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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, 2002
-----------------
Commission file number 000-21553
--------------------------------
METROPOLITAN FINANCIAL CORP.
-------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1109469
-------------------------------- -----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
22901 Millcreek Blvd. Highland Hills, Ohio 44122
- --------------------------------------------------------------------------------------
(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
-------------------------------
(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.[X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
--- ---
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrants most recently completed second quarter.
The aggregate market value at June 30, 2002 was $57,953,323.
As of March 12, 2003, there were 16,151,450 shares of the Registrant's Common
Stock issued and outstanding.
Documents incorporated by reference:
Portions of the Proxy Statement for the 2003 Annual Meeting - Part III
1
METROPOLITAN FINANCIAL CORP.
2002 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business........................................................................................ 3
Item 2. Properties...................................................................................... 29
Item 3. Legal Proceedings............................................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders............................................. 29
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters........................... 30
Item 6. Selected Financial Data......................................................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................... 48
Item 8. Financial Statements and Supplementary Data..................................................... 51
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............ 91
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 91
Item 11. Executive Compensation.......................................................................... 91
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 91
Item 13. Certain Relationships and Related Transactions.................................................. 91
PART IV
Item 14. Controls and Procedures......................................................................... 92
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................... 92
2
PART I
ITEM 1. BUSINESS
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 ("the Bank"). The
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 the 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 67% 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 the Bank.
At December 31, 2002, we operated 24 full service retail sales
offices in Northeastern Ohio. As of December 31, 2002, we also maintained 6 loan
origination offices throughout Ohio and in Western Pennsylvania. We also service
mortgage loans for various investors.
At December 31, 2002, we had total assets of $1.5 billion, total
deposits of $1.1 billion and shareholders' equity of $55.2 million. The Federal
Deposit Insurance Corporation insures the deposits of the Bank up to applicable
limits.
At December 31, 2002, we directly or indirectly owned the following
wholly-owned subsidiaries:
ACTIVE SUBSIDIARIES INACTIVE SUBSIDIARIES
------------------- ---------------------
- - Metropolitan Bank and Trust Company - MetroCapital Corporation
- - Kimberly Construction Company - Metropolitan Securities Corporation
- - Metropolitan Capital Trust I - Metropolitan II Corporation
- - Metropolitan Capital Trust II - Metropolitan III Corporation
- - Metropolitan I Corporation
- - Metropolitan Savings Service Corporation
- - Progressive Land Title Agency, Inc.
- - Venice Inn LLC
The 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 the Bank has acquired by
foreclosure. The Venice Inn LLC was formed to hold title to and operate a hotel
that the Bank acquired through foreclosure as servicer for a pool of commercial
real estate loans.
3
SUPERVISORY DIRECTIVE/SUPERVISORY AGREEMENTS
On July 26, 2001, the Company entered into a Supervisory Agreement
with the Office of Thrift Supervision ("OTS") (the "Company Supervisory
Agreement"), which required the Company to prepare and adopt a plan for raising
capital that uses sources other than increased debt or additional dividends from
the Bank. On January 31, 2002, the Company initiated an offer of common stock
for sale under a rights offering and a concurrent offering to the public.
Management used the net proceeds of the 2002 offerings to raise the capital
required by the Company Supervisory Agreement.
Additionally, the Bank entered into a separate Supervisory Agreement
(the "Supervisory Agreement") between the Bank, the OTS and the Ohio Division of
Financial Institutions ("ODFI"), which requires the Bank to do the following:
1. Develop a capital improvement and risk reduction plan by
September 28, 2001, which date was extended to December 28,
2001;
2. Achieve or maintain compliance with core and risk-based
capital standards at the "well-capitalized" level, including a
risk-based capital ratio of 10% by December 31, 2001, which
date was extended to March 31, 2002. The Bank had achieved a
"well capitalized" level at March 31, 2002, and has maintained
that level through December 31, 2002;
3. Reduce investment in fixed assets (other than artwork) to no
more than 25% of core capital by December 31, 2002. The Bank
has received an extension until June 30, 2003 from the OTS
regarding this requirement;
4. Reduce investment in artwork by $1.3 million by December 31,
2001 (later modified to March 31, 2002), and by an additional
$2.0 million by no later than December 31, 2002;
5. Attain compliance with board approved interest rate risk
policy requirements;
6. Reduce volatile funding sources, such as brokered and
out-of-state deposits;
7. Increase earnings;
8. Improve controls related to credit risk; and
9. Restrict total assets to not more than $1.7 billion.
Any major deviations from the plan require prior OTS approval. 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.
During January 2002, the regulatory authorities approved the capital
and risk reduction plan submitted by the Company.
On July 8, 2002, the OTS issued a Supervisory Directive (the
"Supervisory Directive") to the Company and the Bank. The Supervisory Directive
requires the Boards of Directors of the Bank and the Company to act immediately
to take corrective action to address certain weaknesses and to halt certain
unsafe and unsound practices, regulatory violations, and violations of the
Supervisory Agreement, dated July 26, 2001, between the Bank, the OTS, and the
ODFI.
The Supervisory Directive includes the following provisions:
1. The Bank is prohibited from making Unauthorized Payments, as
defined in the Supervisory Directive, that directly or
indirectly benefit Robert M. Kaye, a director and the former
Chairman and Chief Executive Officer of the Company and the
Bank. "Unauthorized Payments" are defined by the Supervisory
Directive as any payment by the Bank: (a) that contravenes the
Bank's established written procedures for expense
reimbursement; (b) where the Bank lacks documentation
demonstrating that the payment related to a proper business
purpose of the Bank; or (c) where the recipient is not an
employee of the Bank.
