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, 1998.
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
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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: $5,689,000.
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 26, 1999 was
$10,015,809.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,941,726.
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, 1998). The Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held May 20, 1999 is incorporated by reference
into Part III hereof, and the Annual Report of Shareholders for the year ended
December 31, 1998 is incorporated by reference into Part II hereof.
Transitional Small Business Disclosure Format: Yes No X
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Total number of sequentially numbered pages - 66 Exhibit index on sequentially
numbered page - 15-17
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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........................... 11
Item 3 - Legal Proceedings................................ 11
Item 4 - Submission of Matters to a Vote of
Security Holders...................... 11
Part II
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Item 5 - Market for Common Equity and Related
Stockholder Matters.................... 11
Item 6 - Management's Discussion and Analysis
or Results of Operation................ 12
Item 7 - Financial Statements.............................. 12
Item 8 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...... 12
Part III
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Item 9 - Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section
16(a) of the Exchange Act................ 12
Item 10 - Executive Compensation........................... 13
Item 11 - Security Ownership of Certain Beneficial
Owners and Management.................... 13
Item 12 - Certain Relationships and Related Transactions... 13
Item 13 - Exhibits and Reports on Form 8-K................. 13
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Part I.
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 six banking offices located in Hamilton County. The Bank's
products are principally oriented toward small- and medium-sized business and
the professional community. Beginning in late 1991, the Bank began offering
discount brokerage and mortgage lending services. At December 31, 1998, Metro
had consolidated total assets of $134.0 million, total deposits of $119.8
million and shareholders' equity of $12.8 million, representing annual increases
from 1997 of 7.4 percent, 7.7 percent, and 5.8 percent, respectively.
The Bank's primary market area consists of Hamilton County, situated in the
northern section of the Indianapolis Metropolitan Statistical Area, which is the
fastest growing county in the State of Indiana. Annually, the county's
population is growing at a pace of 5.7 percent in the 1990's compared to 1.1
percent for the balance of the Indianapolis area. Each Hamilton County community
is experiencing solid population gains with an approximate total population of
159,000 at the end of 1998. Hamilton County is Indiana's most affluent county
with an estimated per capita income in 1998 of $30,636. 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 1.1 percent (as of 5/98) unemployment rate, and a younger average resident
population employed in predominantly professional, managerial sales and service
occupations. Labor force issues have emerged as the single most important
corporate site selection factor in the 1990's. Despite a labor force of
approximately 87,300, a tight labor market exists in the county. However, due to
the sizable expansion of the county's workforce and changing corporate
employment practices, many employers continue to report success in finding the
workers they need. The county is the leading suburban location in greater
Indianapolis for headquarters and other office operations of companies such as
USA Group, Inc., Thomson Consumer Electronics, Conseco, Marsh Supermarkets,
Charles Schwab & Co, as well as many large manufacturing and distribution
operations.
Since liberalization of Indiana's banking laws in 1985, five of six commercial
banks headquartered in Hamilton County were acquired by bank holding companies
located either out-of-county or out-of-state. Those acquirors, with only one
exception, have subsequently been acquired by larger, out-of-state bank holding
companies. The strategy of Metro's founding investors and its management was
designed to capitalize on the customer dissatisfaction which often accompanies
centralization of out-of-state customer servicing and standardization of
financial products. Management believes that Metro's target customer, i.e. small
business owners and professionals, are not only greater users of financial
services but also are the most sensitive to such change. 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 $134.0 million at December
31, 1998. Metro's acquisition of two branches of Colonial Central Savings Bank,
FSB was a contributing factor in this growth. The Bank's 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 68.7
percent in 1998 as Metro has grown into its infrastructure (the efficiency ratio
is calculated by dividing non-interest expense by the sum of net interest income
and recurring non-interest income). Metro's efficiency ratio, excluding core
deposit intangible, amounted to 66.5 percent in 1998. This ratio would be
reduced further to 66.0 percent when excluding the student loan servicing
expense.
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 five traditional staffed branch offices. The Bank
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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 competes in the marketplace primarily on the basis
of responsible decision making and personalized service.
LENDING ACTIVITY. The Bank's two principal lending categories are
commercial/business credits 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 consist of
approximately 1,600 notes made to nearly 800 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 application for a
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loan.
The Bank typically requires its commercial/business borrowers to have annual
financial statements prepared by independent accountants and, to the extent
possible, requires such financial statements to be audited or reviewed by
accountants. The Bank requires appraisals in connection with loans secured by
real estate. Such appraisals are obtained prior to the time funds are advanced.
The Bank also typically requires personal guaranties from principals involved
with closely-held corporate and other entity 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 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 fourth year of
operations in 1998. 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, the Bank 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 these machines in the following locations:
the Bank's Noble Creek Branch, the Bank's Ninth Street Noblesville Branch, and
the Wal-Mart SuperCenter Branch facility. See "Description of Property"
following.
BANK HOLDING COMPANY REGULATION. Metro is registered as a bank holding company
and is subject to the supervision of, and regulation by, the Board of Governors
of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company
Act of 1956, as amended ("BHC Act"). The Federal Reserve had issued regulations
under the BHC Act 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.
The BHC Act requires the prior approval of the Federal Reserve to acquire more
than a 5% voting interest of any bank or bank holding company. Additionally, the
BHC Act restricts the Registrant's nonbanking activities to those which are
determined by the Federal Reserve to be closely related to banking and a proper
incident thereto.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a bank holding company is
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required to guarantee the compliance of any insured depository institution
subsidiary that may become "undercapitalized" (as defined in FDICIA) with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. For the Registrant's regulatory capital rations
as of December 31, 1998, see the information incorporated by reference in Part
II, Item 7.
The Registrant and affiliate bank is subject to the provisions of the banking
laws of Indiana and is supervised, regulated and examined by the respective
state banking agency, and is subject to the rules and regulations of the Federal
Deposit Insurance Corporation ("FDIC").
Dividends are subject to various legal and regulatory restrictions as summarized
in Note 14.
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.
Insured state-chartered banks are prohibited under FDICIA from engaging as
principal in activities that are not permitted for national banks, unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund, and (ii) the bank is, and continues to be,
in compliance with all applicable capital standards.
The FDIC and the OCC have adopted risk-based capital ratio guidelines to which
depository institutions under their respective supervision are subject. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles among
banking organizations. Risk-based capital ratios are determined by allocating
assets and specified off-balance sheet commitments to four risk weighted
categories, with higher levels of capital being required for the categories
perceived as representing greater risk. The Bank exceeded the risk-based capital
guidelines of the FDIC and OCC as of December 31, 1998.
Branching by the Registrant's affiliate banks in Indiana is subject to the
jurisdiction, and requires the prior approval of, the bank's primary federal
regulatory authority and state's banking agency.
The Registrant and its affiliate bank is subject to the Federal Reserve Act,
which restricts financial transactions between banks and affiliated companies.
The statute limits credit transactions between a bank and its executive officers
and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
FDICIA accomplished a number of sweeping changes in the regulation of depository
institutions, including the Registrant's affiliated banks. FDICIA requires,
among other things, 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 publicity traded shares and such other standards as the
agency deems appropriate.
The deposits of Registrant's affiliate banks are insured up to $100,000 per
insured account by the Bank Insurance fund ("BIF"), which is administered by the
FDIC, except for deposits acquired in connection with affiliations with savings
associations, which deposits are insured by the Savings Association Insurance
fund (`SAIF"). Accordingly, the Registrant's affiliated banks pay deposit
insurance premiums to both BIF and SAIF.
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The Riegle-Neal Community Development and Regulatory Improvement Act of 1994
("ACT") contains seven titles pertaining to community development and home
ownership protection, small business capital formation, paperwork reduction and
regulatory improvement, money laundering and flood insurance. The applicable
federal supervisory agencies continues to promulgate regulations implementing
the Act which apply to Registrant's affiliate banks.
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. Bank holding companies may now acquire
banks anywhere in the United States subject to certain state restrictions.
The Federal Reserve and FDIC have issued regulations requiring that any bank
holding company or bank which has significant exposure to market risk must
measure such risk using its own internal model, subject to the requirements
contained in the regulations, and must maintain adequate capital to support that
exposure.
The regulations apply to any bank holding company or bank whose trading activity
equals 10% or more of its total assets, or whose trading activity equals $1
billion or more. Examiners may require a bank holding company or bank that does
not meet the applicability criteria to comply with the capital requirements if
necessary for safety and soundness purposes. The regulations contain
supplemental rules to determine qualifying and excess capital, calculate
risk-weighted assets, calculate market risk equivalent assets and calculate
risk-based capital ratios adjusted for market risk.
Safety and soundness guidance on the risks posed to financial institutions by
the Year 2000 problem has been issued by the Federal Institutions Examination
Council, whose members include the FDIC and the Federal Reserve Board. The
guidance underscores that Year 2000 preparation is not only an information
systems issue, but also an enterprise-wide challenge that must be addressed at
the highest level of a financial institution.
The guidance sets out the responsibilities of senior management and boards of
directors in managing their Year 2000 projects. Among the responsibilities of
institution managers and directors is that of managing the internal and external
risks presented by providers of data-processing products and services, business
partners, counterparties and major loan customers.
