10KSB 1 metro-10k.txt U.S. Securities and Exchange Commission Washington D.C. 20549 Form 10-KSB Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001. Commission file number 0-23790 ------- MetroBanCorp -------------------------------------------------------------------------------- (Name of small business issuer in its charter) Indiana 35-1712167 --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 10333 N. Meridian Street, Suite 111, Indianapolis, Indiana 46290 ---------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 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 Stock, No Par Value -------------------------------------------------------------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the 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 or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's gross revenues for its most recent fiscal year: $14,019,000. State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days (See definition of affiliate in Rule 12b-2 of the Exchange Act): The aggregate market value of the voting common stock of the issuer held by non-affiliates, based upon the price of a share of common stock as quoted on the Small Cap Issues Market of NASDAQ on February 28, 2002, was $8,999,947. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 2,065,303 as of March 13, 2002. DOCUMENTS INCORPORATED BY REFERENCE. The Registrant's Proxy Statement for the Annual Meeting of Shareholders, to be held May 16, 2002, is incorporated by reference into Part III hereof, and the Annual Report of Shareholders for the year ended December 31, 2001 is incorporated by reference into Part II 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 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 and Results of Operation . . . . . . . . . . . . 10 Item 7 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 8 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Part III -------- Item 9 - Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . 38 Item 10 - Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Item 11 - Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . 38 Item 12 - Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 39 Item 13 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 39
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 consumer lending and deposit services to its customers located principally in Hamilton County and northern Marion County, Indiana. The Bank conducts its business through seven banking offices located in Hamilton County. The Bank's products are principally oriented toward small- and medium-sized business and the professional community. At December 31, 2001, Metro had consolidated total assets of $184.0 million, total deposits of $142.5 million and shareholders' equity of $14.9 million, representing annual increases from 2000 of 9.3%, 2.5%, and 6.4%, respectively. Since liberalization of Indiana's banking laws in 1985, all six commercial banks headquartered in Hamilton County were acquired by bank holding companies located either out-of-county or out-of-state. Those acquirors, with only one exception, have subsequently been acquired by larger, out-of-state bank holding companies. The strategy of Metro's founding investors and its management was designed to capitalize on the customer dissatisfaction which often accompanies centralization of out-of-state customer servicing and standardization of financial products. Management believes that Metro's target customers, i.e. small business owners and professionals, are not only greater users of financial services, but are also the most sensitive to such change. Further, it is the belief of management that such users of financial services prefer to do business with a local bank with responsive decision making. Since the end of its first year of operations, Metro's consolidated total assets have grown from $14.6 million at December 31, 1988 to $184.0 million at December 31, 2001. Metro's acquisition of two branches of Colonial Central Savings Bank, FSB was a contributing factor in this growth. The Bank's growth has put pressure on earnings, with Metro reporting losses or negligible earnings for its first four years of operations. The efficiency ratio of 250.8% in 1988 and 117.7% in the first full year of operations in 1989 has fallen to 69.4% in 2001 as Metro has grown into its infrastructure (the efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and recurring non-interest income). The Bank conducts a general banking business offering various commercial and consumer banking services. A member of the FDIC, the Bank currently operates one main and six traditional staffed branch offices. 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. In February, 2000, the Bank opened a traditional branch office in Fishers, Indiana. The offices of MetroBank include two facilities which are owned by MB Realty Corporation, a wholly owned subsidiary of the Bank. The Bank has also deployed numerous automated teller machines (ATMs) at sites which are leased from the owners of retail businesses in the market area. MARKET AREA AND COMPETITION. All of MetroBank's branches are located in Hamilton County. Here aspects of suburban, urban and rural lifestyles and commerce are present. The Indianapolis metropolitan area is the most dynamic region in the State of Indiana from economic, demographic and geographic viewpoints. Five major thoroughfares (US 31 and Interstates 65, 69, 70 and 74) intersect in the Indianapolis area contributing to its growth as a transportation and distribution center. Hamilton County is riding a wave of growth that is uncharacteristic for most of the mature Midwest markets. In the mid-1990's, The Wall Street Journal identified Hamilton County as one of "America's 20 Hottest White Collar Addresses." A premier corporate environment, high quality residential neighborhoods, outstanding public schools, good local government, and a strong and growing industry combine to make Hamilton County an urban expansion model for the entire Midwest. The county's mixture of fast growing suburban communities and smaller rural towns provides families and businesses with a variety of location choices. Hamilton County has seen robust growth this past decade and is expecting this trend to continue. The county's population grew by over 68,000 between 1990 and 2000, 63.1% increase, and is expected to grow another 15.6% by 2005. In fact, Hamilton County has been the fastest growing county in Indiana over the past 10 years. Moreover, the most recent data from the U.S. Census Bureau shows that Hamilton County is a national leader in 3 its growth rate since 1990. The growth from 1990-2000 places Hamilton County 29th among the nation's 3,140 counties and the fastest growing county in the Midwest. Single-family home building has greatly expanded in Hamilton County over the past five years. Hamilton County represents 28.0% of the Indianapolis MSA new housing growth, while only representing 11.0% of the region's total population growth. Since 1997, Hamilton County has seen the construction of over 13,800 single-family homes. The communities of Fishers and Carmel account for nearly two-thirds of this total. Through the first four months of 2001, Hamilton County's housing starts were running 6.0% ahead of the 2000 pace. Hamilton County continues to be one of the most affluent communities in the Indianapolis area. The median household income of $69,900 in Hamilton County is significantly higher than the Indianapolis MSA, the State of Indiana and the National averages. Moreover, it is expected to grow by an additional 19.3% by 2005, making it one of the most prosperous areas in Indianapolis and in the Midwest. Historically, the City of Carmel has been one of Hamilton County's and Indiana's leaders in income demographics. Hamilton County's Meridian Corporate Corridor ("Corridor") represents a gateway to one of the best business locations in the Midwest. The Corridor features high quality development, a strong corporate presence, moderate operating costs, a modern telecommunications infrastructure and room for future growth. The Corridor extends throughout twenty miles of Hamilton County and is home to over 20,000 workers, supported by a well-educated labor base of over 675,000 people. Corporate headquarters or office operations within the Corridor include Thomson Consumer Electronics, MacMillan Publishing, Delta Faucet, Conseco, CNA Insurance, Verizon, Indiana Mills & Manufacturing, Inc., and Bridgestone Building and Industrial Products. The Bank's primary market area, Hamilton County and northern Marion County, in Indiana, is highly competitive, with numerous other commercial banks having banking or loan production offices in the market place. Many of these banks are affiliated with multi-bank holding companies and have numerous branch offices located throughout the Bank's market area. Several competing financial institutions have entered the Bank's market area in recent years. In addition to competition from commercial banks, competition also exists from savings and loan associations, credit unions, finance companies, insurance companies, mortgage companies, securities brokerage firms, money market and mutual funds, loan production offices and other providers of financial services in the area. These entities generally have greater financial resources than Metro or the Bank. The Bank competes in the marketplace primarily on the basis of responsible decision making and personalized service. LENDING ACTIVITY. The Bank's two principal lending categories are commercial/business credits and consumer loans. Commercial or business credits include, among other things, loans for working capital, machinery and equipment purchases, commercial real estate acquisitions and other corporate needs. Consumer loans include, among other things, loans for purchases of automobiles, homes, home improvements and other consumer purposes. These loans may be extended by the Bank on a secured or unsecured basis. The Bank's consumer loans include a portfolio of guaranteed student loans ("GSLs"). These GSLs consist of approximately 1,000 promissory notes made to nearly 400 borrowers who are geographically dispersed throughout the United States. These GSLs are guaranteed and serviced, pursuant to the Higher Education Act of 1965, as amended ("HEA"), by Sallie Mae Servicing Corporation, respectively. The Bank's GSLs are substantially guaranteed by Sallie Mae Servicing Corporation, and are reinsured in various amounts by the federal government. Commercial lending requires a thorough analysis of the borrower, its industry, current and projected economic conditions and various other factors. Depending upon factors such as, but not limited to, collateral, type of loan, loan maturity, and specific loan terms and conditions, various loan-to-value ratios are established upon application for a loan. The Bank typically requires its commercial/business borrowers to prepare annual financial statements and, to the extent possible, requires such financial statements to be audited or reviewed by independent accountants. The Bank requires appraisals in connection with loans secured by real estate. Such appraisals are obtained prior to the time funds are advanced. The Bank also typically requires personal guaranties from principals involved with closely-held corporate and other entity borrowers. The Bank requires completed loan applications, including personal financial information, from all of its consumer borrowers on loans the Bank originates. With respect to consumer loans that are secured, the Bank obtains a 4 valuation of the collateral prior to extending such loans. Loan officers of the Bank are required to complete a debt-to-income analysis that should meet established lending standards prior to loan approval. Depending upon the type and age of collateral offered, various down payment and equity requirements are set based upon established guidelines. Loan officers are also required to follow all other standard underwriting techniques established by the Board of Directors and the Bank's regulatory agencies. 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 must be reported to the Bank's Management Loan Committee for approval or for informational purposes. Further, secured loans exceeding $500,000 and unsecured loans exceeding $75,000 must be approved by the Bank's Board of Directors' Loan Committee. All loans exceeding $1,000,000 up to the legal lending limit of the bank must be approved by the MetroBank Board of Directors. The Bank also has established general guidelines relating to the ratio between the loan amount and collateral value which must be met before a loan is approved. All loans are graded prior to being approved using an internal grading system. Consumer and commercial loans are made primarily in the Bank's designated market area. The Bank experienced significant loan growth during the past year, and expects this trend to continue in the coming year. Loans are made primarily for portfolio purposes and may be resold at management's discretion. The Bank's Residential Mortgage Loan Department completed its seventh year of operations in 2001. The Department offers both conventional and non-conventional mortgages, as well as construction loans and lot financing. The majority of the loans and their servicing rights originated by this Department will be sold in secondary markets. SUPERVISION AND REGULATION. Both Metro and the Bank operate in highly regulated environments and are subject to supervision and regulation by several governmental regulatory agencies, including the Federal Reserve Board, the FDIC, and the Indiana Department of Financial Institutions. The laws and regulations established by these agencies are generally intended to protect depositors, not shareholders. Changes in applicable laws, regulations, governmental policies, income tax laws and accounting principles may have a material effect on our business and prospects. The following summary is qualified by reference to the statutory and regulatory provisions discussed. MetroBanCorp The Bank Holding Company Act. Because Metro owns all of the outstanding capital stock of the Bank, it is registered as a bank holding company under the federal Bank Holding Company Act of 1956 and is subject to periodic examination by the Federal Reserve and required to file periodic reports of its operations and any additional information that the Federal Reserve may require. Investments, Control, and Activities. With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before acquiring another bank holding company or acquiring more than 5% of the voting shares of a bank (unless it already owns or controls the majority of such shares). Bank holding companies are prohibited, with certain limited exceptions, from engaging in activities other than those of banking or of managing or controlling banks. They are also prohibited from acquiring or retaining direct or indirect ownership or control of voting shares or assets of any company which is not a bank or bank holding company, other than subsidiary companies furnishing services to or performing services for their subsidiaries, and other subsidiaries engaged in activities which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be incidental to these operations. The Bank Holding Company Act does not place territorial restrictions on the activities of such nonbanking-related activities. Metro does not currently plan to engage in any activity other than owning the stock of the Bank. Dividends. The Federal Reserve's policy is that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company's financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to 5 prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Source of Strength. In accordance with Federal Reserve Board policy, Metro is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which Metro might not otherwise do so. MetroBank General Regulatory Supervision. The Bank is an Indiana-chartered banking corporation subject to examination by the Indiana Department of Financial Institutions. The Indiana Department of Financial Institutions and the FDIC regulate or monitor virtually all areas of the Bank's operations. The Bank must undergo regular on-site examinations by the FDIC and DFI and must submit annual reports to the FDIC and the DFI. 