4
2. The Bank must obtain reimbursement for Unauthorized Payments
made to or for the benefit of Mr. Kaye and related parties
since January 1, 1992, and suspend all future payments to Mr.
Kaye and related parties of any kind until such time as there
has been a full accounting of such payments and the Bank has
been fully reimbursed, if appropriate.
3. The Bank must retain an independent certified public
accounting firm acceptable to the OTS to conduct a review and
accounting of all payments that the Bank has made since
January 1, 1992, to or for the direct or indirect benefit of
Robert M. Kaye and related parties. The accounting firm must
submit to the Audit Committee of the Bank's Board and to the
OTS a written report relating to its review identifying, among
other things, any payments that are suspected of being
Unauthorized Payments. Based on the information in the report,
the Audit Committee of the Bank's Board must determine the
amount of any Unauthorized Payments, subject to the review and
concurrence of the OTS. The Bank must then submit to Mr. Kaye
a written demand for repayment of any Unauthorized Payments.
The Supervisory Directive sets various deadlines for
completion of the foregoing matters.
4. To facilitate compliance with the targets and deadlines
specified in the Supervisory Agreement, the Bank must retain a
qualified marketing agent, acceptable to the OTS, to manage
the Bank's efforts to sell its artwork collection. The OTS
noted that the Supervisory Agreement (as modified) required
the Bank to reduce its investment in artwork by $1.3 million
by March 31, 2002, and that the Bank had failed to meet the
March 31, 2002 requirement.
5. The Bank must take appropriate actions to reduce its
investment in fixed assets so that the Bank's investment in
fixed assets (other than artwork) is no more than 25% of core
capital by December 31, 2002, as required by the Supervisory
Agreement. The Bank has received an extension until June 30,
2003 from the OTS regarding this requirement.
6. The Bank is prohibited from engaging in any transactions with
a particular out-of-state bank on whose board Mr. Kaye sits.
7. The Bank is prohibited from originating and purchasing
commercial real estate loans secured by property in California
until the Bank adopts and implements a written plan for
diversification of credit risk that is acceptable to the OTS.
8. The Bank is prohibited from engaging in any transactions with
the Company or any of its affiliates without prior approval of
the OTS.
9. Without prior OTS approval, the Company is prohibited from
paying any dividends, or making any other payments except
those that it was obligated to make pursuant to written
contracts in effect on July 5, 2002, and payment of expenses
incurred in the ordinary course of business.
10. The Company is prohibited from making any payment or engaging
in any transaction that would have the effect of circumventing
any of the restrictions imposed on the Bank in the Supervisory
Directive.
The Company has engaged, with OTS approval, an independent audit
firm, which has concluded its review of the payments specified above in
accordance with the Supervisory Directive. On September 26, 2002, the Audit
Committee of the Bank filed its report with the OTS concluding that total
Unauthorized Payments to Mr. Kaye are $4.8 million. On October 2, 2002, the OTS
stated that it had no objection to the Bank's seeking reimbursement of the $4.8
million from Mr. Kaye. On October 7, 2002, the Bank made a written request to
Mr. Kaye seeking reimbursement of the $4.8 million of Unauthorized Payments by
October 25, 2002, which date was extended until December 12, 2002 and further
extended to December 23, 2002. On December 23, 2002, the Bank and Mr. Kaye
entered into a final settlement of the amount owed to the Bank, and pursuant to
such settlement, the Bank received reimbursements from Mr. Kaye of $3.5 million
($2.5 million, net of taxes). The amount net of taxes was applied directly to
the Bank's capital and not reflected in the Bank's statement of operations for
2002.
5
The Company and the Bank have commenced taking actions to comply
with the remainder of the Supervisory Directive, including the sale of artwork,
and expect to comply with the Supervisory Agreement and the Supervisory
Directive, except for the timing requirements for the sale of fixed assets
(other than artwork). As of December 31, 2002, the Bank had achieved the $3.3
million reduction in artwork required by that date under the Supervisory
Agreement and the Supervisory Directive through sales of approximately $2.8
million to third parties and sales of approximately $540,000 to Mr. Kaye. On
December 18, 2002, the Bank was granted an extension until June 30, 2003 of the
deadline by which it must reduce its investments in fixed assets to no more than
25% of core capital.
The provisions of the Supervisory Directive do not prohibit the
Company from using its unconsolidated resources to make scheduled contractual
payments to Metropolitan Capital Trust I ("Trust I") and Metropolitan Capital
Trust II ("Trust II"). Payments by the Company to Trust I and Trust II are used
by the trusts to pay dividends on the cumulative trust preferred securities of
Trust I and Trust II. The Supervisory Directive does not prohibit Trust I and
Trust II from paying dividends on their respective cumulative trust preferred
securities.
If the Company or the Bank is unable to comply with the terms and
conditions of the Supervisory Directive or the supervisory agreements, the OTS
and the ODFI could take additional regulatory action, including the issuance of
a cease and desist order requiring further corrective action such as raising
additional capital, obtaining additional or new management, requiring the sale
of assets and a reduction in the overall size of the Company, imposing operating
restrictions on the Bank and restricting dividends from the Bank to the Company.
These additional restrictions could make it impossible to service existing debt
of the Company.
As of December 31, 2002, the Company has met all requirements of the
supervisory directive and the supervisory agreements, except as noted above.
MERGER AGREEMENT
On October 23, 2002, the Company and Sky Financial Group, Inc. ("Sky
Financial") executed a definitive agreement for Sky Financial to acquire all the
stock of the Company and merge the Company into Sky Financial.
