10-Q 1 l95419ae10vq.txt METROPOLITAN FINANCIAL CORP. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10 - Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 Commission file number 000-21553 METROPOLITAN FINANCIAL CORP. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Ohio 34-1109469 ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 22901 Millcreek Blvd., Highland Hills, Ohio 44122 --------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (216) 206-6000 ------------------------------------------------------ (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 9, 2002, there were 16,145,192 common shares of the Registrant issued and outstanding. METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED JUNE 30, 2002 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements: Consolidated Statements of Financial Condition as of June 30, 2002 and December 31, 2001 3 Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 5 Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2002 and 2001 6 Notes to Consolidated Financial Statements 7-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-29 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29-31 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 31-32 Item 6. Exhibits and Reports on Form 8-K 32 SIGNATURE 33 2 METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands)

See accompanying notes to consolidated financial statements. 3 METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements. 4 METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

See accompanying notes to consolidated financial statements. 5 METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except per share data)

6 METROPOLITAN FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data. Metropolitan Financial Corp. (the "Company") is a savings and loan holding company and an Ohio corporation. The Company is engaged in the business of originating one to four family, multifamily and commercial real estate loans primarily in Ohio and Pennsylvania and purchasing multifamily and commercial real estate loans throughout the United States. The Company offers full service banking services to communities in Northeast Ohio where its additional lending activities include originating construction, business and consumer loans. The accounting policies of the Company conform to generally accepted accounting principles and prevailing practices within the financial services industry. All significant intercompany transactions have been eliminated. In the opinion of management, the accompanying financial statements include all adjustments and disclosures which the Company considers necessary for a fair presentation of (a) the results of operations for the three- and six-month periods ended June 30, 2002 and 2001; (b) the financial condition at June 30, 2002 and December 31, 2001; (c) the statement of cash flows for the six-month periods ended June 30, 2002 and 2001; and (d) the statement of changes in shareholders' equity for the three- and six-month periods ended June 30, 2002 and 2001. The results of operations for the three- and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for any other period. The annual report for the Company for the year ended December 31, 2001, contains consolidated financial statements and related notes, which should be read in conjunction with the accompanying consolidated financial statements. A summary of significant accounting policies follows: CONSOLIDATION POLICY: The Company and its wholly-owned subsidiaries, MetroCapital Corporation, Metropolitan Capital Trust I, Metropolitan Capital Trust II, Metropolitan I Corporation and its subsidiary, and Metropolitan Bank and Trust Company (the "Bank") and its subsidiaries, are included in the accompanying consolidated financial statements. All significant intercompany balances have been eliminated. USE OF ESTIMATES: In preparing financial statements, management must make estimates and assumptions. These estimates and assumptions affect the amounts reported for assets, liabilities, revenues, and expenses as well as the disclosures provided. Future results could differ from current estimates. Areas involving the use of management's estimates and assumptions primarily include the allowance for losses on loans, the valuation of loan servicing rights, the value of loans held for sale, fixed assets held for sale, fair value of certain securities, the carrying value and amortization of intangibles, the value of real estate owned, the determination and carrying value of impaired loans, and the fair value of financial instruments. Estimates that are more susceptible to change in the near term include the allowance for loan losses, the valuation of loan servicing rights, the value of loans held for sale, the value of real estate owned, and the fair value of certain securities. EARNINGS PER SHARE: Basic and diluted earnings per share are computed based on weighted average shares outstanding during the period. Basic earnings per share has been computed by dividing net income or loss by the weighted average shares outstanding. Diluted earnings per share has been computed by dividing net income or loss by the diluted weighted average shares outstanding. Diluted weighted average shares were calculated assuming the exercise of stock options less the treasury shares assumed to be purchased using the average market price of the Company's stock. Stock options totaling 1,437,494 and 1,168,878, respectively were not considered in computing diluted earnings per common share for June 30, 2002 and 2001 because they were antidilutive. 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 assets 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 7 be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, ceased being amortized starting in 2002. Periodic impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. 2. SUPERVISORY AGREEMENT On July 8, 2002, the Office of Thrift Supervision ("OTS") issued a Supervisory Directive (the "Supervisory Directive") to the Company and the Bank. The Supervisory Directive, requires the Boards of Directors of the Bank and the Company to act immediately to take corrective action to address certain weaknesses and to halt certain unsafe and unsound practices, regulatory violations, and violations of the Supervisory Agreement ,dated July 26, 2001 (the "Supervisory Agreement"), between the Bank, the OTS, and the Ohio Division of Financial Institutions ("ODFI"). The Supervisory Directive includes the following provisions: 1. The Bank is prohibited from making "unauthorized payments", as defined in the Supervisory Directive, that directly or indirectly benefit Robert M. Kaye, a director and the former Chairman and Chief Executive Officer of the Company and the Bank. 2. The Bank must obtain reimbursement for unauthorized payments made to or for the benefit of Mr. Kaye and related parties since January 1, 1992, and suspend all future payments to Mr. Kaye and related parties of any kind until such time as there has been a full accounting of such payments and the Bank has been fully reimbursed, if appropriate. 