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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, 1998
------------------
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)
6001 Landerhaven Drive Mayfield Heights, Ohio 44124
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(440) 646-1111
- -------------------------------------------------------------------------------
(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.[ ]
The aggregated market value of voting stock held by nonaffiliates of the
Registrant as of March 23, 1999 was $15,682,000.
As of March 23, 1999, there were 7,756,393 shares of the Registrant's Common
Stock issued and outstanding.
Documents incorporated by reference:
Portions of the 1998 Annual Report - Parts I and II
Portions of the Proxy Statement for the 1999 Annual Meeting - Part III
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METROPOLITAN FINANCIAL CORP.
1998 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 34
Item 3. Legal Proceedings..................................................................... 34
Item 4. Submission of Matters to a Vote of Security Holders................................... 34
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters................. 36
Item 6. Selected Financial Data............................................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................... 36
Item 8. Financial Statements and Supplementary Data........................................... 37
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.. 37
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 38
Item 11. Executive Compensation................................................................ 38
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 38
Item 13. Certain Relationships and Related Transactions........................................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 38
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PART I
ITEM 1. BUSINESS
GENERAL
Metropolitan Financial Corp. ("Metropolitan") 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 & 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 Metropolitan at the holding company level 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. Our executive office is located at 6001 Landerhaven
Drive, Mayfield Heights, Ohio 44124.
Robert M. Kaye of Rumson, New Jersey, is Metropolitan's current
majority shareholder. Mr. Kaye acquired Metropolitan in 1987 and remained sole
shareholder until the initial public offering of Metropolitan's Common Stock in
October 1996. Since the initial public offering, Mr. Kaye has owned 77.5% of
Metropolitan's outstanding Common Stock. Mr. Kaye 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 Corporation and has ultimate control of
the Corporation and the Bank. In addition, Mr. Kaye is Chairman of the Board and
Chief Executive Officer of the Corporation and the Bank.
At December 31, 1998, we operated 17 full service retail offices in
Northeastern Ohio. As of December 31, 1998, we also maintained five residential
and multifamily/commercial real estate loan production offices. As a secondary
line of business, we service mortgage loans for various investors.
At December 31, 1998, we had total assets of $1.4 billion, total
deposits of $1.1 billion and shareholders' equity of $42.6 million. The Federal
Deposit Insurance Corporation insures the deposits of the Bank up to applicable
limits.
At December 31, 1998, we directly or indirectly owned the following
active and inactive subsidiaries:
ACTIVE SUBSIDIARIES INACTIVE SUBSIDIARIES
- ------------------- ---------------------
- - Metropolitan Bank and Trust Company - MetroCapital Corporation
- - Metropolitan Capital Trust I - Metropolitan Savings Service
Corporation
- - Kimberly Construction Company - Metropolitan Securities Corporation
The Bank changed its name from Metropolitan Savings Bank of Cleveland
to Metropolitan Bank & Trust Company in April 1998. We formed Metropolitan
Capital Trust I during 1998 to facilitate the issuance of cumulative trust
preferred securities. 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.
All required disclosures as part of Guide 3 are either included in
this document or Management's Discussion and Analysis of Financial Condition and
Results of Operations and Five Year Summary of Selected Data which are
incorporated by reference.
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LENDING ACTIVITIES
General. Our primary lending activity is the origination and purchase
of mortgage loans secured by multifamily and commercial real estate. We also
originate one- to four-family residential and construction loans, and to a
lesser extent, consumer and business loans.
Loan Portfolio Composition. The following information presents the
composition of our loan portfolio, including loans held for sale, in dollar
amounts and in percentages before deductions for loans in process, deferred fees
and discounts and allowance for losses on loans.
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DECEMBER 31,
1998 1997 1996
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 189,182 17.4% $146,685 19.2% $114,758 16.8%
Multifamily 337,412 31.1 194,450 25.4 276,544 40.3
Commercial 228,825 21.1 166,593 21.8 135,635 19.8
Construction and land 137,023 12.6 116,829 15.3 71,697 10.5
Held for sale 9,416 0.9 14,230 1.8 8,973 1.3
---------- ----- -------- ----- -------- -----
Total real estate loans 901,858 83.1 638,787 83.5 607,607 88.7
CONSUMER LOANS 96,115 8.8 68,590 9.0 54,180 7.9
CONSUMER HELD FOR SALE 5,601 0.5 -- -- -- --
BUSINESS AND OTHER LOANS 82,317 7.6 57,496 7.5 23,508 3.4
---------- ----- -------- ----- -------- -----
Total loans 1,085,891 100.0% 764,873 100.0% 685,295 100.0%
===== ===== =====
LESS:
Loans in process 46,001 46,833 31,758
Deferred fees, net 5,013 4,108 2,336
Discount (premium) on
loans, net (5,320) 425 560
Allowance for losses on
loans 6,909 5,622 4,175
---------- -------- --------
TOTAL LOANS
RECEIVABLE, NET $1,033,288 $707,885 $646,466
========== ======== ========
DECEMBER 31,
1995 1994
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family $ 76,259 15.0% $112,840 25.2%
Multifamily 231,459 45.8 187,928 41.9
Commercial 109,403 21.5 83,354 18.6
Construction and land 48,210 9.5 38,270 8.5
Held for sale 1,504 0.2 84 0.0
-------- ----- -------- -----
Total real estate loans 466,835 92.0 422,476 94.2
CONSUMER LOANS 32,214 6.3 25,946 5.8
CONSUMER HELD FOR SALE -- -- -- --
BUSINESS AND OTHER LOANS 8,703 1.7 171 0.0
-------- ----- -------- -----
Total loans 507,752 100.0% 448,593 100.0%
===== =====
LESS:
Loans in process 23,373 19,338
Deferred fees, net 1,220 1,480
Discount (premium) on
loans, net 544 837
Allowance for losses on
loans 2,765 1,911
-------- --------
TOTAL LOANS
RECEIVABLE, NET $479,850 $425,027
======== ========
We had commitments to originate or purchase fixed and adjustable rate
loans of $69.8 million and $73.2 million, respectively, at December 31, 1998. In
addition, we had firm commitments to sell fixed rate loans of $24.0 million and
optional commitments to sell fixed rate loans of $6.6 million at December 31,
1998.
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The following table shows the composition of our loan portfolio,
including loans held for sale, in dollar amounts and in percentages before
deductions for loans in process, deferred fees and discounts and allowance for
losses on loans by fixed and adjustable rates.
