METROPOLITAN FINANCIAL CORP /OH/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the fiscal year ended December 31, 2001
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Commission file number 000-21553
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METROPOLITAN FINANCIAL CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Ohio 34-1109469
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)

22901 Millcreek Blvd. Highland Hills, Ohio 44122
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(216) 206-6000
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(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12 (b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
without par
value

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(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, will not be contained, to the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregated market value of voting stock held by nonaffiliates of the
Registrant as of March 11, 2002 was $5,654,000.

As of March 11, 2002, there were 8,134,471 shares of the Registrant's
Common Stock issued and outstanding.

Documents incorporated by reference:

Portions of the Annual Report for the year ended December 31, 2001 - Parts
I and II

Portions of the Proxy Statement for the 2002 Annual Meeting - Part III

METROPOLITAN FINANCIAL CORP.

2001 FORM 10-K

TABLE OF CONTENTS

PART I
Item 1. Business............................................ 1
Item 2. Properties.......................................... 24
Item 3. Legal Proceedings................................... 24
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 24

PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters....................................... 26
Item 6. Selected Financial Data............................. 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 28
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk............................................... 41
Item 8. Financial Statements and Supplementary Data......... 45
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 79

PART III
Item 10. Directors and Executive Officers of the Company.... 79
Item 11. Executive Compensation............................. 79
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 79
Item 13. Certain Relationships and Related Transactions..... 79

PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 79

PART I

ITEM 1. BUSINESS

GENERAL

Metropolitan Financial Corp., (the "Company") is a savings and loan holding
company that was incorporated in 1972. We are engaged in the principal business
of originating and purchasing mortgage and other loans through our wholly-owned
subsidiary, Metropolitan Bank and Trust Company ("Metropolitan Bank").
Metropolitan Bank is an Ohio chartered stock savings association established in
1958. We obtain funds for lending and other investment activities primarily from
savings deposits, wholesale borrowings, principal repayments on loans, and the
sale of loans. The activities of the Company are limited and impact the results
of operations primarily through interest expense on a consolidated basis. Unless
otherwise noted, all of the activities discussed below are of Metropolitan Bank.

Robert M. Kaye is the Company's current majority shareholder. Mr. Kaye
acquired the Company in 1987 and remained its sole shareholder until our initial
public offering of common stock in October 1996. Currently, Mr. Kaye owns
approximately 75% of the Company's outstanding common stock. Mr. Kaye currently
has the ability to decide the outcome of matters submitted to the shareholders
for approval, the ability to elect or remove all the directors of the Company
and the ultimate control of the Company and Metropolitan Bank. In addition, Mr.
Kaye is Chairman of the Board and Chief Executive Officer of the Company and
Metropolitan Bank.

At December 31, 2001, we operated 24 full service retail sales offices in
Northeastern Ohio. As of December 31, 2001, we also maintained 9 loan
origination offices throughout Ohio and in Western Pennsylvania. We also service
mortgage loans for various investors.

At December 31, 2001, we had total assets of $1.6 billion, total deposits
of $1.1 billion and shareholders' equity of $45.5 million. The Federal Deposit
Insurance Corporation insures the deposits of Metropolitan Bank up to applicable
limits.

At December 31, 2001, we directly or indirectly owned the following
wholly-owned subsidiaries:

Metropolitan Bank changed its name from Metropolitan Savings Bank of
Cleveland to Metropolitan Bank and Trust Company in April 1998. We formed
Metropolitan Capital Trust I during 1998 to facilitate the issuance of
cumulative trust preferred securities. We formed Metropolitan Capital Trust II
in 1999 to facilitate the issuance of additional trust preferred securities.
Metropolitan I Corporation was formed in 2000 as a holding company for its
subsidiary, Progressive Land Title Agency, Inc., which operates as a title
agency in Ohio. Kimberly Construction Company's sole business function is to
serve as a principal party to various construction contracts entered into in
connection with the construction of bank premises. Metropolitan Savings Service
Corporation currently holds and manages real estate which Metropolitan Bank has
acquired by foreclosure. The Venice Inn LLC was formed to hold title to and
operate a hotel that Metropolitan Bank acquired through foreclosure as servicer
for a pool of commercial real estate loans.

All required disclosures as part of Guide 3 are included in this document
either in Management's Discussion and Analysis of Financial Condition and
Results of Operations or in the Five Year Summary of Selected Data.

1

SUPERVISORY AGREEMENTS

In 1996 we made our initial public offering of common stock. Since that
time we have grown from $720 million to $1.6 billion in total assets and from 12
to 24 full service retail sales offices. This rapid growth has resulted in
significant credit problems and in having a number of retail sales offices that
do not yet have a large enough deposit base to make them profitable. As a result
our net income has decreased from $4.5 million for the year ended December 31,
1999 to $1.5 million for the year ended December 31, 2000 to a loss of $3.6
million for the year ended December 31, 2001.

As a result of the performance of the Company, on July 26, 2001, the
Company entered into a supervisory agreement with the Office of Thrift
Supervision ("OTS"), which requires us to prepare and adopt a plan for raising
capital that uses sources other than increased debt or which requires additional
dividends from Metropolitan Bank. In response to that agreement the Company
commenced a rights offering and a concurrent offering to the public of shares of
our common stock on January 31, 2002.

Additionally, Metropolitan Bank entered onto a separate supervisory
agreement with the OTS and the Ohio Department of Financial Institutions (the
"ODFI") on July 26, 2001, which requires Metropolitan Bank to take a number of
actions. A summary of those requirements and our actions to date follows.

- Develop a capital improvement and risk reduction plan. The plan was
completed, submitted and a letter indicating the OTS's nonobjection to
the terms of the plan was received on January 24, 2002.

- Achieve and maintain all capital standards at the well-capitalized level
by December 31, 2001, which date was extended to March 31, 2002. The
previously mentioned common stock offerings are expected to close prior
to March 31, 2002 and result in Metropolitan Bank achieving well
capitalized status.

- Reduce investment in fixed assets. Steps have been taken to sell and
leaseback certain retail sales office locations and certain artwork has
been sold.

- Attain compliance with board approved interest rate risk policy
requirements. As of December 31, 2001 Metropolitan Bank is in
compliance.

- Reduce volatile funding sources such as brokered and out of state
deposits. Metropolitan Bank achieved a 32.5% decrease in such deposits
between July 31, 2001 and December 31, 2001.

- Increase earnings. Progress made on this requirement during the last
five months of 2001 was more than offset by provisions for impairment of
loan servicing rights experienced during the fourth quarter of 2001.

- Improved controls related to credit risk. Policy revisions have been
implemented.