3. The Bank must retain an independent certified public accounting firm acceptable to the OTS to conduct a review and accounting of all payments that the Bank has made since January 1, 1992, to or for the direct or indirect benefit of Robert M. Kaye and related parties. The accounting firm must submit to the Audit Committee of the Bank's Board and to the OTS a written report relating to its review identifying, among other things, any payments that are suspected of being unauthorized payments. Based on the information in the report, the Audit Committee of the Bank's Board must determine the amount of any unauthorized payments, subject to the review and concurrence of the OTS. The Bank must then submit to Mr. Kaye a written demand for repayment of any unauthorized payments. The Supervisory Directive sets various deadlines for completion of the foregoing matters. 4. To facilitate compliance with the targets and deadlines specified in the Supervisory Agreement, the Bank must retain a qualified marketing agent, acceptable to the OTS, to manage the Bank's efforts to sell its artwork collection. The OTS noted that the Supervisory Agreement (as modified) required the Bank to reduce its investment in artwork by $1.3 million by March 31, 2002, and that the Bank had failed to meet the March 31, 2002 requirement. 5. The Bank must take appropriate actions to reduce its investment in fixed assets so that the Bank's investment in fixed assets (other than artwork) is no more than 25% of core capital by December 31, 2002, as required by the Supervisory Agreement. 6. The Bank is prohibited from engaging in any transactions with a particular out-of-state bank on whose board Mr. Kaye sits. 7. The Bank is prohibited from originating and purchasing commercial real estate loans secured by property in California until the Bank adopts and implements a written plan for diversification of credit risk that is acceptable to the OTS. 8. The Bank is prohibited from engaging in any transactions with the Company or any of its affiliates without prior approval of the OTS. 8 9. Without prior OTS approval, the Company is prohibited from paying any dividends, or making any other payments except those that it was obligated to make pursuant to written contracts in effect on July 5, 2002, and payment of expenses incurred in the ordinary course of business. 10. The Company is prohibited from making any payment or engaging in any transaction that would have the effect of circumventing any of the restrictions imposed on the Bank in the Supervisory Directive. The Company has engaged, with OTS approval, an independent audit firm, which is currently reviewing the payments specified above in accordance with the Supervisory Directive. The Company and the Bank have commenced taking actions to comply with the remainder of the Supervisory Directive, including the sale of artwork, and expect to comply with the Supervisory Agreement and the Supervisory Directive. The provisions of the Supervisory Directive do not prohibit the Company from using its unconsolidated resources to make scheduled contractual payments to Metropolitan Capital Trust I ("Trust I") and Metropolitan Capital Trust II ("Trust II"). Payments by the Company to Trust I and Trust II are used by the trusts to pay dividends on the cumulative trust preferred securities of Trust I and Trust II. The Supervisory Directive does not prohibit Trust I and Trust II from paying dividends on their respective cumulative trust preferred securities. On July 26, 2001, the Company entered into a separate Supervisory Agreement with the OTS (the "Company Supervisory Agreement"), which required the Company to prepare and adopt a plan for raising capital that uses sources other than increased debt or additional dividends from the Bank. On January 31, 2002, the Company initiated an offer of common stock for sale under a rights offering and a concurrent offering to the public. Management used the net proceeds of the 2002 offerings to raise the capital required by the Company Supervisory Agreement. Additionally, the Bank entered into the Supervisory Agreement between the Bank, the OTS and the ODFI, which requires the Bank to do the following: o Develop a capital improvement and risk reduction plan by September 28, 2001, which date was extended to December 28, 2001; o Achieve or maintain compliance with core and risk-based capital standards at the "well-capitalized" level, including a risk-based capital ratio of 10% by December 31, 2001, which date was extended to March 31, 2002. The Bank had achieved a "well capitalized" level at March 31, 2002 and maintained that level at June 30, 2002; o Reduce investment in fixed assets (other than artwork) to no more than 25% of core capital by December 31, 2002; o Attain compliance with board approved interest rate risk policy requirements; o Reduce volatile funding sources, such as brokered and out-of-state deposits; o Increase earnings; o Improve controls related to credit risk; and o Restrict total assets to not more than $1.7 billion. Any major deviations from the plan require prior OTS approval. Both supervisory agreements also contain restrictions on adding, entering into employment contracts with, or making golden parachute payments to directors and senior executive officers and in changing responsibilities of senior officers. During January 2002, the regulatory authorities approved the capital and risk reduction plan submitted by the Company. 9 If the Company or the Bank is unable to comply with the terms and conditions of the Supervisory Directive or the supervisory agreements, the OTS and the ODFI could take additional regulatory action, including the issuance of a cease and desist order requiring further corrective action such as raising additional capital, obtaining additional or new management, requiring the sale of assets and a reduction in the overall size of the Company, imposing operating restrictions on the Bank and restricting dividends from the Bank to the Company. These additional restrictions could make it impossible to service existing debt of the Company. 3. SECURITIES The amortized cost, gross unrealized gains and losses and fair values of investment securities available for sale and held to maturity at June 30, 2002 and December 31, 2001 are as follows:

10 The tax-exempt municipal bond represents a single issue secured by a multifamily property. The bond was reclassified to available for sale as of June 30, 2002, due to management's decision to market this security when the property, which serves as collateral for the bond, becomes fully occupied. In conjunction with this reclassification, it was determined that there was a permanent impairment to the bond's fair value and a realized loss of $550 thousand was booked. 4. LOANS RECEIVABLE The composition of the loan portfolio at June 30, 2002 and December 31, 2001 is as follows:

Activity in the allowance for losses on loans for the periods ended June 30, 2002 and 2001 is as follows:

Nonperforming loans are as follows at:

Management analyzes loans both on an individual and collective basis and considers a loan to be impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract based on current information and events. Loans which are past due two payments or less and that management feels are probable of being restored to current status within 90 days are not considered to be impaired loans. All impaired loans are included in nonperforming loans. 11 Information regarding impaired loans is as follows:

5. LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at June 30, 2002 and December 31, 2001 are summarized as follows:

Custodial balances maintained in noninterest-bearing checking accounts in connection with the foregoing loan servicing were approximately $37.6 million and $48.5 million at June 30, 2002 and December 31, 2001, respectively. The following is an analysis of the changes in the cost of loan servicing rights for the six-month periods ended June 30, 2002 and 2001:

12 The following is an analysis of the changes in the valuation allowance for impairment of loan servicing rights for the six-month period ended June 30, 2002. No impairment was recorded for the six-month period ended June 30, 2001:

6. DEPOSITS Deposits consist of the following:

At June 30, 2002, scheduled maturities of certificates of deposit were as follows:

Brokered and out-of-state deposits decreased from $127.8 million at December 31, 2001 to $90.0 million at June 30, 2002. 7. BORROWINGS Borrowings consist of the following at June 30, 2002 and December 31, 2001:

13 At June 30, 2002, scheduled payments on borrowings are as follows:

At June 30, 2002, Federal Home Loan Bank advances are collateralized by all of the Company's FHLB stock, one- to-four-family first mortgage loans, multifamily loans, and securities with aggregate carrying values of approximately $17.3 million, $154.0 million, $192.3 million, and $109.9 million, respectively. During 1995, the Company issued subordinated notes ("1995 Subordinated Notes") totaling $14.0 million. Interest on the notes is paid quarterly and principal will be repaid when the notes mature January 1, 2005. Total issuance costs of approximately $1.2 million are being amortized on a straight-line basis over the life of the notes. The notes are unsecured. Effective November 30, 2000, the notes may be redeemed at par at any time. The Company has a note payable to a commercial bank. At June 30, 2002, the current balance outstanding was $5.0 million. The loan matures December 31, 2002. As collateral for the loan, the Company's largest shareholder, Robert Kaye, has agreed to pledge his common stock of the Company which exceeds 50% of the outstanding stock of the Company. In addition, Mr. Kaye has agreed to pledge any additional shares of the Company he may acquire in the future. The loan agreement with the commercial bank has a covenant requiring a minimum return on assets for the previous nine months. If the Company fails to meet this covenant the loan could become immediately due and payable. If that happened the 1995 Subordinated Notes would also become due and payable. The Company has met this requirement or the commercial bank has waived compliance with this requirement for all periods through June 30, 2002. The commercial bank also agreed to delete the minimum return on assets requirement on July 22, 2002. As part of the latest agreement, the Company was also required to make and has made a $1.0 million principal payment on July 25, 2002. In December 2001, the Company entered into a loan agreement with Robert Kaye, its majority shareholder, a non-interest bearing loan in the principal amount of $2.0 million. The Company repaid the loan to Mr. Kaye with proceeds from the stock offerings in March 2002. 8. OFF-BALANCE SHEET ACTIVITIES The Bank can be a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of its customers. These financial commitments include commitments to make loans. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans is represented by the contractual amount of these instruments. The Bank follows the same credit policy to make such commitments as is followed for those loans recorded in the financial statements. As of June 30, 2002, the Bank had fixed and variable rate commitments to originate and/or purchase loans (at market rates) of approximately $80.1 million and $97.2 million, respectively. In addition, the Bank had firm commitments to sell loans totaling $65.5 at June 30, 2002. The Bank's commitments to originate and purchase loans are for loans with rates ranging from 4.75% to 19.9% and commitment periods up to one year. The Bank maintains two standby letters of credit at the Federal Home Loan Bank of Cincinnati for the benefit of Fannie Mae as secondary security for credit risk on multifamily loans securitized in prior years. These standby letters of credit, aggregating approximately $8.6 million, do not accrue interest and are renewed on an annual basis. 14 The Bank has entered into two interest rate swap contracts to hedge variable rate advances with each having a notional amount of $20.0 million. Both contracts mature within five years and have the same counterparty, a nationally recognized broker/dealer. The Bank receives from the contracts variable interest based on one-month or three-month LIBOR, respectively. The Bank in turn pays to the counterparty interest at fixed rates of 6.450% and 6.275%, respectively. The counterparty has the option to terminate the interest rate swap in the event LIBOR exceeds certain rates set on specific dates per the terms of the contracts. The market value of the two swap contracts at June 30, 2002 was an unrealized loss of $3.4 million. 9. SEGMENT REPORTING The Company's operations include two major operating segments. A description of these segments is as follows: RETAIL AND COMMERCIAL BANKING - Retail and commercial banking is the segment of the business that brings in deposits and lends those funds out to businesses and consumers. The local market for deposits is the consumers and businesses in the neighborhoods surrounding the Bank's 24 retail sales offices in Northeastern Ohio. The market for lending is Ohio and the surrounding states. The majority of loans are secured by multifamily and commercial real estate. Loans are also made to businesses secured by business assets and consumers secured by real or personal property. Business loans are concentrated in Northeastern Ohio. MORTGAGE BANKING - Mortgage banking is the segment of the Company's business that originates, sells and services permanent or construction loans secured by one- to four-family residential properties. These loans are primarily originated through commissioned loan officers located in Ohio and Western Pennsylvania. In general, fixed rate loans are originated for sale and adjustable rate loans may be originated for sale or may be retained in the portfolio. Loans that the Bank services include loans originated and retained by the Bank, loans originated by the Bank but sold to others with servicing rights retained by the Bank, and servicing rights to loans originated by others but purchased by the Bank. The servicing rights the Bank purchases may be for loans located in a variety of states and the loans are typically serviced for Fannie Mae or Freddie Mac. PARENT AND OTHER - This consists of the remaining segments of the Company's business. It includes corporate treasury, interest rate risk, and financing operations, which do not generate revenue from outside customers. The net interest income that results from investing in assets and liabilities with different terms to maturity or repricing has been eliminated from the two major operating segments and is included in this category. Operating results and other financial data for the current and preceding year were as follows (in thousands):

