-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HWiXekfp9vrS//kijKiof5wGwkBIaHvPCwBGfYGoJQd3aK9p2xRtPwlm0JuI3OKk zeC7uxlCxTvmaELC+ERccA== 0000818999-97-000003.txt : 19970329 0000818999-97-000003.hdr.sgml : 19970329 ACCESSION NUMBER: 0000818999-97-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROBANCORP CENTRAL INDEX KEY: 0000818999 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 351712167 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23790 FILM NUMBER: 97566931 BUSINESS ADDRESS: STREET 1: 10333 N MERIDIAN ST STREET 2: SUITE 111 CITY: INDIANAPOLIS STATE: IN ZIP: 46290 BUSINESS PHONE: 3175732400 MAIL ADDRESS: STREET 1: 10333 N MERIDIAN STREET STREET 2: SUITE 111 CITY: INDIANAPOLIS STATE: IN ZIP: 46290 10KSB 1 U.S. Securities and Exchange Commission Washington D.C. 20549 Form 10-KSB [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996. Commission file number 0-23790 MetroBanCorp An Indiana Corporation - I.R.S. No. 35-1712167 10333 N. Meridian Street, Suite 111 Indianapolis, Indiana 46290 Issuer's telephone number (317) 573-2400 Securities to be registered under Section 12 (b) of the Act: None. Securities to be registered under Section 12 (g) of the Act: Common Shares, No Par Value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's net interest income for its most recent fiscal year: $4,354,000. State the aggregate market value of the voting stock held by non- affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock as of a specified date within the past 60 days (See definition of affiliate in Rule 12b-2 of the Exchange Act): The aggregate market value of the voting stock of the registrant held by non-affiliates, based upon the price of a share of common stock as quoted on the NASDAQ Small-Cap Market on February 28, 1997, was $7,604,228. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,681,291. DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g. Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed documents should be clearly described for identification purposes (e. g. annual report to security holders for fiscal year ended December 31, 1996). Portions of the Registrant's 1996 Annual Report to Shareholders' are incorporated by reference into parts II and III hereof. Portions of the Registrant's Definitive Proxy statement dated March 24, 1997, are incorporated by reference into Part III hereof. Transitional Small Business Disclosure Format: Yes [ ] No [X]
Form 10-KSB Table of Contents ----------------------------- Part I Page # - ------ ------ Item 1 Description of Business 3 Item 2 Description of Property 10 Ite 3 Legal Proceedings 10 Item 4 Submission of Matters to a Vote of Security Holders 10 Part II - ------- Item 5 Market for Common Equity and Related Stockholder Matters 10 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7 Financial Statements 11 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 11 Part III - -------- Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 11 Item 10 Executive Compensation 11 Item 11 Security Ownership of Certain Beneficial Owners and Management 11 Item 12 Certain Relationships and Related Transactions 12 Item 13 Exhibits and Reports on Form 8-K 12
page 2 Part I. ITEM 1. DESCRIPTION OF BUSINESS MetroBanCorp ("Metro") was incorporated under the laws of the State of Indiana on June 22, 1987 for the purpose of holding all of the shares of common stock of MetroBank ("Bank"), an Indiana chartered commercial bank which commenced operations in April, 1988. The Bank offers a broad range of commercial and personal lending and deposit services to its customers located principally in Hamilton and northern Marion Counties, of Indiana, the Bank's primary marketplace. The Bank conducts its business through five banking offices located in Hamilton County. The Bank's products are principally oriented toward consumers and the small- and medium-sized business and professional communities. Beginning in late 1991, the Bank began offering discount brokerage and mortgage lending services. At December 31, 1996, Metro had consolidated total assets of $113.4 million, total deposits of $99.3 million and shareholders' equity of $11.5 million, representing annual increases from 1995 of 2.25 percent, 4.6 percent, and 3.6 percent, respectively. The Bank's primary market area consists of Hamilton County and northern Marion County, situated in the north central section of the Indianapolis Metropolitan Statistical Area (MSA). Hamilton County is the fastest growing county in the State of Indiana (61.9 percent increase in population between 1980 and 1995). It is also Indiana's most affluent county, with an estimated median household income in 1995 of $53,380. With over 140,000 residents, Hamilton County is known for its high quality residential neighborhoods, premier corporate environment, outstanding public schools and well-developed infrastructure. These characteristics have contributed to dynamic and significant population growth, a low 1.85 percent unemployment rate, and a younger than average resident (33.9 years old) population employed in predominantly professional, managerial, sales and service occupations. Hamilton County is the leading suburban location in greater Indianapolis for headquarters and other office operations of significant companies such as USA Group, Inc. ("USA Group"), Thomson Consumer Electronics, Conseco, Marsh Supermarkets, as well as many large manufacturing and distribution operations. Since liberalization of Indiana's banking laws in 1985, five of six commercial banks headquartered in Hamilton County have been acquired by bank holding companies located either out-of-county or out-of- state. Those acquirors, with only one exception, have subsequently been acquired by larger, out-of-state bank holding companies. The strategy implemented by Metro's founding investors and its management was designed to capitalize on the customer dissatisfaction which often accompanies centralization of out-of-state customer servicing and standardization of financial products. Management believes that Metro's target customer, i.e. small business owners and professionals, are not only greater users of financial services but also are the most sensitive to such centralization and standardization. Further, it is the belief of management that such users of financial services prefer to do business with a bank with responsive decision making on a local level. Since the end of its first year of operations, Metro's consolidated total assets have grown from $14.6 million at December 31, 1988 to $113.4 million at December 31, 1996, representing a 34.9 percent average annual growth. Metro's acquisition of two branches of Colonial Central Savings Bank, FSB, in April, 1991, was a contributing factor in this growth. The Bank's asset growth has put pressure on earnings, with Metro reporting losses or negligible earnings for its first four years of operations. The efficiency ratio of 250.8 percent in 1988 and 117.7 percent in the first full year of operations in 1989 has improved to 76.5 percent in 1996 as Metro has grown into its infrastructure. The Bank conducts a general banking business offering various commercial and consumer banking services. A member of the FDIC, the Bank currently operates one main branch, four traditional staffed branch offices and one automated branch. The Bank opened its first traditional staffed branch office in Noblesville, Indiana in June, 1988, and the Bank became fully operational in its main office, located in Carmel, Indiana, in August, 1988. The Bank established additional traditional staffed branch offices in Noblesville and Carmel, Indiana, as a result of the April, 1991 acquisition of certain assets of Colonial Central Savings Bank, FSB. The Bank's branch offices include two facilities which are owned by MB Realty Corporation, a wholly owned subsidiary of the Bank. The Bank's main office, two traditional staffed offices and the automated branch are leased facilities. The Bank has also deployed numerous automated teller machines (ATM) and automated loan machines (ALM) at sites which are leased from the owners of retail businesses in the market area. page 3 MARKET AREA AND COMPETITION. The Bank's market area, Hamilton and northern Marion Counties, of Indiana, is highly competitive, with numerous other commercial banks having banking or loan production offices in the market place. Many of these banks are affiliated with multi-bank holding companies and have numerous branch offices located throughout the Bank's market area. Two new competing financial banking institutions have entered the Bank's market area in recent months. In addition to competition from commercial banks, competition also exists from savings and loan associations, credit unions, finance companies, insurance companies, mortgage companies, securities brokerage firms, money market and mutual funds, loan production offices and other providers of financial services in the area. These entities generally have greater financial resources than Metro or the Bank. The Bank competes in the marketplace primarily on the basis of responsible decision making, personal service and, to a lesser degree, price. LENDING ACTIVITY. The Bank's two principal lending categories are commercial/business and consumer loans. Commercial or business credits include, among other things, loans for working capital, machinery and equipment purchases, commercial real estate acquisitions and other corporate needs. Consumer loans include, among other things, loans for purchases of automobiles, homes, home improvements and other consumer purposes. These loans may be extended by the Bank on a secured or unsecured basis. The Bank's consumer loans include a substantial portfolio of federally guaranteed student loans ("GSLs"). These GSLs are comprised of approximately 6,700 notes made to nearly 1,700 borrowers who are geographically dispersed throughout the United States. These loans are guaranteed and serviced, pursuant to the Higher Education Act of 1965, as amended ("HEA"), by USA Group Loan Services ("Loan Services") and USA Funds, respectively, both affiliates of USA Group. The Bank's GSLs are substantially guaranteed by USA Funds, and are reinsured in various amounts by the federal government. Under HEA and the regulations thereunder, lenders and their assignees making and servicing GSLs and guarantors guaranteeing GSLs are required to follow specified procedures to ensure that the GSLs are properly made and disbursed and repaid on a timely basis by or on behalf of borrowers. Loan Services has agreed, pursuant to a servicing agreement with the Bank, to perform servicing and collection procedures for the GSLs on behalf of the Bank. However, failure to follow these procedures or failure of the seller to follow procedures relating to the origination of any GSL may result either in the federal Department of Education's refusal to make reinsurance payments to USA Funds or to make interest subsidy and special allowance payments to the Bank with respect to the GSLs or in USA Funds refusal to honor its guarantee agreement with the Bank with respect to the GSLs. Failure of USA Funds to receive federal reinsurance payments could adversely affect USA Funds ability or legal obligation to make guarantee payments to the Bank. Loss of such guarantee payments, interest subsidy payments or special allowance payments could adversely affect the Bank and the performance of its GSLs portfolio. The Bank has the right, under certain circumstances specified in the GSL purchase agreement and the servicing agreement, to cause the seller or Loan Services, as the case may be, to reimburse the Bank for accrued interest amounts not guaranteed by Loan Services or for any lost interest subsidy payments and special allowance payments with respect to a GSL as a result of a breach of the seller representations and warranties or Loan Services covenants, as the case may be, with respect to such GSL. There can be no assurance, however, that the seller will have the financial resources, or that Loan Services will have the ability, to do so. The failure of the seller to repurchase or Loan Services to arrange for the repurchase of a GSL would constitute a breach of the related GSL sale agreement or servicing agreement, as the case may be, enforceable by the Bank. Commercial lending entails a thorough analysis of the borrower, its industry, current and projected economic conditions and various other factors. Depending upon factors such as, but not limited to, collateral, type of loan, loan maturity, and specific loan terms and conditions, various loan-to-value ratios are established upon request for a loan. The Bank typically requires its commercial/business borrowers to have annual financial statements prepared by independent accountants and, to the extent possible, requires such financial statements to be audited or reviewed by accountants. The Bank requires appraisals in connection with loans secured by real estate. Such appraisals are obtained prior to the time funds are advanced. The Bank also typically requires personal guaranties from principals involved with closely- held corporate borrowers. page 4 The Bank requires completed loan applications, including personal financial information, from all of its consumer borrowers on loans the Bank originates. With respect to consumer loans that are secured, the Bank obtains a valuation of the collateral prior to extending such loans. Loan officers of the Bank are required to complete a debt-to- income analysis that should meet management established lending standards prior to loan approval. Depending upon the type and age of collateral offered, various down payment and equity requirements are set based upon established guidelines. Loan officers are also required to follow all other standard underwriting techniques established by the Bank's management, Board of Directors and primary federal regulatory agency. The Bank maintains a loan policy which establishes specific lending authority for each of its loan officers. Loans exceeding a loan officer's individual lending authority must be approved by a loan officer with a higher lending authority. All loans for which the borrower's aggregate debt to the Bank exceeds $50,000 but is less than $350,0000 must be reported to the Bank's Management Loan Committee for approval, or informational purposes. Further, secured loans exceeding $350,0000 and unsecured loans exceeding $50,000 must be approved by the Bank's Board of Directors' Loan Committee. The Bank also has established general guidelines relating to the ratio between the loan amount and collateral value which must be met before a loan is approved. All loans are graded prior to being approved using an internally prepared grading system. Consumer and commercial loans are made primarily in the Bank's designated market area. The Bank anticipates loan demand to increase at a rapid rate in the coming year, but loan balances outstanding to grow more slowly due to management's conservative lending standards. Loans are made for portfolio purposes only and not for resale. The Bank's Residential Mortgage Loan Department completed its second full year of operations in 1996. The Department offers both conventional and non-conventional mortgages ,as well as construction loans and lot financing. The majority of the loans, and their servicing rights, originated by the Department will be sold in secondary markets. During the fourth quarter of 1995, MetroBank established an Automated Branch in the Meridian Park Shoppes, located at 12440 N. Meridian Street in Carmel, Indiana. This facility is similar to the Bank's other full service banking facilities; however, due to the technology being utilized at this facility, there are no employees on site. Also during the fourth quarter of 1995, MetroBank became the first midwestern bank to deploy an ALM. This machine allows the user to apply for and if approved, receive a complete loan with proceeds in about ten minutes. The Bank has deployed three of these machines in the following locations: the Bank's Automated Branch, its Ninth Street Noblesville Branch, and a locally owned jewelry store located on the south side of Indianapolis. BANK HOLDING COMPANY REGULATION. Metro is registered as a bank holding company and is subject to the regulations of the Board of Governors of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding companies are required to file periodic reports with and are subject to periodic examination by the Federal Reserve. The Federal Reserve has issued regulations under the BHCA requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in FDICIA) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary or the bank holding company. Metro is prohibited by the BHCA from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank, or merging or consolidating with another bank holding company, without the prior approval of the Federal Reserve. Metro is also prohibited by the BHCA from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. page 5 Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve is the federal regulatory and examining authority for bank holding companies and has adopted capital adequacy guidelines for bank holding companies. Bank holding companies with consolidated assets in excess of $150 million or with consolidated assets of less than $150 million which are engaged in non-bank activity involving significant leverage or which have a significant amount outstanding debt held by the general public are required to comply with the Federal Reserve's risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total required capital must be "Tier 1 capital," consisting principally of common stockholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder ("Tier 2 capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a Tier 1 (leverage) capital ratio under which the bank holding company must maintain a minimum ratio of Tier 1 capital to average total consolidated assets of 3% in the case of bank holding companies which have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum. Certain regulatory capital ratios for Metro as of December 31, 1996 are shown below: Tier 1 Capital to Risk-Weighted Assets..................... 