Pursuant to the definitive agreement, stockholders of the Company
will be entitled to elect to receive, in exchange for each share of the
Company's common stock held, either $4.70 in cash or .2554 shares of Sky
Financial, or a combination thereof, subject to certain adjustments. The
election process, however, is subject to certain allocation mechanisms that are
reflected in the S-4/A and proxy statement filed on January 30, 2003, which
provides that no more than 70% and no less than 55% of the Company's shares will
be exchanged for Sky Financial common stock.
The transaction provides for the merger of the Company into Sky
Financial, and the subsequent merger of the Bank into Sky Bank, Sky Financial's
commercial banking affiliate.
All required regulatory and shareholder approvals have been
obtained. The acquisition is expected to close on April 30, 2003. For
information surrounding the acquisition, refer to the Form S-4/A filed by Sky
Financial with the Securities and Exchange Commission on January 30, 2003.
6
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.
DECEMBER 31,
------------
2002 2001 2000
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 153,114 13.2% $ 171,813 13.9% $ 288,352 21.1%
Multifamily 310,340 26.7 224,542 18.2 273,358 20.0
Commercial 163,259 14.1 164,786 13.3 254,824 18.6
Construction and land 264,064 22.7 233,504 18.9 193,464 14.1
Held for sale 48,136 4.1 169,320 13.7 51,382 3.8
----------- ----- ----------- ----- ----------- -----
Total real estate loans 938,913 80.8 963,965 78.0 1,061,380 77.6
CONSUMER LOANS 101,627 8.8 138,698 11.2 163,019 11.9
CONSUMER HELD FOR SALE -- -- -- -- -- --
BUSINESS AND OTHER LOANS 121,299 10.4 133,684 10.8 143,329 10.5
----------- ----- ----------- ----- ----------- -----
Total loans $ 1,161,839 100.0% $ 1,236,347 100.0% 1,367,728 100.0%
LESS:
Loans in process 90,628 80,214 72,156
Deferred fees, net 1,951 2,080 2,191
Discount (premium) on loans, net (4,895) (6,969) (7,393)
Allowance for losses on loans 17,103 17,250 13,951
----------- ----------- -----------
TOTAL LOANS
RECEIVABLE, NET $ 1,057,052 $ 1,143,772 $ 1,286,823
=========== =========== ===========
DECEMBER 31,
------------
1999 1998
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 295,061 23.5% $ 189,182 17.4%
Multifamily 292,015 23.3 337,412 31.1
Commercial 247,455 19.7 228,825 21.1
Construction and land 156,112 12.4 137,023 12.6
Held for sale 5,866 0.5 9,416 0.9
----------- ----- ----------- -----
Total real estate loans 996,509 79.4 901,858 83.1
CONSUMER LOANS 143,585 11.4 96,115 8.8
CONSUMER HELD FOR SALE 852 0.1 5,601 0.5
BUSINESS AND OTHER LOANS 114,333 9.1 82,317 7.6
----------- ----- ----------- -----
Total loans 1,255,279 100.0% 1,085,891 100.0%
LESS:
Loans in process 56,212 46,001
Deferred fees, net 4,548 5,013
Discount (premium) on loans, net (7,178) (5,320)
Allowance for losses on loans 11,025 6,909
----------- -----------
TOTAL LOANS
RECEIVABLE, NET $ 1,190,672 $ 1,033,288
=========== ===========
We had commitments to originate or purchase $86.1 million of fixed
rate loans and $65.1 million of adjustable rate loans at December 31, 2002. In
addition, we had firm commitments to sell loans of $73.0 million at December 31,
2002.
7
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.
DECEMBER 31,
------------
2002 2001 2000
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
FIXED RATE LOANS:
Real estate:
One- to four-family $ 74,709 6.3% $ 102,836 8.3% $ 112,535 8.2%
Multifamily 72,671 6.3 116,981 9.5 163,726 12.0
Commercial 76,155 6.6 89,526 7.2 106,771 7.8
Construction and land 33,712 2.9 15,239 1.2 10,411 0.8
Held for sale 38,106 3.3 76,602 6.2 39,903 2.9
----------- ---- ----------- ---- ----------- ----
Total fixed rate real estate loans 295,353 25.4 401,184 32.4 433,346 31.7
Consumer 62,418 5.4 110,978 9.0 149,957 11.0
Consumer held for sale -- -- -- --
Business and other 29,580 2.5 39,736 3.2 54,576 4.0
----------- ---- ----------- ---- ----------- ----
Total fixed rate loans 387,351 33.3% 551,898 44.6% 637,879 46.7%
----------- ---- ----------- ---- ----------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 78,405 6.7% 68,977 5.6% 175,817 12.9%
Multifamily 237,669 20.5 107,561 8.7 109,632 8.0
Commercial 87,104 7.5 75,260 6.1 148,053 10.8
Construction and land 230,352 19.8 218,265 17.7 183,053 13.3
Held for sale 10,030 0.9 92,718 7.5 11,479 0.8
----------- ---- ----------- ---- ----------- ----
Total adjustable rate real estate loans 643,560 55.4 562,781 45.6 628,034 45.8
Consumer 39,209 3.4 27,720 2.2 13,062 1.0
Business and other 91,719 7.9 93,948 7.6 88,753 6.5
----------- ---- ----------- ---- ----------- ----
Total adjustable rate loans 774,488 66.7% 684,449 55.4% 729,849 53.3%
----------- ---- ----------- ---- ----------- ====
LESS:
Loans in process 90,628 80,214 72,156
Deferred fees, net 1,951 2,080 2,191
Discount (premium) on loans, net (4,895) (6,969) (7,393)
Allowance for losses on loans 17,103 17,250 13,951
TOTAL LOANS RECEIVABLE, NET $ 1,057,052 $ 1,143,772 $ 1,286,823
=========== =========== ===========
DECEMBER 31,
------------
1999 1998
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
FIXED RATE LOANS:
Real estate:
One- to four-family $ 112,627 9.0% $ 76,566 7.1%
Multifamily 147,820 11.8 194,521 17.9
Commercial 129,865 10.3 147,860 13.6
Construction and land 16,394 1.3 27,849 2.6
Held for sale 5,866 0.5 8,920 0.8
----------- ---- ----------- ----
Total fixed rate real estate loans 412,572 32.9 455,716 42.0
Consumer 137,678 10.9 93,689 8.6
Consumer held for sale 852 0.1 5,601 0.5
