share
in 1997 and $2.27 per share in 1996. The fair value of each option is
estimated on the date of grant using a risk-free interest rate of 6.25
percent in 1997 and 6.49 percent in 1996; expected dividend yields of
0.77 percent; expected lives of 6.5 years in 1997 and 8.5 years in
1996; and expected volatility of 36.8 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):
Page 46
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal - Current $ 572 $ 442 $ 375
- Deferred (139) (54) (47)
------ ------ ------
$ 433 $ 388 $ 328
------ ------ ------
State - Current $ 132 $ 108 $ 124
- Deferred (25) (8) (24)
------ ------ ------
$ 107 $ 100 $ 100
------ ------ ------
$ 540 $ 488 $ 428
====== ====== ======
</TABLE>
A reconciliation between Metro's effective tax rate and the U.S. Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<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 6.5 6.2
Effect of Graduated Income Taxes (1.0) (1.0) (1.0)
Other (0.5) 3.4 0.6
----- ----- -----
40.0% 43.9% 40.8%
===== ===== =====
</TABLE>
The significant components of Metro's net deferred tax asset as of
December 31, 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Book over Tax Depreciation $ 73 $ 43
Provision for Loan Losses 321 265
Accrual to Cash Adjustment - (26)
Net Unrealized (Gain)/Loss on Investment
Securities Available for Sale (29) 67
Other 54 11
------ ------
$ 419 $ 360
====== ======
</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.
Page 47
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
Metro has entered into non-cancelable operating leases for its main
office and three branch offices. The main office lease will expire in
2005 while the expiration of the branch office leases range from 1998
through 2002. Each operating lease has options to extend into the
future. Rental expense for all four offices in 1997 was $130,000.
Future aggregate minimum annual rentals (not considering renewal
options) are payable as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter
- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$147,900 $138,600 $138,600 $139,600 $120,000 $205,000
</TABLE>
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.
Metro's financial instruments where contract amounts represent credit
risk are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Standby Letters of Credit $ 339 $ 120
Unused Commercial Lines of Credit & Real
Estate Draw Notes 11,785 7,905
Unused Home Equity & Personal Lines of Credit 2,382 2,203
------- -------
Total Commitments $14,506 $10,228
======= =======
</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. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral required, if deemed
necessary, by the Bank 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 the personal
guarantee of the borrower.
Page 48
<PAGE>
Standby letters of credit are conditional commitments issued by the Bank
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. The Bank 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," is 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 1997 were as follows (dollars in thousands):
Balance at Beginning of Year $1,212
Loans Made 204
Loan Repayment (391)
-------
Balance at End of Year $1,025
=======
Certain directors and the companies with which they are affiliated also
provide services to Metro. Metro conducts business with these
affiliated companies for advertising and public relations, legal
services and leasing office space.
Payments made to director-affiliated companies are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Advertising & Public Relations $208 $213 $209
Lease Payments 11 11 2
Legal Services 7 3 5
---- ---- ----
Total $226 $227 $216
==== ==== ====
</TABLE>
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 and guaranteed by the seller. Loan servicing fees paid
to the seller were $63,000, $108,000 and $133,000 in 1997, 1996 and
1995, 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 1997 and 1996. Student loan purchases were $2.0
million in 1995. In 1997, 1996 and 1995, the Bank sold $3.5 million,
$1.2 million, $4.0 million respectively, of student loans back to the
seller.