16.52% Total Risk Based Capital to Risk-Weighted Assets........... 17.77% Tier 1 Leverage Ratio...................................... 10.79% BANK REGULATION. The Bank is organized under the laws of the State of Indiana and is subject to the supervision of the Indiana Department of Financial Institutions ("DFI"), whose examiners conduct periodic examinations of state banks. The Bank is not a member of the Federal Reserve System, so its principal federal regulator is the Federal Deposit Insurance Corporation ("FDIC"), which also conducts periodic examinations of the Bank. A majority of the Bank's deposits are insured by the Bank Insurance Fund ("BIF") administered by the FDIC and are subject to the FDIC's rules and regulations respecting the insurance of deposits. See "Deposit Insurance" following. The deposits acquired from Colonial Central Savings Bank, FSB in 1991 are insured by the Savings Association Insurance Fund ("SAIF"), which is administered by the federal Office of Thrift Supervision ("OTS"). Both federal and state law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosure, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires banks, among other things, to make deposited funds available to customers within specified time periods. Insured state-chartered banks are prohibited under FDICIA from engaging as principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund, and (ii) the bank is, and continues to be, in compliance with all applicable capital standards. BANK CAPITAL REQUIREMENTS. The Bank is also required to meet capital adequacy ratios. The FDIC has adopted risk-based capital ratio guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Like the capital guidelines established by the Federal Reserve for Metro, these guidelines divide an institution's capital into two tiers. Depository institutions are required to maintain a total risk- based capital ratio of 8%, of which 4% must be Tier 1 capital. The FDIC may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. page 6 In addition, the FDIC has established guidelines prescribing a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the guidelines) of 3% for banks that meet certain specified criteria, including that they are in the highest regulatory rating category and are not experiencing or anticipating significant growth. All other institutions are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. Certain regulatory capital ratios under the FDIC's risk-based capital guidelines for the Bank at December 31, 1996 are shown below: Tier 1 Capital to Risk-Weighted Assets..................... 11.35% Total Risk-Based Capital to Risk-Weighted Assets........... 12.61% Tier 1 Leverage Ratio...................................... 7.58% The FDIC included, in its evaluations of a bank's capital adequacy, an assessment of the bank's exposure to declines in the economic value of the bank's capital due to changes in interest rates. On June 26, 1996, the FDIC, along with the Office of the Comptroller of the Currency and the Federal Reserve, issued a joint policy statement to provide guidance on sound practices for managing interest rate risk. The statement sets forth the factors the federal regulatory examiners will use to determine the adequacy of a bank's capital for interest rate risk. These qualitative factors include the adequacy and effectiveness of the bank's internal interest rate risk management process and the level of interest rate exposure. Other qualitative factors that will be considered include the size of the bank, the nature and complexity of its activities, the adequacy of its capital and earnings in relation to the bank's overall risk profile, and its earning exposure to interest rate movements. The interagency supervisory policy statement describes the responsibilities of a bank's board of directors in implementing a risk management process and the requirements of the bank's senior management in ensuring the effective management process must contain. In August, 1996, the Federal Reserve and the FDIC issued final regulations further revising their risk-based capital standards to include a supervisory framework for measuring market risk. The effect of the new regulations is that any bank holding company or bank which has significant exposure to market risk must measure such risk using its own internal model, subject to the requirements contained in the regulations, and must maintain adequate capital to support that exposure. The regulations became effective on January 1, 1997, but compliance with the regulations is not mandatory until January 1, 1998. The new regulations apply to any bank holding company or bank whose trading activity equals 10% or more of its total assets, or whose trading activity equals $1 billion or more. Examiners may require a bank holding company or bank that does not meet the applicability criteria to comply with the capital requirements if necessary for safety and soundness purposes. The new regulations contain supplemental rules to determine qualifying and excess capital, calculate risk-weighted assets, calculate market risk equivalent assets and calculate risk-based capital ratios adjusted for market risk. It is too early to assess the impact or applicability, if any, of these new rules on Metro and the Bank. DIVIDEND LIMITATIONS. Under Federal Reserve supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization's net income available to shareholders over the past year has been sufficient to fully fund the dividends, and (ii) the prospective rate or earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. Metro's Board of Directors has adopted a policy consistent with these guidelines. The FDIC also has authority under the Financial Institutions Supervisory Act to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the bank. page 7 Under Indiana law, the Bank may declare and pay dividends so long as its capital is unimpaired and it has unimpaired retained surplus equal to 25% of capital. Dividends may not exceed undivided profits on hand less losses, bad debts and expenses. The most stringent capital requirement affecting the Bank, however, are those established by the prompt corrective action provisions of FDICIA, which are discussed below. At December 31, 1996, the Bank's capital levels exceeded the criteria necessary to be designated as a "well capitalized" institution, which requires a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater. LENDING LIMITS. Under Indiana law, the total loans and extensions of credit by an Indiana-chartered bank to a borrower outstanding at one time and not fully secured may not exceed 15% of such bank's capital and unimpaired surplus. An additional amount of up to 10% of the bank's capital and unimpaired surplus may be loaned to the same borrower if such loan is fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of such additional loans outstanding. BRANCHES AND AFFILIATES. Establishment of branches for the Bank is subject to approval of the DFI and FDIC and geographic limits established by state law. Indiana's branch banking law permits a bank having its principal place of business in the State of Indiana to establish branch offices in any county in Indiana without geographic restrictions. A bank may also merge with any national or state chartered bank located anywhere in the State of Indiana without geographic restrictions. Also see "Interstate Banking" following. The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a parent bank holding company and a subsidiary bank and a bank and its executive officers and affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, allows for interstate banking and interstate branching without regard to whether such activity is permissible under state law. As of September 29, 1995, bank holding companies may acquire banks anywhere in the United States subject to certain state restrictions. Beginning June 1, 1997, an insured bank may merge with an insured bank in another state without regard to whether such merger is prohibited by state law. Additionally, an out-of-state bank may acquire the branches on an insured bank in another state without acquiring the entire bank; provided, however, that the law of the state in which the branch is located permits such an acquisition. States may permit interstate branching earlier than June 1, 1997, where both states involved in a bank or branch acquisition expressly permit it by statute. Further, bank holding companies may merge existing bank subsidiaries located in different states into one bank. An insured bank subsidiary may now act as an agent for an affiliated bank or savings association in offering limited banking services (receive deposits, renew time deposits, close loans, service loans and receive payments on loan obligations) both within the same state and across state lines. FDICIA. FDICIA accomplished a number of sweeping changes in the regulation of depository institutions. FDICIA requires federal bank regulatory authorities to take "prompt corrective action" with respect to banks which do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The FDIC has adopted regulations to implement the prompt corrective action provisions of FDICIA. Among other things, the regulations define the relevant capital measures for the five capital categories. An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally a leverage ratio 4% or greater. An institution is deemed to be "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%, and is "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. page 8 "Undercapitalized" banks are subject to growth limitations and are required to submit a capital restoration plan. A bank's compliance with such plan is required to be guaranteed by any company that controls the undercapitalized institution. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. "Significantly undercapitalized" banks are subject to one or more of a number of requirements and restrictions, including an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and case receipt of deposits from correspondent banks, and restrictions on compensation of executive officers. "Critically undercapitalized" institutions may not, beginning 60 days after becoming "critically undercapitalized", make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any transaction outside the ordinary course of business. In addition, "critically undercapitalized" institutions are subject to appointment of a receiver or conservator. FDICIA further directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, management compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value of publicly traded shares and such other standards as the agency deems appropriate. DEPOSIT INSURANCE. The Bank's deposits are insured up to $100,000 per insured account, partly by the BIF and partly by the SAIF. As an institution whose deposits are insured by BIF and SAIF, the Bank is required to pay deposit insurance premiums to BIF and to SAIF. The FDIC has adopted rules that implement a transitional risk-based assessment system whereby a base insurance premium will be adjusted according to the capital category and subcategory of an institution to one of three capital categories consisting of (1) well capitalized (2) adequately capitalized, or (3) under capitalized, and one of three subcategories consisting of (a) health, (b) supervisory concern, or (c) substantial supervisory concern. An institution's assessment rate will depend upon the capital category and supervisory category to which it is assigned. Assessment rates for banks range from 0.04 percent for an institution in the highest category (i.e. well capitalized) to 0.31 percent for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern), and for saving associations the rates range from 0.23 percent for well capitalized institutions to 0.31 percent for institutions in the lowest category. The supervisory subgroups to which an institution is assigned by the FDIC is confidential and may not be disclosed. Deposit insurance assessments may increase depending upon the category and subcategory, if any, to which the bank is assigned by the FDIC. Any increase in insurance assessments could have an adverse effect on the earnings of the Bank. ADDITIONAL MATTERS. In addition to the matters discussed above, Metro and the Bank are subject to additional regulation of their business activities, including a variety of consumer protection regulations affecting their lending, deposit and collection activities and regulations affecting secondary mortgage market activities. The earnings of financial institutions, including Metro and the Bank, are also affected by general economic conditions and prevailing interest rates, both domestic and foreign, and by the monetary and fiscal policies of the U.S. Government and its various agencies, particularly the Federal Reserve. Additional legislation and administrative actions affecting the banking industry may be considered by the United States Congress, the Indiana General Assembly and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislation or administrative action will be enacted or the extent to which the banking industry in general or Metro and the Bank in particular would be affected thereby. EMPLOYEES. At December 31, 1996 the Bank had a total of 43 full- time equivalent employees. This included 41 full-time and 5 part-time employees. page 9 ITEM 2. DESCRIPTION OF PROPERTY The principal executive office of Metro and the Bank is located at Three Meridian Plaza, 10333 North Meridian Street, Suite 111, Indianapolis, Indiana, and is leased from an unaffiliated third party. The Bank operates three traditional staffed branch offices and one automated branch, of which two facilities are owned by MB Realty, a wholly owned subsidiary of MetroBank. Traditional staffed branches owned by MB Realty are located at 225 North Ninth Street, Noblesville, Indiana, and 20 South Rangeline Road, Carmel, Indiana. The Bank operates a traditional staffed branch, leased from an unaffiliated third party, located at 255 Sheridan Road, Noblesville, Indiana. The Bank's automated branch which is leased from an affiliated third party, is located at 12440 North Meridian Street, Carmel, Indiana. The Bank has multiple ATM locations throughout its market area that are leased from unaffiliated retail business owners. In 1994, MB Realty purchased a parcel of land in Noblesville, Indiana for possible development of a future branch office. This property was sold to an unaffiliated party in 1996 and is currently being developed by the purchaser, into a multi-use building in which the Bank is constructing a branch office. This branch is scheduled to be fully operational at the end of first quarter of 1997. This new branch is located in the Bank's current market area and will provide additional exposure and greater access within Hamilton and northern Marion Counties. In 1994, MB Realty also purchased a parcel of land in a highly visible Carmel business district for the purpose of relocating its Rangeline Road branch. After extensive evaluation of impending capital expenditures to construct a branch facility at this location, this property is pending sale with an estimated closing date in early 1997. Management will continue to focus on other locations for possible branching opportunities in the Carmel area. ITEM 3. LEGAL PROCEEDINGS There are no pending legal proceedings of a material nature to which Metro or the Bank is a party or in which any of their property is subject, other than routine litigation incidental to the normal business of Metro and the Bank. There is no material legal proceeding in which any director, executive officer, principal shareholder or affiliate of Metro, or any associate of any such director, executive officer, principal shareholder or affiliate, is a party and has an interest adverse to Metro. None of the ordinary routine litigation in which Metro or the Bank is involved is expected to have a material adverse impact upon the financial condition or results of operations of Metro. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1996 to a vote of Metro's shareholders. Part II. ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS In conjunction with a public offering of common stock completed in the second quarter of 1994, Metro obtained approval for quotation on the National Association of Securities Dealers Automated Quotation System Small-Cap Market ("NASDAQ") under the symbol "METB". Prior to the public offering there was no active public trading market for shares of Metro common stock ("Common Stock"). The Common Stock was previously traded on a limited basis in the over-the-counter market through brokers and in privately negotiated transactions. Most trades involved transactions directly with a market maker, inter-dealer transactions, or privately negotiated transactions. As a result, Metro was not always aware of the prices at which trades occurred. At December 31, 1996, there were approximately 344 shareholders of record of Common Stock. The following table sets forth the high and low bid prices for shares of Common Stock for the quarters during the years indicated, as reported by NASDAQ subsequent to the second quarter for 1994. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. page 10