Under the guidance, senior management must provide the board of directors with
status reports, at least quarterly, on efforts to reach Year 2000 goals both
internally and by the institution's major vendors. Senior managers and directors
must allocate sufficient resources to ensure that high priority is given to
seeing that remediation plans are fulfilled, and that the project receives the
quality personnel and timely support it requires.
The guidance does not require financial institutions to obtain Year 2000
certification from their vendors. Rather, an institution must implement its own
internal testing or verification processes for vendor products and services to
ensure that its different computer systems function properly together.
In addition to the matters discussed above, the Registrant's affiliate banks are
subject to additional regulation of their 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 are also affected by general economic
conditions and prevailing interest rates, both domestic and foreign and by the
monetary and fiscal policies of the United States 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, state legislatures 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 the Registrant and its
affiliate banks in particular would be affected thereby.
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CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES. The Federal Reserve is
the federal regulatory and examining authority for bank holding companies. 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 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, 1998 are shown
below:
Tier 1 Capital to Risk-Weighted Assets........................... 14.72%
Total Risk Based Capital to Risk-Weighted Assets................. 16.01%
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 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, 1998 are shown below:
Tier 1 Capital to Risk-Weighted Assets........................... 11.52%
Total Risk-Based Capital to Risk-Weighted Assets................. 12.80%
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Tier 1 Leverage Ratio............................................ 7.86%
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 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 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 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, 1998, 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.
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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 United States without geographic restrictions. 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. 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 with 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.
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
1998, rates ranged from 1.22 percent to 1.24 percent for BIF deposits and 6.10
percent to 6.28 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.
Page 10
<PAGE>
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, 1998, the Bank had a total of 52 full-time equivalent
employees. This included 44 full-time and 15 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 bank branch office, the Bank operates five traditional
staffed branch offices. 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. A
traditional staffed branch is leased from an unaffiliated third party located at
255 Sheridan Road, Noblesville, Indiana and in the Wal-Mart SuperCenter in
Noblesville. The Bank also has a traditional staffed branch located 2025 North
Cherry Street, Noblesville, 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.
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 1998 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."
Page 11
<PAGE>
At December 31, 1998, there were 303 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.
Sale Price Per Share
--------------------
1998 1997
---- ----
Quarter High Low High Low
------- -------------- --------------
First Quarter $10.46 $8.30 $6.59 $5.00
Second Quarter 10.68 8.41 7.50 5.80
Third Quarter 9.55 7.27 8.64 6.48
Fourth Quarter 10.00 7.50 10.20 7.73
Metro declared and paid on a quarterly basis four cash dividends on its shares
of Common Stock during 1998. The amount of each dividend was approximately
$87,300 or $0.05 per share. Future cash dividend payments by Metro are subject
to regulatory and legal limitations and may be dependent upon dividends paid to
Metro by the Bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
-------------------------------------------------------------
Pages 18 through 40, inclusive, of Metro's Annual Report to
Shareholders for the year ended December 31, 1998 is incorporated
herein by reference in regard to this item.
ITEM 7. FINANCIAL STATEMENTS
--------------------
Pages 41 through 66, inclusive, of Metro's Annual Report to
Shareholders for the year ended December 31, 1998 is incorporated
herein by reference in regard to this item.
ITEM 8. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
-----------------------------------------------------------------------
None.
Part III.
---------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------------------
Pages 2 through 7, inclusive, of Metro's Definitive Proxy Statement for
the Annual Meeting of
Page 12
<PAGE>
Shareholders, dated April 20, 1999, is incorporated herein by reference
in regard to this item.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Pages 5 through 11, inclusive, of Metro's Definitive Proxy Statement
for the Annual Meeting of Shareholders, dated April 20, 1999, 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 April 20, 1999, is
incorporated herein by reference in regard to this item.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Page 12 through 13, of Metro's Definitive Proxy Statement for the
Annual Meeting of Shareholders, Dated April 20, 1999, is incorporated
herein by reference in regard to this item.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
---------------------------------
(a) The following Exhibits are being filed as part of this Registration
Statement:
3(i)* Articles of Incorporation
3(ii)* By-Laws
10.01* Employment Agreement dated December 31, 1992 between
Registrant and Ike G. Batalis
10.02* Employment Agreement dated July 1, 1991 between Registrant
and Charles V. Turean
10.03* Employment Agreement dated July 1, 1991 between Registrant
and Andrew E. Illyes
10.04* Letter of Agreement dated December 31, 1992 between the
Registrant and Heptagon, Inc.
10.05* Lease dated September 11, 1987 between Registrant and
Western Plaza Company with respect to property at 255
Sheridan Road, Noblesville, Indiana
10.06* Lease dated October 11, 1993 between Registrant and
Three Meridian Plaza Company with respect to property at
10333 North Meridian Street, Suite 111, Indianapolis,
Indiana
10.07* Form of indemnification Agreement for Directors and
Officers of Registrant
10.11* 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
Page 13
<PAGE>
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 Registrants
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
10.24***** 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, 1998 (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 on February 16, 1994.
** Incorporated by reference to Registrant's Pre-Effective Amendment No. 1
to Registration Statement on Form SB-2, File No. 33-75360, filed March
16, 1994.
*** Incorporated by reference to Registrant's Form 10-QSB for the fiscal
quarter ended June 30, 1994, filed in August, 1994.
**** Incorporated by reference to Registrant's From 10- KSB for the fiscal
year ended December 31, 1995.
Page 14
<PAGE>
***** Incorporated by reference to Registrant's Form 10-QSB for the fiscal
quarter ended March 31, 1998, filed May 13, 1998.
****** Incorporated by reference to Registrant's Form 10-QSB for the fiscal
quarter ended September 30, 1998, filed November 12, 1998.
(b) No Reports on Form 8-K were filed during the last quarter of 1998.
SIGNATURES
In accordance with the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MetroBanCorp
(Registrant)
Date: March 26, 1999 By: /s/Ike G. Batalis
---------------------------------
Ike G. Batalis, President
(Principal Executive Officer)
Date: March 26, 1999 By: /s/ Charles V. Turean
---------------------------------
Charles V. Turean
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: March 26, 1999 By: CHRIS G. BATALIS*
---------------------------------
Chris G. Batalis, Director
Page 15
<PAGE>
Date: March 26, 1999 By: TERRY L. EATON*
---------------------------------
Terry L. Eaton, Director
Date: March 26, 1999 By: EVANS M. HARRELL*
---------------------------------
Evans M. Harrell, Director
Date: March 26, 1999 By: EDWARD G. McMAHON*
---------------------------------
Edward G. McMahon, Director
Date: March 26, 1999 By: ROBERT L. LAUTH, JR. *
---------------------------------
Robert L. Lauth, Jr., Director
Date: March 26, 1999 By: LARRY E. REED*
---------------------------------
Larry E. Reed, Director
Date: March 26, 1999 By: RUSSELL D. RICHARDSON*
---------------------------------
Russell D. Richardson, Director
Date: March 26, 1999 By: EDWARD R. SCHMIDT*
---------------------------------
Edward R. Schmidt, Director
Date: March 26, 1999 By: DONALD F. WALTER*
---------------------------------
Donald F. Walter, Director
*By: /s/ Ike G. Batalis
---------------------------------------
Ike G. Batalis, Attorney-in-Fact
Index to Exhibits
<TABLE>
<CAPTION> Sequential
Exhibit Page
Number Exhibit Number
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
Page 16
<PAGE>
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 Officers N/A
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
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, Inc. N/A
of Student Loan Purchase and Sale Agreements
Effective April 1, 1993
10.18* Student Loan Servicing Agreement, dated August 19, 1989 N/A
10.19* Student Loan Servicing Agreement, dated February 1, 1997 N/A
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
Page 17
<PAGE>
10.22*** Registrant's 1994 Directors' Stock Option Plan N/A
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 and N/A
Wal-Mart Stores, Inc., for property at 16865 Clover Road,
Noblesville, Indiana
10.26****** Amendment No. 1 to Lease Agreement, dated September 30, 1997 N/A
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 N/A
the year ended December 31, 1998
(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 64
27 Financial Data Schedule 65
</TABLE>
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, 1998 and 1997 and for each of the three years ended December 31,
1998, 1997 and 1996. This information should be read in conjunction with the
Consolidated Financial Statements and footnotes included elsewhere in this
Annual Report.
RESULTS OF OPERATIONS
Page 18
<PAGE>
Net Income
Net income in 1998 was $1,051,000, an increase of 29.9 percent from the $809,000
reported in 1997. Total loans amounted to $80.5 million and $77.3 million at
December 31, 1998 and 1997, respectively. The investment portfolio amounted to
$41.3 million and $28.0 million at December 31, 1998 and 1997, respectively.
Total interest income increased by $1,158,000 or 13.1 percent for the year, due
principally to growth in the Bank's loan portfolio. The Bank increased its
provisions for loan losses from $200,000 in 1997 to $311,000 in 1998. This
represents an increase of $111,000 or 55.5 percent over the amount provided in
1997. The provisions made in 1998 were at a level considered necessary by
management to absorb estimated losses in the loan portfolio and is based upon an
assessment of the adequacy of the Bank's loan loss reserve account. The increase
is principally due to the growth experienced in the installment and commercial
loan portfolios.