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 the bank's capital and unimpaired surplus. Deposit Insurance. Deposits in the Bank are insured by the FDIC up to a maximum amount, which is generally $100,000 per depositor subject to aggregation rules. The Bank is subject to deposit insurance assessment by the FDIC pursuant to its regulations establishing a risk-related deposit insurance assessment system, based upon the institution's capital levels and risk profile. The Bank is also subject to assessment for the Financial Corporation (FICO) to service the interest on its bond obligations. The amount assessed on individual institutions, including the Bank, by FICO is in addition to the amount paid for deposit insurance according to the risk-related assessment rate schedule. Increases in deposit insurance premiums or changes in risk classification will increase the Bank's cost of funds, and we may not be able to pass these costs on to our customers. Transactions with Affiliates and Insiders. The Bank is subject to limitations on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. Compliance is also required with certain provisions designed to avoid the taking of low quality assets. The Bank is also prohibited from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. Extensions of credit by the Bank to its executive officers, directors, certain principal shareholders, and their related interests must: o be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties; and o not involve more than the normal risk of repayment or present other unfavorable features. Dividends. Under Indiana law, the Bank may pay dividends from its undivided profits in an amount declared by its board of directors, subject to prior approval of the Indiana Department of Financial Institutions if the proposed dividend, when added to all prior dividends declared during the current calendar year, would be greater than the current year's "net profits" and retained "net profits" for the previous two calendar years. Federal law generally prohibits the Bank from paying a dividend to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. Branching and Acquisitions. Branching by the Bank requires the prior approval of the FDIC and the DFI. Under current law, Indiana chartered banks may establish branches throughout the state and in other 6 states. Congress authorized interstate branching, with certain limitations, beginning in 1997. Indiana law authorizes an Indiana bank to establish one or more branches in states other than Indiana through interstate merger transactions and to establish one or more interstate branches through de novo branching or the acquisition of a branch. Community Reinvestment Act. The Community Reinvestment Act requires that the FDIC evaluate the record of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank. Capital Regulations. The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for off-balance sheet items. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories of 0%, 20%, 50%, or 100%, with higher levels of capital being required for the categories perceived as representing greater risk. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios in excess of the minimums. Neither Metro nor the Bank has received any notice indicating that either is subject to higher capital requirements. The federal bank regulatory authorities have also implemented a leverage ratio to supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. The Bank is also subject to the FDIC's "prompt corrective action" regulations, which implement a capital-based regulatory scheme designed to promote early intervention for troubled banks. This framework contains five categories of compliance with regulatory capital requirements, including "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." As of December 31, 2001, the Bank was qualified as "well capitalized." It should be noted that a bank's capital category is determined solely for the purpose of applying the FDIC's "prompt corrective action" regulations and that the capital category may not constitute an accurate representation of the bank's overall financial condition or prospects. The degree of regulatory scrutiny of a financial institution increases, and the permissible activities of the institution decreases, as it moves downward through the capital categories. Bank holding companies controlling financial institutions can be required to boost the institutions' capital and to partially guarantee the institutions' performance. Other Regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank's loan operations are also subject to federal laws applicable to credit transactions, such as the: o Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; o Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; o Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; o Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; o Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and o rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. 7 The deposit operations of the Bank also are subject to the: o Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and o Electronic Funds Transfer Act, and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking service. Enforcement Powers. Federal regulatory agencies may assess civil and criminal penalties against depository institutions and certain "institution-affiliated parties," including management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution's affairs. In addition, regulators may commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, regulators may issue cease-and-desist orders to, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the regulator to be appropriate. Financial Modernization Legislation. On November 12, 1999, the President Clinton signed into law the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act: o allows bank holding companies meeting management, capital and CRA standards to engage in a substantially broader range of nonbanking activities then was previously permissible, including insurance underwriting and agency, and underwriting and making merchant banking investments in commercial and financial companies; o allows insurers and other financial service companies to acquire banks; o removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and o establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. In order for a bank holding company to engage in the broader range of activities that are permitted by the Gramm-Leach-Bliley Act (1) all of its depository institutions must be well capitalized and well managed and (2) it must file a declaration with the Federal Reserve Board that it elects to be a "financial holding company". In addition, to commence any new activity permitted by the Gramm-Leach-Bliley Act, each insured depository institution of the financial holding company must have received at least a "satisfactory" rating in its most recent examination under the Community Reinvestment Act. Metro has not elected to be a financial holding company. Recent Legislative Developments. On October 26, 2001, President Bush signed the USA Patriot Act of 2001 (the "Patriot Act"). The Patriot Act is intended to strengthen the ability of U.S. Law Enforcement to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions is significant and wide-ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes. Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member 8 banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. RISK FACTORS. A cautionary note about forward-looking statements. In its oral and written communication, Metro from time to time includes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements can include statements about estimated cost savings, plans and objectives for future operations, and expectations about performance, as well as economic and market conditions and trends. They often can be identified by the use of words such as "expect," "may," "could," "intend," "project", "estimate," "believe" or "anticipate." Metro may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Form 10-KSB, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. It is intended that these forward-looking statements speak only as of the date they are made, and Metro undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward looking statement is made or to reflect the occurrence of unanticipated events. By their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from those contained in the forward looking statement. The discussion in the 2001 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition," incorporated in Item 6 of this Form 10-KSB, lists some of the factors which could cause Metro's actual results to vary materially from those in any forward-looking statements. Your attention is directed to this discussion which can be found in Exhibit 13 to this Form 10-KSB. Other uncertainties which could affect Metro's future performance include the effects of competition, technological changes and regulatory developments; changes in fiscal, monetary and tax policies; market, economic, operational, liquidity, credit and interest rate risks associated with Metro's business; inflation; competition in the financial services industry; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; and changes in the securities markets. Investors should consider these risks, uncertainties, and other factors in addition to those mentioned by Metro in its other filings from time to time when considering any forward-looking statement. EMPLOYEES. At December 31, 2001, the Bank had a total of 73 employees. This included 55 full-time and 18 part-time employees. ITEM 2. DESCRIPTION OF PROPERTY ----------------------- The principal executive office of Metro and the Bank is located at Three Meridian Plaza, 10333 North Meridian Street, Suite 111, Indianapolis, Indiana, and is leased from an unaffiliated third party. In addition to the principal executive office, which includes a bank branch, the Bank operates six traditional staffed branch offices. Two offices are owned by MB Realty, a wholly-owned subsidiary of the Bank, while the other four branches are leased facilities. Traditional staffed branches owned by MB Realty are located at 225 North Ninth Street, Noblesville, Indiana, and 20 South Rangeline Road, Carmel, Indiana. Two traditional staffed branches are leased from an unaffiliated third party and are located at 255 Sheridan Road, Noblesville, Indiana and in the Wal-Mart SuperCenter in Noblesville. The Bank also has traditional staffed branches located 2025 Cherry Street, Noblesville, Indiana and 11815 Allisonville Road, Fishers, Indiana, that are leased from affiliated third parties. The Bank has multiple ATM locations throughout its market area that are leased from unaffiliated retail business owners. INVESTMENT IN REAL ESTATE MORTAGES. The Bank makes mortgage loans for single- and multi-family dwellings, commercial & agricultural properties, unimproved land and developmental properties. These mortgage loans may be first or second mortgages, and are primarily serviced and held by the Bank, but may be sold in some circumstances. The Bank may also from time to time purchase government agency bonds secured by mortgages and backed and/or guaranteed by governmental agencies. These agency bonds may include those issued by Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association. 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. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted during the fourth quarter of 2001 to Metro's shareholders, either through the solicitation of proxies or otherwise. Part II. -------- ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS --------------------------------------------------------- In conjunction with a public offering of common stock completed in the second quarter of 1994, Metro obtained approval for quotation on the National Association of Securities Dealers Automated Quotation System Small-Cap Market ("NASDAQ") under the symbol "METB." At December 31, 2001, there were approximately 347 shareholders of record of Metro common stock. The following table sets forth the high and low bid prices for Metro common stock for the quarters during the years indicated, as reported by NASDAQ. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Sale Price Per Share -------------------- 2001 2000 ---- ---- Quarter High Low High Low ------- --------------- ---------------- First Quarter $7.619 $5.329 $8.163 $4.082 Second Quarter 7.286 5.952 5.782 4.422 Third Quarter 8.333 6.714 6.123 5.329 Fourth Quarter 7.857 6.810 6.576 5.215 Metro declared and paid on a quarterly basis four cash dividends on its shares of common stock during 2001. The amount of each dividend was $0.07 per share. In 2000, Metro declared four cash dividends, each in the amount of $.0625 per common share. Future cash dividend payments by Metro are subject to regulatory and legal limitations and may be dependent upon dividends paid to Metro by the Bank. 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 pay to undivided profits of the bank adjusted for statutorily defined bad debts. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS -------------------------------------------------------------- (dollar amounts in thousands, except per share data) The following information is intended to provide an analysis of the consolidated financial condition and performance of Metro and the Bank as of December 31, 2001 and 2000 and for each of the years then ended. This information should be read in conjunction with the Consolidated Financial Statements and footnotes included elsewhere in this Annual Report. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This discussion contains certain forward-looking statements that are subject to risks and uncertainties and includes information about possible or assumed future results of operations. Many possible events or factors could affect our future financial results and performance. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this discussion. These statements are representative only on the date hereof. 10 The possible events or factors include the following: our loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to securitize, sell or purchase certain loans or loan portfolios; syndications or participations of loans; retention of residential mortgage loans; and the management of borrower, industry, product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographic locations, the mix of the loan portfolio and management's judgments regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact our capital and debt financing needs and the mix of funding sources. Decisions to purchase, hold or sell securities are also dependent on liquidity requirements and market volatility, as well as on- and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities, utilization and effectiveness of interest rate contracts and the wholesale and retail funding sources of Metro and the Bank. We are also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans, deposits, debt and derivative financial instruments, such as futures, forwards, swaps, options and other financial instruments with similar characteristics. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the OCC, the FDIC, state regulators and the Office of Thrift Supervision, whose policies and regulations could affect our results. Other factors that may cause actual results to differ from the forward-looking statements include the following: competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies and insurance companies, as well as other entities which offer financial services, located both within and outside the United States and through alternative delivery channels such as the World Wide Web; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions and economic conditions in the geographic regions and industries in which we operate; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and our ability to manage these and other risks. RESULTS OF OPERATIONS Net Income Net income in 2001 was $1,528, an increase of 1.1% from the $1,511 reported in 2000. Total loans amounted to $115,800 and $102,900 at December 31, 2001 and 2000, respectively. The securities portfolio amounted to $37,200 and $40,500 at December 31, 2001 and 2000, respectively. Total interest income increased by $478 or 4.0% for the year, due principally to growth in the Bank's loan portfolio. The Bank increased its provisions for loan losses from $102 in 2000 to $230 in 2001. This represents an increase of $128 or 125.5% over the amount provided in 2000. The provisions made in 2001 were at a level considered necessary by management to provide for probable incurred losses in the loan portfolio and is based upon an assessment of the adequacy of the Bank's loan loss allowance account. Net Interest Income Net interest income is the principal source of the Bank's earnings and represents the difference between interest and fees on earning assets earned by the Bank and the interest cost of deposits and other borrowed funds paid by the Bank. The net interest margin is the difference expressed as a percentage of average earning assets. Factors contributing to the determination of net interest margin include the volume and mix of earning assets and interest bearing liabilities as well as interest rates. The Bank can control the effects of some of these factors through its management of credit extension and interest rate sensitivity, both of which are discussed later. External factors such as the overall condition of the economy, strength of credit demand and Federal Reserve monetary policy can also have significant effects on the changes in net interest income from one period to another. In 2001, net interest income was $7,400, a volume driven increase of 9.8% over net interest income for 2000 which was $6,700. In 2001, the net interest margin decreased to 4.69% of average earning assets, compared to 4.94% in 2000. 11 Rate/Volume Analysis of Change in Net Income 2000 vs. 2001 --------------------------------------------- Dollar Attributable Attributable Interest and Fee Income on: Change to Volume 1 to Rate 1 ----------- -------------- --------------- Loans $ 398 $ 1,463 $ (1,065) Securities 121 203 (82) Short-term Investments (41) 62 (103) ----------- -------------- --------------- Total Interest Income 478 1,728 (1,250) Interest Expense on: Savings and Time Deposits (342) 391 (733) Other Borrowings 119 176 (57) Repurchase Agreements 47 133 (86) ----------- -------------- --------------- Total Interest Expense (176) 700 (876) ----------- -------------- --------------- Net Interest Income $ 654 $ 1,028 $ (374) =========== ============== =============== 1. Changes not solely attributable to volume or rate changes have been allocated in proportion to the changes due to volume or rate. During 2001, both the yield on earning assets and the average cost of funds declined significantly due to lower rates in the economy. In addition, during 2001 the relationship of average interest bearing liabilities to average interest earning assets increased to 78.5% in 2001 from 77.9% in 2000. Distribution of Assets, Liabilities and Shareholders' Equity and Interest Rates and Differential Variance Analysis
2001 2000 -------------------------------- ---------------------------------- Average Yield / Average Yield / Balance Interest Rate Balance Interest Rate ------------ --------- --------- ------------- --------- ---------- Assets ------ Earning Assets: Securities $ 40,954 $2,362 5.77% $ 37,422 $2,241 5.99% Short-term Investments 5,483 197 3.59% 3,762 238 6.33% Loans, net 1 110,560 9,996 9.04% 94,403 9,598 10.17% ------------ --------- --------- ------------- --------- ---------- Total Earning Assets 156,997 12,555 8.00% 135,587 12,077 8.91% --------- --------- --------- ---------- Non-Earning Assets: Cash and Due from Banks 10,300 8,643 Premises and Equipment, net 1,385 1,635 Other Assets 1,908 2,459 ------------ ------------- Total Assets $ 170,590 $ 148,324 ============ =============
1. Includes principal balances of non-accruing loans. Interest on non-accruing loans is not included. 12
Liabilities and Shareholders' Equity ------------------------------------ Interest Bearing Liabilities: Savings and Time Deposits $ 106,706 $4,555 4.27% $ 97,519 $4,897 5.02% Repurchase Agreements 9,331 236 2.53% 4,076 189 4.64% Other Borrowings 7,130 406 5.69% 4,041 287 7.10% ------------ --------- --------- ------------- --------- ---------- Total Interest Bearing Liabilities 123,167 5,197 4.22% 105,636 5,373 5.09% ---------- -------- --------- --------- Non-Interest Bearing Liabilities: Demand Deposits 31,043 27,789 Other Liabilities 1,723 1,512 Shareholders' Equity 14,657 13,387 ------------ ------------- Total Liabilities and Shareholders' Equity $ 170,590 $ 148,324 ============ ============= Net Interest Margin $7,358 4.69% $6,704 4.94% ========== =========
Provision for Loan Losses The Bank records regular provisions to the allowance for loan losses. The provisions are made at a level determined to be necessary by management to absorb probable incurred losses in the loan portfolio. A detailed evaluation of the estimated losses, along with an assessment of the adequacy of the loan loss allowance, 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 totaled $230 and $102 in 2001 and 2000, respectively. At December 31, 2001 and 2000, the Bank had an allowance for loan losses of $1,457 and $1,352, respectively. The Bank's allowance for loan losses to ending total loans, as a percentage, amounted to 1.26% and 1.31% at December 31, 2001 and 2000, respectively. The increase in the provision during 2001 was considered appropriate by management relative to its evaluation of the loan loss allowance adequacy. Based upon management's assessment of the guaranteed nature of its GSLs portfolio, including the strength of the guarantor, a minimal amount of loan loss is allocated for this portfolio of loans (see "Loan Quality" discussed hereinafter). The allowance for loan losses as a percentage of the remaining loan portfolio (excluding GSLs) amounted to 1.29% at December 31, 2001, as compared to 1.35% at December 31, 2000. Non-Interest Income In 2001, Metro's non-interest income to average total assets increased to 0.86% from 0.82% in 2000. Service charges on deposit accounts amounted to $585 in 2001, increasing $84 from 2000, an increase of 16.77%. This increase is due to the growth in the number of new customer relationships, account maintenance fees and processing fees. Other service charges, commissions and fees increased $139 during 2001. These fees include income generated from the Bank's Residential Mortgage Loan Department, principally gains when loans are sold in the secondary market and fees collected from borrowers totaled $170 in 2001, increasing 193.8% over the previous year's amount of $58. In addition, fee income from transactions performed at the Bank's ATMs by non-customers was stable from 2000 to 2001. 13 Non-Interest Income
For the year ended December 31, Percent Change From 2001 2000 2000 to 2001 -------------- -------------- ---------------------- Service Charges on Deposit Accounts $ 585 $ 501 16.77% ATM Fee Income 396 382 3.66 Other Service Charges, Commissions & Fees 466 327 42.51 -------------- -------------- ---------------------- 1,447 1,210 19.59 Securities Gain, Net 17 1 1600.00 -------------- -------------- ---------------------- Total Non-Interest Income $ 1,464 $ 1,211 20.89% ============== ============== ======================
Non-Interest Expense Non-interest expense increased $654 in 2001, or 12.0% over the 2000 level. As a percentage of total average assets, non-interest expense was 3.6% in 2001 compared to 3.7% in 2000. Salary and employee benefits, the largest non-interest expense, increased $338 or 13.1% in 2001. This reflects an increase in the Bank's staff, combined with higher employee compensation and benefit costs. Metro's remaining expense of $3,205 increased $316 or 10.9% from $2,889 in 2000, and is due primarily to increased legal costs associated with revisions to benefit plans and minor increases in several expense categories. Throughout 2001 and 2000, the Bank continued to develop an extensive ATM network. The Bank entered into agreements with several area Shell ETD and Amoco stores to deploy ATMs in their facilities, adding one ATM to the network during 2001 and three during 2000. At December 31, 2001, Metro's ATM network includes twenty-six machines, of which, nineteen are located at off-premise locations and seven are located at Bank branches. Currently, the Bank disburses cash at these sites and intends to allow users to conduct other paper based transactions in the future. Non-Interest Expense
For the year ended December 31, Percent Change From 2001 2000 2000 to 2001 ---------------------------- ----------------------- Salaries and Employee Benefits $ 2,918 $ 2,580 13.10% Net Occupancy Expense 517 506 2.17 Equipment Expense 384 418 (8.13) Advertising and Public Relations 207 228 (9.21) Legal and Professional Services 260 172 51.16 Data Processing 408 388 5.15 Amortization of Core Deposit Intangible - - - Other 1,429 1,177 21.41 ---------------------------- ----------------------- Total $ 6,123 $ 5,469 11.96% ============================ =======================
Provision for Income Taxes Metro's provision for income taxes of $941 represents an effective tax rate of 38.1% in 2001. This compares to an effective tax rate of 35.5% in 2000. A change in state tax law resulted in the lower tax rate in 2000. Footnote twelve of the consolidated financial statements includes a reconciliation of Metro's effective tax rate and the U.S. federal statutory rates. 14 CAPITAL RESOURCES AND CAPITAL ADEQUACY Metro is subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Metro's financial statements. Under federal capital adequacy guidelines and the regulatory framework for prompt corrective action, Metro must meet specific capital guidelines that involve quantitative measure of Metro's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Metro's capital amounts and classification are also subject to qualitative judgments by regulators involving capital components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Metro to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and Tier 1 capital to average assets. Management believes, as of December 31, 2001, that Metro meets all capital adequacy requirements to which it is subject. USE OF FUNDS Securities Securities are the second major category of earning assets for the Bank. This portfolio, together with short-term investments, are 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. Securities comprise 24.6% of total earning assets at December 31, 2001. 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. Total securities at December 31, 2001 decreased by $3,300 or 8.2% from the prior year, a nominal decrease. Weighted average yields on the securities portfolio were 5.77% for 2001 and 5.99% for 2000. Securities consist primarily of U.S. government agency and corporation bonds, mortgage backed securities with both fixed and floating interest rates and municipal securities with fixed interest rates. Securities designated as "held to maturity" include $1,500 of dual indexed derivative securities as of December 31, 2001, representing no change from the prior year. Although these securities' current market values are below cost, Metro believes the decline in value of these securities to be only temporary due to their interest rate characteristics. The Bank has the ability to hold these securities until their respective maturity dates, when significant differences between book value and market value will no longer exist. The mortgage backed securities are subject to both prepayment and interest rate risk and have been classified primarily as available for sale. Securities Weighted Average Yield
1 Year of Less 1 to 5 Years 5 to 10 Year Over 10 Years Total Balance Rate Balance Rate Balance Rate Balance Rate Balance ---------------- --------------- --------------- ---------------- -------- Available for Sale ------------------------------- US Government & Agencies $ 656 6.61% $ - -% $ - -% $ 987 5.41% $ 1,643 Mortgage Backed Securities - - 1,083 6.00 4,785 5.70 26,518 6.23 32,386 -------- -------- -------- -------- -------- Total Available for Sale $ 656 $ 1,083 $ 4,785 $ 27,505 $ 34,029 ======== ======== ======== ======== ======== Held to Maturity ------------------------------- US Government & Agencies $ - -% $ 1,500 5.64% $ - -% $ - -% $ 1,500 States & Political Subdivision 1 - - 1,704 7.19 - - - - 1,704 -------- -------- -------- -------- -------- Total Held to Maturity $ - $ 3,204 $ - $ - $ 3,204 ======== ======== ======== ======== ========
These investment securities weighted average yields are presented on a tax equivalent basis. 1. Average rates were calculated on a tax-equivalent basis using a marginal federal income tax rate of 34%. 15 Loans Total loans increased from $102,900 in 2000, or 12.6%, to $115,800 at December 31, 2001. The increase is due to the growth of both the real estate mortgage portfolio and the commercial/agricultural portfolio, which grew in 2001 by 14.7% and 10.4%, respectively. The Bank continued to make a concerted effort to increase its commercial and installment loan portfolio through the use of an extensive loan officer calling program aimed at the Bank's target market. During 2000, the Bank increased the installment loan portfolio by expanding its indirect lending relationship through a local window manufacturer. The Bank's growth in commercial and other loans is centered around short- and intermediate-term maturities. The Bank has maintained a competitive approach toward high quality loans in its marketplace. The Bank originates residential mortgage loans which are either held for sale and then sold in the secondary market or retained and serviced in the loan portfolio, based on the Bank's Loan Policy and portfolio objectives. Residential loans held for sale were $2,000 and $200 as of December 31, 2001 and December 31 2000, respectively. The increase in 2001 was primarily due to market conditions that led to increased residential mortgage volume.