- Restriction of total assets to not more than $1.7 billion. As of
December 31, 2001 total assets were $1.6 billion.

Both supervisory agreements also contain restrictions on adding, entering into
employment contracts with, or making golden parachute payments to directors and
senior executive officers and in changing responsibilities of senior officers.

2

LENDING ACTIVITIES

General. Our primary lending activities consist of residential mortgage
banking, multifamily loans, construction and land loans, commercial real estate
loans, consumer loans and commercial business loans.

Loan Portfolio Composition. The following table presents the composition of
our loan portfolio, including loans held for sale, in dollar amounts and as a
percentage of all loans before deductions for loans in process, deferred fees
and discounts and allowance for losses on loans.

We had commitments to originate or purchase $68.2 million of fixed rate
loans and $51.5 million of adjustable rate loans at December 31, 2001. In
addition, we had firm commitments to sell loans of $78.0 million at December 31,
2001.

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The following table presents the composition of our loan portfolio, by
fixed and adjustable rates, including loans held for sale, in dollar amounts and
as a percentage of all loans before deductions for loans in process, deferred
fees and discounts and allowance for losses on loans.

The following table illustrates the contractual maturity of our loan
portfolio. The table shows loans that have adjustable or renegotiable interest
rates as maturing in the period during which the contract is due. The table does
not reflect the effects of possible prepayments, enforcement of due-on-sale
clauses, or amortization of premium, discounts, or deferred loan fees. The table
includes demand loans, loans having no stated maturity and overdraft loans in
the due in one year or less category.

4

Multifamily Lending. We originate loans from our present customers,
contacts within the investor community, and referrals from mortgage brokers. We
have become known for originating multifamily loans in our primary multifamily
lending markets of Ohio, and Pennsylvania. Although we operate full service
retail sales offices solely in Northeast Ohio, we have a loan origination office
in Western Pennsylvania. In addition to originating multifamily loans, we
purchase multifamily loans from a variety of sources.

At December 31, 2001, the multifamily loans held for investment totaled
$224.5 million or 18.2% of total loans. The average size of these loans was
approximately $455,000. Currently, we emphasize the origination of multifamily
fixed and adjustable loans with principal amounts of $175,000 to $6.0 million.
Adjustable loans are priced on one-, three- or five-year treasury rates with
typical amortization periods of 25 or 30 years. The loans may be subject to a
maximum individual aggregate interest rate adjustment as well as a maximum
aggregate adjustment over the life of the loan. Typically the maximum loan to
value ratio of multifamily residential loans is 75% or less.

Apartment buildings, generally with less than 75 residential units,
typically secure multifamily loans. Our underwriting process includes a site
evaluation and involves an evaluation of the borrower, whether the borrower is
an individual or a group of individuals acting as a separate entity. We review
the financial statements of each of the individual borrowers and often obtain
personal guarantees in an amount equal to the original principal amount of the
loan. In addition, we complete an analysis of debt service coverage of the
property. Debt service coverage requirements are determined based upon the
individual characteristics of each loan. Typically, these requirements range
from a ratio of 1.15:1 to 1.30:1.

In addition to originating multifamily loans we purchase multifamily loans
from a variety of sources. Prior to purchasing these loans, we use a similar
underwriting process with substantially the same standards as for our originated
loans. In some cases, when we consider the purchase of a portfolio with a
considerable number of moderate balance loans, we use an independent contract
inspector for property inspections. Real estate in Ohio secures 43.4% of our
multifamily loan portfolio. Underlying real estate for the remaining loans is
located primarily in California, Pennsylvania, and New Jersey.

We originate and purchase multifamily loans for investment and to be held
for sale. The decision to hold loans in the portfolio or for sale is based on a
number of factors including our current level of liquidity, interest rate risk,
geographic concentration and capital available to support asset growth. At
December 31, 2001 multifamily loans held for sale totaled $28.3 million. As long
as Metropolitan Bank is subject to the capital provisions of the supervisory
agreements we anticipate that a substantial portion of our multifamily loans
originated and purchased will be held for sale.

We recognize that multifamily loans generally involve a higher degree of
risk than one- to four-family residential real estate loans. Multifamily loans
involve more risk because they typically involve larger loan balances to single
borrowers or groups of related borrowers. The payment experience on these loans
typically depends upon the successful operation of the related real estate
project and is subject to risks such as excessive vacancy rates or inadequate
rental income levels.

Commercial Real Estate Lending. At December 31, 2001, permanent loans held
for investment, secured by commercial real estate, totaled $164.8 million or
13.3% of our total portfolio. The average size of these loans was approximately
$641,000. We originate loans secured by commercial real estate generally when
these loans are secured by retail strip shopping centers or office buildings and
the loan yields and other terms meet our requirements.

We have historically purchased commercial real estate loans secured by
retail strip shopping centers and office buildings to supplement our origination
of commercial real estate loans. However, no commercial real estate loans were
purchased during 2001. As a result of referrals from customers and mortgage
brokers, we make loans on commercial real estate in many states, but
predominantly in Ohio, Pennsylvania, New York and New Jersey.

We originate and purchase commercial real estate loans for investment and
to be held for sale. The decision to hold loans in the portfolio or for sale is
based on a number of factors including our current level of liquidity, interest
rate risk, geographic concentration and capital available to support asset
growth. At December 31, 2001,
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commercial real estate loans held for sale totaled $41.3 million. As long as
Metropolitan Bank is subject to the capital provisions of the supervisory
agreements, we anticipate that a portion of our commercial real estate loans
originated and purchased will be held for sale.

We recognize that commercial real estate loans generally involve a higher
degree of risk than the financing of one- to four-family residential real
estate. These loans typically involve larger loan balances to single borrowers
or groups of related borrowers. The payment experience on these loans is
typically dependent upon the successful operation of the related real estate
project and is subject to certain risks including excessive vacancy due to
tenant turnover and inadequate rental income levels. In addition, the
profitability of the business operating in the property may affect the
borrower's ability to make timely payments. In order to manage and reduce these
risks, we focus our commercial real estate lending on existing properties with a
record of satisfactory performance and target retail strip centers and office
buildings with multiple tenants.

The following table presents information as to the locations and types of
properties securing the multifamily and commercial real estate portfolio as of
December 31, 2001. As of that date, we had loans in 40 states. Properties
securing loans in 37 states are aggregated in the table because none of those
states exceed 5.0% of the outstanding principal balance of the total multifamily
and commercial real estate portfolio.