The financial information provided for each major operating segment has been derived from the internal profitability system used to monitor and manage financial performance and allocate resources. The measurement of performance for the operating segments is based on the organizational structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information presented is also not indicative of the segments' financial condition and results of operations if they were independent entities. The Company evaluates segment performance based on contribution to income before income taxes. Certain indirect expenses have been allocated based on various criteria considered by management to best reflect benefits derived. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Indirect expense allocations and accounting policies have been consistently applied for the periods presented. There are no differences between segment profits and assets and the consolidated profits and assets of the Company. 10. RIGHTS AND COMMON STOCK OFFERINGS On March 22, 2002, the Company closed its offering to current shareholders of non-transferable rights to purchase shares of Company common stock and also a concurrent offering of shares of common stock in a public offering. The purpose of these offerings was to raise funds to increase the equity capital of the Bank as required under the July 26, 2001 supervisory agreements signed with the OTS and ODFI and to make the December 2001 principal payment on the commercial bank note. These offerings generated gross proceeds of $22.0 million, substantially exceeding the $13.0 million minimum established for the offerings. As a result of the offerings, the Bank's regulatory capital ratios are now in excess of the "well-capitalized" capital requirements as of June 30, 2002. 11. PREMISES AND EQUIPMENT HELD FOR SALE At June 30, 2002 premises and equipment held for sale included certain parcels of land and buildings and various works of art owned by the Company. During June, 2002, the Company reclassified these properties as held for sale. Previously, the Company had planned to sell other properties whose fair value met or exceeded carrying value. However, after reevaluating the strategic options available to the Company and the Supervisory Directive management decided to revise its plan to sell properties and, therefore, moved certain additional properties into held for sale and removed other properties from held for sale. In conjunction with the reclassification of these properties , the Company determined that the carrying value of certain properties was less than the estimated net proceeds expected from the sale of these properties. Accordingly, the Company recognized an $8.8 million loss on the valuation impairment of these properties. The fair value of these properties was estimated based on either a present value analysis of the current and expected revenues and expenses based on the properties being considered as income producing or third party purchase offers. Management has not obtained an independent appraisal in arriving at these values. Any future valuation of these assets may result in additional adjustment in their carrying values. No valuation allowance has been recorded on the art held for sale based on an appraisal, which indicates the art's fair value exceeds its current carrying value. 16 12. MANAGEMENT'S PLANS During the periods presented in 2002 and 2001, the Company recorded net losses. Despite large losses, management believes that based on these charges, the Company is becoming better positioned to return to profitability in the future. Additionally, the Company is in the process of selecting an investment banking firm to assist it in evaluating strategic alternatives. These recent results were in large part the result of: a decline in the Company's net interest margin, which was caused by declines in market interest rates to historically low levels when the Company's assets were repricing more quickly than funding sources; higher overhead levels as a result of previous growth initiatives; an increase in the amortization of servicing rights and impairment charges of servicing rights due to a decline in the value of these rights as a direct result of declines in long-term interest rates to historical lows; management's increases in the provisions for loan losses related to specific allocations for certain commercial business and commercial real estate loans and an overall increase in the allocation for these loan categories based on increases in problem credits identified within these portfolios; and an impairment charge related to the Company's classifying commercial real estate as held for sale. Management believes that it is taking the necessary actions to increase the Company's net interest margin primarily through reducing its funding costs. Historically, the Company has depended more than its competitors on brokered deposits and out of state certificates of deposit as a source of funds. These funds typically have a higher cost than local market deposits. During the six months ended June 30, 2002, management reduced brokered deposits by $37.8 million from the level at December 31, 2001. In addition, management has decreased the Company's borrowings by $14.6 million at June 30, 2002 from the amount at December 31, 2001, which borrowings have also been a higher cost source of funds than deposit accounts. Finally, a significant amount of the Company's longer term, higher cost funding continues to mature and reprice in the current lower interest rate environment. Management also is taking steps to increase interest income by converting non-earning assets to earning assets. Management's decision to increase the amount of commercial real estate held for sale and the impairment charge related to this decision was a direct result of management's plan to decrease fixed assets. Management also has taken actions to decrease the non-interest expenses of the Company. The Company has engaged a consulting firm, which is assisting in identifying opportunities for efficiencies. The Company's actions taken to date pursuant to this effort have reduced salaries and related personnel costs and occupancy costs in 2002 compared to the same periods in 2001. Management believes that it has made progress in identifying the losses in the loan portfolio and taking appropriate action to improve future credit quality. These actions include expanding the scope of the loan review function and revising the credit underwriting standards of the Company. Addressing problem credits is a high priority for management. Management feels it has appropriately provided for the risk in the portfolio and based on its current knowledge does not anticipate future increases in the allowance of the magnitude recorded during the second quarter of 2002. To date, the Company continues to meet its credit obligations. In addition, the Bank met the capital requirements to be considered "well capitalized" and the levels required by the Supervisory Agreement. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED FINANCIAL DATA