DECEMBER 31,
1998 1997 1996
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
FIXED RATE LOANS:
Real estate:
One- to four-family $ 76,566 7.1% $ 59,058 7.7% $ 41,436 6.1%
Multifamily 194,521 17.9 60,136 7.9 88,529 12.9
Commercial 147,860 13.6 52,390 6.9 34,726 5.1
Construction and land 27,849 2.6 20,854 2.7 392 0.0
Held for sale 8,920 0.8 6,294 0.8 2,531 0.4
---------- ---- -------- ---- -------- ----
Total fixed rate real
estate loans 455,716 42.0 198,732 26.0 167,614 24.5
Consumer 93,689 8.6 61,307 8.0 46,725 6.8
Consumer held for sale 5,601 0.5 -- -- -- --
Business and other 25,526 2.4 19,575 2.6 5,650 0.8
---------- ---- -------- ---- -------- ----
Total fixed rate loans 580,532 53.5% 279,614 36.6% 219,989 32.1%
---------- ==== -------- ==== -------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 112,616 10.4% 87,627 11.5% 73,322 10.7%
Multifamily 142,891 13.2 134,314 17.6 188,015 27.5
Commercial 80,965 7.5 114,203 14.9 100,909 14.7
Construction and land 109,174 10.0 95,975 12.5 71,305 10.4
Held for sale 496 0.0 7,936 1.0 6,442 0.9
---------- ---- -------- ---- -------- ----
Total adjustable rate
real estate loans 446,142 41.1 440,055 57.5 439,993 64.2
Consumer 2,426 0.2 7,283 0.9 7,455 1.1
Business and other 56,791 5.2 37,921 5.0 17,858 2.6
---------- ---- -------- ---- -------- ----
Total adjustable rate
loans 505,359 46.5% 485,259 63.4% 465,306 67.9%
---------- ==== -------- ==== -------- ====
LESS:
Loans in process 46,001 46,833 31,758
Deferred fees, net 5,013 4,108 2,336
Discount (premium) on
loans, net (5,320) 425 560
Allowance for losses
on loans 6,909 5,622 4,175
---------- -------- --------
TOTAL LOANS
RECEIVABLE, NET $1,033,288 $707,885 $646,466
========== ======== ========
DECEMBER 31,
1995 1994
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
FIXED RATE LOANS:
Real estate:
One- to four-family $ 35,042 6.9% $ 46,418 10.4%
Multifamily 71,909 14.2 19,852 4.4
Commercial 17,615 3.5 7,948 1.8
Construction and land 39 0.0 -- --
Held for sale 1,504 0.3 84 0.0
-------- ---- -------- ----
Total fixed rate real
estate loans 126,109 24.9 74,302 16.6
Consumer 32,214 6.3 25,946 5.8
Consumer held for sale -- -- -- --
Business and other 2,744 0.5 20 0.0
-------- ---- -------- ----
Total fixed rate loans 161,067 31.7% 100,268 22.4%
-------- ==== -------- ====
ADJUSTABLE RATE LOANS:
Real estate:
One- to four-family 41,217 8.1% 66,422 14.8%
Multifamily 159,550 31.4 168,076 37.5
Commercial 91,788 18.1 75,406 16.8
Construction and land 48,171 9.5 38,270 8.5
Held for sale -- -- -- --
-------- ---- -------- ----
Total adjustable rate
real estate loans 340,726 67.1 348,174 77.6
Consumer -- -- -- --
Business and other 5,959 1.2 151 0.0
-------- ---- -------- ----
Total adjustable rate
loans 346,685 68.3% 348,325 77.6%
-------- ==== -------- ====
LESS:
Loans in process 23,373 19,338
Deferred fees, net 1,220 1,480
Discount (premium) on
loans, net 544 837
Allowance for losses
on loans 2,765 1,911
-------- --------
TOTAL LOANS
RECEIVABLE, NET $479,850 $425,027
======== ========
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The following table illustrates the contractual maturity of our loan
portfolio, including loans held for sale at December 31, 1998. 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 $ 1,921 9.16% $ 1,659 8.62% $195,018 7.17% $ 198,598 7.20%
Multifamily 50 8.00 2,923 8.11 334,439 8.15 337,412 8.15
Commercial 747 9.64 9,218 9.39 218,860 8.47 228,825 8.51
Construction and land 92,185 8.65 31,587 8.77 13,251 8.35 137,023 8.65
CONSUMER 8,551 13.69 16,273 9.81 76,892 10.86 101,716 10.93
BUSINESS 35,984 8.52 16,604 9.01 29,729 9.00 82,317 8.79
-------- ------- -------- ----------
Total $139,438 8.94% $78,264 9.08% $868,189 8.29% $1,085,891 8.43%
======== ======= ======== ==========
The total amount of loans due after December 31, 1999 which have
predetermined interest rates is $548.5 million. The total amount of loans due
after that date which have floating or adjustable rates is $398.0 million.
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LOAN ORIGINATIONS AND PURCHASES
Our strategy in recent years has been to increase interest-earning
assets primarily by increasing the total loan portfolio if quality loans with
the necessary portfolio characteristics were available. We accomplished this by
increasing origination capacity and emphasizing purchases. The following table
presents our loan origination, purchase, sale and repayment activities for the
periods indicated.
YEAR ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to four-family $ 77,297 $ 28,017 $ 56,519
Multifamily 29,215 12,600 20,669
Commercial 9,350 29,304 14,667
Construction and land 73,125 77,062 60,566
Consumer 18,888 12,719 10,062
Business 8,606 27,058 18,536
--------- --------- ---------
Total adjustable rate 216,481 186,760 181,019
--------- --------- ---------
FIXED RATE:
Real Estate:
One- to four-family 223,846 53,712 44,795
Multifamily 75,626 9,490 15,759
Commercial 84,511 1,300 --
Construction and land 16,229 25,333 328
Consumer 66,941 17,598 17,242
Business 20,137 15,003 4,249
--------- --------- ---------
Total fixed rate 487,290 122,436 82,373
--------- --------- ---------
Total loans originated 703,771 309,196 263,392
--------- --------- ---------
PURCHASES BY TYPE:
ADJUSTABLE RATE:
Real Estate:
One- to four-family -- 90 1,835
Multifamily 21,611 19,433 45,184
Commercial 36,458 22,541 16,905
Construction and land 1,365 347 --
Consumer -- -- 5,432
--------- --------- ---------
Total adjustable rate 59,434 42,411 69,356
--------- --------- ---------
FIXED RATE:
Real Estate:
One- to four-family 1,077 -- 1,125
Multifamily 118,434 23,195 22,971
Commercial 70,753 46,729 21,296
Construction and land 4,072 1,975 --
Consumer 23,622 16,900 12,224
--------- --------- ---------
Total fixed rate 217,958 88,799 57,616
--------- --------- ---------
Total loans purchased 277,392 131,210 126,972
--------- --------- ---------
SALES:
Real Estate:
One- to four-family (233,620) (34,887) (36,392)
Multifamily (6,117) (9,678) (11,539)
Commercial (30,055) (20,782) (7,808)
Construction and land (3,496) (600) --
Business (559) -- --
--------- --------- ---------
Total loan sales (273,847) (65,947) (55,739)
--------- --------- ---------
Loans securitized (100,995) (98,325) (14,458)
Principal repayments (285,303) (196,556) (142,624)
--------- --------- ---------
Total reductions (660,145) (360,828) (212,821)
--------- --------- ---------
Increase (decrease) in other items, net 4,385 (18,159) (10,927)
--------- --------- ---------
NET INCREASE $ 325,403 $ 61,419 $ 166,616
========= ========= =========
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Multifamily Lending. We emphasize multifamily real estate loans. We
originate these loans from referrals by present customers of the Bank and
mortgage and real estate brokers. Through our existing referral network and
advertising efforts, we have become known for originating multifamily loans in
our primary multifamily lending markets of Ohio, Kentucky, Michigan,
Pennsylvania, and New Jersey. Although we operate full service retail sales
offices solely in Northeast Ohio, we have loan origination offices in Southern
Ohio, Western Pennsylvania, and Southeastern Michigan.