6

The following table presents aggregate information as to the type of
security as of December 31, 2001:

One- to four-family lending. We originate one- to four-family residential
loans for sale and for portfolio. While the proportion originated for sale and
the proportion originated for portfolio vary over time, we anticipate that from
now through December 2002, the majority of our one-to four-family loans will be
originated for sale.

Our portfolio of one- to four-family loans at December 31, 2001 totaled
$171.8 million or 13.9% of our total loan portfolio. These loans are primarily
first mortgages on owner occupied residences. Substantially all loans with loan
to values greater than 85% carry private mortgage insurance. These loans are
concentrated in Northeast Ohio and include both fixed and variable rate loans.
Many of the fixed rate loans were originally construction loans where we offered
the borrower fixed rate permanent financing commitments to commence after the
construction period was over. We limit the amount of this fixed rate end loan
financing retained in our portfolio to limit interest rate risk associated with
long-term fixed-rate loans.

Construction Lending and Land Development. At December 31, 2001, we had
$233.5 million of construction and land development loans outstanding. We
originate construction loans on single family homes to local builders in our
primary lending market and to individual borrowers on owner-occupied properties.
We also make loans to builders for the purchase of fully-improved single family
lots and to developers for the purpose of developing land into single family
lots. Our primary market areas for construction lending are in Northeastern
Ohio, in the counties of Cuyahoga, Lake, Geauga, Summit, Medina, Portage, and
Lorain and the greater Columbus, Ohio market.

The following table presents the number, amount, and type of properties
securing construction and land development loans at December 31, 2001:

The risk of loss on a construction loan largely depends upon the accuracy
of the initial estimate of the property's value upon completion of the project,
the estimated cost of the project, and the proper control over

7

disbursements during construction. We review the borrower's financial position
and may require a personal guarantee on builder loans. We base all loans upon
the appraised value of the underlying collateral, as completed. Construction
inspections are required to support the percentage of completion during
construction.

We establish a maximum loan to value ratio for each type of loan based upon
the contract price, cost estimate or appraised value, whichever is less. The
maximum loan to value ratio by type of construction loan is as follows:

- owner-occupied homes - 80%;

- builder presold homes - 80%;

- builder models or speculative homes - 75%;

- lot loans - 75%;

- development loans - 75% (development of single-family home lots for
resale to builders); and

- builder lines of credit - 75% (development of land for cluster or
condominium projects which will be part of builder line of credit).

Construction loans that we make to builders are for relatively short terms
(6 to 24 months) and are at an adjustable rate of interest. Owner-occupied loans
are generally fixed rate.

We offer builders lines of credit to build single-family homes. We secure
all lines of credit by the homes that are built with the draws under such credit
agreements. Most of the homes built with the line of credit funds are presold
homes. We base draws upon the percentage of completion.

We also originate construction loans on multifamily and commercial real
estate projects where we intend to provide the financing once construction is
complete. We underwrite these loans in a manner similar to our originated and
purchased multifamily residential and commercial real estate loans described
above.

Consumer Lending. The underwriting standards we employ for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.

Consumer loans entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or are secured by
rapidly depreciable assets, such as automobiles. At December 31, 2001, secured
loans comprised $125.3 million or 90.3% of the $138.7 million consumer loan
portfolio. However, even in the case of secured loans, repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance due to the higher likelihood of damage, loss or
depreciation. In addition, consumer loan collections depend upon the borrower's
continuing financial stability. The application of various federal and state
laws, including bankruptcy and insolvency laws, may limit the amount recovered
on such loans in the event of default.

In order to supplement the growth in the consumer loan portfolio, we have
purchased loans through correspondent lenders and bulk portfolios offered for
sale. In 1997, we acquired two packages of subprime loans totaling $6.3 million.
Subprime loans are loans where the borrower's credit rating is below an A grade.
These loans require more intensive collection techniques. However, the yield is
significantly higher to cover these incremental costs. In 1998, we acquired an
additional loan package of $5.0 million of subprime loans secured by
manufactured housing. Total subprime loans were $5.9 million, or 4.2% of total
consumer loans at December 31, 2001. We no longer engage in subprime lending.

At December 31, 2001, our credit card portfolio had an outstanding balance
of $5.8 million with $21.9 million in unused credit lines.

Business Lending. At December 31, 2001, we had $133.7 million of business
loans outstanding. Our business lending activities encompass loans with a
variety of purposes and security, including loans to finance

8

accounts receivable, inventory and equipment. Generally, our business lending
has been limited to borrowers headquartered, or doing business in, our retail
market area. These loans are generally adjustable interest rate loans at some
margin over the prime interest rate and some are guaranteed by the Small
Business Administration.

The following table sets forth information regarding the number and amount
of our business loans as of December 31, 2001:

Business loans differ from residential mortgage loans. Residential mortgage
loans generally are made on the basis of the borrower's ability to make
repayment from his or her employment and other income and are secured by real
property whose value is more easily ascertainable. Business loans are of higher
risk and typically are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of business loans may depend
substantially upon the success of the business. Furthermore, the collateral
securing the loans may depreciate over time, may be difficult to appraise, and
may fluctuate in value based on the success of the business. We work to reduce
this risk by carefully underwriting business loans and by taking real estate as
collateral whenever possible.

SECONDARY MARKET ACTIVITIES

Mortgage Banking. We originate one- to four-family loans for sale through
our retail sales office network and through loan origination offices throughout
Ohio and in Western Pennsylvania. In addition we purchase loans for sale from a
number of correspondent lenders. These loans are sold to Freddie Mac, Fannie Mae
and private buyers. Mortgage banking allows us to generate revenue from loan
sales continuously in spite of the level of cash flows from deposits or other
sources. It also allows us to make long-term fixed rate loans desired by our
customers without absorbing the interest rate risk that can be associated with
those loans. The principal balance of one- to four-family loans and securitized
loans sold during 2001 was $218.0 million, which generated gains of $2.3
million.

The secondary market for mortgage loans is comprised of institutional
investors who purchase loans meeting certain underwriting specifications with
respect to loan-to-value ratios, maturities and yields. Subject to market
conditions, we tailor some of our real estate loan programs to meet the
specifications of FreddieMac and FannieMae, two of the largest institutional
investors. We generally retain a portion of the loan origination fee paid by the
borrower and receive annual servicing fees as compensation for retaining
responsibility for and performing the servicing of all loans sold to
institutional investors. See "Loan Servicing Activities."