Loan Portfolio at Year-End (including loans held for sale) -------------------------------------------------------------------------------------------------- December 31, Percent change from 2001 2000 2000 to 2001 --------------- --------------- ----------------------- Commercial & Agricultural $ 26,782 $ 24,261 10.4% Real Estate - Construction 6,095 2,504 143.4 Real Estate - Mortgage 58,182 49,229 18.2 Installment 22,229 23,848 (6.8) Student Loans 2,512 3,034 (17.2) --------------- --------------- 115,800 102,876 12.6 --------------- --------------- Less: Allowance for Loan Losses (1,457) (1,352) 7.8 --------------- --------------- Net Loans $ 114,343 $ 101,524 12.6% ============== ===============
After 1 But Maturity Distribution Within 1 Year Within 5 Years After 5 Years Total ---------------------------------------- --------------- ----------------- ----------------- ------------ Commercial, Financial & Agricultural $ 12,815 $ 8,883 $ 5,084 $ 26,782 Real Estate - Construction 6,095 - - 6,095 --------------- ----------------- ----------------- ------------ TOTAL $ 18,910 $ 8,883 $ 5,084 32,877 =============== ================= ================= Real Estate - Mortgage 58,182 Installment 22,229 Student Loans 2,512 ------------ TOTAL $ 115,800 ============ Loans Maturing After One Year With : Fixed Interest Rates $ 23,311 $ 22,797 Variable Interest Rates 6,077 23,833 ----------------- ----------------- TOTAL $ 29,388 $ 46,630 ================= =================
16 The Bank's loan portfolio is comprised primarily of commercial and installment loans. At December 31, 2001, 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. 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 ("loan committees") which meet weekly and semi-monthly, respectively. The loan committees provide for continual communication through the collective knowledge, judgment and experience of its members. Additionally, they offer valuable input to lending personnel, act as a loan approval body and monitor the overall quality of the Bank's loan portfolio. The Bank maintains a comprehensive loan review program. The purpose of the program is to evaluate credit quality and loan documentation. Bank management uses this program to evaluate the loan portfolio against its credit quality standards and its assessment of the adequacy of the allowance for loan losses. The Bank's Board of Directors meets monthly to review and approve the activity of the loan committees. Additionally, the Bank's Board of Directors reviews all problem loans and delinquency reports at each Board meeting. The Bank utilizes a risk system whereby each loan (excluding GSLs) 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. As of December 31, 2001, Metro had impaired loans of $1,027. Of this amount, $83 had a related specific allowance of $10. As of December 31, 2000, Metro had impaired loans of $926. Of this amount, $95 had a related specific allowance of $20. The Bank's policy for accruing interest on impaired loans provides for accruing and non-accruing impaired loans, depending on management's assessment of the risk that interest and/or principal may be uncollectible. For non-accruing impaired loans, interest accrued to date is charged against current earnings. No interest for non-accruing impaired loans is accrued after a loan is classified as non-accrual and impaired. All payments received for non-accruing impaired loans are utilized to reduce the principal balance outstanding. Interest income of $97 would have been recorded in 2001 on impaired loans if such loans had been accruing interest throughout the year in accordance with their original terms. In 2001, interest income in the amount of $2 was recorded on non-accrual impaired loans prior to being classified as non-accrual and impaired. The average balance of impaired loans was $866 for the year ended December 31, 2001. Loans are charged off when they are deemed uncollectible. Total charged-off loans, net of recoveries, were $125 in 2001, compared to $214 in 2000. 17 The following tables present activity in the allowance for loan losses account and allocation of the allowance among loan categories: Allowance for Loan Losses
For the year ended December 31, 2001 2000 ---------------- --------------- Allowance for Loan Losses, January 1 $ 1,352 $ 1,464 ---------------- --------------- Loans Charged-Off: Commercial 109 188 Installment 63 44 ---------------- --------------- Total Charged-Off Loans 172 232 ---------------- --------------- Recoveries on Charged-Off Loans: Commercial 35 11 Installment 12 7 ---------------- --------------- Total Recoveries on Charged-Off Loans 47 18 Net Charged-Off Loans 125 214 Provision for Loan Losses 230 102 ---------------- --------------- Allowance for Loan Losses, December 31 $ 1,457 $ 1,352 ================ =============== Average Loans Outstanding $ 110,560 $ 94,403 ================ =============== Net Charged-Off Loans to Average Loans 0.11% 0.23% ================ ===============
Allocation of Allowance for Loan Losses
December 31, ---------------------------------------------------------------------- 2001 2000 --------------------------------- -------------------------------- % of Loans to % of Loans to Amount Total Loans Amount Total Loans ---------------- ---------------- --------------- ---------------- Commercial & Agricultural $ 362 23.1% $ 317 24.1% Real Estate - Construction 77 5.3 33 2.5 Real Estate - Mortgage 731 50.2 679 48.9 Installment 280 19.2 315 23.7 Student Loans 7 2.2 8 0.8 ---------------- ---------------- --------------- ---------------- $ 1,457 100.0% $ 1,352 100.0% ================ ================ =============== ================
The GSL portfolio is fully guaranteed by a third party for all loans which were first disbursed prior to October 1, 1993. For those GSLs disbursed on or after October 1, 1993 (or consolidated on or after that date), the guarantee is 98% 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 GSL. All GSLs are re-insured in various amounts by the federal government. As of December 31, 2001, approximately $721 or 28.7% of the Bank's GSL portfolio was disbursed after October 1, 1993. 18 Under-Performing Assets
December 31, ------------------------------------- 2001 2000 ----------------- --------------- Non-Accruing Loans $ 424 $ 412 Ninety (90) Days Past Due 121 227 ----------------- --------------- Total Under-Performing Assets $ 545 $ 639 ================= =============== Under-Performing Assets as a Percentage of Total Loans 0.47% 0.62% ================= =============== Past Due Loans (90 Days or More) Commercial 26 - Student Loans 95 227 ----------------- --------------- Total $ 121 $ 227 ================= ===============
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) certificates of deposit. Other shorter term sources of funds are large denomination certificates of deposit and securities sold under agreements to repurchase. The following table presents information with respect to the average balances of these funding sources. Funding Sources-Average Balances
For the year ended December 31, Percent Change from 2001 2000 2000 to 2001 ------------- ------------- ------------------------ Core Deposits: Non-Interest Bearing Demand $ 31,043 $ 27,789 11.72% Savings Accounts 4,829 4,909 (1.63) Money Market and NOW Accounts 54,552 48,223 13.12 Other Time Deposits 33,807 31,045 8.90 ------------- ------------- Total Core Deposits 124,231 111,966 10.96 ------------- ------------- Time Deposits of $100 and Over 13,518 13,342 1.32 Other Borrowings and 102.80 Repurchase Agreements 16,461 8,117 ------------- ------------- Total Funding Sources $ 154,210 $ 133,425 15.58% ============= =============
19 Funding Sources - Average Rates
For the year ended December 31, Percent Change from 2001 2000 2000 to 2001 ------------- ------------- ------------------------ Core Deposits Non-Interest Bearing Demand -% -% -% Savings Accounts 1.26 1.99 (36.68) Money Market and NOW Accounts 3.12 4.47 (30.20) Other Time Deposits 6.44 6.10 5.57 ------------- ------------- ------------------------ Total Core Deposits 3.31% 3.91% (14.32%) ------------- ------------- ------------------------ Other Borrowings and Repurchase Agreements 3.90 5.86 (33.56) ------------- ------------- ------------------------ Total Funding Sources 3.37% 4.03% (16.38%) ============= ============= ========================
The Bank's average total core deposits have shown steady growth over the past several years, increasing by $12,300 or 11.0% in 2001 and $4,700 or 4.4% in 2000. During 2001, the Bank experienced increases in all categories of average deposits, except for savings accounts. The daily average balance of savings, money market and NOW accounts and other time deposits increased 10.7% during 2001. No one category of deposits dominated the growth experienced by the Bank. This growth was generated primarily by the Bank's loan calling program which produced a number of new commercial deposits. Also, the Bank continues to service a number of bank accounts which relate to the real estate title services industry. Due to the nature of the title services industry, these deposits are short-term and usually deposited in the Bank during the last week of each month and withdrawn during the first week of the following month. This typically increases the Bank's deposits at the end of each month. Time Deposit of $100 and Over Year End 1 - 90 91 - 180 181 - 366 Beyond 1 Balance Days Days Days Year -------- ------- -------- --------- -------- 2001 $ 13,518 $ 1,591 $ 5,979 $ 2,833 $ 3,115 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 $4,000. The Bank also maintains a current line of credit with the Federal Home Loan Bank in the amount of $13,000 to meet liquidity needs. 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- and long-term borrowings. The purposes of liquidity management are to match sources of funds with anticipated customer borrowings, 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, 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. 