Page 49
<PAGE>
13. PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed statements of the parent company.
MetroBanCorp (Parent Company Only) Condensed Statement of Condition as
of December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
ASSETS: 1997 1996
---- ----
<S> <C> <C>
Cash and Cash Equivalents $ 623 $ 13
Investment Securities Available for Sale
- Market Value 2,502 3,073
Investment in MetroBank 8,874 7,873
Other 210 558
------- -------
Total Assets $12,209 $11,517
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Other Liabilities $ 77 $ 16
Shareholders' Equity 12,132 11,501
------- -------
Total Liabilities and Shareholders' Equity $12,209 $11,517
======= =======
</TABLE>
MetroBanCorp (Parent Company Only) Condensed Statement of Operations for the
years ended December 31, 1997, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest Income $ 181 $ 199 $ 200
Non-Interest Income
Gain on Sale of Securities - 10 -
Non-Interest Expenses (213) (189) (165)
------ ------ ------
Income/(Loss) Before Income Taxes and
Equity in Undistributed Earnings of
MetroBank (32) 20 35
Income Tax Expense - (8) (14)
------ ------ ------
Income/(Loss) Before Equity in Undistributed
Earnings of MetroBank (32) 12 21
Equity in Undistributed Earnings of
MetroBank 841 612 601
------ ------ ------
Net Income $ 809 $ 624 $ 622
====== ====== ======
</TABLE>
Page 50
<PAGE>
MetroBanCorp (Parent Company Only) Condensed Statement of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 809 $ 624 $ 622
-------- -------- --------
Adjustments to Reconcile Net Income to
Cash Provided by/(Used in) Operating
Activities:
Equity in Undistributed Earning of MetroBank (841) (612) (601)
Depreciation and Amortization 12 12 12
Gain on Sale of Investment Securities - (10) -
(Increase)/Decrease in Other Assets 336 (35) (316)
Increase/(Decrease) in Other Liabilities 61 (8) 2
-------- -------- --------
Total Adjustments (432) (653) (903)
-------- -------- --------
Net Cash Flows Provided by/(Used in) Operating
Activities 377 (29) (281)
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds from the Sale of Investment Securities 2,669 3,010 -
Proceeds from Maturity of Investment Securities 400 332 -
Purchases of Investment Securities (2,500) (3,001) -
-------- -------- --------
Net Cash Flows Provided by Investing
Activities 569 341 -
-------- -------- --------
Cash Dividends Paid (336) (336) (167)
-------- -------- --------
Net Increase/(Decrease) in Cash and Cash
Equivalents 610 (24) (448)
Cash and Cash Equivalents at Beginning of Year 13 37 485
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 623 $ 13 $ 37
======== ======== ========
</TABLE>
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
undivided profits of the bank adjusted for statutorily defined bad debts.
Page 51
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENT, that the person whose signature appears
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 resubstitution , for him 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, 1997, 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 this substitute, may
lawfully do or cause to be done by virtue hereof.
By: /s/ Chris G. Batalis February 27, 1998
-------------------------------
Chris G. Batalis, Director
By: /s/ Terry L. Eaton February 27, 1998
-------------------------------
Terry L. Eaton, Director
By: /s/ Evans M. Harrell February 27, 1998
-------------------------------
Evans M. Harrell, Director
By: /s/ Edward G. McMahon February 27, 1998
-------------------------------
Edward G. McMahon, Director
By: /s/ Robert L. Lauth, Jr. February 27, 1998
-------------------------------
Robert L. Lauth, Jr., Director
By: /s/ Larry E. Reed February 27, 1998
-------------------------------
Larry E. Reed, Director
By: /s/ Russell D. Richardson February 27, 1998
-------------------------------
Russell D. Richardson, Director
By: /s/ Edward R. Schmidt February 27, 1998
-------------------------------
Edward R. Schmidt, Director
By: /s/ Donald F. Walter February 27, 1998
-------------------------------
Donald F. Walter, Director
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,595
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,518
<INVESTMENTS-CARRYING> 28,037
<INVESTMENTS-MARKET> 27,844
<LOANS> 77,295
<ALLOWANCE> 998
<TOTAL-ASSETS> 124,718
<DEPOSITS> 111,234
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,352
<LONG-TERM> 0
0
0
<COMMON> 11,210
<OTHER-SE> 922
<TOTAL-LIABILITIES-AND-EQUITY> 124,718
<INTEREST-LOAN> 7,133
<INTEREST-INVEST> 1,586
<INTEREST-OTHER> 104
<INTEREST-TOTAL> 8,823
<INTEREST-DEPOSIT> 3,754
<INTEREST-EXPENSE> 3,791
<INTEREST-INCOME-NET> 5,032
<LOAN-LOSSES> 200
<SECURITIES-GAINS> (15)
<EXPENSE-OTHER> 4,360
<INCOME-PRETAX> 1,349
<INCOME-PRE-EXTRAORDINARY> 809
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 809
<EPS-PRIMARY> .48
<EPS-DILUTED> .47
<YIELD-ACTUAL> 4.87
<LOANS-NON> 10
<LOANS-PAST> 146
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 156
<ALLOWANCE-OPEN> 866
<CHARGE-OFFS> 80
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 998
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