The terms and conditions under which such sales are made depend upon, among
other things, the specific requirements of each institutional investor, the type
of loan, the interest rate environment and our relationship with the
institutional investor. We periodically obtain formal commitments to sell loans
primarily with FreddieMac and FannieMae. Based on these commitments, FreddieMac
or FannieMae is obligated to purchase a specific dollar amount of whole loans
over a specified period. The terms of the commitments range from ten to sixty
days. The pricing varies depending upon the length of each commitment. We
classify loans as held for sale while we are negotiating the sale of specific
loans which meet selected criteria to a specific investor or after a sale

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is negotiated but before it is settled. Sales of loans can take the form of cash
sales of loans or sales of mortgage-backed securities. At times we form a
mortgage-backed security and immediately sell the security rather than the
loans. This increases the potential number of buyers since there is an
established market for mortgage-backed securities with numerous buyers, sellers
and brokers.

Commercial Secondary Marketing. We sell commercial real estate and
multifamily loans on a regular basis. These sales are from our portfolio of
loans held for sale, which totaled $69.7 million at December 31, 2001. These may
be sales of whole loans or participations. During 2001, we sold $98.8 million of
commercial real estate and multifamily loans, which generated gains of $1.5
million. At times we may securitize these loans and sell the securities in order
to sell the loans. Securitization is the process of exchanging the ownership of
loans with an outside entity in exchange for a security based on those loans.
Often we will retain the right to service loans and the outside entity will
retain the risk of credit loss on the loans. In exchange both parties will
receive a small portion of the yield on the loans as compensation for
anticipated costs. When we securitize loans we may sell the securities
immediately, sell them at a later date or retain them in our mortgaged-backed
securities portfolio. Even if the securities are retained in the portfolio they
are classified as available for sale.

During the fourth quarter of 1999, we completed the securitization of
$108.8 million of multifamily loans in a program with FannieMae. This program
uses insurance to provide the credit enhancement necessary to achieve a
satisfactory rating. We are servicing the loans as mortgage-backed securities
for FannieMae. We completed a similar securitization of $93.0 million of
multifamily loans in 1997. During the fourth quarter of 1998, we completed the
securitization of $101.0 million of commercial real estate loans with a private
issuer in a non-rated structure. Similar to the other securitization
transactions, we used an insurance policy to assume a portion of the credit
risk. Metropolitan Bank sells and securitizes commercial real estate and
multifamily loans for a number of reasons including to:

- generate income from gain on sales;

- reduce credit risk;

- make loans more easily pledgeable;

- change the mix of assets;

- affect the level of regulatory capital required;

- reduce concentrations of risk by industry, geography or in an individual
borrower; and

- change the overall asset size of Metropolitan Bank.

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LOAN SERVICING ACTIVITIES

At December 31, 2001, our overall servicing portfolio had a principal
balance of $3.0 billion. Of that amount, loans serviced for others totaled $2.2
billion. The following table summarizes the portfolio by investor and source:

Generally, we service the loans we originate. When we sell loans to an
investor, such as FreddieMac or FannieMae, we normally retain the servicing
rights for the loans. We receive fee income for servicing these sold loans at
various percentages based upon the unpaid principal balances of the loans
serviced. We collect and retain service fees out of monthly mortgage payments.
At December 31, 2001, the unpaid principal balance of our originated servicing
rights was $1.1 billion. The related net book value of originated mortgage
servicing rights was $9.4 million. Occasionally during 2000 and prior years,
Metropolitan Bank pursued bulk purchases of servicing portfolios from other
originating institutions to further increase our servicing fee income. These
purchased servicing portfolios are primarily FreddieMac and FannieMae
single-family loans that are secured by homes located within the eastern half of
the nation. At December 31, 2001, the unpaid principal balance of our purchased
servicing portfolio was $1.1 billion. The related net book value of purchased
mortgage servicing rights was $13.5 million.

Loan servicing functions include collecting and remitting loan payments,
accounting for principal and interest, holding escrow (impound) funds for
payment of taxes and insurance, making rate and payment changes to contractually
adjustable loans, managing loans in payment default, processing foreclosure and
other litigation activities to recover mortgage debts, conducting property
inspections and risk assessment for investment loans and general administration
of loans for the investors to whom they are sold.

We estimate the market value of mortgage servicing rights using a valuation
model. The model uses a number of variables and estimates the market value of
the servicing on a loan-by-loan basis. Some of the significant variables are
prepayment speeds, delinquency rates, servicing costs, periods to hold idle cash
and an estimated rate of return on idle cash. In general, the market value of
purchased or originated servicing rights increases as interest rates rise and
decreases as interest rates fall. This is because the estimated life of the loan
and the estimated income from idle funds both increase as interest rates
increase and decrease as interest rates decrease. Because there are a number of
estimates involved, the end product is necessarily an estimate and is very
sensitive to changes in interest rates. Projecting changes in servicing values
is difficult because it involves estimating how rates will change at a number of
points along the yield curve. During 2001, market interest rates have fallen
primarily due to reductions in short-term rates by the Federal Reserve Board. As
a result, the market values of Metropolitan Bank's servicing rights have not
increased as rapidly as the book value. Interest rates continued to fall during
the period from October 1, 2001 through December 31, 2001 and as a result
Metropolitan Bank recorded impairment of loan servicing rights of $0.9 million.
Future changes in the market value of loan servicing rights depend on a number
of variables, but are primarily dependent on future changes in interest rates.

11

LOAN DELINQUENCIES AND NONPERFORMING ASSETS

Collection procedures vary by type of loan but generally consist of efforts
to collect delinquent balances and if collection efforts fail, to liquidate the
collateral securing the loan to satisfy the obligation. Collection efforts for
one- to four-family loans generally conform to the servicing requirements of
FannieMae and FreddieMac. Notices are sent by mail when the loan reaches 15 days
past due. Within the following 5 days contact is made by telephone. When a loan
reaches 90 days past due we generally begin foreclosure proceedings. Foreclosure
culminates with the sale of property at public auction where we may be the
acquiror. Foreclosed real estate is recorded at the lesser of fair value less
selling costs or the loan balance and marketed for sale.

While each delinquent multifamily or commercial real estate loan receives
individual attention due to the larger size of these loans, certain standard
procedures are followed. First, annual financial statements and rent rolls are
requested from each borrower and are analyzed. Borrowers with debt service
ratios of less than 1:1 or with high vacancy rates are contacted and monitored.
When a loan reaches 20 days past due, contact is made by mail and by telephone
and is documented. If the delinquency continues we send a default letter to the
borrower as soon as we determine that the loan is in default. That letter
indicates what steps the borrower will have to take to cure the default and what
we will do next if the default is not cured. If the default is not cured by the
target date, we notify the borrower in writing that the entire balance of the
loan is due and payable and we begin foreclosure proceedings. Foreclosure may
end in auction, acquisition and marketing of the real estate. Where possible,
further collection actions are taken for deficiencies not satisfied by the sale
of the real estate.