(1) Ratios are based on period end balances. (2) Annualized for comparative purposes. 18 OVERVIEW The Company's results of operations are dependent on a variety of factors, including the general interest rate environment, competitive conditions in the industry, governmental policies and regulations and conditions in the markets for financial assets. Like most financial institutions, the primary contributor to the Company's income is net interest income, the difference between the interest that is earned on interest-earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, such as deposits and borrowings. The Company's operations are also affected by noninterest income, such as loan servicing fees, servicing charges on deposit accounts, and gains or losses on the sales of loans and securities. The Company's principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, and general and administrative expenses. RESULTS OF OPERATIONS Net Income. The Company reported a net loss of $11.1 million for the second quarter of 2002, or $0.69 per share. This is an increase of $9.0 million over the net loss of $2.1 million or $0.26 per share for the second quarter of 2001. The net loss for the six months ended June 30, 2002 was $11.0 million, or $0.89 per share, an increase of $8.5 million from the net loss of $2.5 million, or $0.31 per share for the six months ended June 30, 2001. Although the losses for the second quarter and the six months ended June 30, 2002 were similar, the per share losses were different due to the stock offering in March which increased the Company's capitalization. The primary reasons for the increase in the net loss for both the three- and six-month periods ended June 30, 2002 are: a permanent impairment charge of $8.8 million taken against the Company's premises and equipment; an increase in the loan loss reserve of $6.2 million for the second quarter and $6.3 million for the six months ended June 30, 2002; and increased net losses from loan servicing to $1.5 million and $2.0 million for the three and six months ended June 30, 2002, respectively, due to increased amortization and continued impairment of loan servicing rights in a declining interest rate environment. These increases in expenses were partially offset by an increased tax benefit generated from the operating loss. Net interest income decreased to $7.5 million and $14.8 million for the three and six months June 30, 2002, respectively from $8.4 million and $17.5 million in their respective periods in 2001. Noninterest income decreased in the second quarter of 2002 to $3.1 million from $4.3 million in the same period in 2001. Noninterest income for the six months ended June 30, 2002 increased to $7.7 million from $6.7 million for the same period in 2001. Noninterest expense increased to $21.9 million and $33.5 million for the three and six months ended June 30, 2002, respectively. Interest Income. Total interest income for the quarter ended June 30, 2002 was $23.1 million, a decrease of 23.2%, from the second quarter of 2001. Total interest income for the first six months of 2002 decreased 23.0% from the same period in 2001 to $46.9 million. There are two primary reasons for the decline in interest income over 2001. First, yields on interest-earning assets declined to 6.59% and 6.62% in the three- and six-month periods ended June 30, 2002, respectively, from 7.68% and 7.91% for the same periods in 2001. Secondly, average-earning assets declined in 2002 from 2001. Average earning assets for the second quarter of 2002 decreased 10.2% to $1.407 billion from $1.568 billion in the second quarter of 2001. Average earning assets for the six months ended June 30, 2002 decreased 8.8% to $1.426 billion from $1.563 billion for the same period in 2001. The decrease in average earning assets contributed $4.6 million and $8.6 million of the decrease in interest income for the three and six months ended June 30, 2002, respectively. The decline in the yield on earning assets for the three months ended June 30, 2002 compared to the same period in the prior year was primarily due to declines in the level of short term interest rates from 2001 to 2002. As interest rates have continued to level off, the decline in yields has gradually narrowed. Interest Expense. Total interest expense decreased 27.8% to $15.6 million, and 27.5% to $32.1 million, for the three- and six-month periods ended June 30, 2002, respectively, from $21.7 million and $44.2 million for the same periods in 2001. Interest expense for the three and six months ending June 30, 2002 decreased generally due to a lower average balance of interest-bearing liabilities outstanding and a lower cost of funds compared to the prior year quarter. The average balance of interest-bearing deposits decreased $108.7 million and $84.0 million, or 10.1 % and 7.9 %, for the three- and six- 19 month periods ended June 30, 2002, respectively, as compared to the same periods in 2001. This decrease includes a significant decrease in out of state and brokered certificates of deposit, which generally carry a higher interest rate. Average borrowings decreased $68.5 million and $76.1 million, or 17.6% and 18.7%, for the three- and six-month periods ended June 30, 2002, respectively, as compared to the same periods in 2001. The Company's cost of funds decreased to 4.71% and 4.78% for the three and six months ending June 30, 2002, respectively, as compared to 5.79% and 5.94% for the same periods in 2001. The lower cost of funds contributed $3.6 million and $7.8 million to the decrease in interest expense for the three and six months ended June 30,2002, respectively. Average Balances and Yields. The following tables present the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Net interest margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. All average balances are daily average balances. Nonaccruing loans are considered in average loan balances. The average balances of mortgage-backed securities and securities are presented at historical cost.