Bid Price Per Share ----------------------------------- 1995 1996 -------------- --------------- Quarter High Low High Low --------------- ----- ----- ----- ----- First Quarter $6.00 $5.00 $7.25 $6.00 Second Quarter 6.00 5.25 6.75 5.75 Third Quarter 6.50 5.50 6.75 5.75 Fourth Quarter 7.25 5.75 6.50 5.25 --------------- -------------- ---------------
Metro declared and paid two cash dividends on its shares of Common Stock during 1996. The amount of each dividend was approximately $168,000 or $0.10 per share. Future dividend payments by Metro will be largely dependent upon dividends paid by the Bank and subject to regulatory limitations. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 4 through 13, inclusive, of Metro's Annual Report to Shareholders for the year ended December 31, 1996 is incorporated by reference in regard to this item. ITEM 7. FINANCIAL STATEMENTS Pages 14 through 24, inclusive, of Metro's Annual Report to Shareholders for the year ended December 31, 1996 is incorporated by reference in regard to this item. ITEM 8. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Part III. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Pages 5 through 8, inclusive, of Metro's Definitive Proxy Statement for the Annual Meeting of Shareholders, dated March 24, 1997, is incorporated by reference in regard to this item. ITEM 10. EXECUTIVE COMPENSATION Pages 8 through 12, inclusive, of Metro's Definitive Proxy Statement for the Annual Meeting of Shareholders, dated March 24, 1997, is incorporated by reference in regard to this item. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pages 5 through 14, inclusive, of Metro's Definitive Proxy Statement for the Annual Meeting of Shareholders, dated March 24, 1997, is incorporated by reference in regard to this item. page 11 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Page 14, of Metro's Definitive Proxy Statement for the Annual Meeting of Shareholders, dated March 24, 1997, is incorporated by reference in regard to this item. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following Exhibits are being filed as part of this Registration Statement: 3(i)* Articles of Incorporation 3(ii)* By-Laws 10.01* Employment Agreement dated December 31, 1992 between Registrant and Ike G.Batalis 10.02* Employment Agreement dated July 1, 1991 between Registrant and Charles V. Turean 10.03* Employment Agreement dated July 1, 1991 between Registrant and Andrew E. Illyes 10.04* Letter of Agreement dated December 31, 1992 between the Registrant and Heptagon, Inc. 10.05* Lease dated September 11, 1987 between Registrant and Western Plaza Company with respect to property at 255 Sheridan Road, Noblesville, Indiana 10.06* Lease dated October 11, 1993 between Registrant and Three Meridian Plaza Company with respect to property at 10333 North Meridian Street, Suite 111, Indianapolis, Indiana 10.07* Form of indemnification Agreement for Directors and Officers of Registrant 10.08* Registrant's 1987 Directors' Stock Option Plan 10.09* Registrant's Incorporators' and Founders' Stock Option Plan 10.10* Registrant's 1987 Stock Option and Stock Appreciation Rights Plan 10.11* Registrant's 1991 Directors' Stock Option Plan 10.12* Registrant's 1991 Stock Option and Stock Appreciation Rights plan 10.13** Registrant's Supplemental Executive Retirement Plan 10.15* Student Loan Sale Agreement, dated May 19, 1989 10.16* Student Loan Sale Agreement, dated July 1, 1992 10.17* Consent to Assignment to Secondary Market Services, Inc. of Student loan purchase and sale agreements effective April 1, 1993 10.18* Student Loan Guarantee Agreement, dated August 19, 1998 page 12 10.19 Student Loan Servicing Agreement, dated February 1, 1997 (Confidential) 10.20** Registrant's Employees' Thrift and Retirement Plan 10.20(a)**** Amendment No. 1, dated October 26, 1995 to the Registrant's Employees' Thrift and Retirement Plan 10.21*** Registrant's 1994 Stock Option and Stock Appreciation Rights Plan 10.22*** Registrant's 1994 Directors' Stock Option Plan 10.23**** Lease dated November 1, 1995 between Registrant and Eaton & Lauth, Meridian Park Shoppes, for property at 12440 North Meridian Street, Carmel, Indiana 13 The Annual Report to Shareholders of the Company for the year ended December 31, 1996. Except for the pages and information thereof expressly incorporated by reference in this Form 10-KSB, the Annual Report to Shareholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-KSB. 21* Subsidiaries of the Registrant 24 Powers of Attorney 27 Financial Data Schedule * Incorporated by reference to Registrant's Registration Statement on Form SB-2, File No. 33-75360, filed February 16, 1994. ** Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2, File No. 33-75360, filed March 16, 1994. *** Incorporated by reference to Registrant's Form 10-QSB for the fiscal quarter ended June 30, 1994, filed in August, 1994. **** Incorporated by reference to Registrant's Form 10-KSB for the fiscal year ended December 31, 1995. (b) No Reports on Form 8-K were filed during the last quarter of 1996. page 13 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf of the undersigned, thereunto duly authorized. MetroBanCorp Registrant Date: March 24, 1997 By: /s/Ike G. Batalis ------------------------------- Ike G. Batalis, President Date: March 24, 1997 By: /s/Charles V. Turean ------------------------------- Charles B. Turean Executive Vice President Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Date: March 24, 1997 By: CHRIS G. BATALIS* ------------------------------- Chris G. Batalis, Director Date: March 24, 1997 By: TERRY L. EATON* ------------------------------- Terry L. Eaton, Director Date: March 24, 1997 By: EVANS M. HARRELL* ------------------------------- Evans M. Harrell, Director Date: March 24, 1997 By: EDWARD G. MCMAHON* ------------------------------- Edward G. McMahon, Director Date: March 24, 1997 By: ROBERT L. LAUTH, JR.* ------------------------------- Robert L Lauth, Jr. Director Date: March 24, 1997 By: LARRY E. REED* ------------------------------- Larry E. Reed, Director Date: March 24, 1997 By: RUSSELL D. RICHARDSON* ------------------------------- Russell D. Richardson, Director Date: March 24, 1997 By: EDWARD R SCHMIDT* ------------------------------- Edward R. Schmidt, Director Date: March 24, 1997 By: DONALD F. WALTER* ------------------------------- Donald F. Walter, Director * By: /s/Ike G. Batalis -------------------------------- Ike G. Batalis, Attorney-in-Fact page 14 Index to Exhibits ----------------- Sequential Exhibit Page Number Exhibit Number - ----------- ----------------------------------------------- ------ 3(i)* Articles of Incorporation of the Registrant N/A 3(ii)* By-Laws of the Registrant N/A 10.01* Employment Agreement dated December 31, N/A 1992 between Registrant and Ike G. Batalis 10.02* Employment Agreement dated July 1, 1991 N/A between Registrant and Charles V. Turean 10.03* Employment Agreement dated July 1, 1991 N/A between Registrant and Andrew E. Illyes 10.04* Letter of Agreement dated December 31, 1992 N/A between the Registrant and Heptagon, Inc. 10.05* Lease dated September 11, 1987 between N/A Registrant and Western Plaza Company with respect to property at 255 Sheridan Road, Noblesville, Indiana 10.06* Lease dated October 11, 1993 between N/A Registrant and Three Meridian Plaza Company with respect to property at 10333 North Meridian Street, Suite 111, Indianapolis, Indiana 10.07* Form of indemnification Agreement for Directors N/A and Officers of Registrant 10.08* Registrant's 1987 Directors' Stock Option Plan N/A 10.09* Registrant's Incorporators' and Founders' Stock N/A Option Plan 10.10* Registrant's 1987 Stock Option and Stock N/A Appreciation Rights Plan 10.11* Registrant's 1991 Directors' Stock Option Plan N/A 10.12* Registrant's 1991 Stock Option and Stock N/A Appreciation Rights Plan 10.13** Registrant's Supplemental Executive N/A Retirement Plan page 15 10.15* Student Loan Sale Agreement, dated May 19, 1989 N/A 10.16* Student Loan Sale Agreement, dated July 1, 1992 N/A 10.17* Consent to Assignment to Secondary Market N/A Services, Inc. of Student loan purchase and sale agreements effective April 1, 1993 10.18* Student Loan Guarantee Agreement, dated N/A August 19, 1998 10.19 Student Loan Servicing Agreement, dated N/A February 1, 1997 (Confidential) 10.20** Registrant's Employees' Thrift and Retirement N/A Plan 10.20(a)**** Amendment No. 1, dated October 26, 1995 N/A to the Registrant's Employees'Thrift and Retirement Plan 10.21*** Registrant's 1994 Stock Option and Stock N/A Appreciation Rights Plan 10.22*** Registrant's 1994 Directors' Stock Option Plan N/A 10.23**** Lease dated November 1, 1995 between N/A Registrant and Eaton & Lauth, Meridian Park Shoppes, for property at 12440 North Meridian Street, Carmel, Indiana 13 The Annual Report to Shareholders of the 17 Company for the year ended December 31, 1996. Except for the pages and information thereof expressly incorporated by reference in this Form 10-KSB, the Annual Report to Shareholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-KSB. 21* Subsidiaries of the Registrant N/A 24 Powers of Attorney 57 27 Financial Data Schedule 58 page 16 EX-13 2 EXHIBIT 13. THE ANNUAL REPORT TO SHAREHOLDERS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 1996. Selected Financial Data MetroBanCorp and Subsidiary (in thousands, except share data)
OPERATIONS 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------- Net Interest Income $4,354 $4,150 $3,556 $3,005 $2,668 Non-Interest Income 667 756 520 432 676 Provision for Loan Losses 67 367 165 247 192 Non-interest Expense 3,842 3,489 3,077 2,967 2,748 Net Income before Cumulative Effect of Change in Accounting for Income Taxes 624 622 481 135 404 Cumulative Effect of Changein Accounting for Income Taxes - - - 439 - Net Income 624 622 481 574 404 CONSOLIDATED BALANCE SHEET DATA - --------------------------------------------------------------------------- Total Assets $113,383 $110,879 $90,665 $88,930 $62,308 Total Deposits 99,284 94,864 77,198 73,434 54,387 Loans, Net 64,519 59,542 55,898 48,921 44,107 Total Investment Securities 31,216 29,075 26,882 17,418 8,736 Shareholders' Equity 11,501 11,145 10,351 5,118 4,581 Weighted Average Shares Outstanding 1,681,291 1,681,291 1,409,874 735,837 728,167 GENERAL YEAR END - --------------------------------------------------------------------------- Number of Employees 43 42 43 40 36 Number of Shareholders of Record 344 364 383 269 273 Number of Shares Outstanding 1,681,291 1,681,291 1,681,291 735,837 735,837 PER SHARE DATA - --------------------------------------------------------------------------- Net Income before Cumulative Effect of Change in Accounting for Income Taxes per common share $0.37 $0.37 $0.34 $0.18 $0.55 Cumulative Effect of Change in Accounting for Income Taxes per common share - - - 0.60 - Net Income Per Share 0.37 0.37 0.34 0.78 0.55 Cash Dividends Per Share 0.20 0.10 - - - SELECTED PERFORMANCE RATIOS - -------------------------------------------------------------------------- Return on Average Assets 0.60% 0.64% 0.55% 0.77% 0.65% Return on Average Equity 5.51% 5.71% 5.36% 10.80% 9.20% Average Shareholders' Equity to Average Assets 10.82% 11.23% 10.24% 7.13% 7.11%
page 17 The following information is intended to provide an analysis of the consolidated financial condition and performance of Metro as of December 31, 1996 and 1995 and for each of the three years ended December 31, 1996, 1995 and 1994. This information should be read in conjunction with the Consolidated Financial Statements and footnotes included elsewhere in this Annual Report. RESULTS OF OPERATIONS Net Income Net income in 1996 was $624,000, a slight increase from the $622,000 reported in 1995. Total loans amounted to $65.4 million and $60.5 million at December 31, 1996 and 1995, respectively. The investment portfolio amounted to $31.2 million and $29.1 million at December 31, 1996 and 1995, respectively. The growth in these two asset groups increased interest income by $540,000 or 7.5 percent for the year. The Bank provided provisions of $67,000 to its loan loss reserve for 1996. This expense represents a $300,000 decrease from 1995 loan loss provisions or an 81.7 percent decrease. The provisions made in 1996 were at a level considered necessary by management to absorb estimated losses in the loan portfolio and is based upon an assessment of the adequacy of the Bank's loan loss reserve account. The increase in net income of $141,000 or 29.3 percent in 1995 compared to 1994 is primarily attributable to the increase in loan and investment securities during 1995. During 1995, Metro's total loans outstanding increased by $4.0 million or 7.0 percent. During that same period the investment portfolio increased $2.2 million or 8.2 percent. These increases allowed interest income to increase by $1.4 million or 23.4 percent during 1995. Net Interest Income Net interest income is the principal source of the Bank's earnings and represents the difference between interest and fees on earning assets earned the Bank and the interest cost of deposits and other borrowed funds paid by the Bank. The net interest margin is the difference expressed as a percentage of average earning assets. Factors contributing to the determination of net interest margin include the volume and mix of earning assets and interest rates. The Bank can control the effects of some of these factors through its management of credit extension and interest rate sensitivity, both of which are discussed later. External factors such as the overall condition of the economy, strength of credit demand and Federal Reserve monetary policy can have significant effects on the changes in net interest income from one period to another. In 1996, net interest income was $4.4 million, an increase of 4.9 percent over 1995. In 1996, the net interest margin remained stable at 4.5 percent of average earning assets compared to 4.6 percent in 1995. This decrease is primarily a result of the bank's investment portfolio continuing to reprice downward as several securities in the investment portfolio ended their initial coupon period and have begun to earn interest based on current interest rate indices. In 1995, net interest income was $4.2 million, an increase of 16.7 percent over 1994. This increase resulted from the growth of average balances in interest earning assets and interest bearing liabilities, and from the Bank's continued efforts to restructure its earning asset composition from lower yielding federal funds sold and guaranteed student loans to higher yielding commercial and installment loans. As a result of these effects, the net interest margin increased to 4.6 percent from 4.4 percent in 1994. page 18 Net Interest Income (dollars in thousands)
Percentage Change ----------------- For year ended 1996 1995 December 31, to to INTEREST INCOME 1996 1995 1994 1995 1994 ---- ---- ---- ---- ---- Interest and Fees on Loans $6,130 $5,707 $4,457 7.4% 28.0% Interest on Invest- ment Securities 1,600 1,483 1,369 7.9% 8.3% Interest on Federal Funds Sold 143 217 163 (34.1%) 33.1% ------------------------ ---------------- Total Interest Income 7,873 7,407 5,989 6.3% 23.7% ------------------------ ---------------- INTEREST EXPENSE Interest on Deposits 3,496 3,229 2,419 8.3% 33.5% Interest on Borrowings 23 28 14 (17.9%) 100% ------------------------ ---------------- Total Interest Expense 3,519 3,257 2,433 8.0% 33.9% ------------------------ ---------------- Net Interest Income $4,354 $4,150 $3,556 4.9% 16.7%
Rate/Volume Analysis of Change in Net Income (dollars in thousands)
1996 vs. 1995 1995 vs. 1994 --------------- --------------- Attributable to Attributable to --------------------- -------------------- Dollar Dollar Change Volume Rate Change Volume Rate ------ ------ ---- ------ ------ ---- Interest and Fee Income on: Loans $423 $407 $16 $1,250 $521 $729 Investment Securities 117 180 (63) 114 (10) 124 Federal Funds Sold (74) (51) (23) 54 90 (36) --------------------- --------------------- Total Interest Income 466 536 (70) 1,418 601 817 Interest Expense on: Savings and Time Deposits 267 242 25 810 529 281 Term Borrowing (5) (21) 16 14 (8) 22 --------------------- -------------------- Total Interest Expense 262 221 41 824 521 303 --------------------- -------------------- Net Interest Income(1) $204 $315 ($111) $594 $80 $514 ===================== ==================== (1) Interest on non-accruing loans is not included.