At December 31, 1998, our multifamily loans totaled $337.4 million,
with an average loan size of approximately $534,000. Of this amount, we
originated $123.7 million, or 36.6%. Currently, we emphasize the origination of
multifamily loans with principal amounts of $2.0 to $6.0 million and balloon
maturities of 10 years. Adjustable loans are adjustable on a one-, three- or
five-year schedule with amortization periods of 25 or 30 years. We base rate
adjustments on the appropriate term U.S. Treasury securities plus a margin. 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%).
Due to increasing demand for fixed rate loans, we have allocated more funds for
fixed rate programs. Typically, the loans have balloon maturities of 10 years.
The maximum loan to value ratio of multifamily residential loans is 75%.
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. In order to manage and reduce these risks, we use strict
underwriting standards in our multifamily residential lending process.
Apartment buildings, generally with less than 75 residential units,
typically secure loans originated in this area. Our underwriting process
includes a site evaluation, which considers factors such as location, access by
roadways, condition of the apartments, and amenities. One of our employees
visits each location before a loan approval is made. The underwriting process
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 generally obtain personal
guarantees in an amount equal to the original principal amount of the loan.
Staff independent of the lending department reviews the financial statements of
individual guarantors. 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. For the multifamily loans,
the debt service coverage is calculated based on the maximum interest rate of
the loan.
At December 31, 1998, $213.8 million or 63.4% of our multifamily loan
portfolio was purchased. 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 located in Ohio secures 37.5% of
our multifamily loan portfolio. Underlying real estate for the remaining loans
is primarily located in California, Michigan, Pennsylvania and New Jersey.
Commercial Real Estate Lending. At December 31, 1998, loans secured by
commercial real estate totaled $228.8 million or 21.1% of our total portfolio.
The average size of these loans was $618,000. Of this amount, we originated
$75.2 million or 32.9% and $153.6 million or 67.1% represented loans purchased
from a variety of sources, predominantly other financial institutions.
We purchase 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. In 1997, we began to
introduce more geographic
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diversity into the portfolio based on our desire to acquire high credit quality
loans. We believe a certain amount of geographic diversity is important to
reduce the risk of loss due to regional economic downturns.
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 brought on
by 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 lending on existing properties with a record of satisfactory
performance and target retail strip centers and office buildings with multiple
tenants.
We purchase commercial real estate loans secured by strip shopping
centers and small office buildings to a much greater extent than we originate
commercial real estate loans. Through customer referrals and real estate
brokers, we lend on commercial real estate in many states, but predominantly in
Ohio, Pennsylvania, Northern Kentucky, Michigan and California. These loans are
typically ten year balloon loans with an amortization period of 25 years at a
margin over the appropriate term U.S. Treasury securities. The maximum loan to
value ratio is generally 75%.
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, 1998. We have loans in 41 states. Properties securing loans in
38 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 160 16.0% $126,649 22.4%
Office buildings 31 3.1 14,836 2.6
Retail centers 16 1.6 8,698 1.5
Other 22 2.2 5,532 1.0
----- -------- -------- -----
Total 229 22.9 155,715 27.5
----- ----- -------- -----
California:
Apartments 226 22.5 100,783 17.8
Office buildings 43 4.3 15,760 2.8
Retail centers 66 6.6 30,712 5.5
Other 36 3.6 17,790 3.1
----- ----- -------- -----
Total 371 37.0 165,045 29.2
----- ----- -------- -----
Pennsylvania:
Apartments 47 4.7 25,995 4.6
Office buildings 7 0.7 19,363 3.4
Retail centers 5 0.5 13,170 2.3
Other 4 0.4 1,036 0.2
----- -------- -------- -----
Total 63 6.3 59,564 10.5
----- ----- -------- -----
Other states:
Apartments 199 19.8 83,985 14.8
Office Buildings 49 4.9 41,328 7.3
Retail centers 38 3.8 28,958 5.1
Other 53 5.3 31,642 5.6
----- ----- ------ -------- ------
Total 339 33.8 185,913 32.8
----- ----- -------- ------
1,002 100.0% $566,237 100.0%
===== ===== ======== ======
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The following table presents aggregate information as to the type of
security as of December 31, 1998:
AVERAGE
NUMBER BALANCE
OF LOANS PER LOAN PRINCIPAL PERCENT
-------- -------- --------- -------
(DOLLARS IN THOUSANDS)
Apartments 632 $534 $337,412 59.6%
Office buildings 130 702 91,287 16.1
Retail centers 125 652 81,538 14.4
Other 115 487 56,000 9.9
----- -------- -----
Total 1,002 $565 $566,237 100.0%
===== ======== =====
One- to Four-family Residential Lending. In 1998, we originated
approximately 20.1% of our one- to four-family residential loans through our
full service retail sales offices. We originated the remainder with commissioned
loan officers, correspondent lenders, or our telemarketing department
established in 1998. We maintain one- to four-family residential loan
origination offices in North Olmsted, Ohio and Bloomfield, Michigan. We have
focused our one- to four-family residential lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied residences. As
of December 31, 1998, the one- to four-family residential mortgages totaled
$189.2 million or 17.4% of our loan portfolio.
We emphasize the origination of conventional ARM loans for retention in
our loan portfolio and fixed rate loans suitable for sale in the secondary
market. In addition, we offer fixed rate end loan financing to borrowers
building homes with our approved construction loan builders. We retain only a
limited dollar amount of this fixed rate end loan financing in our portfolio. We
closely monitor the amount being originated and subsequently retained. Property
located in Northeastern Ohio secures substantially all of the one- to
four-family residential mortgage loan originated for retention in our portfolio.
At December 31, 1998, our fixed rate residential mortgage loan portfolio totaled
$76.6 million, or 7.1%, of our total loan portfolio.
We are presently originating three types of ARM products for our
portfolio. The first product is a one-year adjustable ARM. The interest rate is
subject to change annually. The adjustments are based upon the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year.