The steps we take to collect delinquent business loans are even more
diverse because the types of collateral taken vary significantly. Collections
are monitored weekly. We make telephone contact with customers who do not pay by
their due date. If a delay in payment continues we meet with the borrower. The
borrower's cash flow situation is evaluated and a repayment plan instituted. In
some cases we exercise our right to collateral or assignment of receivables to
satisfy the debt.

We initiate contact with delinquent consumer loan customers even sooner
making contact when a payment is 10 days past due since the financial condition
of an individual can change quickly due to a change in employment or marital
status. We bring an action to collect any loan payment that is delinquent more
than 30 days. Our procedures for collection efforts, repossession and sale of
consumer collateral must comply with various requirements under state and
federal consumer protection laws.

On a monthly basis the credit department classifies loans into a number of
credit risk categories and a management committee monitors and directs
collection efforts for the loans that are large and are classified as having
high credit risk. Also monthly, delinquency statistics are reported to
management and the Board of Directors.

The following table sets forth information concerning delinquent loans at
December 31, 2001, in dollar amounts and as a percentage of each category of the
loan portfolio. The amounts presented represent the total remaining principal
balances of the related loans, rather than the actual payment amounts that are
overdue.

In addition to the loans included above we have $15.3 million in business
loans to a group of borrowers who are related to each other that are current but
are a credit concern. On March 26, 2001, based on information

12

provided by the borrowers on March 12, 2001, these loans were put on nonaccrual
and an impairment of the loans of $3.5 million was recorded. At that point we
engaged a forensic accountant and legal counsel to evaluate the business and our
options for pursuing payment of the loans. At the same time we engaged in
negotiations with the borrowers in order to develop an acceptable workout plan.
Although we began to receive payments during the second quarter of 2001, they
were less than the original contractual interest and we judged that the
impairment remained at $3.5 million as of June 30, 2001. Based on the
continuation of payments during the third quarter we negotiated a forbearance
agreement with the borrowers which reduced the interest rate to the current
market level for business loans. The loans were analyzed for impairment again as
of December 31, 2001. Based on consistent payments over the previous eight
months, the change in the terms of the loan and the passage of time the
impairment was judged to be reduced to $3.2 million. At December 31, 2001 these
loans were considered to be impaired, nonperforming and a troubled debt
restructuring although the borrowers were not delinquent since they were in
compliance with the terms of their forbearance agreement. We continue to pursue
collection and explore options in order to bring these loans back to performing
status and ultimately to achieve full collection of all funds due by maturity.

Nonperforming assets include all nonaccrual loans, loans past due greater
than 90 days still accruing, and real estate owned. Generally, interest is not
accrued on loans contractually past due 90 days or more as to interest or
principal payments. In addition, interest is not accrued on loans as to which
payment of principal and interest in full is not expected unless in our judgment
the loan is well secured, and we expect no loss in principal or interest.

When a loan reaches nonaccrual status, we discontinue interest accruals and
reverse prior accruals. The classification of a loan on nonaccrual status does
not necessarily indicate that the principal is uncollectible in whole or in
part. We consider both the adequacy of the collateral and the other resources of
the borrower in determining the steps to take to collect nonaccrual loans. The
final determination as to these steps is made on a case-by-case basis.
Alternatives we consider are commencing foreclosure, collecting on guarantees,
restructuring the loan, or instituting collection lawsuits.

ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS

We maintain an allowance for losses on loans because some loans may not be
repaid in full. We maintain the allowance at a level we consider adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations, including their financial position and collateral values, and other
factors and estimates which are subject to change over time. The allowance is
broken down into two categories, specific and general. Either duration of
delinquency or an impairment calculation under Statement of Financial Accounting
Standards No. 114 determines the specific allowance. The remainder of the loans
not covered by the specific allowance are determined to be either classified or
nonclassified. Those loans that are classified are determined to be substandard,
doubtful or current/watch only. Individual general allowance factors based on
risk are then applied to the various categories by loan type. Those loans that
are nonclassified are grouped by loan type and individual general allowance
factors based on risk are then applied. Management has reviewed Staff Accounting
Bulletin No. 102 and believes that Metropolitan Bank is in compliance with that
pronouncement. We charge a loan against the allowance as a loss when, in our
opinion, it is uncollectible. Despite the charge-off, we continue collection
efforts. As a result, future recoveries may occur.

The following table sets forth an allocation (by total amount and
percentage of loans in each category) of the allowance for losses on loans among
categories as of the dates indicated based on our estimate of probable losses
that were currently anticipated based largely on past loss experience. Since the
factors influencing such estimates are subject to change over time, we believe
that any allocation of the allowance for losses on loans into specific
categories lends an appearance of precision which does not exist. In practice,
we use the allowance as a single unallocated allowance available for all loans.
The allowance can also be reallocated among different loan categories if actual
losses differ from expected losses and based upon changes in our expectation of
future losses.

13

The following allocation table should not be interpreted as an indication
of the actual amounts or the relative proportion of future charges to the
allowance.

The risks associated with off-balance sheet commitments are insignificant.
Therefore, we have not provided an allowance for those commitments.

INVESTMENT PORTFOLIO

We maintain our investment portfolio in accordance with policies adopted by
the Board of Directors that consider the regulatory requirements and
restrictions which dictate the type of securities that we can hold. As a member
of the Federal Home Loan Bank System, Metropolitan Bank is required to hold a
minimum amount of Federal Home Loan Bank stock based upon asset size and
outstanding borrowings.

The following table summarizes the amounts and the distribution of
securities held as of the dates indicated:

The tax-exempt municipal bond has an estimated market value of $11.6
million compared to a carrying value of $14.3 million at December 31, 2001. This
bond represents a single issue secured by a multi-family property. The trustee
has advised us that the issuer of the bond is currently supplementing operating
revenue with cash held by the trustee in order to pay taxes on the property.
Therefore, the marketability and market value of the bond have declined during
2001. However, based on an analysis as of December 31, 2001, management does not
currently believe that it is probable that it will not collect all payments due
according to the term of the bond and, therefore, no impairment other than a
temporary impairment has occurred.

14

The following table sets forth the contractual maturities and approximate
weighted average yields of debt securities at December 31, 2001.