Business and other 46,849 3.7 25,526 2.4
----------- ---- ----------- ----
Total fixed rate loans 597,951 47.6% 580,532 53.5%
----------- ==== ----------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 182,434 14.5% 112,616 10.4%
Multifamily 144,195 11.5 142,891 13.2
Commercial 117,590 9.4 80,965 7.5
Construction and land 139,718 11.1 109,174 10.0
Held for sale -- -- 496 0.0
----------- ---- ----------- ----
Total adjustable rate real estate loans 583,937 46.5 446,142 41.1
Consumer 5,907 0.5 2,426 0.2
Business and other 67,484 5.4 56,791 5.2
----------- ---- ----------- ----
Total adjustable rate loans 657,328 52.4% 505,359 46.5%
----------- ==== ----------- ====
LESS:
Loans in process 56,212 46,001
Deferred fees, net 4,548 5,013
Discount (premium) on loans, net (7,178) (5,320)
Allowance for losses on loans 11,025 6,909
----------- -----------
TOTAL LOANS RECEIVABLE, NET $ 1,190,672 $ 1,033,288
=========== ===========
8
The following table illustrates the contractual maturity of our loan
portfolio at December 31, 2002. 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.
DUE AFTER
ONE YEAR
DUE IN ONE THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ---------- ---------- -----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
REAL ESTATE:
One- to four-family $ 110 6.56% $ 6,353 6.48% $ 146,651 6.08% $ 153,114 6.09%
Multifamily 2,189 6.18 39,735 7.24 268,416 7.01 310,340 7.03
Commercial 6,109 8.15 25,991 7.52 131,159 7.91 163,259 7.86
Construction and land 186,034 5.24 69,238 4.81 8,792 7.88 264,064 5.25
CONSUMER 1,390 10.30 8,936 9.73 91,301 7.94 101,627 8.07
BUSINESS 50,278 6.24 18,451 7.45 52,570 7.80 121,299 7.14
---------- ---------- ---------- ----------
Total $ 246,110 5.55% $ 168,704 6.41% $ 698,889 7.11% $1,113,703 6.69%
========== ========== ========== ==========
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 primarily in the state of
Ohio, and to some extent in Pennsylvania. We originate multifamily loans
primarily for investment. At December 31, 2002, we are not holding any
multifamily loans for sale.
At December 31, 2002, the multifamily loans held for investment
totaled $310.3 million or 26.7% of total loans. The average size of these loans
was approximately $665,000. 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 are subject
to a maximum individual aggregate interest rate adjustment as well as a maximum
aggregate adjustment over the life of the loan (generally 6%). Generally, the
maximum loan to value ratio of multifamily residential loans is 75% or less.
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 typically 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.
At December 31, 2002, real estate in Ohio secures 45.2% of our
multifamily loan portfolio as compared to 43.4% at December 31, 2001. Underlying
real estate for the remaining loans is located primarily in California and
Pennsylvania. The Bank no longer originates loans in California. The Bank's
exposure with California loans continues to decrease with normal payoffs and
amortization.
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, 2002, permanent
loans held for investment, secured by commercial real estate, totaled $163.3
million or 14.1% of our total portfolio. The average size of these loans was
approximately $716,000.
9
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 originate commercial
real estate loans primarily for investment. At December 31, 2002, the Bank held
no commercial real estate loans 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, 2002. As of that date, we had loans in 36 states.
Properties securing loans in 32 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.
NUMBER
OF LOANS PERCENT PRINCIPAL PERCENT
-------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Ohio:
Apartments 159 23% $140,106 30%
Office buildings 28 4 14,412 3
Retail centers 23 3 17,899 4
Other 16 2 9,931 2
-------- -------- -------- --------
Total 226 32 197,369 39
California:
Apartments 152 22 76,511 16
Office buildings 15 2 4,736 1
Retail centers 51 7 21,095 4
Other 12 2 4,888 1
-------- -------- -------- --------
Total 230 33 107,230 22
Pennsylvania:
Apartments 25 4 16,077 3
Office buildings 10 1 18,590 4
Retail centers 5 1 10,882 2
Other 4 1 11,259 2
-------- -------- -------- --------
Total 44 7 56,808 11
New York:
Apartments 7 1 2,958 1
Office buildings 4 1 4,868 1
Retail centers 7 1 10,184 2
Other 3 0 891 0
-------- -------- -------- --------
Total 21 3 18,901 4
Other states:
Apartments 124 18 74,688 16
Office Buildings 14 2 18,503 4
Retail centers 24 3 12,146 2
Other 12 2 2,975 1
-------- -------- -------- --------
Total 174 25 108,312 24
-------- -------- -------- --------
695 100% $473,599 100%
======== ======== ======== ========
10
The following table presents aggregate information as to the type of
security as of December 31, 2002:
AVERAGE
NUMBER BALANCE
OF LOANS PER LOAN PRINCIPAL PERCENT
-------- -------- --------- -------
(DOLLARS IN THOUSANDS)
Apartments 467 $ 665 $310,340 66%
Office buildings 71 861 61,109 13
Retail centers 110 656 72,206 15
Other 47 637 29,944 6
------ -------- --------
Total 695 $ 681 $473,599 100%
====== ======== ========
One- to four-family lending. We originate one- to four-family
residential loans for sale and for the Bank's portfolio. While the mix of loans
originated for sale versus originated for portfolio vary over time, currently
the Bank anticipates that, for the foreseeable future, the majority of one- to
four-family loans will be originated for sale.