In addition, the adjustments are generally limited to a 2% maximum annual
interest rate adjustment and a maximum lifetime adjustment of 6%. The second
product, known as a five/one ARM, has the same index and caps as the one year
ARM. The five/one ARM, however, retains its initial interest rate for the first
five years of the loan and then begins to adjust annually in the sixth year. The
third product, the three-year ARM, allows for interest rate adjustments every
three years. The adjustments are based upon the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of three years. In addition,
the adjustments are generally limited to a 2% maximum interest rate adjustment
per change and a maximum lifetime adjustment of 6%.
Our originated ARMs do not permit negative amortization of principal
and most of them are convertible into fixed rate mortgages. We typically sell
these loans in the secondary market if the option to convert to a fixed rate is
exercised. We originate ARMs with terms to maturity of up to 30 years. Borrowers
are qualified based upon secondary market requirements.
At December 31, 1998, $23.8 million, or 12.6% of our one- to
four-family residential loan portfolio was purchased. We use an underwriting
process with substantially the same standards as for our originated loans when
purchasing these loans.
Construction Lending and Land Development. 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
area for construction
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lending is in Northeastern Ohio, in the counties of Cuyahoga, Lake, Geauga,
Summit, Medina, Portage, and Lorain. We currently have one commissioned
construction loan originator in the high volume Columbus, Ohio construction
market to originate single family construction loans and improved lot loans.
The following table presents the number, amount, and type of properties
securing construction and land development loans at December 31, 1998:
NUMBER OF PRINCIPAL
LOANS BALANCE
----- -------
(DOLLARS IN
THOUSANDS)
RESIDENTIAL CONSTRUCTION LOANS:
Owner-occupied 74 $ 20,611
Builder presold 42 9,733
Builder model homes 129 26,810
Builder lines of credit 26 24,430
Lot loans 55 8,188
Development loans 28 18,650
--- --------
Total residential construction loans 354 108,422
NONRESIDENTIAL CONSTRUCTION LOANS:
Multifamily 3 3,956
Commercial 5 15,173
--- --------
Total nonresidential construction loans 8 19,129
LAND LOANS 5 8,152
--- --------
Total 367 $135,703
=== ========
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 and the estimated cost of the project. The application process includes
a submission of the cost, specifications and plans. We also review the
borrower's financial position and require a personal guarantee on all builder
loans. We base all loans upon the appraised value of the underlying collateral,
as completed. Qualified independent fee appraisers who have been approved by the
Board of Directors complete the appraisals.
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--70% (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).
All 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. These loans increase the yield
on, and the proportion of interest rate sensitive loans in, the loan portfolio.
We offer builders lines of credit to build single family homes.
Builders cannot use these lines for any other purpose. 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. The
number of homes built without contracts for sale or as model homes is limited by
the financial strength of the builder. We permit the use of lines of credit only
where a builder owns a specific
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number of lots in a development. We base draws upon the percentage of
completion. At all times, we retain enough funds to complete the home. We make
disbursements only after receipt of a property inspection and a mechanic's lien
update from the title company.
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 do 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, 1998, secured
loans comprised $91.0 million or 89.5% of the $101.7 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 depends upon the borrower's
continuing financial stability. Thus, personal circumstances are more likely to
have an adverse affect on collection. Furthermore, 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 been purchasing loans through correspondent lenders and bulk portfolios
offered for sale. At December 31, 1998, purchased consumer loans represented
$59.5 million, or 58.5% of the outstanding balance of consumer loans. Second
mortgages on one- to four-family homes, and first liens on automobiles, or
manufactured housing are the primary collateral types for these loans. 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 also secured by
manufactured housing. Total subprime loans were $10.2 million, or 9.6% of total
consumer loans at December 31, 1998.
At December 31, 1998, our credit card portfolio had an outstanding
balance of $7.3 million with $26.8 million in unused credit lines. Of the
outstanding balance, $2.6 million related to cards we originated and $4.7
million related to credit card relationships we purchased.
Business Lending. We began offering business loans in 1994. At December
31, 1998, we had $82.3 million of business loans outstanding against available
lines totaling $101.0 million. 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 rates at some margin over
the prime interest rate and some are guaranteed by the Small Business
Administration.
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The following table sets forth information regarding the number and
amount of our business loans as of December 31, 1998:
OUTSTANDING
NUMBER TOTAL LOAN PRINCIPAL
OF LOANS COMMITMENT BALANCE
-------- ---------- ------------
(DOLLARS IN THOUSANDS)
LOANS SECURED BY:
Accounts receivable, inventory and equipment 205 $38,060 $30,876
Second lien on real estate 67 23,835 17,865
First lien on real estate 35 28,292 27,979
Specific equipment and machinery 33 1,622 1,622
Titled vehicles 30 990 990
Stocks and bonds 5 1,492 1,367
Certificates of deposit 9 617 281
UNSECURED LOANS 18 2,602 1,337
--- ------- -------
Total 402 $97,510 $82,317
=== ======= =======
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 substantially
depend upon the success of the business itself. 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.
SECONDARY MARKET ACTIVITIES
In addition to originating loans for our own portfolio, we participate
in secondary mortgage market activities by selling whole loans, as well as
creating mortgage-backed securities, with FannieMae and the FreddieMac.
Secondary market sales allow us to make loans during periods when deposit flows
decline, or are not otherwise available, and at times when customers prefer
loans with long-term fixed interest rates which we choose not to hold in our own
portfolio. Our primary focus in mortgage banking operations is to sell fixed
rate one- to four-family residential mortgage loans.
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 sale of
substantially all loans to FreddieMac and FannieMae is without recourse to us.
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. In the case of one- to four-family residential loans, we
periodically obtain formal commitments primarily with FreddieMac and FannieMae.
Pursuant to 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 is negotiated but before it is settled.
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During the third quarter of 1997, we completed the securitization of
$93.0 million of multifamily loans with FannieMae under a newly developed
program. This program uses insurance to provide the credit enhancement necessary
to achieve a triple A rating. We are servicing the loans as mortgage-backed
securities for FannieMae. To date, we have retained ownership of the securities
in that portfolio. 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 1997 FannieMae transaction, we
used an insurance policy to assume all credit risk. In addition to decreasing
loans receivable and increasing mortgage-backed securities, the securitizations
have had several other benefits, including the following:
- improvement in the credit risk profile of the Bank's balance
sheet by converting whole loans into mortgage-backed
securities guaranteed by others;
- reduction of the required level of risk-based capital; and
- addition of high quality collateral which can be pledged for
borrowings in the secondary market to fund future loan growth.