page 19 Distribution of Assets, Liabilities and Shareholders'Equity and Interest Rates and Differential Variance Analysis (dollars in thousands)
for year ended December 31, -------------------------------------------------------------- 1996 | 1995 | 1994 --------------------|---------------------|------------------- Average| In- |Yield|Average| In- |Yield |Average| In- |Yield Balance|terest|/Rate|Balance|terest|/Rate |Balance|terest|/Rate -------|------|-----|-------|------|------|-------|------|---- ASSETS | | | | | | | | Earning | | | | | | | | Assets: | | | | | | | | | | | | | | | | Investment | | | | | | | | Securities $30,318|$1,600|5.28%|$26,918|$1,483| 5.51%|$24,665|$1,369|5.55% | | | | | | | | Federal | | | | | | | | Funds Sold 2,669| 143|5.36%| 3,619| 217| 6.00%| 4,215| 163|3.87% | | | | | | | | Loans, net(2) 63,319| 6,130|9.68%| 59,115| 5,707| 9.65%| 51,563| 4,457|8.64% -------|------|-----|-------|------|------|-------|------|---- Total Earning | | | | | | | | Assets $96,306|$7,873|8.17%|$89,652|$7,407| 8.26%|$80,443|$5,989|7.45% |------|-----| |------|------| |------|---- Non-Earning | | | | | | | | Assets | | | | | | | | | | | | | | | | Cash & Due | | | | | | | | from Banks 4,453| | | 4,783| | | 5,124| | | | | | | | | | Premises & | | | | | | | | Equipment, | | | | | | | | net 1,996| | | 1,736| | | 1,183| | | | | | | | | | Other Assets 1,906| | | 896| | | 889| | --------| | |-------| | |-------| | Total Assets $104,661| | |$97,067| | |$87,639| | ========| | |=======| | |=======| | | | | | | | | | Liabilities | | | | | | | | and | | | | | | | | Shareholders' | | | | | | | | Equity | | | | | | | | --------|------|-----|-------|------|------|-------|------|----- Interest Bearing | | | | | | | | Liabilities: | | | | | | | | Savings & | | | | | | | | Time Deposits $75,597|$3,496|4.62%|$70,328|$3,229| 4.59%|$64,208|$2,419|3.77% |------|-----| |------|------| |------|----- | | | | | | | | Term | | | | | | | | Borrowing 271| 23|8.49%| 519| 28| 5.39%| 309| 14|4.53% | | | | | | | | Total Interest | | | | | | | | Bearing | | | | | | | | Liabilities $75,868|$3,519|4.64%|$70,847|$3,257| 4.60%|$64,517|$2,433|3.77% | | | | | | | | | | | | | | | | Non-Interest | | | | | | | | Bearing | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | Demand | | | | | | | | Deposits 16,443| | | 14,897| | | 13,385| | | | | | | | | | Other | | | | | | | | Liabilities 1,027| | | 424| | | 763| | | | | | | | | | Shareholders' | | | | | | | | Equity 11,323| | | 10,899| | | 8,974| | --------| | |-------| | |-------| | Total | | | | | | | | Liabilities | | | | | | | | and | | | | | | | | Shareholders' | | | | | | | | Equity $104,661| | |$97,067| | |$87,639| | ========|------|-----|=======|------|------|=======|------|----- Net Interest | | | | | | | | Margin |$4,354|4.52%| |$4,150| 4.63%| |$3,556|4.42% |======|=====| |======|======| |======|===== (2) Includes principal balances of non-accuring loans. Interest on non-accruing loans is not included.
page 20 Provision for Loan Losses The Bank provides for possible loan losses through regular provisions to the allowance for loan losses. The provisions are made at a level which is considered necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the estimated losses along with an assessment of the adequacy of the loan loss reserve is completed quarterly by management. The evaluation includes, but is not limited to, analysis of risk classification, past due status, historical write-off experience, type of loan, collateral and other significant factors as management deems necessary. The provision for loan losses amounted to $67,000, $367,000 and $165,000 in 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, the Bank had an allowance for loan losses of $866,000 and $910,000, respectively. The Bank's allowance for loan losses to ending total loans, as a percentage, amounted to 1.32 percent and 1.50 percent at December 31, 1996 and 1995, respectively. This decrease reflects continued low levels of under-performing assets and a general improvement in the condition of the Bank's loan portfolio. Based upon management's assessment of the guaranteed nature of its student loan portfolio, including the strength of the guarantor, a minimal amount of loan loss is allocated for the Bank's student loan portfolio. See "Loan Quality" discussed herein after. The allowance for loan losses as a percentage of the remaining loan portfolio (excluding guaranteed student loans) amounted to 1.55 percent at December 31, 1996, as compared to 1.92 percent at December 31, 1995. During 1995, the Bank initiated two new lending programs; first, the Bank instituted a new indirect lending program with several retailers in its marketplace. Second, the Bank deployed three Automated Loan Machines (ALMs) in its market area, which allow the user to apply for and, if approved, receive an unsecured installment loan up to a maximum loan amount of $5,000. The Bank's ALMs were added in late 1995 and have had little effect on the loan portfolio. Additionally, the Bank added several commercial loan officers to increase the Bank's lending volume. In connection with these new lending programs, management continues to maintain comparable underwriting standards. Management's analysis of the loan loss reserve considered these factors. Non-Interest Income In 1996, Metro's non-interest income to average total assets ratio decreased to 0.64 percent from 0.78 percent in 1995 and 0.59 percent in 1994. Excluding net securities losses and gain on the sale of real estate, non-interest income was $644,000, $754,000 and $520,000 in 1996, 1995 and 1994, respectively. Service charges on deposit accounts decreased 2.3 percent while other service charges, commissions and fees decreased $103,000 or 23.1 percent in 1996. This decrease is principally due to a reduced volume of mortgage loan applications processed by the Bank's Mortgage Loan Division. page 21 Non-Interest Income (dollars in thousands)
Percent For year ended Change From December 31, 1996 1995 ------------------ to to 1996 1995 1994 1995 1994 ------------------ ------------------ Service Charges on Deposit Accounts $302 $309 $330 (2.27%) (6.36%) Other Service Charges, Commissions and Fees 342 445 190 (23.15%) 134.21% ------------------ ------------------ 644 754 520 (14.59%) 45.00% Securities-Gain/(Loss), Net (12) 2 - (700.00%) - Gain on Sale of Real Estate 35 - - - - ------------------ ------------------ Total Non-Interest Income $667 $756 $520 (11.77%) 45.38% ================== ==================
Non-Interest Expense Non-interest expense increased $353,000 or 10.1 percent in 1996 over the 1995 level. As a percentage of total average assets, this category was 3.7 percent in 1996 compared to 3.6 percent in 1995 and 3.5 percent in 1994. Salary and employee benefits, the largest non-interest expense, increased $98,000 or 6.6 percent in 1996. This increase reflects both an increase in the Bank's employee base, higher employee compensation and benefit costs, and new staff additions during the year. Also, the Bank's other expenses increased $255,000 or 12.7 percent for the year ended December 31, 1996. This increase is primarily attributable to the Bank's efforts to automate the delivery of its products and services through the use of its Automated Branch, ALMs, and numerous off-site ATMs. During the fourth quarter of 1995, the Bank opened its first Automated Branch in Carmel, Indiana. This branch can perform most functions of a traditional branch through the use of an ATM, ALM and customer kiosk . In addition to the ALM located at the automated branch, the Bank also operates two other ALMs located in a jewelry store and at the Bank's Noblesville Ninth Street branch. Also during 1995 and 1996, Metro developed an extensive off- premise ATM network. Metro entered into agreements with several area convenience store franchises to deploy ATMs in their facilities. As of December 31, 1995, three new off-premise ATMs had been deployed. During 1996, Metro deployed an additional ten ATMs. Currently, the Bank disburses cash at these sites and intends to include coupons and other paper based products in the future. During 1996, Metro's legal and professional services expense increased to $137,000 from $132,000 in 1995. Also, during 1996 the Bank's student loan servicing fees decreased from $133,000 in 1995 to $108,000 in 1996. This decrease is primarily attributable to the Bank's efforts to decrease its student loan servicing fees through student loan sales and swapping of certain student loans with the guarantor. In 1996, the Bank's advertising and public relations expense decreased by $42,000 or 15.4 percent, from the previous year. This decrease is primarily due to a reduced number of television and radio commercials for the Bank during 1996. page 22 In 1996, the Bank's FDIC insurance assessment increased by 60.7 percent or $71,000. This increase is due principally to the recognition of a one time recapitalization charge on the Savings Association Insurance Fund (SAIF) of $134,000 incurred during the third quarter. The Bank currently has $26.3 million or 26.5 percent of its deposits insured by the Savings Association Insurance Fund (SAIF). Non-interest expense increased $412,000 or 13.39 percent in 1995 over the 1994 level. Salaries and employee benefits, the largest non-interest expense, increased $183,000 or 14.18 percent from 1994. This increase reflected an increase in the Bank's employee base and higher employee compensation and benefit costs. Equipment expense increased $103,000 or 52.55 percent from 1995. This increase was due to increased operating expense of the Bank's off-site ATMs and ALMs implemented in late 1995 and during 1996. During 1995, advertising and public relations expense increased $46,000 or 20.35 percent from 1994. This increase was due primarily to increased television and radio commercials during 1995. During 1995, the FDIC insurance assessment decreased $46,000 or 28.2 percent from 1994. This decrease was due primarily to a reduced premium rate on Bank deposits insured with the FDIC during the fourth quarter of 1995. Non-Interest Expense (dollars in thousands)
For year ended December 31, Percent Change From ---------------------- 1996 to 1995 to 1996 1995 1994 1995 1994 ---------------------- ------------------ Salaries and Employee Benefits. $1,572 $1,474 $1,291 6.65% 14.18% Net Occupancy Expense.......... 265 195 197 35.90% (1.02%) Equipment Expense.............. 299 196 187 52.55% 4.81% Advertising and Public Relations........... 230 272 226 (15.44%) 20.35% Legal and Professional Services 137 132 79 3.79% 67.09% Data Processing................ 238 179 162 32.96% 10.49% FDIC Insurance Assessment...... 188 117 163 60.68% (28.22%) Student Loan Servicing Fees.... 108 133 164 (18.80%) (18.90%) Amortization of Core Deposit Intangible......... 141 141 141 0.00% 0.00% Other.......................... 664 650 467 2.15% 39.19% ----------------------- ------------------ Total $3,842 $3,489 $3,077 10.12% 13.39% ======================= ==================
Provision for Income Taxes Metro provides for income taxes under the liability method of accounting for income taxes. Effective January 1, 1993, Metro adopted the provisions of SFAS 109, "Accounting for Income Taxes." Metro's provision for income taxes of $488,000 represents an effective tax rate of 43.9 percent in 1996. This compared to an effective tax rate of 40.8 percent in 1995 and 42.3 percent in 1994. Details relative to Metro's income tax provisions are discussed in Note 10 to the Consolidated Financial Statements included in this Annual Report. page 23 CAPITAL RESOURCES AND CAPITAL ADEQUACY Metro is subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Metro's financial statements. Under federal capital adequacy guidelines and the regulatory framework for prompt corrective action, Metro must meet specific capital guidelines that involve quantitative measures of Metro's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Metro's capital amounts and classification are also subject to qualitative judgments by regulators involving capital components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Metro to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk- weighted assets, and Tier 1 capital to average assets. Management believes, as of December 31, 1996, that Metro meets all capital adequacy requirements to which it is subject. The following table sets forth the actual and minimum capital amounts and ratios of Metro and the Bank as of December 31, 1996 (dollars in thousands):
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total Capital (to Risk Weighted Assets) Consolidated $12,150 17.77% $5,570 *8.00% $6,838 *10.00% Bank 8,514 12.61% 5,404 *8.00% 6,755 *10.00% Tier 1 Capital (to Risk Weighted Assets) Consolidated 11,295 16.52% 2,735 *4.00% 4,103 * 6.00% Bank 7,670 11.35% 2,702 *4.00% 4,053 * 6.00% Tier 1 Capital (to Average Assets) Consolidated 11,295 10.79% 4,186 *4.00% 5,233 * 5.00% Bank 7,670 7.58% 4,046 *4.00% 5,058 * 5.00% --------------- ---------------- ------------------ * greater than or equal to.