Our portfolio of one- to four-family loans at December 31, 2002
totaled $153.1 million or 13.2% 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 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, 2002, we
had $264.1 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,
2002:
NUMBER OF PRINCIPAL
LOANS BALANCE
----- -------
(DOLLARS IN THOUSANDS)
RESIDENTIAL CONSTRUCTION LOANS:
Owner-occupied 171 $ 39,510
Builder presold 88 20,589
Builder model homes 241 59,771
Builder lines of credit 30 55,117
-------- --------
Total residential construction loans 530 174,987
NONRESIDENTIAL CONSTRUCTION LOANS:
Multifamily 5 6,009
Commercial 4 9,044
-------- --------
Total nonresidential construction loans 9 15,053
OTHER LOANS
Land loans 15 8,302
Development loans 147 65,722
-------- --------
Total other loans 162 74,024
-------- --------
Total 701 $264,064
======== ========
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
disbursements during construction. We review the borrower's financial position
and 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.
11
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, 2002, secured
loans comprised $95.8 million or 94.3% of the $101.6 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 the past, 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. In 1998, we acquired an additional
loan package of $5.0 million of subprime loans secured by manufactured housing.
Total subprime loans were $3.9 million, or 3.9% of total consumer loans at
December 31, 2002. We no longer engage in subprime lending.
During 2002, we sold our credit card portfolio and exited the credit
card business.
Business Lending. At December 31, 2002, we had $121.3 million of
business loans outstanding. Our business lending activities encompass loans with
a variety of purposes and security, including loans to finance 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.
12
The following table sets forth information regarding the number and
amount of our business loans as of December 31, 2002:
OUTSTANDING
NUMBER TOTAL LOAN PRINCIPAL
OF LOANS COMMITMENT BALANCE
-------- ---------- -------
(DOLLARS IN THOUSANDS)
LOANS SECURED BY:
Accounts receivable, inventory and equipment 78 $ 14,217 $ 10,193
Second lien on real estate 67 25,271 23,443
First lien on real estate 130 86,061 75,948
Specific equipment and machinery 11 6,228 4,479
Titled vehicles 26 1,260 830
Stocks and bonds 5 1,358 1,137
Certificates of deposit 7 525 484
UNSECURED LOANS 56 6,290 4,785
-------- -------- --------
Total 380 $141,210 $121,299
======== ======== ========
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 2002 was $964.1 million, which generated gains
of $12.2 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 Freddie Mac and Fannie Mae, 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 Freddie Mac and Fannie Mae. Based on these
commitments, Freddie Mac or Fannie Mae 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 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. Since the first quarter of 2002, the Company has chosen
to no longer sell its commercial real estate and multifamily loans in the
secondary market, except where the Company may choose to reduce exposure with
certain existing relationships, or to allow the Company to grant additional
loans to an existing borrower without increasing its overall exposure to
13
any such individual borrower. During 2002, we sold $6.5 million of commercial
real estate and multifamily loans, which generated gains of $51,000.
LOAN SERVICING ACTIVITIES
At December 31, 2002, 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:
ORIGINATED PURCHASED PORTFOLIO
SERVICING SERVICING SERVICING TOTAL
--------- --------- --------- -----
(DOLLARS IN THOUSANDS)
One- to Four-family:
Held for investment -- -- $ 372,979 $ 372,979
Freddie Mac $ 879,420 $ 746,952 -- 1,626,372
Fannie Mae 18,032 281,715 -- 299,747
Private investors 32,704 15,899 -- 48,603
---------- ---------- ---------- ----------
Total One- to Four-family 930,156 1,044,566 372,979 2,347,701
Multifamily and Commercial:
Held for investment -- -- 411,312 411,312
Fannie Mae 57,469 39,206 -- 96,675
Private investors 142,148 23,913 -- 166,061
---------- ---------- ---------- ----------
Total Multifamily and
Commercial 199,617 63,119 411,312 674,048
---------- ---------- ---------- ----------
Total $1,129,773 $1,107,685 $ 784,291 $3,021,749
========== ========== ========== ==========
Generally, we service the loans we originate. When we sell loans to
an investor, such as Freddie Mac or Fannie Mae, 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, 2002, the unpaid principal balance of our originated servicing
rights was $1.1 billion. The related net book value of originated mortgage
servicing rights was $7.0 million. Occasionally during 2000 and prior years, the
Bank pursued bulk purchases of servicing portfolios from other originating
institutions to further increase our servicing fee income. These purchased
servicing portfolios are primarily Freddie Mac and Fannie Mae single-family
loans that are secured by homes located within the eastern half of the nation.
At December 31, 2002, the unpaid principal balance of our purchased servicing
portfolio was $1.1 billion. The related net book value of purchased mortgage
servicing rights was $6.1 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 and 2002, market
interest rates have fallen primarily due to reductions in short-term rates by
the Federal Reserve Board and other economic factors. As a result, the market
values and book values of the Bank's servicing rights have decreased rapidly.