We also sell whole loans or participations in multifamily and
commercial real estate loans to private investors and retain the right to
service the loans. We make the majority of our sales of multifamily and
commercial real estate loans under individually negotiated whole loan or
participation sales agreements. These sales are for individual loans or for a
package of loans. During 1998, we sold $12.9 million of multifamily and
commercial real estate participations. The Bank may seek a participant when a
loan would otherwise exceed the loan-to-one borrower limit. We have sold other
loans to manage geographic concentration or interest rate risk. In addition, we
sell multifamily and commercial real estate loans that are purchased under a
loan option program. See "--Loan Option Income."
LOAN SERVICING ACTIVITIES
At December 31, 1998, the overall servicing portfolio was $2.1 billion.
Of that amount, loans serviced for others totaled $1.5 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:
Metropolitan portfolio $ -- $ -- $186,481 $ 186,481
FreddieMac 319,082 469,645 -- 788,727
FannieMae 57,998 428,159 -- 486,157
Private investors 3,469 7,837 -- 11,306
-------- -------- -------- ----------
Total One- to Four-family 380,549 905,641 186,481 1,472,671
-------- -------- -------- ----------
Multifamily and Commercial:
Metropolitan portfolio -- -- 430,978 430,978
FreddieMac 3,323 1,608 -- 4,931
FannieMae 78,454 22,865 -- 101,319
Private investors 77,473 25,806 -- 103,279
-------- -------- -------- ----------
Total Multifamily and
Commercial 159,250 50,279 430,978 640,507
-------- -------- -------- ----------
Total $539,799 $955,920 $617,459 $2,113,178
======== ======== ======== ==========
Generally, we service the loans we originate. When we sell loans to an
investor, such as FreddieMac or FannieMae, we generally 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.
To further increase our servicing fee income, the Bank has aggressively pursued
purchases of servicing portfolios from other originating institutions. These
purchased servicing portfolios are primarily FreddieMac and FannieMae single
family loans that are geographically
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located within the eastern half of the nation. At December 31, 1998, the unpaid
principal balance of our purchased servicing portfolio was $955.9 million. The
related balance of purchased mortgage servicing rights was $9.9 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.
LOAN OPTION INCOME
During 1995, we developed a program to purchase loans and sell loan
options in order to take advantage of our underwriting capabilities, increase
net interest income and increase noninterest income. In these transactions, we
purchase loans and sell nonrefundable options to a third party to purchase these
same loans at a specified price within a specified period. Prior to purchasing
the loans that will be subject to the options, the Bank uses an underwriting
process with substantially the same standards as in its origination process. In
the event the option is not exercised, we would sell the underlying loans or
transfer them to the Bank's portfolio at their fair value at the date of the
transfer. We negotiate a nonrefundable option fee based on a percentage of the
principal amount of the loans involved. The third party acquiring the option is
a loan broker who markets the loans to potential buyers who may be willing to
pay a higher price for the loans. To date, we have entered into these option
transactions with one loan broker. At December 31, 1998, there were $5.6 million
in loans held for sale in connection with outstanding options. We have
recognized $388,000 in income in connection with loan options during 1998.
BRIDGE LOAN ACTIVITY
During 1997, we developed a program to underwrite and originate bridge
loans to take advantage of our underwriting capabilities and to increase
interest income. A bridge loan is a short term financing arrangement provided to
a borrower until they secure more permanent financing or sell the property. For
these loans we assess the debt service capacity and underlying collateral value
as we would for other multifamily or commercial real estate loans. We collect a
fee at origination which is deferred and recognized in interest income over the
term of the loan. As a result of the comparatively short term to maturity of
these loans, the borrowers must refinance the underlying properties sooner than
is the case with longer term, permanent loans. This adds a potential element of
risk. In all cases, these loans are adequately secured by real property. During
1998, we originated three of these loans totaling $5.4 million and recognized
origination fees of $449,000 in net interest income. During the two years, we
funded ten loans totaling $21.2 million. We are no longer actively marketing
this program.
LOAN DELINQUENCIES AND NONPERFORMING ASSETS
When a borrower fails to make a required payment on a loan, we begin
work to cure the delinquency by contacting the borrower. In the case of real
estate loans, we send a late notice 15 days after the due date. If the
delinquency is not cured within 30 days of the due date, we contact the borrower
by telephone. We make additional written and verbal contacts with the borrower
between 30 and 90 days after the due date. If the delinquency continues for a
period of 90 days, we usually bring an action to foreclose on the property. If
we foreclose on the property, we sell the property at public auction where we
may be the acquirer. Delinquent consumer loans are handled in a similar manner,
except that we make our initial contact when the payment is 10 days past due. We
bring an action to collect any loan payment that is delinquent for 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. In the case of business loans, we monitor payment
activity on a weekly basis. We make telephone contact with any borrower who has
not made their payment by its due date. If a delay in payment
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continues, we meet with the borrower. The borrowers' cash flow situation is
evaluated and a repayment plan instituted. In some situations, we exercise our
rights to collateral or assignment of receivables in order to liquidate the
debt.
The following table sets forth information concerning delinquent loans
at December 31, 1998, 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 1 $ 104 0.05% 7 $ 512 0.26% 8 $ 616 0.31%
Multifamily -- -- -- -- -- -- -- -- --
Commercial 1 142 0.06 6 6,123 2.68 7 6,265 2.74
Construction and land -- -- -- 4 1,824 1.33 4 1,824 1.33
CONSUMER 58 669 0.66 365 2,498 2.46 423 3,167 3.11
BUSINESS 4 863 1.05 14 1,734 2.11 18 2,597 3.15
-- ------ --- ------- --- -------
Total 64 $1,778 0.16% 396 $12,691 1.17% 460 $14,469 1.33%
== ====== === ======= === =======
Nonperforming assets include all nonaccrual loans, loans past due
greater than 90 days still accruing, and real estate owned. 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.
The following table summarizes non-performing assets by category as of
the dates indicated.
AT DECEMBER 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccruing loans
One-to four-family $ 512 $ 792 $ 950 $ 293 $ 337
Multifamily -- -- 871 2,138 1,585
Commercial real estate 6,123 198 2,032 391 150
Construction and land
development 1,824 -- -- 15 15
Consumer 2,038 1,562 802 266 153
Business 1,734 211 268 -- --
------- ------ ------ ------ ------
Total nonaccruing loans 12,231 2,763 4,923 3,103 2,240
Loans past due greater
than 90
days still accruing 460 384 271 204 128
------- ------ ------ ------ ------
Total nonperforming loans 12,691 3,147 5,194 3,307 2,368
Real estate owned 5,534 2,037 177 258 53
------- ------ ------ ------ ------
Total nonperforming
assets $18,225 $5,184 $5,371 $3,565 $2,421
======= ====== ====== ====== ======
Nonperforming loans to
total loans 1.23% 0.44% 0.80% 0.69% 0.55%
Nonperforming assets
to total assets 1.34% 0.56% 0.70% 0.60% 0.51%
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For the years ended December 31, 1998 and 1997, gross interest income
which would have been recorded had the nonaccruing loans been current in
accordance with their original terms amounted to $788,000 and $151,000,
respectively. The amounts that were included in interest income on these loans
were $291,000 and $132,000 for the years ended 1998 and 1997, respectively.