Net income in 1997 was $809,000, a 29.6 percent increase from the $624,000
reported in 1996. During 1997, the Bank's total loans outstanding increased by
$11.9 million or 18.2 percent. During that same period, the investment portfolio
decreased $3.2 million or 10.2 percent. These increases allowed interest income
to increase by $950,000 or 12.1 percent during 1997.
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 1998, net interest income was $5.7 million, an increase of 13.1 percent over
1997. In 1998, the net interest margin remained stable at 4.8 percent of average
earning assets compared to 4.8 percent in 1997. This decrease is primarily a
result of growth in the Bank's interest-bearing deposits.
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 the Bank's loan portfolio, combined with an overall higher loan
portfolio yield.
Page 19
<PAGE>
Net Interest Income
(dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31, Percentage change from
INTEREST INCOME 1998 1997 1996 1997 to 1998 1996 to 1997
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest and Fees on Loans $7,851 $7,133 $6,130 10.1% 16.4%
Interest on Investment Securities 1,739 1,586 1,600 9.6 (0.9)
Interest on Federal Funds Sold 391 104 143 276.0 (27.3)
--------- --------- --------- ------- -------
Total Interest Income 9,981 8,823 7,873 13.1% 12.1%
--------- --------- --------- ------- -------
INTEREST EXPENSE
Interest on Deposits 4,292 3,754 3,496 14.3% 7.4%
Interest on Borrowings -- 37 23 (100.0) 60.9
--------- --------- --------- ------- -------
Total Interest Expense 4,292 3,791 3,519 13.2% 7.7%
--------- --------- --------- ------- -------
Net Interest Income $5,689 $5,032 $4,354 13.1% 15.6%
========= ========= ========= ======= =======
</TABLE>
Rate Volume Analysis of Change in Net Income
(dollars in thousands)
<TABLE>
<CAPTION>
1997 vs. 1998 1996 vs. 1997
------------------------------------------------- -----------------------------------------------
Dollar Attributable to Attributable to Dollar Attributable to Attributable to
Interest and Fee Income on: Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Loans $718 $623 $95 $1,003 $859 $144
Investment Securities 153 153 -- (14) (38) 24
Federal Funds Sold 287 291 (4) (39) (48) 9
------- ------- ------ ------ ------- ------
Total Interest Income 1,158 1,067 91 950 773 177
Interest Expense on:
Savings and Time Deposits 258 197 61
538 493 45
Term Borrowings (37) (30) (7) 14 20 (6)
------- ------- ------ ------ ------- ------
Total Interest Expense 501 463 38 272 217 55
------- ------- ------ ------ ------- ------
Net Interest Income(1) $657 $604 $53 $678 $556 $122
======= ======= ====== ====== ======= ======
</TABLE>
- --------
(1) interest on non-accruing loans is not included.
Page 20
<PAGE>
Distribution of Assets, Liabilities and Shareholders' Equity
and Interest Rates and Differential Variance Analysis
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ---------------------------- ----------------------------
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 $32,819 $1,739 5.36% $29,595 $1,586 5.36% $30,318 $1,600 5.28%
Federal Funds Sold 7,108 391 5.50% 1,824 104 5.70% 2,669 143 5.36%
Loans, net(2) 78,276 7,851 10.04% 71,997 7,133 9.91% 63,319 6,130 9.68%
---------------------------- ---------------------------- ----------------------------
Total Earning Assets $118,203 $9,981 8.44% $103,416 $8,823 8.53% $96,306 $7,873 8.17%
---------------- ----------------- ---------------
Non-Earning Assets:
Cash and Due from Banks 7,498 5,574 4,453
Premises and
Equipment, net 1,476 1,575 1,996
Other Assets 1,609 1,835 1,906
-------- -------- ---------
Total Assets
$128,786 $112,400 $104,661
======== ======== ==========
Liabilities and Shareholders' Equity
- ------------------------------------
Interest Bearing Liabilities:
Savings and Time
Deposits $90,096 $4,292 4.76% $79,748 $3,754 4.70% $75,597 $3,496 4.62%
Term Borrowings 2 -- -- 581 37 6.37% 271 23 8.49%
---------------------------- ---------------------------- ----------------------------
Total Interest Bearing
Liabilities $90,098 $4,292 4.76% $80,329 $3,791 4.72% $75,868 $3,519 4.64%
---------------- ----------------- ---------------
Non-Interest Bearing
Liabilities:
Demand Deposits 24,896 18,993 16,443
Other Liabilities 1,422 1,275 1,027
Shareholders' Equity 12,370 11,803 11,323
-------- -------- ---------
Total Liabilities and
Shareholders' Equity $128,786 $112,400 $104,661
======== ======== ==========
Net Interest Margin $5,689 4.42% $5,032 4.87% $4,354 4.52%
======= ======= =======
</TABLE>
- -----------
(2) includes principal balances of non-accruing loans. Interest on
non-accruing loans is not included.
Page 21
<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 $311,000, $200,000, and $67,000 in
1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the Bank had
an allowance for loan losses of $1,300,000 and $998,000, respectively. The
Bank's allowance for loan losses to ending total loans, as a percentage,
amounted to 1.62 percent and 1.29 percent at December 31, 1998 and 1997,
respectively. The increases in the provision during 1998 were considered
appropriate by management relative to the loan loss reserve adequacy analysis.
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 1.71 percent at
December 31, 1998, as compared to 1.38 percent at December 31, 1997.
Non-Interest Income
In 1998, Metro's non-interest income to average total assets ratio decreased to
0.75 percent from 0.78 percent in 1997, compared to 0.64 percent in 1996.
Excluding net securities losses and gain on the sale of real estate,
non-interest income was $961,000, $877,000, $667,000 and in 1998, 1997 and 1996,
respectively. Service charges on deposit accounts increased 10.97 percent while
other service charges, commissions and fees increased $133,000 or 27.54 percent
in 1998. 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.
<TABLE>
<CAPTION>
Non-Interest Income
(dollars in thousands)
Percent Change From
1997 1996
For the year ended December 31, to to
1998 1997 1996 1998 1997
------------ -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Service Charges on
Deposit Accounts $354 $319 $302 10.97% 5.63%
Page 22
<PAGE>
Other Service Charges,
Commissions & Fees 616 483 342 27.54% 41.23%
------------ -------------- --------------- -------------- --------------
970 802 644 20.95% 24.53%
Securities Gain/(Loss), Net (9) (15) (12) (40.00%) 25.00%
Gain on Sale of Real Estate -- 90 35 -- 157.14%
------------ -------------- --------------- -------------- --------------
Total Non-Interest Income $961 $877 $667 9.58% 31.48%
============ ============== =============== ============== ==============
</TABLE>
Non-Interest Expense
Non-interest expense increased $206,000 in 1998, or 4.7 percent over the 1997
level. As a percentage of total average assets, this category was 3.5 percent in
1998, compared to 3.9 percent in 1997 and 3.7 percent in 1996. Salary and
employee benefits, the largest non-interest expense, increased $160,000 or 8.9
percent in 1998. This reflects an increase in the Bank's staff, combined with
higher employee compensation and benefit costs. The Company's other expenses
increased $ 59,000 or 7.35 percent from 1997, and is due primarily to increases
in loan expense, meeting expense and operating supplies.
Throughout 1996, 1997 and 1998, 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 and 1998, Metro
installed an additional four and two ATMs, respectively. At December 31, 1998,
Metro's ATM network contains twenty-three machines, of which, seventeen are
located at off-premise locations and six 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 1998, Metro's legal and professional services expense decreased to
$225,000 from $258,000 in 1997. This decrease 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 1998, the Bank's student loan servicing fees decreased from $63,000
in 1997 to $37,000 in 1998. This decrease is due primarily to the reduction in
the number and balance of loans within the Bank's student loan portfolio.
Page 23
<PAGE>
In 1998, the Bank's FDIC insurance assessment increased by 12.0 percent or
$3,000. This increase is due principally to increases in insured deposits.
Equipment expense decreased $78,000 in 1998 or 17.8 percent from 1997. This
decrease is due primarily to expense recognized in 1997 for the start-up of the
Bank's in-store banking office and closing of the Bank's automated branch.
Non-interest expense increased $518,000 or 13.5 percent in 1997 over 1996.
Salaries and employee benefits, the largest non-interest expense, increased
$225,000 or 14.3 percent from 1996. This increase reflects an increase in the
Bank's employee base and higher employee compensation and benefit costs.
During 1997, occupancy expense increased $62,000 or 23.4 percent from 1996. This
increase was due primarily to the opening of the Noble Creek branch during 1997.
During 1997, the FDIC insurance assessment decreased $163,000 or 86.7 percent
from 1996. This decrease is due principally to recognition of a one time
recapitalization charge incurred in 1996.