20 At December 31, 2001, $49,700 or 42.9% of the loan portfolio were fixed rate loans, and $66.1 or 57.1% were variable rate. Fixed and variable rate loans with a scheduled maturity date greater than one year amounted to $46,100 and $29,900, respectively, at December 31, 2001. No securities mature in less than one year. The Bank's average loan-to-deposit ratio, another indication of liquidity, was 81.3% in 2001, compared to 76.4% for 2000. Management also monitors the Bank's balance between interest rate sensitive assets and liabilities to ensure that changes in interest rates will not adversely affect earnings. Management of these sensitive items is important to protect the net interest margin and assure earnings stability during periods of adverse fluctuations in market interest rates. Interest rate sensitivity occurs when assets and liabilities are subject to rate and yield changes within a designated time horizon. An interest rate sensitivity gap ("GAP") is determined by the differential of interest-earning assets and interest-bearing liabilities. For an institution with a negative GAP for a given period, the amount of its interest-bearing liabilities maturing or otherwise repricing within such period exceeds the amount of the interest-earning assets repricing within the same period. Accordingly, in a rising interest rate environment, institutions with a negative GAP will generally experience greater increases in costs of their interest-bearing liabilities than in yields on their interest-earning assets. Conversely, the yields on interest-earning assets of institutions with a negative GAP will generally decrease less than the cost of their interest-bearing liabilities during declining interest rate environments. Changes in interest rates will generally have the opposite effect on institutions with a positive GAP. Management closely monitors its liquidity and interest rate sensitivity. Management's objective in interest rate sensitivity management is to reduce the Bank's vulnerability to future interest rate fluctuations while providing for growth of the net interest margin. Management's goal is to maintain a GAP ratio of rate-sensitive assets to rate-sensitive liabilities within a range of 0.70 to 1.30 for the one year time frame. The Bank's cumulative GAP ratio on December 31, 2001 was 61.0% for expected maturities of ninety days or less and 81.1% for maturities of one year or less. These ratios fall within the Bank's desired liquidity range for one year. Management intends to maximize its net interest margin while managing interest rate risk within prudent boundaries. Based upon the current balance sheet structure of the Bank, any future increase in interest rates could have a positive impact on the Bank's net interest margin and earnings. Given current economic conditions, management expects any decrease in general interest rates to have a minimal effect on the Bank's earnings. Interest Rate Sensitivity Analysis
91 - 365 1 - 5 Beyond 5 1 - 90 Days Days Years Years Total -------------- -------------- --------------- ------------- ------------- Earning Assets: Securities $ 3,769 $ 23,049 $ 8,177 $ 2,238 $ 37,233 Loans (excluding non-accruing) 50,373 14,675 34,750 15,578 115,376 -------------- -------------- --------------- ------------- ------------- Total Earning Assets $ 54,142 $ 37,724 $ 42,927 $ 17,816 $ 152,609 ============== ============== =============== ============= ============= Interest-Bearing Liabilities: Savings and Time Deposits $ 70,306 $ 22,734 $ 11,487 $ 650 $ 105,177 Repurchase Agreements 17,544 - - - 17,544 Borrowed Funds - 2,000 5,000 - 7,000 -------------- -------------- --------------- ------------- ------------- Total Interest-Bearing Liabilities $ 87,850 $ 24,734 $ 16,487 $ 650 $ 129,721 ============== ============== =============== ============= ============= Interest Rate Sensitivity Gap Per Period $ (33,708) $ 12,990 $ 26,440 $ 17,166 $ 22,888 Cumulative Interest Rate Gap $ (33,708) $ (20,718) $ 5,722 $ 22,888 $ 22,888 Cumulative Ratio of Interest Rate Sensitivity 61.6% 81.6% 104.4% 117.6% 117.6%
21 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders MetroBanCorp Indianapolis, Indiana We have audited the accompanying consolidated balance sheets of MetroBanCorp as of December 31, 2001 and 2000 and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Crowe, Chizek and Company LLP Indianapolis, Indiana January 18, 2002, except for Note 1-Stock Dividends, as to which the date is March 12, 2002 22 ITEM 7. FINANCIAL STATEMENTS --------------------
Consolidated Balance Sheets MetroBanCorp December 31, ASSETS 2001 2000 --------------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks $ 28,955 $ 22,192 Securities Held to Maturity (Fair Value: 2001 - $3,272 and 2000 - $3,104) 3,204 3,208 Securities Available for Sale 34,029 37,334 --------------- --------------- Total Securities 37,233 40,542 --------------- --------------- Loans Held for Sale 2,018 212 Loans, net of Allowance of $1,457 and $1,352 112,325 101,312 Premises and Equipment, net 1,168 1,508 Accrued Interest Receivable and Other Assets 2,286 2,566 --------------- --------------- Total Assets $ 183,985 $ 168,332 =============== =============== LIABILITIES --------------------------------------------------------------------------------------------------------------------------- Deposits: Non-Interest Bearing $ 37,341 $ 36,139 Interest Bearing 105,177 102,871 --------------- --------------- Total Deposits 142,518 139,010 --------------- --------------- Repurchase Agreements 17,544 8,868 Other Borrowings 7,000 5,000 Accrued Interest Payable and Other Liabilities 1,993 1,420 --------------- --------------- Total Liabilities 169,055 154,298 --------------- --------------- SHAREHOLDERS' EQUITY --------------------------------------------------------------------------------------------------------------------------- Preferred Stock: 1,000,000 shares authorized; none outstanding - - Common Stock: no par value, 3,000,000 shares authorized; 2,064,823 and 2,140,135 issued and outstanding in 2001 and 2000 14,968 14,352 Treasury Stock, 42,630 shares, at cost (238) - Accumulated Deficit (81) (191) Accumulated Other Comprehensive Income/(Loss) 281 (127) --------------- --------------- Total Shareholders' Equity 14,930 14,034 --------------- --------------- Total Liabilities and Shareholders' Equity $ 183,985 $ 168,332 =============== ===============
See accompanying notes. 23
Consolidated Statements of Income MetroBanCorp Year ended December 31, 2001 2000 --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans, including related fees $ 9,996 $ 9,598 Securities 2,362 2,241 Other 197 238 --------------- ---------------- Total Interest Income 12,555 12,077 --------------- ---------------- INTEREST EXPENSE: Deposits 4,555 4,897 Other 642 476 --------------- ---------------- Total Interest Expense 5,197 5,373 --------------- ---------------- Net Interest Income 7,358 6,704 Provision for Loan Losses 230 102 --------------- ---------------- Net Interest Income after Provision for Loan Losses 7,128 6,602 --------------- ---------------- NON-INTEREST INCOME: Service Charges on Deposit Accounts 585 501 Securities Gains 17 1 Other Service Charges, Commissions and Fees 466 327 ATM Fee Income 396 382 --------------- ---------------- Total Non-Interest Income 1,464 1,211 --------------- ---------------- NON-INTEREST EXPENSE: Salaries and Employee Benefits 2,918 2,580 Occupancy, net 517 506 Equipment 384 418 Advertising and Public Relations 207 228 Legal and Professional 260 172 Data Processing 408 388 Other 1,429 1,177 --------------- ---------------- Total Non-Interest Expense 6,123 5,469 --------------- ---------------- Income Before Income Taxes 2,469 2,344 Provision for Income Taxes 941 833 --------------- ---------------- NET INCOME $ 1,528 $ 1,511 =============== ================ BASIC NET INCOME PER COMMON SHARE $ 0.73 $ 0.69 =============== ================ DILUTED NET INCOME PER COMMON SHARE $ 0.70 $ 0.68 =============== ================
See accompanying notes. 24
Consolidated Statements of Cash Flows MetroBanCorp Year ended December 31, OPERATING ACTIVITIES: 2001 2000 -------------------------------------------------------------------------------------------------------------------------- Net Income $ 1,528 $ 1,511 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses 230 102 Depreciation and Amortization 345 402 Net amortization (accretion) of securities 112 49 (Gain)/Loss on Disposal of Equipment 5 - (Gain)/Loss on Sale of Securities (17) (1) Changes in Accrued Interest Receivable and Other Assets (19) (193) Change in Accrued Interest Payable and Other Liabilities 573 300 Change in Loans Held for Sale (1,806) (94) --------------- --------------- Net Cash Provided by Operating Activities 951 2,076 --------------- --------------- INVESTING ACTIVITIES: -------------------------------------------------------------------------------------------------------------------------- Proceeds from Maturities of Securities Available for Sale 10,096 5,098 Proceeds from Sales of Securities Available for Sale 9,638 4,502 Purchases of Securities Available for Sale (15,813) (8,678) Proceeds from the Repayment of Student Loans 522 730 Net Loans made to Customers (11,765) (15,659) Purchases of Premises and Equipment (104) (366) Proceeds from Disposal of Equipment 94 - --------------- --------------- Net Cash Used in Investing Activities (7,332) (14,373) --------------- --------------- FINANCING ACTIVITIES: -------------------------------------------------------------------------------------------------------------------------- Change in Deposits 3,508 20,864 Change in Repurchase Agreements 8,676 3,473 Cash Dividends Paid (566) (502) Change in Fed Funds Purchased - (3,300) Proceeds from FHLB advances 7,000 5,000 Repayments on FHLB advances (5,000) - Issuance of Common Stock 117 237 Repurchase of Common Stock and Fractional Shares (591) (809) --------------- --------------- Net Cash Provided by Financing Activities 13,144 24,963 --------------- --------------- -------------------------------------------------------------------------------------------------------------------------- Net Increase/(Decrease) in Cash and Cash Equivalents 6,763 12,666 Cash and Cash Equivalents at Beginning of Period 22,192 9,526 --------------- --------------- Cash and Cash Equivalents at End of Period $ 28,955 $ 22,192 =============== =============== Supplemental Disclosure of Cash Flow Information: Cash Paid During the Year for Interest Expense $ 5,489 $ 5,008 Cash Paid During the Year for Income Taxes, net 898 954
See accompanying notes. 25