Interest rates continued to fall during 2002 and as a result the Bank recorded
additional impairment of loan servicing rights of $4.5 million during the year.
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.
Alternatively, the fair value of servicing rights may be determined by obtaining
an independent third party appraisal.
14
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 Fannie Mae and Freddie Mac. Notices are sent by mail when the
loan reaches 15 days past due. Generally, 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 acquirer. 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 regularly. 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, 2002, 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.
60-89 DAYS 90 DAYS AND OVER TOTAL DELINQUENT LOANS
---------- ---------------- ----------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------ -------- ------ ------ --------
(DOLLARS IN THOUSANDS)
REAL ESTATE
One- to four-family 2 $ 465 0.2% 15 $ 2,352 1.2% 17 $ 2,817 1.4%
Multifamily 3 1,037 0.3 2 507 0.2 5 1,544 0.5
Commercial real estate -- -- -- 3 1,795 1.1 3 1,795 1.1
Construction and land -- -- -- 2 143 0.1 2 143 0.1
Consumer 150 759 0.7 181 3,213 3.2 331 3,972 3.9
Business 1 1 0.0 8 3,952 3.3 9 3,953 3.3
------- ------- ------- ------- ------- -------
Total 156 $ 2,262 0.2% 211 $11,962 1.0% 367 $14,224 1.2%
======= ======= === ======= ======= === ======= ======= ===
In addition to the loans included above we have $15.1 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 financial
projections provided by the borrowers on March 12, 2001, $14.7 million of
business loans to the previously mentioned borrowers were placed on nonaccrual
status and were calculated to be impaired in the amount of $3.5 million. These
loans are business loans secured by junior liens on several nursing homes and
assisted living centers. The borrowers did not make any payments on these loans
during the first quarter of 2001. The estimate of the impairment was the result
of comparing the book value of the loans to the present value of
15
cash flows expected to be received based on the most likely workout scenario. In
May 2001, the borrowers began making interest payments on these loans. These
loans were brought current as of September 30, 2002 through payments by the
borrowers and a reduction in the rates charged on these loans. However, due to
the continuing weakness of the borrowers, these loans are still considered
impaired, nonperforming and a troubled debt restructuring at December 31, 2002.
As of December 31, 2002, the borrowers were performing per their restructured
lending agreements. Management determined the amount of the impairment of these
loans to have remained $3.5 million as of December 31, 2002.
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 probable incurred 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 special mention. 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 the 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.
16
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.
DECEMBER 31,
------------
2002 2001 2000
---- ---- ----
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
One-to four-family $ 338 17.3% $ 323 22.0% $ 1,759 24.8%
Multifamily 1,150 26.7 981 20.4 1,962 20.5
Commercial real estate 1,612 14.1 1,785 16.7 1,956 18.7
Construction and land 1,710 22.7 946 18.9 1,296 13.6
Consumer 3,233 8.8 5,341 11.2 3,631 11.9
Business 8,920 10.4 7,874 10.8 1,952 10.5
Unallocated 140 -- -- -- 1,395 --
------- ----- ------- ----- ------- -----
Total $17,103 100.0% $17,250 100.0% $13,951 100.0%
======= ===== ======= ===== ======= =====
DECEMBER 31,
------------
1999 1998
---- ----
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY TO CATEGORY TO
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
One-to four-family $ 778 24.0% $ 304 18.3%
Multifamily 904 23.3 648 31.1
Commercial real estate 1,281 19.7 1,019 21.1
Construction and land 550 12.4 237 12.6
Consumer 3,947 11.5 2,335 9.3
Business 2,462 9.1 1,675 7.6
Unallocated 1,103 -- 691 --
------- ----- ------- -----
Total $11,025 100.0% $ 6,909 100.0%
======= ===== ======= =====
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, the 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:
DECEMBER 31,
------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
SECURITIES:
Mutual funds $ 1,196 $ 5,784 $ 889
Tax-exempt bond 13,755 14,349 14,705
Revenue bond 165 480 775
Freddie Mac preferred stock 2,832 6,750 6,150
Freddie Mac note -- -- 9,986
Fannie Mae note -- 4,931 19,920
Federal Home Loan Bank notes -- 4,943 --
Federal Home Loan Bank stock 13,823 16,889 20,624
Treasury notes and bills 95,463 71,946 2,361
-------- -------- --------
Total $127,234 $126,072 $ 75,410
======== ======== ========
OTHER INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks $ 4,323 $ 577 $ 2,727
======== ======== ========
The tax-exempt municipal bond represents a single issue secured by a
multifamily property. The bond was reclassified to available for sale as of June
30, 2002, due to a decrease in the cash flow generated by the multifamily
property to make required debt service payments on the bond and management's
decision to market this security when the property, which serves as collateral
for the bond, becomes fully occupied. In conjunction with this reclassification,
it was determined that there was a permanent impairment to the bond's fair value
and a realized loss of $550,000 was recorded in the second quarter of 2002.
Since December 31, 2002, there has been further deterioration in this bond and a
further impairment of $909,000 was recorded in the first quarter of 2003.
17
The following table sets forth the contractual maturities and approximate
weighted average yields of debt securities at December 31, 2002.