<TABLE>
<CAPTION>
Non-Interest Expense
(dollars in thousands)
For the year ended December 31, Percent Change From
1998 1997 1996 1997 to 1998 1996 to 1997
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits $1,957 $1,797 $1,572 8.90% 14.31%
Net Occupancy Expense 391 327 265 19.57% 23.40%
Equipment Expense 359 437 299 (17.85%) 46.15%
Advertising and Public Relations 241 234 230 2.99% 1.74%
Legal and Professional Services 225 258 137 (12.79%) 88.32%
Data Processing 325 275 238 18.18% 15.55%
FDIC Insurance Assessment 28 25 188 12.00% (86.70%)
Student Loan Servicing Fees 37 63 108 (41.27%) (41.67%)
Amortization of Core Deposit
Intangible 141 141 141 0.00% 0.00%
Other 862 803 664 7.35% 20.93%
----------- ------------- ------------ ---------------- -----------------
Total $4,566 $4,360 $3,842 4.72% 13.48%
=========== ============= ============ ================ =================
</TABLE>
Page 24
<PAGE>
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
$722,000 represents an effective tax rate of 40.7 percent in 1998. This compares
to an effective tax rate of 40.0 percent in 1997 and 43.9 percent in 1996.
Details relative to Metro's income tax provisions are discussed in Note 10 to
the Consolidated Financial Statements included in this Annual Report.
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, 1998, 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, 1998 (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> <C> <C>
Total Capital
(to Risk Weighted Assets)
Consolidated $13,872 16.01% Greater than $6,932 Greater than 8.00% Greater than $8,665 Greater than 10.00%
or equal to or equal to or equal to or equal to
Bank 11,018 12.78% Greater than 6,884 Greater than 8.00% Greater than 8,605 Greater than 10.00%
or equal to or equal to or equal to or equal to
Page 25
<PAGE>
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 12,751 14.72% Greater than 3,466 Greater than 4.00% Greater than 5,199 Greater than 6.00%
or equal to or equal to or equal to or equal to
Bank 9,913 11,52% Greater than 3,442 Greater than 4.00% Greater than 5,163 Greater than 6.00%
or equal to or equal to or equal to or equal to
Tier 1 Capital
(to Average Assets)
Consolidated 12,751 9.89% Greater than 5,155 Greater than 4.00% Greater than 6,444 Greater than 5.00%
or equal to or equal to or equal to or equal to
Bank 9,913 7.86% Greater than 5,047 Greater than 4.00% Greater than 6,309 Greater than 5.00%
or equal to or equal to or equal to or equal to
</TABLE>
As of December 31, 1998, 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.
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.
Page 26
<PAGE>
Investment securities comprise 33.7 percent of total earning assets at December
31, 1998. 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 1998,
proceeds from investment securities consisted of 4 sales totaling $4.5 million
and scheduled maturing investments.
Total investment securities at December 31, 1998, increased by $13.3 million or
47.4 percent over the prior year. This increase is attributable primarily to
growth in deposit liabilities.
Weighted average yields of the investment securities portfolio were 5.85
percent in 1998 and 5.44 percent in 1997.
Investment securities consist primarily of U.S. government agency and
corporation bonds, mortgage backed securities with both fixed and floating
interest rates and municipal securities with fixed interest rates. Derivative
securities, all designated as "held to maturity", comprise $2.0 million of total
investment securities as of December 31, 1998, a decrease of $7.5 million from
the prior year. 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 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 $2.3 million at December 31, 1998, compared to
$7.5 million at December 31, 1997, a decrease of $5.2 million from year-end
1997. This decrease is attributable to the Bank's daily fluctuations in cash and
liquidity requirements.
<TABLE>
<CAPTION>
Investment Securities Portfolio
(dollars in thousands)
Gross Gross Estimated
Unrealized Unrealized Market
Amortized Cost Gains Losses Values
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
December 31, 1998
Investment Securities Held to Maturity
- --------------------------------------
Mortgage-Backed Securities $- $- $ - $-
Municipal Securities 1,716 - (63) 1,826
U.S. Government Agencies and Corporations 1,889 29 - 1,745
--------------- --------------- ------------- -------------
Total Investment Securities Held to Maturity 3,605 29 ($63) 3,571
--------------- --------------- ------------- -------------
Page 27
<PAGE>
Investment Securities Available for Sale
- ----------------------------------------
Mortgage-Backed Securities 28,843 46 -- 28,889
U.S. Government Agencies and Corporations 8,799 38 -- 8,837
--------------- --------------- ------------- -------------
Total Investment Securities Available for Sale 37,642 84 -- 37,726
--------------- --------------- ------------- -------------
Total Investment Securities $41,247 $113 ($63) $41,297
=============== =============== ============= =============
December 31, 1997
Investment Securities Held to Maturity
Mortgage-Backed Securities $33 $- $ - $33
U.S. Government Agencies and Corporations 9,486 - (193) 9,293
Time Deposits - - - -
------------- ------------- ------------- -------------
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 & 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>
Page 28
<PAGE>
<TABLE>
<CAPTION>
Maturity Distribution of Investment Securities
(dollars in thousands)
As of December 31, 1998
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 $- $- $- $-
1 - 5 Years - - 721 722
5 - 10 Years - - 4,004 4,039
Due After 10 Years - - 24,118 24,128
-------------- ------------- -------------- --------------
Total Mortgage-Backed Securities - - 28,843 28,889
-------------- ------------- -------------- --------------
U.S. Government Agencies and Corporations
- -----------------------------------------
Due within One Year 389 389 500 503
1 - 5 Years 1,500 1,437 6,299 6,331
5 - 10 Years - - 2,000 2,003
Due After 10 Years - - - -
-------------- ------------- -------------- --------------
Total U.S. Government Agencies and
Corporations 1,889 1,826 8,799 8,837
-------------- ------------- -------------- --------------
Municipal Securities
- ---------------------
Due within One Year - - - -
1 - 5 Years 154 157 - -
5 - 10 Years 1,562 1,588 - -
Due After 10 Years - - - -
-------------- ------------- -------------- --------------
Total Municipal 1,716 1,745 - -
Securities
-------------- ------------- -------------- --------------
Total Investment Securities $3,605 $3,571 $37,642 $37,726
============== ============= ============== ==============
</TABLE>
Page 29
<PAGE>
<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 $ - $ -
Page 29
<PAGE>
1 - 5 Years - - 1,999 1,997
5 - 10 Years - - - -
Due After 10 Years - - 8,978 9,009
-------------- -------------- -------------- --------------
Total Mortgage-Backed Securities 33 33 10,997 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. Governments Agencies and
Corporations 9,486 9,293 7,455 7,512
-------------- -------------- -------------- --------------
- -----------------------------------------------------
-------------- -------------- -------------- --------------
Total Investment Securities $9,519 $9,326 $18,432 $18,518
============== ============== ============== ==============
</TABLE>
Investment Securities Weighted Average Yield
Due within Due After 10
One Year 1 to 5 Years 5 to 10 Years Years Overall
-------- ------------ ------------- ---- -------
1998 6.44% 5.55% 5.47% 6.08% 5.85%
1997 3.68% 6.08% 5.11% 6.71% 5.44%
Loans
Total loans increased by 4.1 percent from the prior year to $80.5 million at
December 31, 1998. The increase is due to the growth of both the commercial
portfolio and the installment portfolio, which grew in 1998 by 6.4 percent and
9.1 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
1998, the Bank increased the installment loan portfolio by expanding its
indirect lending relationship through a local window manufacturer.
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 5.5 percent of the Bank's loan portfolio at December 31,
1998, these loans are comprised of approximately 1,600
Page 30
<PAGE>
promissory notes made to nearly 800 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, 1997 to 1996 to
1998 1997 1996 1998 1997
--------------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Commercial $50,556 $47,527 $35,064 6.41% 35.54%
Real Estate - Construction 2,399 3,689 3,970 (35.0%) (7.08%)
Mortgage 776 646 787 20.1% (17.92%)
Installment 22,333 20,467 15,933 9.1% 28.46%
Student Loans 4,405 4,966 9,631 (11.3%) (48.44%)
--------------- ------------ ------------- ------------- --------------
80,469 77,295 65,385 4.1% 18.22%
--------------- ------------ ------------- ------------- --------------
Less: Allowance for Loan
Losses (1,300) (998) (866) 30.3% 15.24%
-------------- ------------ ------------- ------------- -------------
Net Loans $79,169 $76,297 $64,519 3.8% 18.26%
============== ============ ============= ============= =============
</TABLE>
The Bank's loan portfolio is comprised primarily of commercial and installment
loans. At December 31, 1998, 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.
Composition of Loan by Type
December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- ------------
Commercial 62.8% 61.5% 53.6%
Real Estate - Construction 3.0% 4.8% 6.1%
Mortgage 0.9% 0.8% 1.2%
Installment 27.8% 26.5% 24.4%
Student Loans 5.5% 6.4% 14.7%
Page 31
<PAGE>
------------- ------------- ------------
Total 100.0% 100.0% 100.0%
Loan Quality
The primary responsibility and accountability for the day-to-day lending
activities of the Bank rests 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, 1998, Metro
had investments in loans which were impaired in accordance with SFAS No's. 114
and 118 of $368,700. Of this amount, $364,300
Page 32
<PAGE>
had no related specific allowance. The remaining $4,400 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 $20,832 would have been recorded in 1998 on impaired loans if such
loans had been accruing interest throughout the year in accordance with their
original terms. In 1998, interest income in the amount of $7,922 was recorded on
impaired loans prior to being classified as impaired. The average balance of
impaired loans was $215,400 at December 31, 1998.