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY MetroBanCorp Common Accumulated Other Total Share- Shares Common Treasury (Accumulated Comprehensive Comprehensive holders' Outstanding Stock Stock Deficit) Income/(Loss) Income Equity ----------------------------------------------------------------------------------------------------------------------------------- Balances, January 1, 2000 2,033,036 $14,232 $ - $ (508) $ (448) $ 13,276 Net Income - - - 1,511 - $ 1,511 1,511 Change in Unrealized Gains on Securities, net - - - - 321 321 321 -------- Comprehensive Income $ 1,832 ======== Cash Dividend ($0.23 per share) - - - (502) (502) MetroBanCorp Employee Equity Plan 1,241 8 - - 8 Exercised Options and Employee Stock Purchase Plan 41,309 229 - - 229 Purchases of Common Stock (134,420) (809) - - (809) 5% Stock Dividend 97,058 692 - (692) - -------------------------------------------------------------------------------------------------- ---------- Balances, December 31, 2000 2,038,224 14,352 - (191) (127) 14,034 Net Income - - - 1,528 - $ 1,528 1,528 Change in Unrealized Gains on Securities, net - - - - 408 408 408 -------- Comprehensive Income $ 1,936 ======== Common stock purchased by MetroBanCorp's Supplemental Executive Retirement Plan (42,630) - (238) - (238) Cash Dividend ($0.27 per share) - - - (566) (566) MetroBanCorp Employee Equity Plan 1,322 9 - - 9 Exercised Options and Employee Stock Purchase Plan 20,382 108 - - 108 Purchases of Common Stock (52,657) (353) - - (353) 5% Stock Dividend, net of fractional shares 100,182 852 - (852) - -------------------------------------------------------------------------------------------------- ---------- Balances, December 31, 2001 2,064,823 $14,968 $ (238) $ (81) $ 281 $ 14,930 ================================================================ ========== Disclosure of Reclassification Amount 2001 2000 ------------------------------------------------------- Unrealized Holding Gains Arising During Period 707 532 Less: Reclassification Adjustment for Gains/(Losses) Included in Net Income (17) (1) Tax effect (282) (210) -------------------- Other Comprehensive Income 408 321 ====================
See accompanying notes. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS METROBANCORP (Dollar amounts in thousands, except per share data) 1. BACKGROUND OF CORPORATION MetroBanCorp ("Metro") was incorporated in the State of Indiana in 1987 for the purpose of holding all of the shares of common stock of MetroBank ("Bank"), an Indiana-chartered commercial bank which commenced operations in April, 1988. The Bank's primary market and service area is Hamilton County and northern Marion County, which are together considered part of the Northside Suburban Indianapolis metropolitan area. The Bank's primary mission is to provide commercial and individual banking services in the previously defined service area. 2. SUMMARY OF ACCOUNTING AND REPORTING POLICIES Basis of Accounting - The accompanying consolidated financial statements include the accounts of Metro and the Bank. The consolidated financial statements have been prepared in accordance with accounting principles, generally accepted in the United States of America and conform with general practices in the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimated. The allowance for loan losses and fair values of financial instruments are particularly subject to change. All significant intercompany balances and transactions have been eliminated. Cash Flows - Cash and cash equivalents include cash on hand, amounts due from banks and overnight Federal Funds Sold. Net cash flows are reported for loan and deposit transactions. Securities - Metro has the intent and ability to hold securities classified as held to maturity until their respective maturities. Their securities are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities not classified as held to maturity are considered available for sale. Available for sale securities are stated at fair market value. Unrealized gains and losses, net of taxes, are included in other comprehensive income. Gains or losses from the sale of securities are determined on a specific identification basis. Interest income includes the amortization of premiums and accretion of discounts. Securities are written down to fair value when a decline in fair value is not temporary. Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated collectively for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. In general, loans internally classified as doubtful or loss are considered impaired while loans classified as substandard are individually evaluated for impairment. Depending on the relative size of the credit relationship, late or insufficient payments of 30 to 90 days will cause management to re-evaluate the credit under its normal evaluation procedures. Loans - Loans that management has the intent and ability to hold for the foreseeable future or until pay-off are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market on an aggregate basis. 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. 27 Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment to the related loan's yield. The Bank is generally amortizing these amounts over the contractual life of the related loans. Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 30 years. Repurchase Agreements - 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 $17,544 and $10,455 during 2001 and 2000, respectively. The daily average outstanding balance of securities sold under agreements to repurchase amounted to $9,331 and $4,076 for the years ended December 31, 2001 and 2000 respectively. The weighted average rate during 2001 and 2000 was 2.52% and 4.64%. Per Share Data - Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during each year. Net income per common share, assuming dilution, is computed as above except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares (stock options) had been issued. Below is a table reconciling basic net income per common share and net income per common share - assuming dilution:
2001 2000 -------------- -------------- Basic Net income $ 1,528 $ 1,511 ============== ============== Weighted average common shares outstanding 2,088,582 2,191,636 Basic earnings per common share $ 0.73 $ 0.69 ============== ============== Diluted Net income $ 1,528 $ 1,511 ============== ============== Weighted average common shares outstanding for basic earnings per common share 2,088,582 2,191,636 Add: Dilutive effects of assumed exercises of stock options 76,350 23,044 -------------- -------------- Average shares and dilutive potential common shares 2,164,932 2,214,680 ============== ============== Diluted earnings per common share $ 0.70 $ 0.68 ============== ==============
Stock options for 58,709 and 171,195 shares of common stock were not considered in computing diluted earnings per common share for 2001 and 2000 because they were antidilutive. Stock Dividends - A 5% stock dividend was declared on January 10, 2000 to shareholders of record on January 20, 2000 and distributed on February 7, 2000. A 5% stock dividend was declared January 25, 2001 to shareholders of record on March 1, 2001 and distributed March 12, 2001. A 5% stock dividend was declared on February 5, 2002 to shareholders of record on March 1, 2002 and distributed March 12, 2002. All average share and per share amounts have been retroactively adjusted for all prior years to reflect these stock dividends. Comprehensive Income - Comprehensive income consists of net income and other comprehensive income/(loss). Other comprehensive income/(loss) includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity. Stock Compensation - Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method to measure expense using an option pricing model to estimate fair value. Loss Contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve 28 uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Financial Instruments - Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Income Taxes - Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Dividend Restrictions - According to banking regulations, the Bank is restricted as to the amount of dividends that can be paid to Metro without prior regulatory approval. Indiana chartered banks are limited in the amount of dividends they may pay to undivided profits of the bank adjusted for statutorily defined bad debts. Industry Segment - Internal financial information is reported and aggregated in one line of business, banking. Derivatives - Beginning January 1, 2001, a accounting standard required all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values are recorded in the income statement. Fair value changes involving hedges are generally recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard on January 1, 2001 did not have a material effect. New Accounting Pronouncements - A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. Adoption of this standard on January 1, 2002 will not have a material effect on the Company's financial statements. 3. SECURITIES The fair value of securities available for sale and the related gains and losses recognized in accumulated other comprehensive income/(loss) were as follows:
Gross Gross Unrealized Unrealized Fair Value Gains Losses ----------------- ----------------- --------------- 2001 ---- U.S. Government and federal agency $ 1,643 $ - $ (13) Mortgage-backed 32,386 545 (45) ----------------- ----------------- --------------- Total $ 34,029 $ 545 $ (58) ================= ================= =============== 2000 ---- U.S. Government and federal agency $ 7,375 $ 3 $ (25) Mortgage-backed 29,959 41 (239) ----------------- ----------------- --------------- Total $ 37,334 $ 44 $ (264) ================= ================= ===============
29 The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
Gross Gross Carrying Unrecognized Unrecognized Amount Gains Losses Fair Value --------------- --------------- --------------- ------------- 2001 ---- U.S. Government and federal agency $ 1,500 $ 23 $ - $ 1,523 State and municipal 1,704 45 - 1,749 --------------- --------------- --------------- ------------- Total $ 3,204 $ 68 $ - $ 3,272 =============== =============== =============== ============= 2000 ---- U.S. Government and federal agency $ 1,500 $ - $ (100) $ 1,400 State and municipal 1,708 - (4) 1,704 --------------- --------------- --------------- ------------- Total $ 3,208 $ - $ (104) $ 3,104 =============== =============== =============== =============
The fair value of debt securities and carrying amount, if different, by contractual maturity at December 31, 2001 are presented in the following table. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately.