MORTGAGE-BACKED SECURITIES PORTFOLIO

Mortgage-backed securities offer higher rates than treasury or agency
securities with similar maturities because the timing of the repayment of
principal can vary based on the level of prepayments of the underlying loans.
However, they offer lower yields than similar loans because the risk of loss of
principal is often guaranteed by the issuing entity or through mortgage
insurance. We acquire mortgage-backed securities through purchases and
securitization of loans from our portfolio. We classify all mortgage-backed
securities as available for sale. The following table sets forth the fair market
value of the mortgage-backed securities portfolio at the dates indicated.

The following table sets forth the final maturities and approximate
weighted average yields of mortgage-backed securities at December 31, 2001.

15

The actual timing of the payment of principal on mortgage-backed securities
is dependent on principal payments on the underlying loans which may or may not
carry prepayment penalties for the borrowers. Therefore, the table above is not
necessarily representative of actual or expected cash flows from these
securities.

SOURCES OF FUNDS

Metropolitan Bank's primary sources of funds are deposits, amortization and
repayment of loan principal, borrowings, sales of mortgage loans, sales or
maturities of mortgage-backed securities, securities, and short-term
investments. Deposits are the principal source of funds for lending and
investment purposes. We offer the following types of accounts:

Statement and Checking Accounts. We offer three types of statement savings
accounts, two interest-bearing checking, and one noninterest-bearing checking
account for consumers. We offer three types of statement savings accounts and
one noninterest-bearing checking account for business and commercial customers.
As of December 31, 2001, Metropolitan Bank's total core deposits, as a
percentage of total local deposits (i.e., excluding brokered, out of state and
custodial deposits) increased to 39.2% from 32.0% as of December 31, 2000.

In connection with loan servicing activities, we maintain custodial
checking accounts for principal and interest payments collected for investors
monthly and for tax and insurance escrow balances.

Certificates of Deposit. We offer fixed rate, fixed term certificates of
deposit. Terms are from seven days to five years. These accounts generally bear
the highest interest rates of any deposit product offered. We review interest
rates offered on certificates of deposit regularly and adjust them based on cash
flow projections and market interest rates. In conjunction with certificates of
deposit, we also offer Individual Retirement Accounts.

From time to time, we have accepted certificates of deposit through brokers
or from out-of-state individuals and entities, predominantly financial
institutions. These deposits typically have balances of $90,000 to $100,000 and
have a term of one year or more. At December 31, 2001, these individuals and
entities held approximately $127.8 million of certificates of deposits, or 11.2%
of total deposits. Subsequent to June 30, 2001, Metropolitan Bank has reduced
its dependency on brokered and out-of-state deposits as required by the
supervisory agreement it entered into with the OTS and ODFI. At December 31,
2001, Metropolitan Bank had reduced brokered and out-of-state deposits by $49.2
million during 2001. Metropolitan Bank currently has approval from the FDIC to
issue brokered deposits through December 31, 2002. However, this authority is
limited to 12% of assets and can be withdrawn by the FDIC.

16

The following table provides information regarding trends in average
deposits for the periods indicated. The noninterest bearing demand deposit
category includes principal and interest custodial accounts and taxes and
insurance custodial accounts for loans serviced for FreddieMac, FannieMae and
private investors.

The following table shows rate and maturity information for certificates of
deposit as of December 31, 2001.

17

The following table shows the remaining maturity for time deposits of
$100,000 or more as of December 31, 2001.

In addition to deposits, we rely on borrowed funds. The discussion below
describes our current borrowings.

Subordinated Note Offering. In December 1995, we issued subordinated notes
due January 1, 2005 with an aggregate principal balance of $14.000 million
through a public offering. The current balance outstanding is $13.985 million.
The interest rate on the notes is 9.625%.

Commercial Bank Note Payable. The Company has a note payable with a
commercial bank. At December 31, 2001, the current balance outstanding was $5.0
million. The loan matures December 31, 2002.

Loan From Majority Shareholder. In December 2001, the Company entered into
a loan agreement with Robert Kaye, its majority shareholder. The loan agreement
is in the amount of $2.0 million and bears no interest. The loan matures on the
earlier of the closings of the currently outstanding stock offerings or March
31, 2002.

Federal Home Loan Bank Advances. The Federal Home Loan Bank makes funds
available for housing finance to eligible financial institutions like
Metropolitan Bank. We collateralize advances by any combination of the following
assets: one- to four-family first mortgage loans, multifamily loans, home equity
loans, commercial real estate loans, investment securities, mortgage-backed
securities, Federal Home Loan Bank deposits, and Federal Home Loan Bank stock.
The aggregate balance of assets pledged as collateral for Federal Home Loan Bank
advances at December 31, 2001 was $425 million. In August 2001, based on the
financial condition of Metropolitan Bank as of the end of the first quarter of
2001, the Federal Home Loan Bank increased Metropolitan Bank's collateral
requirement with respect to one-to four-family loans and multifamily loans from
125% of borrowings to 150% of borrowings. As a result, the Bank's borrowing
capacity was reduced to a collateral shortage, which means that Metropolitan
bank must provide additional collateral and has no ability to borrow from the
Federal Home Loan Bank until it does. Since that time, Metropolitan Bank has
pledged additional collateral, reclassified loans as held for sale and
experienced significant payoff of loans. On January 24, 2002, Metropolitan Bank
pledged additional collateral to eliminate the shortage.

Repurchase Agreements. From time to time, Metropolitan Bank borrows funds
by using its investment or mortgage-backed securities to issue reverse
repurchase agreements. A reverse repurchase agreement is a transaction where we
borrow money from a brokerage firm or bank and deliver securities to them as
collateral for the borrowing. When the loan is paid off we receive back or
repurchase the securities. The aggregate balance of mortgage-backed securities
and cash pledged as collateral for reverse repurchase agreements at December 31,
2001 was approximately $44 million.

18

The following table shows the maximum month-end balance, the average
balance, and the ending balance of borrowings during the periods indicated.

The following table provides the interest rates, which include amortization
of issuance costs of borrowings during the periods indicated.

GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S JUNIOR
SUBORDINATED DEBENTURES

The Company has two issues of cumulative trust preferred securities
outstanding through wholly-owned subsidiaries. Each issuing entity has invested
the total proceeds from the sale of the securities in junior subordinated
deferrable interest debentures issued by the Company. The securities are listed
on the NASDAQ Stock Market's National Market.

19

COMPETITION

Metropolitan Bank faces strong competition both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other savings institutions, commercial banks,
mortgage companies, credit unions, finance companies, and insurance companies.

Metropolitan Bank attracts its deposits through its retail sales offices,
primarily from the communities in which those retail sales offices are located.
Therefore, competition for those deposits is principally from other savings
institutions, commercial banks, credit unions, mutual funds, and brokerage
companies located in the same communities.