Loans are charged off when they are deemed uncollectable. Total charged-off
loans, net of recoveries, were $9,000 in 1998, compared to $68,000 in 1997 and
$111,000 in 1996.
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)
For the year ended
December 31,
1998 1997
---- ----
Allowance for Loan Losses, January 1 $998 $866
----------- ----------
Loans Charged-Off:
Commercial - -
Installment 29 80
----------- ----------
Total Charged-Off Loans 29 80
----------- ----------
Recoveries on Charged-Off Loans:
Commercial - 5
Installment 20 7
----------- ----------
Total Recoveries on Charged-Off Loans 20 12
Net Charged-Off Loans 9 68
Provision for Loan Losses 311 200
----------- ----------
Allowance for Loan Losses, December 31 $1,300 $998
=========== ==========
Average Loans Outstanding $79,149 $72,892
=========== ==========
Net Charged-Off Loans to Average Loans 0.01% 0.09%
=========== ==========
Page 33
<PAGE>
Allocation of Allowance for Loan Losses
(dollars in thousands)
December 31,
--------------------------
1998 1997
---- ----
Commercial $866 $652
Real Estate - Construction 39 51
Mortgage 8 9
Installment 375 278
Student Loans 12 8
----------- -----------
Total $1,300 $998
=========== ===========
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, 1998, approximately $1,060,000 or 24.1 percent of the Bank's
student loan portfolio was disbursed after October 1, 1993.
Under-Performing Assets
(dollars in thousands)
December 31,
----------------------
1998 1997
---- ----
Non-Accruing Loans $369 $10
Renegotiated Loans - -
Ninety (90) Days Past Due 134 146
========== =========
Total Under-Performing Assets $503 $156
========== =========
Under-Performing Assets as a
Percentage of Total Loans 0.63% 0.20%
========== =========
Past Due Loans (90 Days or More)
Commercial - -
Real Estate - Construction - -
Mortgage - -
Installment - -
Student Loans 134 146
---------- ---------
Page 34
<PAGE>
Total $134 $146
========== =========
In addition to the loans classified as under-performing, management is closely
monitoring loans approximating $863,000 as of December 31, 1998 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.
<TABLE>
<CAPTION>
Funding Sources-Average Balances
(dollars in thousands)
Percent Change from
For the year ended December 31, ------------------------------
------------------------------------------ 1997 to 1996 to
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Core Deposits:
Non-Interest Bearing Demand $24,896 $18,993 $16,443 31.8% 15.51%
Savings Accounts 4,961 5,354 5,764 (7.34%) 7.11%
Money Market and NOW Accounts 31,992 28,760 27.64% 11.24%
40,835
Other Time Deposits 31,043 29,963 29,652 3.60% 1.05%
------------------------------------------ -------------- --------------
Total Core Deposits $101,735 $86,302 $80,619 17.88% 7.05%
------------------------------------------ -------------- --------------
Time Deposits of $100,000 and Over $13,257 $12,439 $11,464 6.58% 8.50%
Federal Funds Purchased and
Securities Sold under (99.41%) 162.89%
Agreements to Repurchase 3 510 194
------------------------------------------ -------------- --------------
Total Funding Sources $114,995 $99,251 $92,277 15.86% 7.56%
========================================== ============== ==============
</TABLE>
Funding Sources - Yields
Page 35
<PAGE>
<TABLE>
<CAPTION>
Percent Change from
For the year ended December 31, ---------------------------
-------------------------------------- 1997 to 1996 to
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Core Deposits
Non-Interest Bearing Demand - - - - -
Savings Accounts 2.27% 2.72% 2.77% (16.54%) (1.81%)
Money Market and NOW Accounts 3.96% 3.69% 3.40% 7.32% 8.53%
Other Time Deposits 5.63% 5.75% 5.76% (2.09%) .17%
-------------------------------------- ------------- -------------
Total Core Deposits 3.41% 3.54% 4.64% (3.67%) 23.71%
-------------------------------------- ------------- -------------
Federal Funds Purchased and
Securities Sold Under
Agreements to Repurchase 5.14% 5.42% 4.88% (5.17%) 11.07%
-------------------------------------- ------------- -------------
Total Funding Sources 3.73% 3.83% 4.64% (2.61%) 17.46%
====================================== ============= =============
</TABLE>
The Bank's average total core deposits have shown steady growth over the past
several years, increasing by $15.4 million or 17.9 percent in 1998 compared to
7.0 percent in 1997. During 1998, 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 14.2 percent during 1998.
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)
Year End 181 - 366 Beyond 1
Balance 1 - 90 Days 91 - 180 Days Days Year
-------- ----------- ------------- ---------- --------
1998 $11,728 $3,459 $2,386 $2,704 $3,179
Page 36
<PAGE>
1997 $12,530 $3,200 $1,259 $4,083 $3,988
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 $3.0 million. The Bank also maintains a line of credit with the
Federal Home Loan Bank of Indianapolis in the amount of $7.5 million to meet
liquidity needs. The Bank had no Federal Funds purchased during 1998.
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, 1998, $38.0 million or 47.4 percent of the loan portfolio are
fixed rate loans, excluding non-accruing loans. Variable rate loans, excluding
non-accruing loans, amounted to $42.1 million or 52.6 percent of the loan
portfolio at December 31, 1998. Fixed and variable rate loans with scheduled
maturities greater than one year amounted to $32.0 million and $17.3 million,
respectively at December 31,1998. In the investment securities category, $0.9
million or 2.2 percent of the portfolio matures within one year. The Bank's
average loan-to-deposit ratio, another indication of liquidity, was 69.1 percent
in 1998 compared to 72.9 percent for 1997.
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
Page 37
<PAGE>
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.
Management closely monitors 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, 1998, was 71.4 percent for
interest rate sensitive assets and liabilities of ninety days or less and 91.8
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.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
(dollars in thousands)
1 - 90 Days 91 - 365 1 - 5 Years Beyond 5
Days Years Total
--------------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Earning Assets:
Investment Securities $ 3,521 $19,800 $15,361 $2,649 $41,331
Federal Funds Sold 2,325 - - - 2,325
Loans (excluding non-accruing) 33,925 10,255 22,812 13,065 80,057
============== ============= ============= ============= ==============
Total Earning Assets $39,771 $30,055 $38,173 $15,714 $123,713
============== ============= ============= ============= ==============
Interest-Bearing Liabilities:
Page 38
<PAGE>
Savings and Time Deposits $ 55,705 $20,324 $14,265 $ - $ 90,294
Borrowed Funds - - - - -
-------------- ------------- ------------- ------------- --------------
Total Interest-Bearing Liabilities $ 55,705 $20,324 $14,265 $ - $ 90,294
============== ============= ============= ============= ==============
Interest Rate Sensitivity Gap Per
Period ($15,934) $9,731 $23,907 $15,714 $33,418
Cumulative Interest Rate Gap ($15,934) ($6,203) $17,704 $33,418 $33,418
Cumulative Ratio of Interest Rate
Sensitivity 71.4% 91.8% 119.6% 137.0% 137.0%
</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
Metro formed a Year 2000 Committee to address all areas related to Year 2000 in
January, 1998. The Committee consists of senior management and representatives
from each functional area of the organization.
The Committee developed a Year 2000 Plan to identify all internal and external
systems which may be affected by the Year 2000. Systems were prioritized based
on an assessment of Year 2000 risk and potential impact to operations, earnings
and capital. A timeline was developed to ensure that tasks in the Year 2000 Plan
would be completed consistent with management's objectives and regulatory
guidelines.
Page 39
<PAGE>
A Testing Plan was developed to establish methodologies for testing of internal
and external systems for Year 2000 critical dates. Results of testing have been
reviewed and certified by Metro's Year 2000 Committee. The Year 2000 Plan
includes remediation or replacement of non-compliant systems.
Metro's data processor, Computer Services, Inc., Paducah, Kentucky, conducted
Proxy Testing during July and August, 1998. Proxy Testing allowed for Year 2000
testing of core system processing by Computer Services, Inc.'s client banks.
Metro was represented by a member of management during the Proxy Testing
process. Based on the results of testing, all core systems are Year 2000 ready.
Metro identified third-party vendors providing products or services identified
as mission-critical to operations. The identified vendors were contacted to
obtain the Year 2000 status of products and services used by Metro. Based on an
evaluation by the Year 2000 Committee, no significant Year 2000 issues were
identified.
Metro identified customers with significant loan and deposit relationships. Each
non-consumer customer was contacted to review the status of their Year 2000 plan
and to complete a Year 2000 Questionnaire. Customers which may pose Year 2000
risk were identified based on their questionnaire responses. Additional
follow-up for customers which may pose significant Year 2000 risk is ongoing.
Metro operates 23 branch and off-site automated teller machines (ATM). ATM's
requiring hardware and/or software upgrades to Year 2000 compliance have been
scheduled with the ATM manufacturers. ATM's are expected to be Year 2000
compliant by March 31, 1999.