As of December 31, 1996, the most recent notification from the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Bank must maintain minimum total risk-weighted, Tier 1 and leverage ratios as set forth in the table. There are no conditions or events since this notification that management believes have changed its or the Bank's capital category. page 24 USE OF FUNDS Investment Securities Investment securities is the second major category of earning assets for the Bank. This portfolio, together with Federal Funds Sold, is used to manage the Bank's interest rate sensitivity and liquidity as other components of the balance sheet change. Management's objective is to maximize, within quality standards, its net interest margin while providing a stable source of liquidity through the scheduled stream of maturities and interest income. Metro holds certain of its investment securities as "available for sale." Unrealized gains and losses, net of taxes, are excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized. Metro reclassified, at December 31, 1995, $3.8 million of " held to maturity" securities as "available for sale." The reclassification had no impact on Metro's earnings, but allows additional flexibility to adapt as interest rates change. Metro has the intent and ability to hold securities classified as held to maturity until their respective maturities. Accordingly, such securities are stated at cost and are adjusted for amortization of premiums and accretion of discounts. Realized gains or losses from the sale of securities are reflected in income on a specific identification basis. Interest income and the amortization of the premium and discount arising at the time of acquisition are included in income. Investment securities comprise 32.6 percent of total earning assets at December 31, 1996. The "held to maturity" portfolio is managed to provide a stable source of liquidity through scheduled maturities and interest income payments. The "available for sale" portfolio is managed to maximize investment yields and to provide liquidity to react timely to the needs of the Bank. During 1996, proceeds from investment securities consisted of four sales totaling $4.0 million and scheduled maturing investments. Total investment securities at December 31, 1996 increased by $2.1 million or 7.4 percent over the prior year. This increase is attributable to funds received from several sources, including the liquidation of guaranteed student loans and the overall increase in the Bank's core deposit base. Weighted average yields of the investment securities portfolio were 5.54 percent in 1996 and 5.20 percent in 1995. Investment securities consist primarily of U.S. government agency and corporation bonds, derivative securities with both fixed and indexed interest rates, and mortgage backed securities with both fixed and floating interest rates. The derivative securities are subject to interest rate risk due to their dual index feature and are comprised of deleveraged bonds and structured agency and corporation notes. At December 31, 1996, the derivative securities amounted to $9.5 million classified as held to maturity and $2.9 million included in available for sale securities. Although these securities' current market values are below cost, Metro does not believe these securities to be other than temporarily impaired due to the creditworthiness of the issuers (primarily the Federal Home Loan Bank), the shorter term maturities of the notes (approximately three years), current interest rate yields of the securities and Metro's intent and ability to hold such securities to maturity. The mortgage backed securities are subject to both prepayment and interest rate risk and have been classified primarily as available for sale. Federal funds sold amounted to $6.3 million at December 31, 1996 compared to $6.7 million at December 31, 1995, a decrease of $400,000 from year-end 1995. This decrease is attributable to the Bank's daily fluctuations in cash and liquidity requirements. page 25 Investment Securities Portfolio (dollars in thousands)
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values --------- ---------- ---------- --------- DECEMBER 31, 1996 Investment Securities Held to Maturity Mortgage Backed Securities $94 $2 $- $96 U.S. Government Agencies and Corporations 9,462 - (549) 8,913 Time Deposits 500 - - 500 --------- --------- ---------- -------- $10,056 $2 ($549) $9,509 ========= ========= ========== ======== Investment Securities Available For Sale Mortgage-Backed Securities $15,913 $51 ($129) $15,835 U.S. Government Agencies and Corporations 5,401 - (76) 5,325 --------- --------- ---------- ------- $21,314 $51 ($205) $21,160 ========= ========= ========== ======= DECEMBER 31, 1995 Investment Securities Held to Maturity Mortgage-Backed Securities $328 $5 $- $333 U.S. Government Agencies and Corporations 9,438 - (753) 8,685 Time Deposits 500 - - 500 -------- --------- --------- -------- $10,266 $5 ($753) $9,518 ======== ========= ========= ======== Investment Securities Available For Sale Mortgage-Backed Securities $9,466 $30 ($148) $9,348 U.S. Treasury Security and Obligations of U.S. Government Agencies and Corporations 9,599 17 (155) 9,461 --------- -------- --------- --------- $19,065 $47 ($303) $18,809 ========= ======== ========= =========
page 26 Maturity Distribution of Investment Securities (dollars in thousands)
As of December 31, 1996 ------------------------------------ Held to Available Maturity for Sale -------------- --------------- Fair Fair Market Market Cost Value Cost Value ---- ------ ---- ------ Mortgage-Backed Securities - ---------------------------- Due within one Year $49 $50 $- $- 1 - 5 Years 45 46 2,169 2,175 6 - 10 Years - - 2,401 2,348 Due After 10 Years - - 11,343 11,312 ---- ------ ------- ------- Total $94 $96 $15,913 $15,835 ==== ====== ======= ======= U.S. Government Agencies and Corporations - ---------------------------- Due within One Year $ - $ - $400 $400 1 - 5 Years 7,962 7,623 5,001 4,925 6 - 10 Years 1,500 1,290 - - Due After 10 Years - - - - ------ ------ ------ ------ Total $9,462 $8,913 $5,401 $5,325 ====== ====== ====== ====== Time Deposits - ---------------------------- Due within One Year $500 $500 $ - $ - ====== ====== ====== ======
As of December 31, 1995 -------------------------------------- Held to Available Maturity for Sale ---------------- ---------------- Fair Fair Market Market Cost Value Cost Value ---- ------ ---- ------ Mortgage-Backed Securities - -------------------------- Due within One Year $198 $199 $ - $ - 1 - 5 Years - - - - 6 - 10 Years 130 134 1,759 1,734 Due After 10 Years $ - $ - 7,707 7,614 ---- ---- ------ ------ Total $328 $333 $9,466 $9,348 ==== ==== ====== ====== U.S. Treasury Security and Obligations of U.S. Government and Corporations - ------------------------------ Due within One Year $ - $ - $1,999 $1,998 1 - 5 Years 7,938 7,394 6,611 6,458 6 - 10 Years 1,500 1,291 - - Due After 10 Years - - 989 1,005 ------ ------ ------ ------ Total $9,438 $8,685 $9,599 $9,461 ====== ====== ====== ====== Time Deposit - ----------------------------- Due within One Year $500 $500 $ - $ - ====== ====== ====== =====
page 27 Investment Securities Weighted Average Yield
Due 1 to Less 5 to Less Due within than 5 than 10 After One Years Years 10 Year Years Overall ------ --------- --------- ------- ------- 1996 6.24% 4.87% 5.40% 6.62% 5.54% 1995 5.75% 4.30% 5.08% 6.61% 5.20%
Loans Total loans increased by 8.2 percent to $65.4 million at December 31, 1996 from the prior year. The increase is due to the growth of both the commercial portfolio and the installment portfolio, which grew in 1996 by 12.7 percent and 20.3 percent, respectively. The Bank continued to make a concerted effort during the year to increase its commercial and installment loan portfolio through the use of an extensive loan officer calling program aimed at the Bank's target market. During 1996, the Bank increased the installment loan portfolio by expanding its indirect lending relationship through a local window manufacturer. Throughout 1996, the Bank sold approximately $1.2 million of its guaranteed student loan portfolio to Secondary Market Services, Inc., an affiliate of USA Group. The primary reason for this transaction was to provide the Bank with additional cash to fund its internally generated loan growth. The Bank's growth in commercial and other loans is centered around short- and intermediate-term maturities. The bank has maintained a competitive approach toward high quality loans in its marketplace. The Bank's loan portfolio is well diversified with no significant concentration of loans in any single industry. While Guaranteed Student Loans (GSLs) account for 14.7 percent of the Bank's loan portfolio at December 31, 1996, these loans are comprised of approximately 6,700 notes made to nearly 1,700 borrowers who are geographically dispersed throughout the United States. These loans are serviced and guaranteed pursuant to the Higher Education Act of 1965, as amended ("HEA"), by USA Group Loan Services and USA Funds, respectively, affiliates of USA Group. Loan Portfolio at Year-End (dollars in thousands)
Percent change from December 31, 1995 1994 to to 1996 1995 1994 1996 1995 ------------------------- -------------- Commercial $35,064 $31,122 $25,950 12.7% 19.9% Real Estate - Construction 3,970 2,251 2,208 76.4% 1.9% Mortgage 787 838 1,022 (6.1%) (18.0%) Installment 15,933 13,242 9,748 20.3% 35.8% Student Loans 9,631 12,999 17,556 (25.9%) (26.0%) ------------------------- --------------- Total Loans 65,385 60,452 56,484 8.2% 7.0% =============== Less: Allowance for Loan Losses (866) (910) (586) ------------------------- Net Loans $64,519 $59,542 $55,898 =========================
The Bank's loan portfolio is comprised primarily of commercial and installment loans. At December 31, 1996, the Bank did not have any significant outstanding loan concentration in similar industries that could cause an adverse impact during an economic downturn in any one industry segment. page 28 Composition of Loan Portfolio by Type
December 31, ----------------------- 1996 1995 1994 ----------------------- Commercial 53.6% 51.5% 45.9% Real Estate - Construction 6.1% 3.7% 3.9% Mortgage 1.2% 1.4% 1.8% Installment 24.4% 21.9% 17.3% Student Loans 14.7% 21.5% 31.1% -----------------------
Loan Quality The primary responsibility and accountability for the day-to-day lending activities of the Bank rest with each loan officer. Bank management has established specific lending authority for each loan officer based upon the loan officer's experience and performance. The Bank also has a management loan committee and a director loan committee which meet weekly and semi-monthly, respectively. These committees provide for continuous communication through the collective knowledge, judgment and experience of its members. Additionally, they offer valuable input to lending personnel, act as a loan approval body and monitor the overall quality of the Bank's loan portfolio. The Bank maintains a comprehensive loan review program. The purpose of the program is to evaluate credit quality and loan documentation. Bank management uses this program to evaluate the loan portfolio against its credit quality standards and its assessment of the adequacy of the allowance for loan losses. The Bank's Board of Directors meets monthly to review and approve the activity of the loan committees. Additionally, the Bank's Board reviews all problem loans and delinquency reports at each Board meeting. The Bank utilizes a risk system whereby each commercial, financial, real estate-construction, mortgage and installment loan is assigned a risk rating, with the individual ratings monitored on an ongoing basis. Each week, reports of problem loans are prepared and reviewed by the Bank's loan committees. In addition to under-performing loans, these reports include loans where a customer's cash flow or net worth may be insufficient with regard to loan repayment, loans which have been criticized in a regulatory examination and any other loans where either the ultimate collectibility of the loan is in question or the loan has characteristics requiring special monitoring. Assets considered to be under-performing are monitored closely by Bank management. Under-performing assets are defined as: 1) non- accrual loans where the ultimate collectibility of interest is uncertain, but the principal is considered collectible; 2) loans past due ninety days or more as to principal or interest; 3) loans which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower; and 4) other real estate owned. Metro adopted the Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement of Financial Accounting Standard No. 118, on January 1, 1995. As of December 31, 1996, Metro had investments in loans which were impaired in accordance with SFAS No's. 114 and 118 of $157,000. Of this amount, $148,000 had no related specific allowance. The remaining $9,000 of impaired loans were fully reserved. The Bank's policy for recognizing income on impaired loans is to accrue interest until a loan is classified as impaired. For loans which receive the classification of impaired during the current period, interest accrued to date is charged against current earnings. No interest is accrued after any loan is classified impaired. All payments received for loans which are classified as impaired are utilized to reduce the principal balance outstanding. Interest income of $28,000 would have been recorded in 1996 on impaired loans if such loans had been accruing interest throughout the year in accordance with their original terms. In 1996, interest income in the amount of $10,000 was recorded on impaired loans prior to being classified as impaired. The average balance of impaired loans was $161,000 at December 31, 1996. page 29 Loans are charged off when they are deemed uncollectible. Total charged-off loans, net of recoveries, were $111,000 in 1996, compared to $43,000 in 1995 and $29,000 in 1994. The following tables present activity in the allowance for loan losses account and allocation of the allowance among loan categories: Allowance for Loan Losses (dollars in thousands)
For year ended December 31, --------------------------- 1996 1995 ---- ---- Allowance for Loan Losses, January 1, $910 $586 ---- ---- Loans Charged Off: Commercial 48 28 Installment 71 26 ---- ---- Total Charge-Off 119 54 ---- ---- Recoveries on Charged-Off Loans: Commercial 7 1 Installment 1 10 ---- ---- Total Recoveries 8 11 ---- ---- Net Charge-Off 111 43 ---- ---- Provision for Loan Losses 67 367 ---- ---- Allowance for Loan Losses, December 31 $866 $910 ---- ---- Average Loans Outstanding $64,224 $59,115 ======= ======= Net Charge-Off to Average Loans 0.17% 0.07% ======= =======
Allocation of Allowance for Loan Losses (dollars in thousands)
December 31, --------------- 1996 1995 ---- ---- Commercial $532 $590 Real Estate - Construction 60 38 Mortgage 5 17 Installment 263 259 Student Loans 6 6 ---- ---- Total $866 $910 ==== ====
page 30 The student loan portfolio is fully guaranteed by a third party for all loans which were first disbursed prior to October 1, 1993. For those loans disbursed on or after October 1, 1993 (or consolidated on or after that date), the guarantee is 98 percent of the principal and interest due, provided that the lender did not incur violations sufficient to cause the assessment of an interest penalty or the loss of guarantee on the loan. All guaranteed student loans are re-insured in various amounts by the federal government. As of December 31, 1996, approximately $704,000 or 7.31 percent of the Bank's student loan portfolio was disbursed after October 1, 1993. Under-Performing Assets (dollars in thousands)
December 31, --------------- 1996 1995 --------------- Non-Accruing Loans $157 $37 Renegotiated Loans - - Ninety (90) Days Past Due 445 792 -------------- Total Under-Performing Assets $602 $829 ============== Under-Performing Assets as a Percentage of Total Loans 0.92% 1.37% Past Due Loans (90 Days or More) Commercial $- $- Real Estate - Construction - - Mortgage - - Installment - - Student Loans 445 792 -------------- Total $445 $792 ==============
In addition to the loans classified as under-performing, managment is closely monitoring loans approximately $31,000 as of December 31, 1996 for the borrowers' ability to continue to comply with contractual terms. For these loans, the existing conditions do not warrant either a partial charge-off or classification as non-accrual. Management believes it has taken a conservative approach in its evaluation of under-performing credits and the loan portfolio in general, both in acknowledging the general condition of the portfolio and in establishing the allowance for loan losses. page 31 SOURCES OF FUNDS The Bank's primary funding source is its base of core customer deposits, which includes non-interest bearing demand deposits, regular savings and money market accounts, and small denomination (under $100,000) certificates of deposit. Other shorter term sources of funds are large denomimation certificates of deposit and securites sold under agreements to repurchase. The following table represents information with respect to average balances of these funding sources. Funding Sources-Average Balances (dollars in thousands)
Percent Change from For year ended ----------------- December 31, 1995 1994 --------------------------- to to 1996 1995 1994 1996 1995 --------------------------- ----------------- Core Deposits: Non-Interest Bearing Demand $16,443 $13,767 $13,664 19.44% .75% Savings Accounts 5,764 5,686 5,727 1.37% (.72%) Money Market and NOW Accounts 28,760 25,164 22,123 14.29% 13.75% Other Time Deposits 29,652 30,226 28,868 (1.90%) 4.70% --------------------------- ----------------- Total Core Deposits $80,619 $74,843 $70,382 7.72% 6.34% --------------------------- ----------------- Time Deposits of $100,000 and Over $11,464 $9,278 $7,491 23.56% 23.86% Federal Funds Purchased and Securities Sold under Agreements to Repurchase 194 533 114 (63.60%) 367.54% --------------------------- ----------------- Total Funding Sources $92,277 $84,654 $77,987 9.00% 8.55% =========================== =================