EMPLOYEES

At December 31, 2001, we had a total of 472 employees, including part-time
and seasonal employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be excellent.

REGULATION AND SUPERVISION

INTRODUCTION

The Company is a savings and loan holding company within the meaning of the
Home Owners' Loan Act. As a savings and loan holding company, we are subject to
the regulations, examination, supervision, and reporting requirements of the
OTS. Metropolitan Bank, an Ohio-chartered savings and loan association, is a
member of the Federal Home Loan Bank System. The Federal Deposit Insurance
Corporation ("FDIC"), through the Savings Association Insurance Fund, insures
Metropolitan Bank's deposits. Metropolitan Bank is subject to examination and
regulation by the OTS, the FDIC, and the ODFI. Metropolitan Bank must comply
with regulations regarding matters such as capital standards, mergers,
establishment of branch offices, subsidiary investments and activities, and
general investment authority.

METROPOLITAN FINANCIAL CORP.

As a savings and loan holding company, we are subject to restrictions
relating to our activities and investments. Among other things, we are generally
prohibited, either directly or indirectly, from acquiring control of any other
savings association or savings and loan holding company, without prior approval
of the OTS, and from acquiring more than 5% of the voting stock of any savings
association or savings and loan holding company which is not a subsidiary.
Similarly, a person must obtain OTS approval prior to that person's acquiring
control of the Company or Metropolitan Bank.

METROPOLITAN BANK AND TRUST COMPANY

General. The enforcement authority of the OTS includes the ability to
impose penalties for and to seek correction of violations of laws and
regulations and unsafe or unsound practices. This authority includes the power
to assess civil money penalties, issue cease and desist orders against an
institution, its directors, officers or employees and other persons or initiate
legal action.

On July 26, 2001 Metropolitan Bank signed a supervisory agreement with the
OTS and the ODFI. These documents acknowledge that these two regulatory
authorities are of the opinion that we have engaged in acts and practices that
are unsafe and unsound. We have agreed to take a number of steps to improve our
safety and soundness without admitting or denying any unsafe or unsound
practices. The Company also signed a supervisory agreement with the OTS on July
26, 2001.

As a lender and a financial institution, Metropolitan Bank is subject to
various regulations promulgated by the Federal Reserve Board including, without
limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves),
Regulation E (Electronic Fund Transfers), Regulation F (Interbank Liabilities),
Regulation Z (Truth in Lending), Regulation CC (Availability of Funds), and
Regulation DD (Truth in Savings). As lenders of loans secured by real property,
and as owners of real property, financial institutions, including Metropolitan
Bank, are

20

subject to compliance with various statutes and regulations applicable to
property owners generally, including environmental laws and regulations.

Insurance of Accounts and Regulation by the Federal Deposit Insurance
Corporation. Metropolitan Bank is a member of the Savings Association Insurance
Fund, which is administered by the FDIC. The FDIC insures deposits up to
applicable limits and the full faith and credit of the United States Government
backs such insurance. As insurer, the FDIC imposes deposit insurance premiums
and conducts examinations of and requires reporting by FDIC-insured
institutions. The FDIC also has the authority to initiate enforcement actions
against savings associations after giving the OTS an opportunity to take such
action. It may terminate the deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices or is in
an unsafe or unsound condition.

Regulatory Capital Requirements. The capital regulations of the OTS
establish a "leverage limit," a "tangible capital requirement," and a
"risk-based capital requirement." The leverage limit currently requires a
savings association to maintain "core capital" of not less than 3% of adjusted
total assets. The OTS has taken the position, however, that the prompt
corrective action regulation has effectively raised the leverage ratio
requirement for all but the most highly-rated institutions. The leverage ratio
has in effect increased to 4% since an institution is "undercapitalized" if,
among other things, its leverage ratio is less than 4%. The tangible capital
requirement requires a savings association to maintain "tangible capital" in an
amount not less than 1.5% of adjusted total assets. The risk-based capital
requirement generally provides that a savings association must maintain total
capital in an amount at least equal to 8.0% of its risk-weighted assets. The
risk-based capital regulations are similar to those applicable to national
banks. The regulations assign each asset and certain off-balance sheet assets
held by a savings association to one of four risk-weighting categories, based
upon the degree of credit risk associated with the particular type of asset.

Metropolitan Bank is also subject to the capital adequacy requirements
under the Federal Deposit Insurance Corporation Investment Act of 1991. The
additional capital adequacy ratio imposed under Federal Deposit Insurance
Corporation Investment Act is the Tier 1 capital to risk adjusted assets ratio.
This ratio must be at least 6.0% for a "well capitalized" institution.

Banks and savings associations are classified into one of five categories
based upon capital adequacy, ranging from "well-capitalized" to "critically
undercapitalized." Generally, the regulations require the appropriate federal
banking agency to take prompt corrective action with respect to an institution
which becomes "undercapitalized" and to take additional actions if the
institution becomes "significantly undercapitalized" or "critically
undercapitalized." Based on these requirements, Metropolitan Bank is an
"adequately capitalized" institution.

The appropriate federal banking agency has the authority to reclassify a
well-capitalized institution as adequately capitalized. In addition, the agency
may treat an adequately capitalized or undercapitalized institution as if it
were in the next lower capital category, if the agency determines, after notice
and an opportunity for a hearing, that the institution is in an unsafe or
unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings, or liquidity in its most recent examination. As a result
of such reclassification or determination, the appropriate federal banking
agency may require an adequately capitalized or under-capitalized institution to
comply with mandatory and discretionary supervisory actions.

While the OTS and ODFI have not established individual minimum capital
requirements for Metropolitan Bank, they have entered into a supervisory
agreement with Metropolitan Bank. Under that agreement Metropolitan Bank must
achieve well-capitalized status for core capital (5%) and risk-based capital
(10%) by March 31, 2002. At December 31, 2001 we complied with all requirements
for an adequately capitalized institution. The Company is selling common stock
under a combined rights offering and offering to the public during the first
quarter of 2002 in order to meet the requirements for well-capitalized status by
March 31, 2002.

21

The following table indicates our capital position compared to the
requirements for an adequately capitalized institution and a well-capitalized
institution as of December 31, 2001.

Restrictions on Dividends and Other Capital Distributions. Savings
association subsidiaries of holding companies generally are required to provide
their OTS regional director with not less than thirty days' advance notice of
any proposed declaration of a dividend on the association's stock. Any dividend
declared within the notice period, or without giving the prescribed notice, is
invalid. In some circumstances, an association may be required to provide their
OTS regional director with an application for a proposed declaration of a
dividend on the association's stock.