DUE IN
-----------------------------------------------------------------
ONE MONTH TWO MONTHS ONE YEAR MORE THAN
OR LESS TO ONE YEAR TO FIVE YEARS FIVE YEARS TOTAL
--------- ----------- ------------- ---------- -----
(DOLLARS IN THOUSANDS)
Tax-exempt bond -- $ 295 $ 1,715 $ 11,745 $ 13,755
Revenue bond -- 165 -- -- 165
U.S. Treasury Notes and Bills $ 42,006 53,457 -- -- 95,463
-------- -------- -------- -------- --------
Total $ 42,006 $ 53,917 $ 1,715 $ 11,745 $109,383
======== ======== ======== ======== ========
Weighted average tax-equivalent yield 1.01% 2.57% 10.61% 10.61% 2.96%
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.
DECEMBER 31,
------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Fannie Mae pass-through certificates $ 45,510 $ 54,319 $ 74,412
GNMA pass-through certificates 29,893 28,830 27,249
Freddie Mac participation certificates 16,835 1,462 2,948
BPA Commercial Capital L.L.C
mortgage-backed security 52,449 70,244 77,162
Freddie Mac Collateralized Mortgage
Obligation 8,185 8,577 8,192
Fannie Mae Collateralized Mortgage
Obligation -- 3,690 5,666
Other 111 191 200
-------- -------- --------
Total $152,983 $167,313 $195,829
======== ======== ========
The following table sets forth the final maturities and approximate
weighted average yields of mortgage-backed securities at December 31, 2002.
DUE IN
-----------------------------------
ONE YEAR
TO FIVE OVER
YEARS FIVE YEARS TOTAL
----- ---------- -----
(DOLLARS IN THOUSANDS)
Fannie Mae pass-through
certificates $ 12,976 $ 32,534 $ 45,510
GNMA pass-through certificates -- 29,893 29,983
Freddie Mac participation
certificates -- 16,835 16,385
BPA Commercial Capital L.L.C
Mortgage-backed security -- 52,449 52,449
Freddie Mac Collateralized
Mortgage Obligation -- 8,185 8,185
Other -- 111 111
-------- -------- --------
Total mortgage-backed securities $ 12,976 $140,007 $152,983
======== ======== ========
Weighted average yield 6.52% 6.01% 6.11%
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.
18
SOURCES OF FUNDS
The 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 deposit accounts:
Statement and Checking Accounts. We offer a statement savings
account, two types of passbook savings accounts, an investment sweep account,
two interest-bearing checking, and one noninterest-bearing checking account for
consumers. We offer three noninterest-bearing checking accounts and an
investment sweep for business and commercial customers. The Bank also offers
both checking and savings accounts for public funds customers. As of December
31, 2002, the Bank's total core deposits, as a percentage of total deposits
increased to 37.3% from 31.8% as of December 31, 2001. Core deposits are defined
as the Bank's checking and savings deposits less public funds and custodial
accounts.
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 weekly 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 three months to two years. At December 31, 2002, these
individuals and entities held approximately $74.8 million of certificates of
deposits, or 7.12% of total deposits. Subsequent to June 30, 2001, the Bank has
reduced its dependency on brokered and out-of-state deposits as required by the
Supervisory Agreement. During 2002, the Bank reduced brokered and out-of-state
deposits by $53.0 million.
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 Freddie Mac, Fannie Mae and
private investors.
DECEMBER 31,
------------
2002 2001
---- ----
PERCENT PERCENT
AVERAGE OF RATE AVERAGE OF RATE
AMOUNT TOTAL PAID AMOUNT TOTAL PAID
------ ----- ---- ------ ----- ----
(DOLLARS IN THOUSANDS)
Noninterest-bearing
demand deposits $ 137,840 12.6% $ 105,535 9.2%
Interest bearing deposits:
Demand deposits 207,540 19.1 2.39% 158,881 13.8 3.63%
Savings deposits 88,786 8.2 1.58 95,038 8.3 2.50
Time deposits 654,431 60.1 4.53 788,172 68.7 5.89
---------- ----- ---------- -----
Total interest-bearing
deposits 950,757 87.4 3.31% 1,042,091 90.8 5.23
---------- ----- ---------- -----
Total average deposits $1,088,597 100.0% $1,147,626 100.0%
========== ===== ========== =====
DECEMBER 31,
------------
2000
----
PERCENT
AVERAGE OF RATE
AMOUNT TOTAL PAID
------ ------ ----
Noninterest-bearing
demand deposits $ 71,714 6.3%
Interest bearing deposits:
Demand deposits 99,142 8.7 4.15%
Savings deposits 146,635 12.9 3.82
Time deposits 818,062 72.1 6.11
---------- -----
Total interest-bearing
deposits 1,063,839 93.7 5.60
---------- -----
Total average deposits $1,135,553 100.0%
========== =====
19
The following table shows rate and maturity information for
certificates of deposit as of December 31, 2002.
PERCENT OF
0.00-1.99% 2.00-3.99% 4.00-5.99% 6.00-7.99% TOTAL TOTAL
---------- ---------- ---------- ---------- ----- -----
(DOLLARS IN THOUSANDS)
CERTIFICATE ACCOUNTS
MATURING IN QUARTER ENDING:
March 31, 2003 $ 16,661 $ 49,578 $ 71,506 $ 11,433 $149,178 25.2%
June 30, 2003 18,873 46,777 19,736 15,553 100,939 17.0
September 30, 2003 3,010 38,367 20,442 3,838 65,657 11.1
December 31, 2003 4,275 32,189 9,651 600 46,715 7.9
March 31, 2004 5,577 37,957 19,173 76 62,783 10.6
June 30, 2004 2 8,872 9,149 572 18,595 3.1
September 30, 2004 -- 3,245 4,759 806 8,810 1.5
December 31, 2004 -- 6,135 4,353 4,557 15,045 2.5
March 31, 2005 -- 2,282 4,748 1,685 8,715 1.5
June 30, 2005 -- 3,637 3,279 925 7,841 1.3
September 30, 2005 -- 8,783 15,217 959 24,959 4.2
December 31, 2005 -- 1,752 679 1,944 4,375 0.7
Thereafter -- 5,379 70,391 3,652 79,422 13.4
-------- -------- -------- -------- -------- -----
Total $ 48,398 $244,953 $253,083 $ 46,600 $593,034 100.0%
======== ======== ======== ======== ======== =====
Percent of total 8.2% 41.3% 42.6% 7.9%
The following table shows the remaining maturity for time deposits
of $100,000 or more as of December 31, 2002.