Metro has developed a Customer Awareness Program, designed to communicate to
customers and potential customers the status of Metro's Year 2000 status. The
program primarily includes statement messages, statement stuffers and bank lobby
information which educates customers about Year 2000 issues and relates Metro's
progress toward Year 2000 compliance.
Metro has developed a Contingency Plan designed to address mission-critical
system failures which could result from Year 2000. The Contingency Plan provides
for back-up systems and processes in the event of failure. The Contingency Plan
includes various scenarios which may occur and specific actions to be taken in
the event of system failures.
As of December 31, 1998, all areas of Metro's Year 2000 certification process
are substantially complete. Upgrades for some software applications are planned
for the first part of 1999, along with completion of ATM upgrades.
Costs associated with Year 2000 compliance have been substantially incurred as
of December 31, 1998. Future costs, if any, are not expected to have a material
impact on Metro's financial position or results of operations.
Page 40
<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, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows, for each of the three years in the period ended December
31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 28, 1999.
Page 41
<PAGE>
Consolidated Statement of Condition
MetroBanCorp & Subsidiary
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
ASSETS 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Banks $7,719 $ 9,595
Federal Funds Sold 2,325 7,500
----------------------
Total Cash and Cash Equivalents 10,044 17,095
----------------------
Investment Securities Held to Maturity - at Amortized
Cost (Market Value: 1998 - $3,182 and 1997 - $9,326) 3,605 9,519
Investment Securities Available for Sale - at Market Value 37,726 18,518
----------------------
Total Investment Securities 41,331 28,037
----------------------
Loans 80,469 77,295
Allowance for Loan Losses (1,300) (998)
----------------------
Loans, net 79,169 76,297
----------------------
Premises and Equipment, net 1,536 1,406
Accrued Interest Receivable 956 834
Core Deposit Intangible, net of Accumulated
Amortization of $1,085 in 1998 and $944 in 1997 41 182
Deferred Tax Asset 554 419
Other Assets 349 448
----------------------
Total Assets $133,980 $ 124,718
======================
LIABILITIES
- ----------------------------------------------------------------------------------
Deposits:
Non-Interest Bearing Demand $29,534 $ 28,552
Interest Bearing:
Savings and NOW Accounts 46,594 40,500
Time Deposits of $100,000 and over 11,728 12,530
Other Time Deposits 31,972 29,652
----------------------
Total Deposits 119,828 111,234
----------------------
Securities Sold Under Agreements to Repurchase -
Accrued Interest Payable 449 426
Other Liabilities 864 926
----------------------
Total Liabilities 121,141 112,586
----------------------
COMMITMENTS AND CONTINGENCIES (Note 11) - -
Page 42
<PAGE>
SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------
Preferred Stock: 1,000,000 authorized;
none outstanding - -
Common Stock: 3,000,000 authorized;
1,941,726 issued and outstanding in 1998 and 1997 13,548 11,210
Accumulated Earnings (756) 880
Net Unrealized Gain/(Loss) on Investment Securities
Available for Sale 47 42
----------------------
Total Shareholders' Equity 12,839 12,132
----------------------
Total Liabilities and Shareholders' Equity $133,980 $ 124,718
======================
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
Consolidated Statement of Operations
MetroBanCorp & Subsidiary
(dollars in thousands, except per share data)
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $7,851 $ 7,133 $ 6,130
Interest on Investment Securities 1,739
1,586 1,600
Interest on Federal Funds Sold 391
104 143
---------------- ---------------- ----------------
Total Interest Income 9,981 8,823 7,873
---------------- ---------------- ----------------
INTEREST EXPENSE:
Interest on Deposits 4,292 3,754 3,496
Interest on Term Borrowings - 37 23
---------------- ---------------- ----------------
Total Interest Expense 4,292 3,791 3,519
---------------- ---------------- ----------------
Net Interest Income 5,689 5,032 4,354
Provision for Loan Losses 311 200 67
---------------- ---------------- ----------------
Net Interest Income after Provision
for Loan Losses 5,378 4,832 4,287
---------------- ---------------- ----------------
NON-INTEREST INCOME:
Service Charges on Deposit Accounts 354 319 302
Net Securities Loss (9) (15) (12)
Other Service Charges, Commissions and Fees 616 483 342
Page 43
<PAGE>
Gain on Sale of Real Estate - 90 35
---------------- ---------------- ----------------
Total Non-Interest Income 961 877 667
---------------- ---------------- ----------------
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 1,957 1,797 1,572
Net Occupancy Expense 391 327 265
Equipment Expense 359 437 299
Advertising and Public Relations 241 234 230
Legal and Professional Services 225 258 137
Data Processing 325 275 238
FDIC Insurance Assessment 28 25 188
Student Loan Servicing Fees 37 63 108
Amortization of Core Deposit Intangible 141 141 141
Other 862 803 664
---------------- ---------------- ----------------
Total Non-Interest Expense 4,566 4,360 3,842
---------------- ---------------- ----------------
Income Before Income Taxes 1,773 1,349 1,112
Applicable Income Taxes 722 540 488
---------------- ---------------- ----------------
NET INCOME $1,051 $ 809 $ 624
================ ================ ================
NET INCOME PER COMMON SHARE $0.54 $ 0.42 $ 0.32
================ ================ ================
NET INCOME PER COMMON SHARE - ASSUMING DILUTION $0.52 $ 0.41 $ 0.32
================ ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING 1,941,726 1,941,726 1,941,726
---------------- ---------------- ----------------
WEIGHTED AVERAGE SHARES OUTSTANDING-ASSUMING DILUTION 2,035,493 1,979,720 1,941,726
---------------- ---------------- ----------------
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
Page 44
<PAGE>
Consolidated Statement of Cash Flows
MetroBanCorp & Subsidiary
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $1,051 $ 809 $ 624
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 311 200 67
Deferred Income Tax Benefit (141) (164) (62)
Depreciation and Amortization 451 517 394
Gain on Sale of Real Estate - (90) (35)
(Gain)/Loss on Sale of Securities 9 15 12
(Increase)/Decrease in Accrued Interest Receivable (122) 37 82
(Increase)/Decrease in Other Assets 99 51 (12)
Increase/(Decrease) in Accrued Interest Payable 23 7 (47)
Increase in Other Liabilities (62) 247 175
--------------- ----------------- -------------------
Total Adjustments 568 820 574
--------------- ----------------- -------------------
Net Cash Flows Provided by Operating Activities 1,619 1,629 1,198
--------------- ----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------
Proceeds from Maturities of Investment Securities Held to 8,020 500 233
Maturity
Proceeds from Maturities of Investment Securities Available 8,876 400 2,348
for Sale
Proceeds from Sales of Investment Securities Available for Sale 4,500 10,997 3,954
Purchases of Investment Securities Available for Sale (32,973) (8,483) (8,563)
Purchase of Investment Securities Held to Maturity (1,717) - -
Proceeds from Sales of Student Loans - 3,546 1,178
Proceeds from the Repayment of Student Loans 562 1,119 2,190
Net Loans made to Customers (3,744) (16,643) (8,412)
Purchases of Premises and Equipment (439) (320) (526)
Proceeds from the Sale of Real Estate - 461 409
--------------- ----------------- -------------------
Net Cash Flows Used in Investing Activities (16,915) (8,423) (7,189)
--------------- ----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Demand Deposits, NOW and Savings Accounts 7,076 10,404 2,699
Page 45
<PAGE>
Net Increase in Time Deposits 1,518 1,546 1,721
Net Decrease in Securities Sold under
Agreements to Repurchase - (1,500) (2,400)
Cash Dividends Paid (349) (336) (336)
--------------- ----------------- -------------------
Net Cash Flows Provided by Financing Activities 8,245 10,114 1,684
--------------- ----------------- -------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase/(Decrease) in Cash and
Cash Equivalents (7,051) 3,320 (4,307)
Cash and Cash Equivalents at Beginning of Period 17,095 13,775 18,082
--------------- ----------------- -------------------
Cash and Cash Equivalents at End of Period $10,044 $17,095 $13,775
=============== ================= ===================
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year for Interest Expense $4,288 $ 3,767 $ 3,584
Cash Paid During the Year for Income Taxes 912 612 483
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
CONSOLIDATED STATEMENT OF
SHAREHOLDERS' EQUITY
MetroBanCorp & Subsidiary
(dollars in thousands)
Page 46
<PAGE>
<TABLE>
<CAPTION>
Common Common Accumulated Accumulated Comprehensive Total
Shares Stock Earnings / Other Income Shareholders'
Outstanding (Deficit) Comprehensive Equity
Income
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 1,681,291 $11,210 $119 ($184) $11,145
Net Income - - 624 - $624 624
Unrealized Gains on
Securities,
Net of Tax and
Reclassification Adjustment - - - 68 68 68
(see Disclosure)
Comprehensive Income $692
=============
Cash Dividend (336) (336)
- -------------------------------------------------------------------------------------- --------------
Balances, December 31, 1996 1,681,291 11,210 407 (116) 11,501
Net Income - - 809 - $809 809
Unrealized Gain on
Securities,
Net of Tax and 158
Reclassification Adjustment - - - 158 158
(see Disclosure)
Comprehensive Income $967
- ---------------------------------- =============
Cash Dividend (336) (336)
- -------------------------------------------------------------------------------------- --------------
Balances, December 31, 1997 1,681,291 11,210 880 $42 $12,132
Net Income - - 1,051 - $1,051 1,051
Unrealized Gain on
Securities,
Net of Tax and
Reclassification Adjustment - - - 5 5 5
(see Disclosure)
Comprehensive Income $1,056
=============
Cash Dividend (349) (349)
5% Stock Dividend 84,017 880 (880) -
10% Stock Dividend 176,418 1,458 (1,458)
Balances, December 31, 1998 1,941,726 $13,548 ($756) $47 $12,839
================================================== ==============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<TABLE>
<CAPTION>
Disclosure of Reclassification Amount 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized Holding Gains Arising During Period $13 $272 $120
Less: Reclassification Adjustment for Losses
Included in Net Income (5) (9) (7)
Income Tax Expense Related to Items of Other
Comprehensive Income (3) (105) (45)
---------------------------------------
Net Unrealized Gains on Securities $5 $158 $68
=======================================
</TABLE>
Page 47
<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.