Funding Sources - Yields
Percent Change from For year ended ---------------- December 31, 1995 1994 --------------------------- to to 1996 1995 1994 1996 1995 --------------------------- ---------------- Core Deposits: Non-Interest Bearing Demand - - - - - Savings Accounts 2.77% 3.21% 2.83% (13.71%) 13.43% Money Markets & NOW Accounts 3.40% 3.30% 2.53% 3.03% 30.43% Other Time Deposits 5.76% 5.65% 4.69% 1.95% 20.47% --------------------------- ----------------- Total Core Deposits 4.64% 4.61% 3.78% .65% 21.96% --------------------------- ----------------- Federal Funds Purchased and Securities Sold under Agreements to Repurchase 4.88% 5.40% 3.17% (9.63%) 70.35% --------------------------- ----------------- Total Yield 4.64% 4.62% 3.78% .43% 22.22% =========================== =================
The Bank's average core deposits have shown steady growth over the past several years, increasing by $2.8 million or 3.6 percent in 1996 compared 10.6 percent in 1995. During 1996, the Bank experienced increases in all categories of average deposits. The daily average balance of savings, money market and NOW accounts and certificates of deposit increased 4.6 percent during 1996. page 32 No one category of deposits dominated the growth experienced by the Bank. This growth was generated primarily by the Bank's loan calling program which produced a number of new commercial deposits. Also, the Bank continues to service a number of bank accounts which relate to the real estate title services industry. Due to the nature of the title services industry, these deposits are short-term and usually deposited in the Bank during the last week of each month and withdrawn during the first week of the following month. This typically increases the Bank's deposits at the end of each month. Certificates of Deposit of $100,000 and Over (dollars in thousands)
Year 91 - 181 - Beyond End 1 - 90 180 366 1 Year Balance Days Days Days ------- ------- ------ ------ ------ 1996 $10,800 $1,497 $1,649 $5,435 $2,219 1995 $8,697 $2,250 $2,115 $1,410 $2,922
Currently, the Bank has available separate agreements with two regional banks which provide for the purchase of Federal funds to meet short-term liquidity needs. The total amount of Federal funds available to the Bank under these agreements is $2.4 million. The average balance of Federal funds purchased during 1996 was $133,000. LIQUIDITY AND RATE SENSITIVITY The primary function of liquidity and interest rate sensitivity management is to provide for and assure an ongoing flow of funds that is adequate to meet all current and future financial needs of the Bank. Such financial needs include funding credit commitments, satisfying deposit withdrawal requests, purchasing property and equipment and paying operating expenses. The funding sources of liquidity are principally the maturing assets and short-term and long-term borrowings. The purposes of liquidity management are to match sources of funds with anticipated customer borrowings and withdrawals and other obligations and to ensure a dependable funding base. Rate sensitivity analysis places each of the Bank's balance sheet components in its appropriate maturity category according to its repricing frequency, thus enabling management to measure the exposure to changes in interest rates. The Bank's Asset/Liability and Investment Committee, which sets forth the guidelines under which the Bank manages its deposits and its investment and loan portfolios, is responsible for monitoring the Bank's investment portfolio. The objective of this committee is to provide for the maintenance of an adequate net interest margin and adequate level of liquidity to keep the Bank sound and profitable during all stages of an interest rate cycle. Metro utilizes the services of an external investment consultant and widely recognized research firm. These outside consultants provide Metro with decision support information necessary to monitor, analyze and track the performance of the Bank's investment portfolio. At December 31, 1996, $32.0 million or 49.1 percent of the loan portfolio are fixed rate loans, excluding non-accruing loans. Variable rate loans, excluding non-accruing loans, amounted to $33.2 million or 50.9 percent of the loan portfolio at December 31, 1996. Fixed and variable rate loans with a scheduled maturity date greater than one year amounted to $27.0 million and $8.1 million, respectively, at December 31, 1996. In the investment securities category, $17.1 million or 54.8 percent of the portfolio matures within one year. The Bank's average loan-to-deposit ratio, another indication of liquidity, was 69.8 percent in 1996 compared to 70.3 percent for 1995. Management also monitors the Bank's balance between interest rate sensitive assets and liabilities to ensure that changes in interest rates will not adversely affect earnings. Management of these sensitive items is important to protect the net interest margin from adverse fluctuations in market interest rates and assure earnings stability. page 33 Interest rate sensitivity occurs when assets and liabilities are subject to rate and yield changes within a designated time horizon. An interest rate sensitivity gap ("GAP") is determined by the differential of interest-earning assets and interest- bearing liabilities. For an institution with a negative GAP for a given period, the amount of its interest-bearing liabilities maturing or otherwise repricing within such period exceeds the amount of the interest-earning assets repricing within the same period. Accordingly, in a rising interest rate environment, institutions with a negative GAP will generally experience greater increases in costs of their interest-bearing liabilities than in yields on their interest-earning assets. Conversely, the yields on interest-earning assets of institutions with a negative GAP will generally decrease less than the cost of their interest- bearing liabilities during declining interest rate environments. Changes in interest rates will generally have the opposite effect on institutions with a positive GAP. In the first nine years of the Bank's operations, management has closely monitored its liquidity and interest rate sensitivity. Management's objective in interest rate sensitivity management is to reduce the Bank's vulnerability to future interest rate fluctuations while providing for growth of the net interest margin. Management's goal is to maintain a GAP ratio of rate- sensitive assets to rate-sensitive liabilities within a range of 0.70 to 1.30 for the one year time frame. The cumulative GAP ratio of the Bank on December 31, 1996 was 74.4 percent for expected maturities of ninety days or less and 69.4 percent for maturities of one year or less. These ratios fall near or within the Bank's desired liquidity range for one year. Management recognized that the Bank is within a liability sensitive position at December 31, 1996 and will consider strategies to maintain its desired position. Management will continue to maximize its net interest margin while managing interest rate risk within prudent boundaries. Based upon the current balance sheet structure of the Bank, any future increase in interest rates could have a negative impact on the Bank's net interest margin and earnings. Given current economic conditions, management expects any increase in general interest rates to have a minimal effect on the Bank's earnings. Interest Rate Sensitivity Analysis (dollars in thousands)
1 - 90 91 - 1 - 5 Beyond Days 365 Years 5 Total Days Years ------- ------- -------- ------- ------- Earning Assets: Investment Securities $ - $949 $15,107 $15,160 $31,216 Federal Funds Sold 6,300 - - - 6,300 Loans (excluding non- accruing) 26,272 11,957 15,929 11,070 65,228 ------- ------- ------- ------- -------- Total Earning Assets $32,572 $12,906 $31,036 $26,230 $102,744 ======= ======= ======= ======= ======== Interest-Bearing Liabilities: Savings and Time Deposits $42,268 $21,694 $11,993 $186 $76,141 Borrowed Funds 1,500 - - - 1,500 ------- ------- ------- ------- ------- Total Interest-Bearing Liabilities $43,768 $21,694 $11,993 $186 $77,641 ======= ======= ======= ======= ======= Interest Rate Sensitivity Gap Per Period ($11,196) ($8,788) $19,043 $26,044 $25,103 Cumulative Gap ($11,196) ($19,984) ($941) $25,103 $25,103 Cumulative Ratio of Interest Rate Sensitivity 74.4% 69.4% 98.9% 132.3% 132.3%
page 34 EFFECTS OF INFLATION The assets and liabilities of a banking entity are unlike companies with investments in inventory, plant and equipment. Being primarily monetary in nature and, in this respect, different from most non-financial services companies, the performance of a bank is affected more by changes in interest rates than by inflation. Over the past five years, the rate of inflation has been relatively low. As a result, the impact upon the Bank's balance sheet and levels of income and expense has been minimal. page 35 Report of Independent Public Accountants To the Board of Directors and the Shareholders of MetroBanCorp: We have audited the accompanying consolidated statement of condition of MetroBanCorp (an Indiana Corporation) and subsidiary as of December 31, 1996 and 1995, and the related statements of operations, shareholders' equity and cash flows, for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MetroBanCorp and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP Indianapolis, Indiana, January 29, 1997. page 36 Consolidated Statement of Condition MetroBancorp & Subsidiary (in thousands)
December 31, ------------------------ 1996 1995 ------ ------ ASSETS Cash and Due from Banks........................... $7,475 $11,432 Federal Funds Sold................................ 6,300 6,650 ------ ------ Total Cash and Cash Equivalents.............. 13,775 18,082 ------ ------ Investment Securities Held to Maturity - at Amortized Cost (Market Value: 1996 - $9,509 and 1995 - $9,518)................ 10,056 10,266 Investment Securities Available for Sale - at Market Value...................... 21,160 18,809 ------ ------ Total Investment Securities.................. 31,216 29,075 ------ ------ Loans 65,385 60,452 Allowance for Loan Losses......................... (866) (910) ------ ------ Loans, net........................................ 64,519 59,542 ------ ------ Premises and Equipment, net....................... 1,821 1,910 Accrued Interest Receivable....................... 871 953 Core Deposit Intangible, net of Accumulated Amortization of $804 in 1996 and $664 in 1995.... 322 463 Deferred Tax Asset................................ 360 365 Other Assets...................................... 499 489 ------- ------- Total Assets................................ $113,383 $110,879 ======= ======= LIABILITIES Deposits: Non-Interest Bearing Demand......................$23,141 $17,983 Interest Bearing: Savings and NOW Accounts..................... 35,507 37,966 Time Deposits of $100,000 and over........... 10,800 8,697 Other Time Deposits.......................... 29,836 30,218 ------ ------ Total Deposits.................................... 99,284 94,864 Securities Sold Under Agreements to Repurchase.... 1,500 3,900 Accrued Interest Payable.......................... 419 466 Other Liabilities................................. 679 504 ------- ------ Total Liabilities........................... 101,882 99,734 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred Stock: 1,000,000 authorized; none outstanding.............................. - - Common Stock: 3,000,000 authorized; 1,681,291 Issued and Outstanding in 1996 and 1995.............................. 11,210 11,210 Accumulated Earnings.............................. 407 119 Net Unrealized Loss on Investment Securities Available for Sale................. (116) (184) ------ ------ Total Shareholders' Equity....................... 11,501 11,145 -------- -------- Total Liabilities and Shareholders' Equity $113,383 $110,879 ======== ======== The accompanying notes to the consolidated financial statements are an integral part of these statements.
page 37 Consolidated Statement of Operations MetroBanCorp & Subsidiary (in thousands, except share data)
Years ended December 31 ------------------------- 1996 1995 1994 ---- ---- ---- INTEREST INCOME: Interest and Fees on Loans.................... $6,130 $5,707 $4,457 Interest on Investment Securities............. 1,600 1,483 1,369 Interest on Federal Funds Sold................ 143 217 163 ----- ----- ----- Total Interest Income........................... 7,873 7,407 5,989 ----- ----- ----- INTEREST EXPENSE: Interest on Deposits.......................... 3,496 3,229 2,419 Interest on Term Borrowings.................. 23 28 14 ----- ----- ----- Total Interest Expense.......................... 3,519 3,257 2,433 ----- ----- ----- Net Interest Income............................. 4,354 4,150 3,556 Provision for Loan Losses..................... 67 367 165 ----- ----- ----- Net Interest Income after Provision for Loan Losses............................. 4,287 3,783 3,391 ----- ----- ----- NON-INTEREST INCOME: Service Charges on Deposit Accounts............ 302 309 330 Net Securities Gain/(Loss)..................... (12) 2 - Other Service Charges, Commissions and Fees.... 377 445 190 ----- ----- ----- Total Non-Interest Income....................... 667 756 520 ----- ----- ----- NON-INTEREST EXPENSE: Salaries and Employee Benefits.................. 1,572 1,474 1,291 Net Occupancy Expense........................... 265 195 197 Equipment Expense............................... 299 196 187 Advertising and Public Relations................ 230 272 226 Legal and Professional Services................. 137 132 79 Data Processing................................. 238 179 162 FDIC Insurance Assessment....................... 188 117 163 Student Loan Servicing Fees..................... 108 133 164 Amortization of Core Deposit Intangible......... 141 141 141 Other........................................... 664 650 467 ----- ----- ----- Total Non-Interest Expense...................... 3,842 3,489 3,077 Income Before Income Taxes...................... 1,112 1,050 834 Applicable Income Taxes...................... 488 428 353 ----- ----- ----- NET INCOME...................................... $624 $622 $481 ===== ===== ===== NET INCOME PER COMMON SHARE...................... $0.37 $0.37 $0.34 ===== ===== ===== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,681,291 1,681,291 1,409,874 --------- --------- --------- The accompanying notes to the consolidated financial statements are an integral part of these statements.
page 38 Consolidated Statement of Cash Flows MetroBanCorp & Subsidiary (in thousands)
Years ended December 31, ------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994 - ---------------------------------------------------------------------------- Net Income......................................... $624 $622 $481 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses...................... 67 367 165 Deferred Income Tax Provision/(Benefit)........ (62) (71) 184 Depreciation and Amortization.................. 394 293 316 Gain on Sale of Real Estate.................... (35) - - (Gain)/Loss on Sale of Securities.............. 12 (2) - (Increase)/Decrease in Accrued Interest Receivable..................................... 82 (156) (64) (Increase)/Decrease in Other Assets............ (12) (180) 15 Increase/(Decrease) in Accrued Interest Payable (47) 113 65 Increase in Other Liabilities.................. 175 141 39 - --------------------------------------------------------------------------- Total Adjustments.................................. 574 505 720 - --------------------------------------------------------------------------- Net Cash Flows Provided by Operating Activities.... 1,198 1,127 1,201 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Maturities of Investment Securities Held to Maturity................ 233 66 117 Proceeds from Maturities of Investment Securities Available for Sale.............. 2,348 194 1,727 Proceeds from Sales of Investment Securities Available for Sale.............. 3,954 1,588 - Purchases of Investment Securities Available for Sale......................... (8,563) (4,380) (12,029) Purchase of Student Loans..................... - (2,020) (3,092) Proceeds from Sales of Student Loans.......... 1,178 4,005 884 Proceeds from the Repayment of Student Loans.............................. 2,190 1,002 - Net Loans made to Customers................... (8,412) (6,264) (4,934) Purchases of Premises and Equipment........... (526) (531) (472) Proceeds from the Sale of Real Estate......... 409 - - - ---------------------------------------------------------------------------- Net Cash Flows Used in Investing Activities (7,189) (6,340) (17,799) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the Issuance of Common Stock.... - - 5,239 Net Increase in Demand Deposits, NOW and Savings Accounts....................... 2,699 14,651 3,554 Net Increase in Time Deposits................. 1,721 3,015 210 Net Increase/(Decrease) in Securities Sold under an Agreement to Repurchase........... (2,400) 1,500 (6,600) Repayment of Long-Term Borrowings............. - - (750) Repayment of Short-Term Borrowings............ - - (16) Cash Dividend Paid............................ (336) (167) - - ---------------------------------------------------------------------------- Net Cash Flows Provided by Financing Activities 1,684 18,999 1,637 - ---------------------------------------------------------------------------- Net Increase/(Decrease) in Cash and Cash Equivalents............................... (4,307) 13,786 (14,961) Cash and Cash Equivalents at Beginning of Period...................................... 18,082 4,296 19,257 - ---------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period........$13,775 $18,082 $4,296 ========================== Supplemental Disclosure of Cash Flow Information: Cash Paid During the Year for Interest Expense $3,584 $3,101 $2,368 Cash Paid During the Year for Income Taxes 483 131 10 The accompanying notes to the consolidated financial statements are an integral part of these statements.