Nonperforming assets were $18.2 million at December 31, 1998, an
increase of $13.0 million from $5.2 million at December 31, 1997. During the
same period, total net loans receivable increased $325.4 million to $1.0 billion
at December 31, 1998. The nonaccrual loan component of nonperforming assets
increased $9.5 million to $12.2 million while real estate owned increased $3.5
million to $5.5 million. Nonperforming loans showed significant increases in
four areas: commercial real estate; construction and land development; business
loans; and consumer loans. Real estate owned increased due to two properties
acquired in December.
The $5.9 million increase in nonperforming commercial real estate is
attributable to three loans including a $4.0 million loan financing a waterpark
in Southern California. This loan and one other are bridge loans, a program we
are no longer actively marketing. Based on appraisals and other current
estimates of value, we do not anticipate losses on these three loans. The $1.8
million increase in nonperforming construction and land development loans is
related to two borrowers. The largest is a $1.3 million land development loan
for residential lots that has experienced slower than anticipated lot
absorption. The remaining loans are model home construction loans. Based on
appraised values and current market research, we do not anticipate losses on
these two relationships.
The $1.5 million increase in nonperforming business loans is consistent
with the growth in business loans. We introduced this product in 1995. From 1996
to 1997, this loan category grew $34.0 million to $57.5 million. In 1998, this
loan category grew another $24.8 million to $82.3 million. Total nonperforming
business loans are $1.7 million, or 2.1% of that loan category. Unlike the real
estate lending which comprises 80% of our loan portfolio, business loans often
depend on the successful operation of a business and depreciable collateral.
Therefore, we expect nonperforming loans and losses to be higher for business
loans than for real estate loans. Management currently estimates probable losses
on these five loans at $900,000. We have allocated a portion of the allowance
for loan losses to this estimate until the actual loss is determined and
charged-off. We are aggressively pursuing collection of all nonperforming loans
including those described above.
Nonperforming consumer loans have increased to $2.5 million at December
31, 1998 and represent 2.5% of the consumer portfolio. This increase is
primarily attributable to subprime lending. We began suprime lending in 1997.
These loans typically carry higher delinquency rates than other consumer loans
and provide a greater yield to compensate for the related increase in costs.
These loans account for $240,000, or 29.7% of consumer loan charge-offs in 1998.
The aggregate balance of the subprime portfolio at December 31, 1998 was $10.2
million or less than one percent of total loans. All consumer loans that are
delinquent 120 days or more are 100% covered by loan insurance or a portion of
the allowance for loan losses equal to the estimated loss has been allocated to
that loan.
In December 1998, we acquired title to a motel in Northeast Ohio and a
marina in California through foreclosure. We adjusted the carrying value of
these properties to their estimated fair value of $3.4 million and $1.3 million,
respectively, at the time of acquisition. We are actively pursuing the sale of
both properties. We anticipate no further losses.
At December 31, 1998, we had potential problem loans totaling $3.1
million which were classified by management as substandard and were not included
in the table above. Seven loans secured by multifamily and commercial real
estate are $1.8 million of this amount. Although these loans were current or not
seriously delinquent, there is some unfavorable development involving each loan.
If not corrected, the unfavorable development could result in the loan changing
to nonaccrual status or a loss being incurred. We are in contact with these
borrowers, and we monitor their status closely.
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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. While we may
periodically allocate portions of the allowance for specific problem loans, the
whole allowance is available for any loan charge-offs that occur. 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 of the allowance for
losses on loans among categories as of December 31 of the years 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. 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,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
One-to four-family $ 304 18.3% $ 237 19.8% $ 228 17.1% $ 172 15.2% $ 189 25.2%
Multifamily 648 31.1 482 25.4 1,020 40.8 887 45.8 733 41.9
Commercial real estate 1,019 21.1 1,400 23.0 937 20.3 676 21.5 358 18.6
Construction and land 237 12.6 353 15.3 193 10.5 167 9.5 99 8.5
Consumer 2,335 9.3 2,132 9.0 1,182 7.9 512 6.3 340 5.8
Business 1,675 7.6 456 7.5 197 3.4 74 1.7 1 --
Unallocated 691 -- 562 -- 418 -- 277 -- 191 --
------ ----- ------ ----- ------ ------ ------ ----- ------ -----
Total $6,909 100.0% $5,622 100.0% $4,175 100.0% $2,765 100.0% $1,911 100.0%
====== ===== ====== ===== ====== ====== ====== ===== ====== =====
With the uncertainties that could adversely affect the overall quality
of the loan portfolio, we consider an adequate allowance for losses on loans
essential. We consider the unallocated allowance adequate to cover losses from
the existing loans that have not demonstrated problems such as late payments,
financial difficulty of the borrower, or deterioration of collateral values. In
our opinion the risks associated with off-balance sheet commitments are
insignificant. Therefore, we have not provided an allowance for these
commitments.
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20
The following table provides an analysis of the allowance for losses on
loans for the periods indicated. In each period, we base the provision for loan
losses on an analysis of individual credits, prior and current loss experience,
overall growth in the portfolio, and current economic conditions.
AT DECEMBER 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
BALANCE AT BEGINNING
OF PERIOD $5,622 $4,175 $2,765 $1,911 $1,239
Charge-offs:
One- to four-family 5 32 22 23 23
Multifamily 39 494 119 -- 64
Commercial real estate -- -- -- 27 --
Construction and land -- -- -- -- --
Consumer 809 363 95 56 14
Business 565 10 -- -- --
------ ------ ------ ------ ------
Total charge-offs 1,418 899 236 106 101
------ ------ ------ ------ ------
Recoveries:
One-to four-family 25 -- -- 1 1
Multifamily 13 -- -- -- 6
Commercial real estate -- -- -- -- --
Construction and land -- -- -- -- --
Consumer 17 6 11 -- --
Business -- -- -- -- --
------ ------ ------ ------ ------
Total recoveries 55 6 11 1 7
------ ------ ------ ------ ------
Net charge-offs 1,363 893 225 105 94
Provision for loan losses 2,650 2,340 1,635 959 766
------ ------ ------ ------ ------
BALANCE AT END OF PERIOD $6,909 $5,622 $4,175 $2,765 $1,911
====== ====== ====== ====== ======
Net charge-offs to
average loans 0.16% 0.13% 0.04% 0.02% 0.03%
Provision for loan
losses to average loans 0.31% 0.35% 0.28% 0.21% 0.21%
Allowance for losses on
loans to total
nonperforming loans
at end of period 54.44% 178.60% 80.38% 83.61% 80.70%
Allowance for losses on
loans to total loans
at end of period 0.66% 0.79% 0.64% 0.57% 0.45%
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 mix. As the
Bank grows, management anticipates this investment will increase.