Page 48
<PAGE>
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. Depreciation included in non-interest expense is
computed using the straight-line method over the estimated useful lives of
the related assets ranging from 3 to 30 years. Routine maintenance,
repairs and minor improvements are charged to non-interest expense as
incurred.
Core Deposit Intangible - The core deposit intangible represents the
excess of acquisition costs over the fair value of net assets acquired and
is being amortized on the straight-line basis over a period of eight
years.
Securities Sold Under Agreements to Repurchase - These securities are
generally treated as collateralized financing transactions and are
recorded at the amount at which the securities were sold plus accrued
interest. It is Metro's policy to relinquish control of securities sold
under the agreements to repurchase. Metro also monitors its exposure with
respect to securities borrowed transactions. The maximum amount of
outstanding agreements at any month-end was $0 and $1.5 million during
1998 and 1997, respectively. The daily average outstanding balance of
securities sold under agreements to repurchase amounted to $0 and $3,150
for the years ended December 31, 1998 and 1997, respectively.
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 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 dilution:
<TABLE>
<CAPTION>
For the Year Ended 1998
-----------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------ -------------------- ---------
<S> <C> <C> <C>
Net Income per Common Share
Income available to common
stockholders $1,051,000 1,941,726 $0.54
=========
Page 49
<PAGE>
Effects of Dilutive Options
Stock options - 93,767
------------------ --------------------
Net Income per Common Share-Assuming Dilution $1,051,000 2,035,493 $0.52
================== ==================== =========
</TABLE>
Per share data included in Metro's consolidated statement of operations
for 1998, 1997 and 1996 was based on the weighted average number of common
shares outstanding. Outstanding stock options during 1996 did not have a
dilutive effect on earnings per share.
Reclassifications - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 1998
presentation. Such reclassifications had no effect on net income.
Impact of Accounting Changes - Income which established standards for
reporting and display of comprehensive income and its components. The
impact of this adoption is presented in the Consolidated Statement of
Shareholders" Equity.
Effective January 1, 1998, Metro adopted the provisions of SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
which standardized the disclosure requirements for pensions and other
postretirement benefits. The adoption of this statement does not impact
Metro's financial condition or its results of operations.
In June, 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement requires, among other things, that all derivative
instruments be recorded on the balance sheet at their fair value. The
statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (January 1, 2000 for Metro). Metro does not
expect the impact of this statement will be material to its results of
operations or its financial position.
Stock Dividends - A five percent stock dividend was declared on March 12,
1998 to shareholders of record on March 18, 1998 and distributed on April
6, 1998. A ten percent stock dividend was declared on January 8, 1999 to
shareholders of record on January 19, 1999 and distributed on February 8,
1999. All average share and per share amounts have been retroactively
adjusted to reflect these stock dividends.
3. INVESTMENT SECURITIES
Investment securities consist primarily of U.S. government agency and
corporation bonds, mortgage backed securities with both fixed and floating
interest rates and municipal securities with fixed interest rates. During
1998, derivative securities balances were reduced from $11.5 million to
$2.0 million through maturity or sale. Interest rate risk associated with
remaining derivative securities is not material. The bank has the ability
to hold remaining derivative securities until the 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:
Page 50
<PAGE>
<TABLE>
<CAPTION>
Investment Securities Portfolio
(dollars in thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
December 31, 1998 Cost Gains Losses
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Investment Securities Held to Maturity
Municipal Securities $1,716 $29 $- $1,745
U.S. Government Agencies and Corporations 1,889 - (63) 1,826
-------------- ---------------- --------------- ---------------
Total Investment Securities Held to Maturity 3,605 29 (63) 3,571
-------------- ---------------- --------------- ---------------
Investment Securities Available for Sale
Mortgage-Backed Securities 28,843 46 - 28,889
U.S. Government Agencies and Corporations 8,799 38 - 8,837
-------------- ---------------- --------------- ---------------
Total Investment Securities Available for Sale 37,642 84 - 37,726
-------------- ---------------- --------------- ---------------
Total Investment Securities $41,247 $113 ($63) $41,297
============== ================ =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Gross
Gross Unrealized Estimated
December 31, 1997 Amortized Cost Unrealized Gains Losses Market 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
Page 51
<PAGE>
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>
The carrying value of U.S. government agencies, corporation securities,
and mortgaged-backed securities at December 31, 1998 and 1997 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, 1998
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 $- $- $- $-
1 - 5 Years - - 721 722
5 - 10 Years - - 4,004 4,039
Due After 10 Years - - 24,118 24,128
------------- -------------- ------------ --------------
Total Mortgage-Backed Securities - - 28,843 28,889
------------- -------------- ------------ --------------
U.S. Government Agencies and
Corporations
----------------------------
Due within One Year 389 389 500 503
1 - 5 Years 1,500 1,437 6,299 6,331
5 - 10 Years - - 2,000 2,003
Due After 10 Years - - - -
------------- -------------- ------------ --------------
Total U.S. Government Agencies and
Corporations 1,889 1,826 8,799 8,837
------------- -------------- ------------ --------------
Municipal Securities
--------------------
Due within One Year - - - -
Page 52
<PAGE>
1 - 5 Years 154 157 - -
5 - 10 Years 1,562 1,588 - -
Due After 10 Years - - - -
------------- -------------- ------------ --------------
Total Municipal Securities 1,716 1,745 - -
------------- -------------- ------------ --------------
Total Investment Securities $3,605 $3,571 $37,642 $37,726
============= ============== ============ ==============
</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 $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>
Proceeds from sales of investments in debt securities were $4.5 million in
1998 as compared to $11.0 million in 1997. Net realized loss on sale of
investment securities amounted to $9,000 during 1998 compared to a $15,000
loss for the same period in 1997.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Page 53
<PAGE>
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. Carry
amounts which are comprised of the unamortized fee income are immaterial.
The estimated carrying and fair values of Metro's financial instruments as
of December 31, 1998 are as follows (dollars in thousands):
Carrying Value Fair Value
----------------- ----------------
Financial Assets:
Cash & Cash Equivalents $10,044 $10,044
Investment Securities 41,331 41,297
Loans, Net 79,169 84,070
Deposits 119,828 120,848
5. LOANS
Total loans at December 31, 1998 and 1997 by major loan categories are as
follows (dollars in thousands):
1998 1997
---- ----
Commercial 50,556 $47,527
Real Estate - Construction 2,399 3,689
Mortgage 776 646
Installment 22,333 20,467
Student Loans 4,405 4,966
------------- ------------
Total Loans $80,469 $77,295
Allowance for Loan Losses (1,300) (998)
------------- ------------
Page 54
<PAGE>
Loans, Net $79,169 $76,297
============= ============
Transactions in the allowance for loan loss account for the years
indicated were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Balance at Beginning of Year $998 $866 $910
Provision for Loan Losses 311 200 67
Charged-Off Loans (29) (80) (119)
Recoveries 20 12 8
----------- ------------------------
Balance at End of Year $1,300 $998 $866
=========== ========================
</TABLE>
As of December 31, 1998, Metro had investments in loans which were
impaired in accordance with SFAS No.'s 114 and 118 of $368,700. Of this
amount, $364,100 had no related specific allowance. The remaining $4,600
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, 1998, the average balance of impaired
loans was $215,400. Interest income of $20,832 would have been recorded in
1998 on impaired loans if such loans had been accruing interest throughout
the year in accordance with their original terms. In 1998, interest income
in the amount of $7,922 was recorded on impaired loans prior to being
classified as impaired.
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 consist of the
following (dollars in thousands):
Page 55
<PAGE>
1998 1997
Land and Improvements $200 $200
Building and Improvements 1,182 999
Furniture and Equipment 1,896 1,683
----------- ----------
Total 3,278 2,882
Less: Accumulated Depreciation and
Amortization (1,742) (1,476)
----------- ----------
Total, Net $1,536 $1,406
=========== ==========
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 $68,100, $57,600, and
$51,000, in 1998, 1997, and 1996, 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
$18,900, $13,000, and $12,000 in 1998, 1997, and 1996, 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
Page 56
<PAGE>
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 $5.84 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 $ 5.84 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 $4 to
$9 per share.