The OTS regulations impose limitations upon certain "capital distributions"
by savings associations. These distributions include cash dividends, payments to
repurchase or otherwise acquire an association's shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital.

In addition, the OTS retains the authority to prohibit any capital
distribution otherwise authorized under the regulation if the OTS determines
that the capital distribution would constitute an unsafe or unsound practice.
Metropolitan Bank operates with lower capital ratios than most other banks and,
as a result, faces a higher risk of falling below regulatory capital
requirements. If Metropolitan Bank becomes undercapitalized, Metropolitan Bank
will have to comply with increased restrictions on the payment of dividends and
may lose its ability to pay dividends.

The Gramm-Leach Bliley Act, or Financial Services Modernization Act, became
law in November of 1999. This law includes significant changes in the way
financial institutions are regulated and types of financial business they may
engage in. Among other things the law provides for:

- facilitation of affiliations among banks, securities firms, and insurance
companies;

- changes in the regulation of securities activities by banks;

- changes in the regulation of insurance activities by banks;

- elimination of the creation of new unitary thrift holding companies;

- new regulation of the use and privacy of customer information by banks;
and

- modernization of the Federal Home Loan Bank System.

22

Qualified Thrift Lender Test. Pursuant to the Qualified Thrift Lender
test, a savings institution must invest at least 65% of its portfolio assets in
qualified thrift investments on a monthly average basis on a rolling 12-month
look-back basis. Portfolio assets are an institution's total assets less
goodwill and other intangible assets, the institution's business property, and a
limited amount of the institution's liquid assets.

A savings association's failure to remain a Qualified Thrift Lender may
result in: a) limitations on new investments and activities; b) imposition of
branching restrictions; c) loss of Federal Home Loan Bank borrowing privileges;
and d) limitations on the payment of dividends. The qualified thrift investments
of Metropolitan Bank were in excess of 68.0% of its portfolio assets as of
December 31, 2001.

Ohio Regulation. As a savings and loan association organized under the
laws of the State of Ohio, Metropolitan Bank is subject to regulation by the
ODFI. Regulation by the ODFI affects the internal organization of Metropolitan
Bank as well as its savings, mortgage lending, and other investment activities.
Periodic examinations by the ODFI are usually conducted on a joint basis with
the OTS. Ohio law requires Metropolitan Bank to maintain federal deposit
insurance as a condition of doing business.

Ohio has adopted a statutory limitation on the acquisition of control of an
Ohio savings and loan association which requires the written approval of the
ODFI prior to the acquisition by any person or entity of a controlling interest
in an Ohio association. In addition, Ohio law requires prior written approval of
the ODFI of a merger of an Ohio association with another savings and loan
association or a holding company affiliate.

FEDERAL AND STATE TAXATION

The Company, Metropolitan Bank and other includable subsidiaries file
consolidated federal income tax returns on a December 31 calendar year basis
using the accrual method of accounting. The Internal Revenue Service has audited
the Company, Metropolitan Bank and other includable subsidiaries through
December 31, 1994.

In addition to the regular income tax, corporations, including savings
associations such as Metropolitan Bank, generally are subject to an alternative
minimum tax. An alternative minimum tax is imposed at a tax rate of 20% on
alternative minimum taxable income ("AMTI"), which is the sum of a corporation's
regular taxable income with certain adjustments and tax preference items, less
any available exemption. Adjustments and preferences include depreciation
deductions in excess of those allowable for alternative minimum tax purposes,
tax-exempt interest on most private activity bonds issued after August 7, 1986
(reduced by any related interest expense disallowed for regular tax purposes),
and, for 1990 and succeeding years, 75% of the difference (positive or negative)
between adjusted current earnings ("ACE") and AMTI. Any ACE reductions to AMTI
are limited to prior aggregate ACE increases to AMTI. ACE equals pre-adjustment
AMTI increased or decreased by certain ACE adjustments and determined without
regard to the ACE adjustment and the alternative tax net operating loss. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax, and alternative tax net operating losses can offset no more
than 90% of AMTI. The payment of alternative minimum tax will give rise to a
minimum tax credit which will be available with an indefinite carry forward
period to reduce federal income taxes in future years (but not below the level
of alternative minimum tax arising in each of the carry forward years).

Metropolitan Bank is subject to the Ohio corporate franchise tax. As a
financial institution, Metropolitan Bank computes its franchise tax based on its
net worth. Under this method, Metropolitan Bank will compute its Ohio corporate
franchise tax by multiplying its net worth (as determined under generally
accepted accounting principles) as specifically adjusted pursuant to Ohio law,
by the applicable tax rate, which is currently 1.3%. As an Ohio-chartered
savings and loan association, Metropolitan Bank also receives a credit against
the franchise tax for a portion of the state supervisory fees paid by it.

At the present time, the Company does not have a liability for the net
worth portion of the franchise tax as it satisfies the requirements to be
treated as a qualified holding company. In addition, there is no liability on
the net income portion of the tax as the holding company has historically
operated at a net loss on a stand-alone basis.

23

ITEM 2. PROPERTIES

Our executive office is located at 22901 Millcreek Blvd., Highland Hills,
Ohio 44122. We operate twenty-four retail sales offices. We lease nine of these
locations under long-term lease agreements with various parties. We own the
other fifteen retail sales offices, located in Aurora, Beachwood, Brunswick,
Cleveland Heights, Euclid, Hudson, Macedonia, Mayfield Heights, Medina,
Montrose, Solon, Stow, Twinsburg, Willoughby Hills, and Willoughby, Ohio. Our
executive office and a majority of our retail sales offices include space beyond
what is required for the conduct of our business. That space is rented to
nonaffiliated entities under long term leases. In addition, we own land in
Auburn, Avon, Brecksville, Broadview Heights, and Strongsville, Ohio. The Bank
currently leases office space for its residential and construction loan
production offices in Akron, Ashland, Canton, Cincinnati, Columbus, Dayton,
North Olmsted and Toledo, Ohio. We also have a commercial real estate loan
origination office in Pittsburgh, Pennsylvania.

The supervisory agreement with Metropolitan Bank requires that we reduce
our investment in premises and equipment by December 31, 2002. Therefore,
Metropolitan Bank may sell some of its existing real estate and artwork to
comply with this requirement. Assets that management currently intends to sell
are classified as held for sale in the financial statements.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings incidental to the
conduct of its business. We do not expect that any of these proceedings will
have a material adverse effect on our financial position or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of shareholders of the Company during the
fourth quarter of the fiscal year covered by this Report, through the
solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF THE REGISTRANT

(Included pursuant to Instruction 3