Available for Sale Held to Maturity --------------- ------------------------------ Carrying Fair Value Amount Fair Value Due in one year or less $ 656 $ - $ - Due after one year through five years - 3,204 3,272 Due after five years through ten years - - - Due after ten years 987 - - Mortgage backed securities 32,386 - - --------------- ------------ ------------- Total Securities $ 34,029 $ 3,204 $ 3,272 =============== ============ =============
Securities with a carrying value of approximately $18,324 and $12,500 were pledged at December 31, 2001 and 2000, to secure certain deposits and repurchase agreements, and for other purposes as permitted or required by law. Gross realized gains/losses on the sale of securities amounted to a $19 gain and $2 loss during 2001 compared to gains of $1 and losses of $0 in 2000. 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value approximates carrying amount for all items except those described further. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. Estimated fair value for loans is based on the rates charged at year end for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. Estimated fair value for time deposits and fixed rate borrowings is based on the rates paid at year end for new deposits or borrowings, applied until maturity. Estimated fair value for off-balance-sheet loan commitments are considered nominal. The estimated carrying and fair values of Metro's financial instruments, are as follows:
December 31, --------------------------------------------------------------- 2001 2000 ----------------------------- ---------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------ ------------- ------------ ------------ Financial Assets: Cash and equivalents $ 28,955 $ 28,955 $ 22,192 $22,192 Securities 37,233 37,301 40,542 40,438 Loans, net 114,343 119,745 101,524 102,951 Accrued interest receivable 854 854 1,096 1,096 Financial Liabilities: Deposits 142,518 144,141 139,010 139,201 Other Borrowings 7,000 6,939 5,000 5,027 Repurchase agreements 17,544 17,544 8,868 8,868 Accrued interest payable 545 545 837 837
30 5. LOANS Total loans by major loan categories are as follows: December 31, ----------------------------- 2001 2000 ------------ ------------- Commercial & Agricultural $ 26,782 $ 24,261 Real Estate - Construction 6,095 2,504 Real Estate - Mortgage 56,164 49,017 Installment 22,229 23,848 Student Loans 2,512 3,034 ------------ ------------- Total Loans 113,782 102,664 Allowance for Loan Losses (1,457) (1,352) ------------ ------------- Loans, Net $112,325 $ 101,312 ============ ============= Activity in the allowance for loan loss is for the years indicated was as follows: 2001 2000 ------------- -------------- Balance at Beginning of Year $ 1,352 $ 1,464 Provision for Loan Losses 230 102 Charged-Off Loans (172) (232) Recoveries 47 18 ------------- -------------- Balance at End of Year $ 1,457 $ 1,352 ============= ============== The Bank's policy for recognizing income on impaired loans is to accrue interest until a loan is classified as impaired. For loans which receive the classification of impaired during the current period, interest accrued to date is charged against current earnings. No interest is accrued after a loan is classified as impaired. All payments received for loans which are classified as impaired are utilized to reduce the principal balance outstanding. Impaired loans were as follows. 2001 2000 ------------ ------------ Year-end loans with no allocated allowance $ 944 $ 831 for loan losses Year-end loans with allocated allowance 83 95 ------------ ------------ for loan losses $ 1,027 $ 926 ============ ============ Total Amount of the allowance for loan losses allocated $ 10 $ 20 2001 2000 ------------ ------------ Average of impaired loans during the year $ 866 $ 830 Interest income recognized during impairment 71 - Cash-basis interest income recognized 61 - 6. PREMISES AND EQUIPMENT Premises and equipment at December 31, 2001 and 2000 consist of the following: 2001 2000 ----------- ----------- Land and Improvements $ 216 $ 216 Building and Improvements 1,442 1,523 Furniture and Equipment 2,277 2,221 ----------- ----------- Total 3,935 3,960 Less: Accumulated Depreciation and Amortization (2,767) (2,452) ----------- ----------- $ 1,168 $ 1,508 =========== =========== 31 7. DEPOSITS The aggregate amount of time deposits in denominations of $100 or more at December 31, 2001 and 2000 was $13,518 and $13,342. At December 31, 2001, the scheduled maturities of time deposits are as follows: 2002 2003 2004 2005 2006 Thereafter Total -------- -------- -------- -------- -------- ---------- -------- $ 31,041 $ 8,368 $ 1,475 $ 1,074 $ 570 $ 650 $ 43,178 8. OTHER BORROWINGS At year-end 2001 and 2000, other borrowings consisted entirely of advances from the Federal Home Loan Bank (FHLB) which were as follows: Maturity Date Interest Rate 2001 -------------------------- ------------------- -------------- June 3, 2002 7.28% $ 2,000 June 4, 2003 4.86 2,000 September 19, 2003 3.70 2,000 November 26, 2003 3.73 1,000 -------------- Total $ 7,000 ============== Each advance is payable at its maturity date. The advances were collateralized by first mortgage loans under a blanket lien arrangement with the FHLB. Maturities over the next five years are: 2002 $ 2,000 2003 5,000 9. 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% of their pre-tax compensation, limited by the amount allowed by the IRS. Metro matching contributions are 110% of the first 6% of the employee's compensation, provided the employee contributes at least 2% 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% 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 $103 and $83 in 2001 and 2000. Supplemental Executive Retirement Plan - Metro has established a Supplemental Executive Retirement Plan (SERP) for certain executive officers. 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% 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 $132 and $38 in 2001 and 2000. Employee Equity Ownership Plan - Effective January 1, 1999, Metro established the Employee Equity Ownership Plan (EEOP), an equity-based compensation plan, for certain employees of Metro as defined by the plan. In order to receive an award under the EEOP, the employee must be actively employed throughout the computation period. The EEOP is designed and intended to promote the achievement of the Bank's goals by providing an incentive to employees to assist in meeting those goals, and to share the results of meeting or exceeding those goals with the employees. Metro's contribution expense related to the EEOP was $9 in 2001 and $4 in 2000. Target Benefit Plan - Effective January 1, 2001, Metro established the Target Benefit Plan (TBP), to provide its executive officers supplemental retirement benefits. The benefit due is based on a formula with payments due at 32 normal retirement age. Participants vest 100% after five years of service. Metro's contribution expense related to the TBP was $62 in 2001. Directors Retirement Plan - Effective January 1, 2001, Metro established the Directors Retirement Plan (DRP) for non-employee directors. Non-employee directors are eligible to participate in the Plan on the later of the Plan's effective date or after five years of service to the Board. Payment is due at retirement age of 75 in an amount equal to the current annual retainer rate for a ten year period. Metro's contribution expense related to the DRP was $142. 10. REGULATORY CAPITAL REQUIREMENTS Metro and MetroBank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. These guidelines and the regulatory framework for prompt corrective action involve quantitative measures of capital, assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices as well as qualitative judgments by the regulators about components, risk weightings, and other factors. Compliance with these regulations can limit dividends paid by either entity. Both entities must comply with regulations that establish minimum levels of capital adequacy. The Bank must also comply with capital requirements promulgated by the FDIC under its "prompt corrective action" rules. The Bank's deposit insurance assessment rate is based, in part, on these measurements. Actual and required capital amounts and ratios are presented below at year-end.
To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions ------------------------ ------------------------ ------------------------- 2001 Amount Ratio Amount Ratio Amount Ratio ----------- -------- ----------- --------- ----------- --------- Total Capital to risk weighted assets Consolidated $16,106 12.8% $ 10,037 8.0% $12,546 10.0% Bank 14,588 11.7% 9,978 8.0% 12,472 10.0% Tier 1 Capital to risk weighted assets Consolidated 14,649 11.7% 5,018 4.0% 7,528 6.0% Bank 13,131 10.5% 4,989 4.0% 7,483 6.0% Tier 1 Capital to average assets Consolidated 14,649 8.3% 7,102 4.0% 8,878 5.0% Bank 13,131 7.5% 7,025 4.0% 8,782 5.0% To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions ------------------------ ------------------------ ------------------------- 2000 Amount Ratio Amount Ratio Amount Ratio ----------- -------- ----------- --------- ----------- --------- Total Capital to risk weighted assets Consolidated $15,513 13.7% $ 9,033 8.0% $11,291 10.0% Bank 13,196 11.8% 8,982 8.0% 11,228 10.0% Tier 1 Capital to risk weighted assets Consolidated 14,161 12.5% 4,516 4.0% 6,774 6.0% Bank 11,844 10.6% 4,491 4.0% 6,737 6.0% Tier 1 Capital to average assets Consolidated 14,161 9.6% 5,933 4.0% 7,416 5.0% Bank 11,844 8.1% 5,846 4.0% 7,307 5.0%
As of December 31, 2001, the Bank categorized 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 that management believes have changed Metro's or the Bank's capital categories. 33 11. STOCK OPTION PLANS 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% per year. All options granted under these plans have an exercise price of $5.30 per share. These plans terminated on March 31, 2001, but options granted under the plans are eligible for exercise through their original expiration dates. During 1994, shareholders of Metro adopted the 1994 Stock Option and Stock Appreciation Rights Plan for officers and key employees of Metro and the Bank, and the 1994 Directors' Stock Option Plan for directors of Metro. Options and SAR's under these plans are fully vested at the grant date. Options granted under these plans have exercise prices ranging from $4 to $8 per share. As of December 31, 2001, there were 698,042 shares of common stock reserved for issuance under these plans. Stock option activity under these plans was as follows (information has been restated for stock dividend issuances): Number of Weighted Average Options Shares Share Price ------------------------------------------------------------------------- January 1, 2000 374,366 $ 5.57 Granted 46,802 6.48 Granted 10,474 5.44 Exercised (30,298) 5.05 Forfeitures (36,919) 4.96 ------------------------------------------------------------------------- December 31, 2000 364,425 $ 5.79 Granted 47,469 5.44 Granted 9,975 6.80 Exercised (7,359) 5.05 Forfeitures (21,270) 5.23 ------------------------------------------------------------------------- December 31, 2001 393,240 $ 6.11 ============== Shares exercisable 393,240 =============== Options outstanding at December 31, 2001, have a weighted average remaining life of 5.69 years. The weighted average fair value of the options granted was $2.45 per share in 2001 and $2.06 per share in 2000. Had compensation cost for stock options been measured using the fair value method, net income and earnings per share would have been the pro forma amounts indicated below. 2001 2000 -------- -------- Pro forma net income $ 1,393 $ 1,404 Pro forma basic earnings per share .67 .67 Pro forma diluted earnings per share .64 .66 The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date. 2001 2000 -------- -------- Risk-free interest rate 5.12% 5.79% Expected option life 10.0 10.0 Expected stock price volatility 35.34 32.3 Dividend yield 4.0% 4.17% 12. 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: 34 2001 2000 --------------- -------------- Federal - Current $ 819 $ 604 - Deferred (54) 93 --------------- -------------- 765 697 --------------- -------------- State - Current 184 110 - Deferred (8) 26 --------------- -------------- 176 136 --------------- -------------- $ 941 $ 833 =============== ============== A reconciliation between Metro's effective tax rate and the U.S. federal statutory rate is as follows: 2001 2000 ----------- ---------- U.S. Federal Statutory Rate 34.0% 34.0% State Income Taxes, Net of Federal Income Tax Benefit 5.4 3.8 Tax Exempt Interest (1.0) (0.9) Other (0.3) (1.3) ----------- ---------- 38.1% 35.6% ========== ========== The significant components of Metro's net deferred tax asset as of December 31, 2001 and 2000 are as follows: 2001 2000 --------- --------- Depreciation $ 135 $ 103 Provision for Loan Losses 511 474 Net Unrealized (Gain)/Loss on Securities Available for Sale (206) 93 Other 26 33 --------- --------- $ 466 $ 703 ========= ========= No valuation allowance was deemed necessary. 13. COMMITMENTS AND CONTINGENCIES Metro has entered into non-cancelable operating leases for its main office and four branch offices. The main office lease will expire in 2005 while the expiration of the branch office leases range from 2002 through 2004. Each operating lease has options to extend into the future. Rental expense for 2001 and 2000 was $193 and $193. Future aggregate minimum annual rentals (not considering renewal options) are payable as follows: 2002 2003 2004 2005 2006 Thereafter ------ ------ ------ ------ ------ ------------ $ 151 $ 110 $ 107 $ 23 $ - $ - 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. 