page 39 Consolidated Statement of Shareholders' Equity MetroBanCorp & Subsidiary (in thousands, except share data)
Net Unrealized Gains/(Loss) on Investment Accumulated Securities Common Shares Common Earnings Available Outstanding stock /(Deficit) for Sale Total - ------------------------------------------------------------------------------- Balances, December 31, 1993.. 735,837 $5,971 ($817) ($36) $5,118 Net Income................... - - 481 - 481 Issuance of Stock............ 945,454 5,436 - - 5,436 Offering Cost................ - (197) - - (197) Net Unrealized Loss on Investment Securities Available for Sale........... - - - (487) (487) - ------------------------------------------------------------------------------- Balances, December 31, 1994 1,681,291 11,210 (336) (523) 10,351 Net Income................... - - 622 - 622 Dividend Paid................ - - (167) - (167) Net Unrealized Gain on Investment Securities Available for Sale........... - - - 339 339 - ------------------------------------------------------------------------------- Balances, December 31, 1995 1,681,291 11,210 119 (184) 11,145 Net Income................... - - 624 - 624 Dividend Paid................ - - (336) - (336) Net Unrealized Gain on Investment Securities Available for Sale........... - - - 68 68 - ------------------------------------------------------------------------------- Balances, December 31, 1996 1,681,291 $11,210 $407 ($116) $11,501 The accompanying notes to the consolidated financial statements are an integral part of these statements.
page 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS METROBANCORP & SUBSIDIARY 1. BACKGROUND OF CORPORATION MetroBanCorp ("Metro") was incorporated in the State of Indiana in 1987 for the purpose of holding all of the shares of common stock of MetroBank ("Bank"), an Indiana-chartered commercial bank which commenced operations in April, 1988. The Bank's primary market and service area is Hamilton County and Northern Marion County, which are together considered parts of the Northside Suburban Indianapolis metropolitan area. The Bank's primary mission is to provide commercial and individual banking services in the previously defined service area. 2. SUMMARY OF ACCOUNTING AND REPORTING POLICIES BASIS OF ACCOUNTING - The accompanying consolidated financial statements include the accounts of Metro and the Bank. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and conform with general practices in the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimated. All significant intercompany balances and transactions have been eliminated. CASH EQUIVALENTS - For purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents include cash on hand, amounts due from banks and overnight Federal funds sold. INVESTMENT SECURITIES - Metro has the intent and ability to hold securities classified as held to maturity until their respective maturities. Accordingly, such securities are stated at cost and are adjusted for amortization of premiums and accretion of discounts. All securities not classified as held to maturity are considered available for sale. Unrealized gains and losses, net of taxes, are excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized. Realized gains or losses from the sale of securities are reflected in income on a specific identification basis. Interest income and the amortization of the premium and discount arising at acquisition are included in income. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the reserve is based upon an evaluation of the portfolio, a review of loan delinquencies, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors. The reserve is increased by provisions for loan losses charged against income. LOANS - Interest income on all loans is calculated using the simple interest method on the daily balances of the principal amount outstanding. The Bank's policy is to place loans on non-accrual status when management believes the collection of interest to be doubtful. page 41 Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment to the related loan's yield. The Bank is generally amortizing these amounts over the contractual life of the related loans. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization included in non-interest expense is computed using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 30 years. Routine maintenance, repairs and minor improvements are charged to non-interest expense as incurred. CORE DEPOSIT INTANGIBLE - The core deposit intangible represents the excess of acquisition costs over the fair value of net assets acquired and is being amortized on the straight-line basis over a period of eight years. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - These securities are generally treated as collateralized financing transactions and are recorded at the amount at which the securities were sold plus accrued interest. It is Metro's policy to relinquish control of securities sold under the agreements to repurchase. Metro also monitors its exposure with respect to securities borrowed transactions. The maximum amount of outstanding agreements at any month-end was $3.0 million during the year. The average outstanding balance of securities sold under agreements to repurchase amounted to $53,000 for the year ended December 31, 1996. PER SHARE DATA - Per share data included in Metro's consolidated statement of operations is based upon the weighted average number of common shares outstanding. Outstanding stock options during 1996 and 1995 did not have a dilutive effect on earnings per share. RECLASSIFICATIONS - Certain 1994 and 1995 amounts in the consolidated financial statements have been reclassified to conform with the 1996 presentation. Such reclassifications had no effect on net income. IMPACT OF ACCOUNTING CHANGES - The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," which modifies the accounting for mortgage servicing rights to allow the recognition of servicing assets whether they are purchased or originated. Metro adopted the provisions of this statement effective January 1, 1996, and there was no material impact to its consolidated financial condition or results of operations. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Metro adopted the provisions of this statement effective January 1, 1996, and there was no material impact to its consolidated financial condition or results of operations. 3. INVESTMENT SECURITIES Investment securities consist primarily of U.S. government agency and corporation bonds, derivative securities with both fixed and indexed interest rates, and mortgage backed securities with both fixed and floating interest rates. The derivative securities are subject to interest rate risk due to their dual index feature and are comprised of deleveraged bonds, and structured agency and corporation notes. At December 31, 1996, the derivative securities amounted to $9.5 million classified as held to maturity and $2.9 million included in available for sale securities. Although these securities' current market values are below cost, Metro does not believe these securities to be other than temporarily impaired due to the creditworthiness of the issuers (primarily the Federal Home Loan Bank), the shorter term maturities of the notes (approximately three years), current interest rate yields of the securities and Metro's intent and ability to hold such securities to maturity. The mortgage backed securities are subject to both prepayment and interest rate risk and have been classified primarily as available for sale. The amortized cost and estimated market values of investment securities are as follows: page 42 Investment Securities (dollars in thousands)
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values --------- ---------- ---------- -------- DECEMBER 31, 1996 Investment Securities Held to Maturity Mortgage-Backed Securities $94 $2 $ - $96 U.S. Government Agencies and Corporations 9,462 - (549) 8,913 Time Deposits 500 - - 500 --------- --------- ---------- --------- $10,056 $2 ($549) $9,509 ========= ========= ========== ========= Investment Securities Available for Sale Mortgage-Backed Securities $15,913 $51 ($129) $15,835 U.S. Government Agencies and Corporations 5,401 - (76) 5,325 --------- --------- ---------- -------- $21,314 $51 ($205) $21,160 ========= ========= ========== ========
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values --------- ---------- ---------- --------- DECEMBER 31, 1995 Investment Securities Held to Maturity Mortgage-Backed Secutities $328 $5 $ - $333 U.S. Government Agencies and Corporations 9,438 - (753) 8,685 Time Deposits 500 - - 500 --------- ---------- ---------- --------- $10,266 $5 ($753) $9,518 ========= ========== ========== ========= Investment Securities Available For Sale Mortgage-Backed Securities $9,466 $30 ($148) $9,348 U.S. Treasury Securities and Obligations of U.S. Government Agencies and Corporations 9,599 17 (155) 9,461 --------- ---------- ---------- --------- $19,065 $47 ($303) $18,809 ========= ========== ========== =========
page 43 The carrying value of U.S. government agencies, corporation securities, and mortgaged-backed securities at December 31, 1996 and 1995 are shown below by the contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):
As of December 31, 1996 -------------------------------------- Held to Available Maturity for Sale ---------------- ---------------- Fair Fair Market Market Cost Value Cost Value ---- ------ ---- ------ Mortgage-Backed Securities - ---------------------------- Due within one Year $49 $50 $- $- 1 - 5 Years 45 46 2,169 2,175 6 - 10 Years - - 2,401 2,348 Due After 10 Years - - 11,343 11,312 ---- ----- ------- ------- Total $94 $96 $15,913 $15,835 ==== ===== ======= ======= U.S. Government Agencies and Corporations - ---------------------------- Due within One Year $- $- $400 $400 1 - 5 Years 7,962 7,623 5,001 4,925 6 - 10 Years 1,500 1,290 - - Due After 10 Years - - - - ------ ------ ------ ------ Total $9,462 $8,913 $5,401 $5,325 ====== ====== ====== ====== Time Deposits - ---------------------------- Due within One Year $500 $500 $ - $ - ====== ====== ====== ======
page 44
As of December 31, 1995 ---------------------------------------- Held to Available Maturity for Sale ------------------ ------------------ Fair Fair Market Market Cost Value Cost Value ------ ------ ----- ------ Mortgage-Backed Securities - ---------------------------- Due within One Year $198 $199 $ - $ - 1 - 5 Years - - - - 6 - 10 Years 130 134 1,759 1,734 Due After 10 Years - - 7,707 7,614 ------ ----- ------ ------ Total $328 $333 $9,466 $9,348 ====== ===== ====== ====== U.S. Treasury Securities and Obligations of U.S. Government Agencies and Corporations - ---------------------------- Due within One Year $ - $ - $1,999 $1,998 1 - 5 Years 7,938 7,394 6,611 6,458 6 - 10 Years 1,500 1,291 - - Due After 10 Years - - 989 1,005 ------ ----- ----- ----- Total $9,438 $8,685 $9,599 $9,461 ====== ====== ====== ====== Time Deposits - --------------------------- Due within One Year $500 $500 $ - $ - ====== ====== ====== ======
Proceeds from sales of investments in debt securities were $4.0 million in 1996 as compared to $1.6 million in 1995. Net realized loss on sale of investment securities amounted to $12,000 during 1996 compared to a $2,000 gain for the same period in 1995. page 45 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments." SFAS 107 requires entities to disclose the fair market value of financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheet, for which it is practicable to estimate fair value. The following methods and assumptions were used to estimate the fair value of each type of financial instrument: CASH AND CASH EQUIVALENTS - For these instruments, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES - For investment securities, fair values are based on quoted market prices, if available. For securities where quoted prices are not available, fair value is estimated based on market prices of similar securities. LOANS - The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS - The fair value of non-interest bearing demand deposits and savings and NOW accounts is the amount payable as of the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Securities sold under agreements to repurchase generally have an original term to maturity of 30 days or less and, therefore, their carrying amount is a reasonable estimate of fair value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - Loan commitments and standby letters of credit are generally of a short-term nature and, therefore, their carrying amount is a reasonable estimate of their fair value. The estimated carrying and fair values of Metro's financial instruments as of December 31, 1996, are as follows (dollars in thousands):
Carrying Fair Value Value ------------------------- Financial Assets: Cash & Cash Equivalents $13,775 $13,775 Investment Securities 31,216 30,669 Loans, Net 64,519 65,481 Deposits 99,284 99,495 Securities Sold Under Agreements to Repurchase 1,500 1,500 Off-Balance Sheet Financial Instruments 10,228 10,228 -------------------------
page 46 5. LOANS Total loans at December 31, 1996 and December 31, 1995 by major loan categories are as follows (dollars in thousands):
1996 1995 ------- ------- Commercial $35,064 $31,122 Real Estate - Construction 3,970 2,251 Mortgage 787 838 Installment 15,933 13,242 Student Loans 9,631 12,999 ------- ------- Total Loans $65,385 $60,452 ------- ------- Allowance for Loan Losses (866) (910) ------- ------- Loans, Net $64,519 $59,542 ======= =======
Transactions in the allowance for loan losses for the years indicated were as follows (dollars in thousands):
1996 1995 1994 ---- ---- ---- Balance at Beginning of year $910 $586 $450 Provision for Loan Losses 67 367 165 Charged-Off Loans (119) (54) (32) Recoveries 8 11 3 ---- ---- ---- Balance at End of Year $866 $910 $586 ==== ==== ====
As of December 31, 1996, Metro had investments in loans which are impaired in accordance with SFAS No's 114 and 118 of $157,000. Of this amount, $148,000 had no related specific allowance. The remaining $9,000 of impaired loans were fully reserved. Metro's policy for recognizing income on impaired loans is to accrue interest until a loan is classified as impaired. For loans which receive the classification of impaired during the current period, interest accrued to date is charged against current earnings. No interest is accrued after a loan is classified as impaired. All payments received for loans which are classified as impaired are utilized to reduce the principal balance outstanding. For the year ended December 31, 1996, the average balance of impaired loans was $161,000; additionally, no interest income was earned on these loans during the year ended December 31, 1996. page 47 6. PREMISES AND EQUIPMENT Premises and equipment at December 31, 1996 and 1995 consist of the following (dollars in thousands):
1996 1995 ---- ---- Land and Improvements $605 $980 Building and Improvements 954 942 Furniture and Equipment 1,344 1,006 ----- ----- Total 2,903 2,928 Less: Accumulated Depreciation and Amortization (1,082) (1,018) ------ ----- Total, Net $1,821 $1,910