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21
The following table summarizes the amounts and the distribution of
securities held as of the dates indicated:
AT DECEMBER 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
SECURITIES:
Mutual funds $ 2,059 $ 1,706 $ 2,009
Tax-exempt bond 14,817 4,740 --
Revenue bond 1,400 -- --
FannieMae medium term note 9,884 -- 6,065
FreddieMac preferred stock 7,500 -- --
FannieMae preferred stock -- -- 5,100
Federal Home Loan Bank stock 6,054 5,350 3,989
------- ------- -------
Total $41,714 $11,796 $17,163
======= ======= =======
OTHER INTEREST-EARNING ASSETS:
Interest-bearing deposits with banks $ 9,275 $ 1,961 $ 2,745
Term repurchase agreements -- 6,397 6,000
------- ------- -------
Total $ 9,275 $ 8,358 $ 8,745
======= ======= =======
The following table sets forth the contractual maturities and approximate
weighted average yields of debt securities at December 31, 1998.
DUE IN
----------------------
ONE YEAR FIVE TO MORE THAN
OF LESS TEN YEARS TEN YEARS TOTAL
-------- ---------------------- -----
(DOLLARS IN THOUSANDS)
Mutual funds $ 2,059 $ -- $ -- $ 2,059
Tax-exempt bond -- -- 14,817 14,817
Revenue bond -- -- 1,400 1,400
FannieMae medium term note -- 9,884 -- 9,884
------- ------- ------- -------
Total $ 2,059 $ 9,884 $16,217 $28,160
======= ======= ======= =======
Weighted average yield 5.06% 5.89% 7.07% 6.51%
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. 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 own portfolio. As rates declined during 1998 we experienced an increase in
prepayments on mortgage-backed securities over the level experienced in 1997
and 1996. We classify all mortgage-backed securities as available for sale.
The following table sets forth the mortgage-backed securities portfolio
at the dates indicated.
AT DECEMBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
FannieMae pass-through certificates $ 61,705 $ 97,146 $19,775
GNMA pass-through certificates 5,870 8,037 9,700
FreddieMac participation certificates 13,149 37,714 26,713
BPA Commercial Capital L.L.C.
mortgage-backed security 100,995 -- --
FreddieMac Collateralized Mortgage
Obligation 8,494 -- --
FannieMae Collateralized Mortgage
Obligation 7,868 -- --
Other 214 270 484
-------- -------- -------
Total $198,295 $143,167 $56,672
======== ======== =======
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The following table sets forth the contractual maturities and
approximate weighted average yields of mortgage-backed securities at December
31, 1998.
DUE IN
------
ONE FIVE
YEAR TO TO TEN OVER
FIVE YEARS YEARS TEN YEARS TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
FannieMae pass-through
certificates $6,743 $53,757 $ 1,205 $ 61,705
GNMA pass-through certificates 81 -- 5,789 5,870
FreddieMac participation
certificates -- -- 13,149 13,149
BPA Commercial Capital L.L.C.
Mortgage-backed security -- -- 100,995 100,995
FreddieMac Collateralized
Mortgage Obligation -- -- 8,494 8,494
FannieMae Collateralized
Mortgage Obligation -- -- 7,868 7,868
Other -- 214 214
------- -------- -------- --------
Total mortgage-backed securities $6,824 $53,757 $137,714 $198,295
====== ======= ======== ========
Weighted average yield 7.41% 7.27% 7.26% 7.27%
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. The following paragraphs provide a brief description of the
types of accounts offered:
Passbook and Statement Savings Accounts. Consumers may invest savings
in and withdraw savings from regular passbook, tiered passbook and statement
savings accounts without restriction. We compound interest on tiered passbook
accounts monthly and credit the account monthly. We compound interest on regular
passbook and statement savings accounts quarterly and credit the account
quarterly.
Checking Accounts. We offer two interest-bearing checking and one
noninterest-bearing checking account for consumers. The noninterest checking
requires no minimum balance and has no monthly service fees. The rate paid on
the interest checking account depends upon the balance in the account. We can
waive monthly service charges on personal interest-bearing checking accounts if
the consumer maintains either a $1,000 minimum balance or a greater than $5,000
minimum balance in another deposit account or establish a direct deposit
relationship. All accounts have no minimum maturity or penalty for early
withdrawal and no restrictions on the size and frequency of the withdrawals or
additional deposits. We review the interest rate paid on the interest-bearing
checking accounts regularly and adjust the rate based on cash flow projections
and market interest rates.
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. This remains a recurring but
relatively short-term source of funds given the level of loans serviced for
others.
We also offer a commercial checking account. This account is
noninterest bearing and is assessed monthly service charges based upon
transaction activity levels.
Certificates of Deposit. We offer fixed rate, fixed term certificates
of deposit. Terms are from seven days to five years. There are no regulatory
rate ceilings. Certificates of deposit require a penalty for withdrawal prior to
maturity dates. 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.
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From time to time, we have accepted certificates of deposit 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. We do not accept these deposits through brokers. At December
31, 1998, these individuals and entities held approximately $166.3 million of
certificates of deposits, or 15.8% of total deposits.
Individual Retirement Accounts ("IRA"). We also offer IRAs. Customers
may invest funds in a passbook account or any certificate of deposit we
currently offer.
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.
DECEMBER 31,
------------
1998 1997 1996
---- ---- ----
PERCENT PERCENT PERCENT
AVERAGE OF RATE AVERAGE OF RATE AVERAGE OF RATE
AMOUNT TOTAL PAID AMOUNT TOTAL PAID AMOUNT TOTAL PAID
------ ----- ---- ------ ----- ---- ------ ----- ----
(DOLLARS IN THOUSANDS)
Noninterest-bearing
demand deposits $ 51,385 6.1% $ 38,837 5.8% $ 31,248 5.5%
Interest bearing deposits:
Demand deposits 45,980 5.5 2.75% 39,965 5.9 2.66% 36,273 6.4 2.64%
Savings deposits 184,907 21.9 4.54 170,362 25.2 4.56 169,866 30.2 4.79
Time deposits 560,010 66.5 5.87 426,450 63.1 5.93 325,960 57.9 5.83
-------- ----- -------- ----- -------- -----
Total interest-bearing
deposits 790,897 93.9 5.38 636,777 94.2 5.36 532,099 94.5 4.97
-------- ----- -------- ----- -------- -----
Total average deposits $842,282 100.0% $675,614 100.0% $563,347 100.0%
======== ===== ======== ===== ======== =====
Deposits increased 42.5% to $1.1 billion at December 31, 1998 from a
year earlier. This increase was consistent with the overall growth of the Bank.
The increase was primarily due to a 50.8% increase in time deposits to $720.8
million. During the same period, the Bank experienced overall growth in other
types of savings accounts.
The following table shows rate and maturity information for
certificates of deposit as of December 31, 1998.