As of December 31, 1998, there were 443,693 shares of common stock
reserved for issuance under these plans. Stock option activity under these
plans was as follows:
Number of Weighted Average
Options Shares Exercise Price
--------------------------------------------------------------------
December 31, 1995 172,796 $5.64
Granted 15,593 5.30
--------------------------------------------------------------------
December 31, 1996 188,388 5.61
Granted 50,127 5.77
--------------------------------------------------------------------
December 31, 1997 238,515 5.64
Granted 40,425 7.90
Granted 8,250 8.98
Cancelled (2,100) 6.23
------------- -----------
285,090 $6.06
===========
Shares Exercisable 285,090
=============
Page 57
<PAGE>
Metro accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with FASB Statement No. 123, Metro's net
income would have been reduced to $960,000 ($0.49 per share) in 1998,
$734,000 ($0.38 per share) in 1997, and $608,000 ($0.36) in 1996. 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 estimated fair value
of options utilizing the information and assumptions that follows. Options
outstanding at December 31, 1998, have a weighted average remaining life
of 4.3 years. The weighted average fair value of the options granted was
$3.58 per share in 1998 and $2.62 per share in 1997. The fair value of
each option is estimated on the date of grant using a risk-free interest
rate of 5.50 percent in 1998 and 6.25 percent in 1997; expected dividend
yields of 1.94 percent and 0.77 percent in 1997; expected lives of 6.1
years in 1998 and 6.5 years in 1997; and expected volatility of 38.7
percent in 1998 and 36.8 percent in 1997.
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):
1998 1997 1996
---- ---- ----
Federal - Current $659 $572 $442
- Deferred (120) (139) (54)
---------- --------- --------
$539 $433 $388
---------- --------- --------
State - Current $204 $132 $108
- Deferred (21) (25) (8)
---------- --------- --------
$183 $107 $100
---------- --------- --------
$722 $540 $488
========== ========= ========
A reconciliation between Metro's effective tax rate and the U.S. federal
statutory rate is as follows:
1998 1997 1996
---- ---- ----
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 6.5
Effect of Graduated Income Taxes (1.0) (1.0) (1.0)
Tax Exempt Interest (0.8) - -
Other 1.0 (0.5) 3.4
-------- -------- --------
40.7% 40.0% 43.9%
======== ======== ========
Page 58
<PAGE>
The significant components of Metro's net deferred tax asset as of December
31, 1998 and 1997 are as follows (dollars in thousands):
1997 1996
---------- ---------
Book over Tax Depreciation $82 $73
Provision for Loan Losses 444 321
Accrual to Cash Adjustment - -
Net Unrealized (Gain)/Loss on Investment
Securities Available for Sale (37) (29)
Other 65 54
---------- ---------
$554 $419
========== =========
Metro did not record a valuation allowance against the deferred tax assets
as management expects to fully realize all tax benefits in the future.
11. COMMITMENTS AND CONTINGENCIES
Metro has entered into non-cancelable operating leases for its main office
and three branch offices. The main office lease will expire in 2005 while
the expiration of the branch office leases range from 1999 through 2002.
Each operating lease has options to extend into the future. Rental expense
for all four offices in 1998 was $162,000. Future aggregate minimum annual
rentals (not considering renewal options) are payable as follows:
1999 2000 2001 2002 2003 Thereafter
---------- ---------- ---------- ---------- --------- ----------
$154,500 $150,500 $139,600 $120,000 $ 95,300 $113,900
Metro is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit under lines of credit, real estate draw note arrangements and
standby letters of credit. These instruments involve varying degrees of
credit risk in excess of the amount recognized in the consolidated
statement of condition.
Metro's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitment to extend credit
and standby letters of credit is represented by the contractual amount of
these instruments. Metro uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Page 59
<PAGE>
Metro's financial instruments where contract amounts represent credit risk
are as follows (dollars in thousands):
1998 1997
---- ----
Standby Letters of Credit $50 $339
Unused Commercial Lines of Credit &
Real Estate Draw Notes 13,807 11,785
Unused Home Equity & Personal
Lines of Credit 2,253 2,382
------- -------
Total Commitments $16,110 $14,506
======== =======
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.
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
Page 60
<PAGE>
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 1998 were as follows (dollars in thousands):
Balance at Beginning of Year $1,025
Loans Made 957
Loan Repayments (656)
----------
Balance at End of Year $1,326
==========
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):
1998 1997 1996
---- ---- ----
Advertising & Public Relations $178 $208 $213
Lease Payments 2 11
11
Legal Services 6 7 3
--------- -------- -------
Total $186 $226 $227
========= ======== =======
The Bank purchased student loans from a company of which certain executive
officers
Page 61
<PAGE>
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
$37,000, $63,000 and $108,000 in 1998, 1997 and 1996, 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 1998,1997
or 1996. In 1997 and 1996, the Bank sold $3.5 million, and $1.2 million,
respectively, of student loans back to the seller.
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, 1998 and 1997 (dollars in thousands):
ASSETS: 1998 1997
---- ----
Cash and Cash Equivalents $142 $623
Investment Securities Available for Sale
- Market Value 2,515 2,502
Investment in MetroBank 9,991 8,874
Other 204 210
----------- ----------
Total Assets $12,852 $12,209
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Other Liabilities $13 $77
Shareholders' Equity 12,839 12,132
----------- ----------
Total Liabilities and Shareholders' Equity $12,852 $12,209
=========== ==========
MetroBanCorp (Parent Company Only) Condensed Statement of Operations for
the years ended December 31, 1998, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest Income $166 $181 $199
Non-Interest Income
Page 62
<PAGE>
Gain on Sale of Securities - - 10
Non-Interest Expenses (281) (213) (189)
----------- --------- ---------
Income/(Loss) Before Income Taxes and
Equity in Undistributed Earnings of
MetroBank (115) (32) 20
Income Tax Expense 46 - (8)
----------- --------- ---------
Income/(Loss) Before Equity in Undistributed
Earnings of MetroBank (69) (32) 12
Equity in Undistributed Earnings of
MetroBank 1,120 841 612
----------- --------- ---------
Net Income $1,051 $809 $624
=========== ========= =========
</TABLE>
MetroBanCorp (Parent Company Only) Condensed Statement of Cash Flows for
the years ended December 31, 1998, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $1,051 $809 $624
------------ ------------- ------------
Adjustments to Reconcile Net Income to
Cash Provided by/(Used in) Operating
Activities:
Equity in Undistributed Earning of MetroBank (1,120) (841) (612)
Depreciation and Amortization - 12 12
Gain on Sale of Investment Securities - - (10)
(Increase)/Decrease in Other Assets 6 336 (35)
Increase/(Decrease) in Other Liabilities (64) 61 (8)
------------ ------------- ------------
Total Adjustments (1,178) (432) (653)
------------ ------------- ------------
Net Cash Flows Provided by/(Used in) Operating
Activities (127) 377 (29)
------------ ------------- ------------
Cash Flows From Investing Activities:
Proceeds from the Sale of Investment Securities 2,000 2,669 3,010
Proceeds from Maturity of Investment Securities 2,000 400 332
Purchases of Investment Securities (4,005) (2,500) (3,001)
------------ ---------------------------
Net Cash Flows Provided by/Used in Investing
Activities (5) 569 341
------------ ------------- ------------
Cash Dividends Paid (349) (336) (336)
------------ ------------- ------------
Net Increase/(Decrease) in Cash and Cash
Equivalents (481) 610 (24)
Cash and Cash Equivalents at Beginning of Year 623 13 37
------------ ------------- ------------
Cash and Cash Equivalents at End of Year $142 $623 $13
============ ============= ============
</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 64
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,719
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,325
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,726
<INVESTMENTS-CARRYING> 41,331
<INVESTMENTS-MARKET> 41,045
<LOANS> 80,469
<ALLOWANCE> (1,300)
<TOTAL-ASSETS> 133,980
<DEPOSITS> 119,828
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,313
<LONG-TERM> 0
0
0
<COMMON> 13,548
<OTHER-SE> (709)
<TOTAL-LIABILITIES-AND-EQUITY> 133,980
<INTEREST-LOAN> 7,851
<INTEREST-INVEST> 1,739
<INTEREST-OTHER> 391
<INTEREST-TOTAL> 9,981
<INTEREST-DEPOSIT> 4,292
<INTEREST-EXPENSE> 4,292
<INTEREST-INCOME-NET> 5,689
<LOAN-LOSSES> 311
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 4,566
<INCOME-PRETAX> 1,773
<INCOME-PRE-EXTRAORDINARY> 1,051
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,051
<EPS-PRIMARY> .54
<EPS-DILUTED> .52
<YIELD-ACTUAL> 4.42
<LOANS-NON> 369
<LOANS-PAST> 134
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 503
<ALLOWANCE-OPEN> 998
<CHARGE-OFFS> 29
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 1,300
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