DECEMBER 31, 2002
-----------------
(DOLLARS IN THOUSANDS)
Three months or less $ 81,184
Over three through six months 42,108
Over six through twelve months 31,131
Over twelve months 89,741
--------
Total $244,164
========
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 $14.0 million
through a public offering. The current balance outstanding is $13.96 million.
The interest rate on the notes is 9.625%.
Commercial Bank Line of Credit. The Company has a line of credit
with a commercial bank ("line of credit"). The line of credit is $5.0 million
and currently has a balance of $2.9 million. This line of credit matures on
December 31, 2003.
Federal Home Loan Bank Advances. The Federal Home Loan Bank makes
funds available for housing finance to eligible financial institutions like the
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, 2002 was $595 million.
Repurchase Agreements. From time to time, the 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, 2002, was
approximately $49 million.
The following table shows the maximum month-end balance, the average
balance, and the ending balance of borrowings during the periods indicated.
20
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
MAXIMUM MONTH-END BALANCE:
Federal Home Loan Bank advances $278,339 $378,143 $365,094
1995 subordinated notes 13,985 13,985 14,000
Commercial bank repurchase agreement -- -- 50,000
Commercial bank line of credit 4,007 6,000 7,000
Commercial bank note payable 5,000 5,000 --
Loan from majority shareholder 2,000 2,000 --
Repurchase agreements 49,508 41,000 80,166
AVERAGE BALANCE:
Federal Home Loan Bank advances $253,107 $313,908 $290,369
1995 subordinated notes 13,968 13,985 13,987
Commercial bank repurchase agreement -- -- 25,250
Commercial bank line of credit 855 2,482 6,083
Commercial bank note payable 3,348 3,507 --
Loan from majority shareholder 466 22 --
Repurchase agreements 44,531 41,000 70,595
ENDING BALANCE:
Federal Home Loan Bank advances $225,280 $278,912 $365,094
1995 subordinated notes 13,960 13,985 13,985
Commercial bank repurchase agreement -- -- --
Commercial bank line of credit 2,907 -- 6,000
Commercial bank note payable -- 5,000 --
Loan from majority shareholder -- 2,000 --
Repurchase agreements 49,140 41,000 41,000
The following table provides the interest rates, which include amortization of
issuance costs of borrowings during the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
WEIGHTED AVERAGE INTEREST RATE:
Federal Home Loan Bank advances 5.54% 5.94% 6.15%
1995 subordinated notes 9.63 9.63 9.63
Commercial bank repurchase agreement -- -- 8.25
Commercial bank line of credit 3.05 8.10 8.80
Commercial bank note payable 4.66 5.67 --
Loan from majority shareholder 0.00 0.00 --
Repurchase agreements 5.52 5.98 6.06
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.
COMPETITION
The 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.
The 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.
21
EMPLOYEES
At December 31, 2002, we had a total of 391 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. The 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
the Bank's deposits. The Bank is subject to examination and regulation by the
OTS, the FDIC, and the ODFI. The 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 the 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 the Bank signed a supervisory agreement with the
OTS and the ODFI. This document acknowledges 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.
On July 8, 2002, the Bank was placed under a supervisory directive
by the OTS. This document states that the Bank did not meet all of the
requirements of the supervisory agreements signed in July 2001.
As of December 31, 2002, the Company has met all requirements of the
supervisory directive and the supervisory agreements, except for the sale of its
fixed assets. The Company has received an extension on this requirement until
June 30, 2003.
As a lender and a financial institution, the 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 the Bank, are
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. The 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
22
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.
The 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, the Bank is a "well
capitalized" institution, as of December 31, 2002.
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.
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, 2002.
ADEQUATELY CAPITALIZED WELL CAPITALIZED
---------------------- ----------------
PERCENT OF PERCENT OF
AMOUNT ASSETS AMOUNT ASSETS
------ ------ ------ ------
Tangible Capital:
Actual $110,111 7.50% $110,111 7.50%
Requirement 22,032 1.50 29,376 2.00
Excess (Deficiency) 88,079 6.00 80,375 5.50
Core Capital:
Actual $110,111 7.50% $110,111 7.50%
Requirement 58,751 4.00 73,439 5.00
Excess (Deficiency) 51,360 3.50 36,672 2.50
Risk-based Capital:
Actual $120,416 10.80% $120,416 10.80%
Requirement 89,188 8.00 111,485 10.00
Excess (Deficiency) 31,228 2.80 8,931 0.80
Tier 1 Capital to Risk-adjusted Assets
Actual $109,472 9.82% $109,472 9.82%
Requirement 44,594 4.00 66,891 6.00
Excess (Deficiency) 64,878 5.82 42,581 3.82
23
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.
Due to the regulatory classification of the Bank, it is not permitted to make
any dividend payments to Metropolitan Financial Corp., its parent company,
without prior OTS approval.
The Gramm-Leach Bliley Act, or Financial Services Modernization Act,
became law in November of 1999. This law includes significant changes in the way