PERCENT OF
2.00-4.99% 5.00-5.99% 6.00-6.99% 7.00-8.99% TOTAL TOTAL
--------- --------- --------- --------- ------- ------------
(DOLLARS IN THOUSANDS)
CERTIFICATE ACCOUNTS
MATURING IN QUARTER ENDING:
March 31, 1999 $ 35,159 $ 99,440 $ 68,790 $ 355 $203,744 28.3%
June 30, 1999 13,833 106,047 33,787 78 153,745 21.3
September 30, 1999 834 53,522 8,521 -- 62,877 8.7
December 31, 1999 4,573 80,689 25,509 1,472 112,243 15.6
March 31, 2000 656 39,042 21,761 5,262 66,721 9.3
June 30, 2000 341 13,370 8,504 29 22,244 3.1
September 30, 2000 5 16,583 2,351 8,436 27,375 3.8
December 31, 2000 -- 26,786 2,167 1,222 30,175 4.2
March 31, 2001 -- 13,914 2,351 134 16,399 2.3
June 30, 2001 -- 6,753 637 -- 7,390 1.0
September 30, 2001 -- 2,768 220 -- 2,988 0.4
December 31, 2001 -- 2,378 28 -- 2,406 0.3
Thereafter -- 8,102 3,966 396 12,464 1.7
------- -------- -------- ------- -------- -----
Total $55,401 $469,394 $178,592 $17,384 $720,771 100.0%
======= ======== ======== ======= ======== =====
Percent of total 7.7% 65.1% 24.8% 2.4%
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The following table shows the remaining maturity for time deposits of
$100,000 or more as of December 31, 1998.
DECEMBER 31, 1998
-------------------
(DOLLARS IN THOUSANDS)
Three months or less $ 34,994
Over three through six months 24,130
Over six through twelve months 32,889
Over twelve months 37,417
--------
Total $129,430
========
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 with an aggregate principal balance of $14.0 million through a public
offering. The interest rate on the notes is 9.625%. We pay interest monthly.
These subordinated notes are unsecured.
Line of Credit. We have a commercial line of credit agreement with a
commercial bank. The maximum borrowing under the line is $12.0 million. We
modified the agreement during 1998 to increase the borrowing limit from $4.0
million. The line matures May 30, 1999, but we can renew the line annually as
agreed by both parties. The interest rate on the line of credit is tied to LIBOR
or prime at our option. As collateral for the loan, our largest shareholder,
Robert Kaye, has agreed to pledge a portion of his shares of Common Stock of
Metropolitan in an amount at least equal in value to 200% of any outstanding
balance. At December 31, 1998, the outstanding balance under this agreement was
$8.0 million.
Federal Home Loan Bank Advances. The Federal Home Loan Bank makes funds
available for housing finance to eligible financial institutions like the Bank.
The Federal Home Loan Bank generally limits advances to 50% of assets from all
borrowing sources. We collateralize advances by any combination of the following
assets and collateralization rates: one- to four-family first mortgage loans,
not past due greater than 90 days, pledged on a blanket basis at 150% of the
advance amount, specifically identified residential mortgage loans at 125% of
the advance amount and various types of investment and mortgage-backed
securities at rates ranging from 101% to 110% of the advance amount. We pledge
Federal Home Loan Bank stock owned by the Bank as additional collateral, but
this stock is not available as primary collateral. The aggregate balance of
assets pledged as collateral for Federal Home Loan Bank advances at December 31,
1998 was $184.0 million. All of these were one- to four-family loans pledged
under the blanket pledge agreement.
Reverse Repurchase Agreements. From time to time, the Bank borrows
funds by using its investment or mortgage-backed securities to issue reverse
repurchase agreements. This type of borrowing provides an alternative source of
funds to Federal Home Loan Bank borrowings and at times, more favorable rates.
The aggregate balance of mortgage-backed securities pledged as collateral for
reverse repurchase agreements at December 31, 1998 was $87.7 million.
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The following table shows the maximum month-end balance, the average
balance, and the ending balance of borrowings during the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
MAXIMUM MONTH-END BALANCE:
FHLB advances $119,000 $73,700 $75,150
1993 subordinated notes 4,874 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 8,000 4,000 --
Reverse repurchase agreements 97,983 74,496 23,500
AVERAGE BALANCE:
FHLB advances $ 65,714 $59,325 $50,546
1993 subordinated notes 1,999 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 2,147 114 --
Reverse repurchase agreements 70,368 38,843 4,480
ENDING BALANCE:
FHLB advances $111,236 $41,000 $59,500
1993 subordinated notes -- 4,874 4,874
1995 subordinated notes 14,000 14,000 14,000
Line of credit 8,000 1,500 --
Reverse repurchase agreements 82,250 74,496 23,500
The following table provides the interest rates of borrowings during
the periods indicated.
WEIGHTED AVERAGE INTEREST RATE:
FHLB advances 5.68% 5.65% 5.43%
1993 subordinated notes 10.47 10.47 10.47
1995 subordinated notes 10.48 10.48 10.48
Line of credit 8.49 8.98 --
Reverse repurchase agreements 5.66 5.73 5.61
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN METROPOLITAN'S JUNIOR SUBORDINATED
DEBENTURES
During 1998, Metropolitan's wholly owned subsidiary, Metropolitan
Capital Trust I, issued 2,775,000 shares ($10 liquidation amount per security)
of 8.60% cumulative trust preferred securities. Metropolitan Capital Trust I
invested the total proceeds from the sale of the 8.60% cumulative trust
preferred securities in the 8.60% guaranteed preferred beneficial interests in
junior subordinated debentures of Metropolitan. These debentures mature on June
30, 2028. We are amortizing total issuance costs of $1.4 million on a
straight-line basis over the life of the junior subordinated debentures. The
8.60% cumulative trust preferred securities are listed on the Nasdaq Stock
Market's National Market under the symbol "METFP." At December 31, 1998, the
outstanding balance of the junior subordinated debentures was $27.8 million. The
average balance outstanding during 1998 was $18.6 million. The weighted average
rate was 8.79%.
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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 competes for loans principally on the basis of the interest rates and
loan fees it charges, the type of loans it originates, and the quality of
services it provides to borrowers. Some of the Bank's competitors, however, have
higher lending limits and substantially greater financial resources than the
Bank.
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. The Bank competes for these deposits
by offering a variety of deposit accounts at competitive rates, convenient
business hours, convenient branch locations, and high quality service.
EMPLOYEES
At December 31, 1998, we had a total of 354 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.
ADDITIONAL INFORMATION INCORPORATED BY REFERENCE
Additional information required by Guide 3 is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Five Year Summary of Selected Data of the Annual Report.
REGULATION AND SUPERVISION
INTRODUCTION
Metropolitan is a savings and loan holding company within the meaning
of the Home Owners' Loan Act