7. BENEFIT PLANS EMPLOYEES' THRIFT AND RETIREMENT PLAN - Metro maintains a trusteed contributory thrift and retirement plan (Employees' Thrift and Retirement Plan) covering all employees who have attained the age of twenty-one and work a minimum of one thousand hours per calendar year. Salary redirection or "401(k)" contributions are made to the Employees' Thrift and Retirement Plan pursuant to a Salary Redirection Agreement between each eligible employee and the Bank. Eligible employees may contribute up to 10 percent of their pre-tax compensation, limited by the amount allowed by the IRS. Effective January 1, 1995, Metro increased the amount of employee contributions it matches from 75 percent to 100 percent of the first 6 percent of the employee's compensation, provided the employee contributes at least 2 percent of their compensation to the Plan. Metro may make additional profit sharing contributions to the Plan as determined and approved by the Board of Directors. Employees vest 100 percent in Metro's matching and discretionary profit sharing contributions at the end of five years of Plan participation. Metro's contribution expense related to the Employees' Thrift and Retirement Plan amounted to $51,000, $64,000, and $36,000, in 1996, 1995, and 1994, respectively. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - Effective January 1, 1993, Metro established the Supplemental Executive Retirement Plan (SERP), a non-qualified deferred compensation plan, for certain executives of Metro. The provisions of the SERP allow the Plan's participants who are also participants of the Employees' Thrift and Retirement Plan to defer compensation from Metro or receive contributions without regard to the amounts limited by the IRS under the Employee's Thrift and Retirement Plan. SERP participants' salary deferrals, however, are limited to amounts not to exceed 25 percent of the participant's compensation, including amounts contributed to the Employees' Thrift and Retirement Plan. Metro may make matching contributions in percentage amounts as described under the Employees' Thrift and Retirement Plan. Also, Metro may make discretionary contributions to the SERP as determined and approved by the Board of Directors. Metro's contribution expense related to the SERP was $12,000, $5,000, and $1,000 in 1996, 1995, and 1994, respectively. 8. STOCK AND CAPITAL ADEQUACY For information on capital adequacy, see section entitled "Capital Resources and Capital Adequacy," in Management's Discussion and Analysis section of the annual report. page 48 9. STOCK OPTION PLANS Prior to 1991, Metro had three stock option plans: the 1987 Stock Option and Stock Appreciation Rights Plan for officers and key employees of Metro and the Bank, the 1987 Directors' Stock Option Plan for those persons who serve as directors of Metro and the Bank, and the Incorporators' and Founders' Stock Option Plan. During 1991, shareholders of Metro approved the repricing of all outstanding options and stock appreciation rights (SARs) granted under these plans to a then current fair market price of $6.75 per share, and shareholders approved extending, until December 31, 2000, the term of each outstanding option and SAR. Shareholders also approved termination of all three of these plans. All options and SARs granted under such plans prior to their termination may be exercised until the newly approved expiration date. During 1991, shareholders of Metro adopted the 1991 Stock Option and Stock Appreciation Rights Plan for officers and key employees of Metro and the Bank and the 1991 Directors' Stock Option Plan for directors of Metro and the Bank. Options and SARs under these plans are fully vested at the grant date, except for options granted to the directors of the Bank which vest at 20 percent per year. All options granted under these plans have an exercise price of $ 6.75 per share. During 1994, shareholders of Metro adopted the 1994 Stock Option and Stock Appreciation Rights Plan for officers and key employees of Metro and the Bank, and the 1994 Directors' Stock Option Plan for directors of Metro. Options and SARs under these plans are fully vested at the grant date. Options granted under these plans have exercise prices ranging from $5 to $7 per share. As of December 31, 1996, there were 206,650 shares of common stock reserved for issuance under these plans. Stock option activity under these plans was as follows:
Number Weighted of Average Options Shares Exercise Price ----------------------------------------------- December 31, 1993 75,450 $6.75 Granted 60,900 6.23 Cancelled 100 6.75 ----------------------------------------------- December 31, 1994 136,250 6.52 Granted 13,100 6.37 Cancelled 100 6.75 ---------------------------------------------- December 31, 1995 149,250 6.51 Granted 13,500 6.12 ---------------------------------------------- December 31, 1996 162,750 6.48 Shares Exercisable 162,750 ===== =======
page 49 Metro accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, Metro's net income would have been reduced to $608,000 ($0.36 per share) in 1996, and $603,000 ($0.36 per share) in 1995. Because the Statement No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro-forma compensation cost may not be representative of that to be expected in future years. Options outstanding at December 31, 1996, have a weighted average remaining life of 5.9 years. The weighted average fair value of the options granted was $2.27 per share in 1996 and $2.39 per share in 1995. The fair value of each option is estimated on the date of grant using a risk-free interest rate of 6.49 percent in 1996 and 6.06 percent in 1995; expected dividend yields of 3.00 percent; expected lives of 8.5 years in 1996 and 7.5 years in 1995; and expected volatility of 37.0 percent. 10.INCOME TAXES Metro and the Bank file a consolidated income tax return. Deferred tax assets and liabilities are recorded based on differences between the financial statement and tax bases of assets and liabilities and income tax rates expected to be in effect when the amounts related to such differences are realized or settled. The provision (benefit) for income taxes consists of the following (dollars in thousands):
1996 1995 1994 ------------------------- Federal - Current $442 $375 $75 - Deferred (54) (47) 197 ------------------------- $388 $328 $272 ------------------------- State - Current $108 $124 $94 - Deferred (8) (24) (13) ------------------------- $100 $100 $81 ------------------------- $488 $428 $353 =========================
A reconciliation between Metro's effective tax rate and the U.S. federal statutory rate is as follows:
1996 1995 1994 ---------------------- U.S. Federal Statutory Rate 35.0% 35.0% 35.0% State Income Taxes, Net of U.S. Federal Income Tax Benefit 6.5 6.2 6.5 Effect of Graduated Income (1.0) (1.0) (1.6) Other 3.4 0.6 2.4 ---------------------- 43.9% 40.8% 42.3% ======================
page 50 The significant components of Metro's net deferred tax asset as of December 31, 1996 and 1995 are as follows (dollars in thousands):
1996 1995 ---- ---- Book over Tax Depreciation $43 $10 Provision for Loan Losses 265 281 Accrual to Cash Adjustment (26) (53) Net Unrealized Loss on Investment Securities Available for Sale 67 135 Other 11 (8) ---- ---- $360 $365 ==== ====
Metro did not record a valuation allowance against the deferred tax assets as management expects to fully realize all tax benefits in the future. 11.COMMITMENTS AND CONTINGENCIES Metro has entered into non-cancelable operating leases for its main office and two branch offices. All operating leases for branch offices will expire in 1998. Metro has the option of extending two of these leases into future years. Rental expense for all three offices was $105,000, $93,000 and $111,000 in 1996, 1995 and 1994 respectively. Future aggregate minimum annual rentals (not considering renewal options) are payable as follows: 1999 and 1997 1998 After ---------------------------- $97,800 $37,700 $ - Metro is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit under lines of credit, real estate draw note arrangements and standby letters of credit. These instruments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statement of condition. Metro's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitment to extend credit and standby letters of credit is represented by the contractual amount of these instruments. Metro uses the same credit policies in making commitments and conditional obligations as it does for on- balance sheet instruments. page 51 Metro's financial instruments where contract amounts represent credit risk are as follows (dollars in thousands):
1996 1995 ------- ------ Standby Letters of Credit $120 $127 Unused Commercial Lines of Credit & Real Estate Draw Notes 7,905 3,574 Unused Home Equity & Personal Lines of Credit 2,203 2,008 ------- ------ Total Commitments $10,228 $5,709 ======= ======
Commitments to extend credit under lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and typically require the payment of fees. The total commitment amounts do not necessarily represent future cash requirements. Commitments sometimes expire before being drawn upon while others may not be drawn upon to the full amount available. Metro evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral required, if deemed necessary, by Metro upon extension of credit is based upon management's credit evaluation of the borrower. The type of collateral typically involves a mortgage position in the underlying property collateralized by the loan, but may include accounts receivable, inventory, fixtures and equipment, general intangibles and personal guarantee of the borrower. Standby letters of credit are conditional commitments issued by Metro to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support private borrowing arrangements. Substantially all guarantees expire in less than one year. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending credit under line of credit arrangements. Metro may require cash, marketable securities, property and/or mortgage positions as collateral supporting these commitments in those instances in which collateral is deemed necessary. Metro's investment in off-balance sheet derivative financial instruments, as defined by Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," are limited to fixed and variable interest rate loan commitments. Fixed rate loan commitments are generally extended for no longer than six months. Interest rates on the variable rate loan commitments are adjustable on either a daily or monthly basis. 12.RELATED PARTY TRANSACTIONS Certain directors of Metro and companies with which they are affiliated, and certain principal officers of the Bank, are customers of, and have banking transactions with, the Bank in the ordinary course of business. All such loans and commitments for loans included in such transactions have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and, in the opinion of management, did not involve more than a normal risk of collectibility or present other unfavorable features. Loan transactions with directors and their affiliates and principal officers of Metro for 1996 were as follows (dollars in thousands): Balance at Beginning of Year $573 Loans Made 1,032 Loan Repayment (393) ------ Balance at End of Year $1,212 ====== page 52 Certain directors and the companies with which they are affiliated also provide services to Metro. Metro had commitments under operating lease arrangements with a director-affiliated company to lease certain office space. Total lease payments made in 1996 and 1995 under such lease agreements were $10,500 and $2,000, respectively. Metro did not lease space from these directors in 1994. Certain advertising and public relations services are also provided by a director-affiliated company. The amount paid for these services was $213,000 in 1996, $209,000 in 1995, and $231,000 in 1994. The Bank purchased student loans from a company of which certain executive officers serve as directors of Metro and the Bank. The loans are serviced by the seller and are also guaranteed by the seller. Loan servicing fees paid to the seller were $108,000, $133,000 and $164,000, in 1996, 1995 and 1994, respectively. The loans are purchased on the same terms as those offered by the seller to other institutions. There were no purchases of student loans in 1996. Student loan purchases were $2.0 million and $3.1 million in 1995 and 1994, respectively. In 1996, 1995 and 1994 the Bank sold $1.2 million, $4.0 million, $0.9 million, respectively, of student loans back to the seller. 13.PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed statements of the parent company. MetroBanCorp (Parent Company Only) Condensed Statement of Condition as of December 31, 1996 and 1995 (dollars in thousands):
1996 1995 ---- ---- ASSETS: Cash and Cash Equivalents $13 $37 Investment Securities Available for Sale - Market Value 3,073 3,394 Investment in MetroBank 7,873 7,199 Other 558 539 ------- ------- Total Assets $11,517 $11,169 ======= ======= LIABILITIES AND SHAREHOLDERS EQUITY Other Liabilities $16 $24 Shareholders' Equity 11,501 11,145 ------- ------- Total Liabilities and Shareholders' Equity $11,517 $11,169 ======= =======
page 53 MetroBanCorp (Parent Company Only) Condensed Statement of Operations for the years ended December 31, 1996 and 1995 (dollars in thousands):
1996 1995 ---- ---- Interest Income $199 $200 Non-Interest Income Gain on Sale of Securities 10 - Non-Interest Expenses (189) (165) ---- ---- Income Before Income Taxes and Equity in Undistributed Earnings of MetroBank 20 35 Income Tax Expense (8) (14) ---- ---- Income Before Equity in Undistributed Earnings of MetroBank 12 21 Equity in Undistributed Earnings of MetroBank 612 601 ---- ---- Net Income $624 $622 ==== ====
page 54 MetroBanCorp (Parent Company Only) Condensed Statement of Cash Flows for the years ended December 31, 1996 and 1995 (dollars in thousands):
1996 1995 ---- ---- Cash Flows From Operating Activities: Net Income $624 $622 ---- ____ Adjustments to Reconcile Net Income to Cash used in Operating Activities Equity in undistributed Earnings of MetroBank (612) (601) Depreciation and Amortization 12 12 Gain on Sale of Investment Securities (10) - Increase in Other Assets (35) (316) Increase/(Decrease) in Other Liabilities (8) 2 ---- ---- Total Adjustments (653) (903) ---- ---- Net Cash Flows from Operating Activities (29) (281) ---- ---- Cash Flows From Investing Activities: Proceeds from the Sale of Investment Securities 3,010 - Proceeds from Maturity of Investment Securities 332 - Purchases of Investment Securities (3,001) - ---- ---- Net Cash Flows Provided by Investing Activities 341 - ---- ---- Cash Dividend Paid (336) (167) ---- ---- Net Decrease in Cash and Cash Equivalents (24) (448) Cash and Cash Equivalents at Beginning of Year 37 485 ---- ---- Cash and Cash Equivalents at End of Year $13 $37 ==== ====
page 55 14. RESTRICTION ON TRANSFERS FROM METROBANK According to banking regulations, the Bank is restricted as to the amount of dividends that can be paid to Metro without prior regulatory approval. Indiana chartered banks are limited in the amount of dividends they may pay to the undivided profits of the bank adjusted for statutorily defined bad debts. page 56 EX-24 3 EXHIBIT 24. POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT, that the person whose signature apprears below constitutes and appoints Ike G. Batalis and Charles V. Turean, or either individually, his true and lawful attorney- in-fact and agent, with full power of substitution and resubstitu- tion, for him and in his name, place and stead, in any and all capacities to sign MetroBanCorp's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. By: /s/Chris G. Batalis February 28, 1997 ------------------------------- Chris G. Batalis, Director By: /s/Terry L. Eaton February 28, 1997 ------------------------------- Terry L. Eaton, Director By: /s/Evans M. Harrell February 28, 1997 ------------------------------- Evans M. Harrell, Director By: /s/Edward G. McMahon February 28, 1997 ------------------------------- Edward G. McMahon, Director By: /s/Robert L. Lauth, Jr. February 28, 1997 ------------------------------- Robert L. Lauth Jr., Director By: /s/Larry E. Reed February 28, 1997 ------------------------------- Larry E. Reed, Director By: /s/Russell D. Richardson February 28, 1997 ------------------------------- Russell D. Richardson, Director By: /s/Edward R. Schmidt February 28, 1997 ------------------------------- Edward R. Schmidt, Director By: /s/Donald F. Walter February 28, 1997 ------------------------------- Donald F. Walter, Director page 57 EX-27 4 ARTICLE 9 FDS FOR 10-KSB
9 1000 12-MOS DEC-31-1996 JAN-1-1996 DEC-31-1996 7,475 0 6,300 0 21,160 31,216 30,669 65,385 866 113,383 99,284 1,500 1,098 0 0 0 11,210 291 113,383 6,130 1,600 143 7,873 3,496 3,519 4,354 67 (12) 3,842 1,112 624 0 0 624 0.37 0 4.52 157 445 0 829 910 119 8 866 0 0 0
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