35 Metro's financial instruments where contract amounts represent credit risk are as follows: 2001 2000 ---------- ----------- Standby Letters of Credit $ 12 $ 161 Commitments to Extend Credit 11,980 17,858 Unused Commercial Lines of Credit & Real Estate Draw Notes 6,797 678 Unused Home Equity & Personal Lines of Credit 2,078 1,751 ---------- ----------- Total Commitments $ 20,867 $ 20,448 ========== =========== Commitments to extend credit under lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and typically require the payment of fees. The total commitment amounts do not necessarily represent future cash requirements. Commitments sometimes expire before being drawn upon while others may not be drawn upon to the full amount available. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral required, if deemed necessary, by the Bank upon extension of credit is based upon management's credit evaluation of the borrower. The type of collateral typically involves a mortgage position in the underlying property collateralized by the loan, but may include accounts receivable, inventory, fixtures and equipment, general intangibles and the personal guarantee of the borrower. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support private borrowing arrangements. Substantially all guarantees expire in less than one year. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending credit under line of credit arrangements. The Bank may require cash, marketable securities, property and/or mortgage positions as collateral supporting these commitments in those instances in which collateral is deemed necessary. 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. At year end 2001 a reserve of $624 was required on deposits with the Federal Reserve or as cash on hand. These reserves do not earn interest. 14. 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. Loan transactions with directors and their affiliates and principal officers of Metro for 2001 were as follows: Balance at Beginning of Year $ 1,232 Loans Made 93 Loan Repayments (734) ------------ Balance at End of Year $ 591 ============ Deposits held for directors and their affiliates and principal officers of Metro as of December 31, 2001 and 2000 were $1,700 and $2,800. Certain directors and the companies with which they are affiliated also provide services to Metro. Metro conducts business with these affiliated companies for advertising and public relations, legal services and leasing office space. Payments made to director-affiliated companies are as follows: 2001 2000 ------------ ------------ Advertising & Public Relations $ 175 $ 203 Legal Services - 3 ------------ ------------ Total $ 175 $ 206 ============ ============ 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 and guaranteed by the seller. Loan servicing fees paid to the seller were $24 and $27 in 2001 and 2000, 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 2001 or 2000. 36 15. PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed statements of the parent company. Condensed Statements of Condition at December 31: ASSETS: 2001 2000 -------- -------- Cash and Cash Equivalents $ 247 $ 106 Securities Available for Sale 1,550 2,003 Investment in MetroBank 13,391 11,725 Other 435 229 -------- -------- Total Assets $ 15,623 $ 14,063 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Other Liabilities $ 693 $ 29 Shareholders' Equity 14,930 14,034 -------- -------- Total Liabilities and Shareholders' Equity $ 15,623 $ 14,063 ======== ======== Condensed Statements of Operations for the years: 2001 2000 -------- -------- Dividends from Banking Subsidiary $ 550 $ 1,150 Interest Income 119 124 Non-Interest Expenses (617) (256) Income Tax Benefit 190 53 Equity in Undistributed Earnings of MetroBank 1,286 440 -------- -------- Net Income $ 1,528 $ 1,511 ======== ======== 37 Condensed Statements of Cash Flows for the years: 2001 2000 ------- ------- Cash Flows from Operating Activities: Net Income $ 1,528 $ 1,511 Adjustments to Reconcile Net Income to Cash Provided by/(Used in) Operating Activities: Equity in Undistributed Earning of MetroBank (1,286) (440) Net amortization of securities 2 36 Change in Other Assets and Liabilities, net 437 16 ------- ------- Net Cash Flows from operating activities 681 1,123 ------- ------- Cash Flows From Investing Activities: Proceeds from the Sale of Securities -- 2,000 Proceeds from Maturity of Securities 500 -- Purchases of Securities -- (2,005) ------- ------- Net Cash Flows from investing activities 500 500 ------- ------- Cash Flows from Financing Activities: Cash Dividends Paid (566) (502) Purchases of Treasury Stock, net (591) (809) Exercise of options 117 237 ------- ------- Net cash from financing activities (1,040) (1,074) ------- ------- Net Increase/(Decrease) in Cash and Cash Equivalents 141 44 Cash and Cash Equivalents at Beginning of Year 106 62 ------- ------- Cash and Cash Equivalents at End of Year $ 247 $ 106 ======= ======= ITEM 8. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ----------------------------------------------------------------------- DISCLOSURE None. Part III. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ------------------------------------------------------------- The information set forth under the caption "Election of Directors", "Executive Officers of The Company" and "Section 16(a) Beneficial Ownership Reporting Compliance" in Metro's Proxy Statement, which is to be filed with the Commission within 120 days of December 31, 2001 pursuant to Regulation 14A under the Exchange Act, is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION ---------------------- The information set forth under the caption "Executive Compensation" in Metro's Proxy Statement, which is to be filed with Commission within 120 days of December 31, 2001 pursuant to Regulation 14A under the Exchange Act, is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The information set forth under the caption "Security Ownership of Beneficial Owners and Management" in Metro's Proxy Statement, which is to be filed with the Commission within 120 days of December 31, 2001 pursuant to Regulation 14A under the Exchange Act, is incorporated herein by reference. 38 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The information set forth under the caption "Certain Relationships and Related Transactions" in Metro's Proxy Statement, which is to be filed with the Commission within 120 days of December 31, 2001 pursuant to Regulation 14A under the Exchange Act, is incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K --------------------------------- (a) The following Exhibits are being filed as part of this Registration Statement: 3.01* Articles of Incorporation 3.02* By-Laws 10.01*1 Employment Agreement dated December 31, 1992 between Registrant and Ike G. Batalis 10.02*1 Employment Agreement dated July 1, 1991 between Registrant and Charles V. Turean 10.03*1 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*1 Form of Indemnification Agreement for Directors and Officers of Registrant 10.13**1 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, 1989 10.19* Student Loan Servicing Agreement, dated February 1, 1997 10.20**1 Registrant's Employees' Thrift and Retirement Plan 10.21***1 Registrant's 1994 Stock Option and Stock Appreciation Rights Plan 10.22***1 Registrant's 1994 Directors' Stock Option Plan 10.24***** Lease dated March 18, 1997 between Registrant and Riverview Hospital, for property at 2025 Cherry Street, Noblesville, Indiana 10.25****** Sublease dated September 11, 1997 between Registrant and Wal-Mart Stores, Inc., for property at 16865 Clover Road, Noblesville, Indiana 39 10.26****** Amendment No. 1 to Lease Agreement dated September 30, 1997, between the Registrant and Phoenix Home Life Mutual Insurance Company for property at 10333 North Meridian Street, Suite 111, Indianapolis, Indiana 10.27*******1 Employment Agreement dated May 10, 1999 between Registrant and Gregory J. Murray 10.28******* Memorandum of In-Store Bank Facility License Agreement dated August 13, 1999 between Registrant and SUPERVALU INC., d/b/a Cub Foods for property located at 14610 US 31 North, Carmel, Indiana 10.29******* Memorandum of Lease dated August 26, 1999 between Registrant and G & J PARTNERSHIP for property located at 11815 Allisonville Road, Fishers, Indiana 10.30 MetroBanCorp Target Benefit Plan 10.31 MetroBanCorp Director Retirement Plan 13 The Annual Report to Shareholders of the Company for the year ended December 31, 2001 (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 * Incorporated by reference to Registrant's Registration Statement on Form SB-2, File No. 33-75360 filed on February 16, 1994. ** Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2, File No. 33-75360, filed March 16, 1994. *** Incorporated by reference to Registrant's Form 10-QSB for the fiscal quarter ended June 30, 1994, filed in August, 1994. **** Incorporated by reference to Registrant's Form 10-KSB for the fiscal year ended December 31, 1995. ***** Incorporated by reference to Registrant's Form 10-QSB for the fiscal quarter ended March 31, 1998, filed May 13, 1998. ****** Incorporated by reference to Registrant's Form 10-QSB for the fiscal quarter ended September 30, 1998, filed November 12, 1998. ******* Incorporated by reference to Registrant's Form 10-KSB for the fiscal year ended December 31, 1999. 1 Indicates a management contract or compensatory plan or arrangement filed as an exhibit. (b) No Reports on Form 8-K were filed during the fourth quarter of 2001. 40 SIGNATURES In accordance with the requirements of Section 13 or 15 (d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MetroBanCorp (Registrant) Date: March 29, 2002 By: /s/ Ike G. Batalis --------------------------- Ike G. Batalis, President In accordance with the Exchange Act, this report has been signed by the following person on behalf of the registrant and in the capacities indicated as of March 29, 2002. By: /s/ Ike G. Batalis ---------------------------------- Ike G. Batalis, President (Principal Executive Officer) By: /s/ Charles V. Turean ---------------------------------- Charles V. Turean Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) By: CHRIS G. BATALIS* ---------------------------------- Chris G. Batalis, Director By: TERRY L. EATON* ---------------------------------- Terry L. Eaton, Director By: EVANS M. HARRELL* ---------------------------------- Evans M. Harrell, Director By: JAMES F. KEENAN * ---------------------------------- James F. Keenan, Director By: ROBERT L. LAUTH, JR. * ---------------------------------- Robert L. Lauth, Jr., Director By: JAMES C. LINTZENICH* ---------------------------------- James C. Lintzenich, Director By: EDWARD G. MCMAHON* ---------------------------------- Edward G. McMahon, Director By: R. D. "RUSTY" RICHARDSON* ---------------------------------- R. D. "Rusty" Richardson, Director By: EDWARD R. SCHMIDT* ---------------------------------- Edward R. Schmidt, Director By: DONALD F. WALTER* ---------------------------------- Donald F. Walter, Director *By: /s/ Ike G. Batalis ---------------------------------- Ike G. Batalis, Attorney-in-Fact 41 Index to Exhibits ----------------- Exhibit Number Exhibit -------------------------------------------------------------------------------- 3.01* Articles of Incorporation of the Registrant 3.02* By-Laws of the Registrant 10.01*1 Employment Agreement dated December 31, 1992 between Registrant and Ike G. Batalis 10.02*1 Employment Agreement dated July 1, 1991 between Registrant and Charles V. Turean 10.03*1 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*1 Form of Indemnification Agreement for Directors and Officers of the Registrant 10.13**1 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, 1989 10.19* Student Loan Servicing Agreement, dated February 1, 1997 10.20**1 Registrant's Employees' Thrift and Retirement Plan 10.21***1 Registrant's 1994 Stock Option and Stock Appreciation Rights Plan 10.22***1 Registrant's 1994 Directors' Stock Option Plan 10.24***** Lease dated March 18, 1997 between Registrant and Riverview 42 Hospital, for property at 2025 Cherry Street, Noblesville, Indiana 10.25****** Sublease dated September 11, 1997 between Registrant and Wal-Mart Stores, Inc., for property at 16865 Clover Road, Noblesville, Indiana 10.26****** Amendment No. 1 to Lease Agreement, dated September 30, 1997 between the Registrant and Phoenix Home Life Mutual Insurance Company for property at 10333 North Meridian Street, Suite 111, Indianapolis, Indiana 10.27*******1 Employment Agreement dated May 10, 1999 between Registrant and Gregory J. Murray 10.28******* Memorandum of In-Store Bank Facility License Agreement dated August 13, 1999 between Registrant and SUPERVALU INC., d/b/a Cub Foods for property located at 14610 US North, Carmel, Indiana 10.29******* Memorandum of Lease dated August 26, 1999 between Registrant and G & J PARTNERSHIP for property located at 11815 Allisonville Road, Fishers, Indiana 10.30 MetroBanCorp Target Benefit Plan 10.31 MetroBanCorp Director Retirement Plan 13 The Annual Report to Shareholders of the Company for the year ended December 31, 2001 (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 43