(1) Capitalized construction interest in 2001. 20

(1)Capitalized construction interest in 2001. Rate and Volume Variances. Net interest income is affected by changes in the level of interest-earning assets and interest-bearing liabilities and changes in yields earned on assets and rates paid on liabilities. The following table sets forth, for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in average asset and liability balances and changes in average rates. Changes attributable to the combined impact of volume and rate have been allocated proportionately to change due to volume and change due to rate. 21

Provision for Loan Losses. The provision for loan losses increased to $6.2 million and $6.3 million for the three- and six-month periods ended June 30, 2002, respectively, as compared to $3.1 million and $4.2 million for the same periods in 2001. Management increased the provision for loan losses primarily due to a credit quality deterioration of $11 million in the commercial business loan portfolio and a further deterioration of $5.2 million in the commercial real estate loan portfolio. Additionally, increased risk in the business and commercial real estate markets caused the Company to increase the factors used in determining the loan loss provision for these classified loan categories. As a result, the allowance for losses on loans at June 30, 2002 was $20.7 million, or 1.97%, of total loans, as compared to $17.3 million, or 1.49%, of total loans at December 31, 2001. Noninterest Income. Total noninterest income decreased 27.0% to $3.1 million for the second quarter of 2002, as compared to $4.3 million for the same period in 2001. Noninterest income for the six months ended June 30, 2002, increased 15.1% to $7.8 million from $6.7 million in the same period in 2001. Gain on sale of loans was $1.5 million and $3.2 million in the three- and six-month periods ended June 30, 2002, respectively, as compared to $1.8 million and $2.5 million during the same periods in 2001. The primary reason for the increase in the first six months of 2002 as compared with the same period in 2001 was a decrease in interest rates in mid to late 2001 and early 2002 which has caused an increase in refinance activity resulting in increased residential mortgage loan origination volumes and, therefore, an increase in loans available to sell. The reason for the decrease in the second quarter is that the Company is no longer selling any multi-family and commercial real estate loans. The proceeds from sales of residential loans held for sale in the first six months of 2002 were $431.0 million as compared to $91 million in 22 the same period in 2001. Proceeds from the sale of multifamily and commercial real estate loans were $6.5 million for the first six months of 2002 as compared to $49.3 million for the same period in 2001. There were losses from net loan servicing of $1.5 million in the three-month period ended June 30, 2002 as compared to losses of $674 thousand for the same period in 2001. For the six-month period ended June 30, 2002, losses on net loan servicing were $2.0 million as compared to losses of $783 thousand for the same time period in 2001. The primary reason for the higher losses was the increased amortization and impairment of servicing rights due to an increase in prepayment of loans in 2002 compared to the same period in 2001. The portfolio of loans serviced for others increased to $2.3 billion at June 30, 2002 as compared to $2.2 billion at December 31, 2001. Service charges on deposit accounts increased 73.6% and 46.6% to $849 thousand and $1.3 million in the three- and six-month periods ended June 30, 2002 compared to $489 thousand and $893 thousand for the same periods in 2001. The primary reason for the significant increase is due to new fee-generating programs that the Company implemented during 2002. The Company had $828 thousand and $1.8 million in gains on the sale of securities in the three- and six-month periods ended June 30, 2002, respectively as compared to $1.1 million and $1.5 million for the same periods in 2001. In both periods substantially all of the gains were the result of securitizing one to four family loans and simultaneously selling those securities. Other operating income decreased to $1.4 million in the three-month period ended June 30, 2002 compared to $1.6 million for the same period in the previous year. For the six months ended June 30, 2002 other operating income increased to $3.4 million as compared to $2.6 million for the same period in the prior year. The decrease in the second quarter of 2002 was directly attributable to a $550 thousand one-time permanent impairment charge on the tax-exempt municipal bond the Company holds. Excluding this one-time charge, other operating income increased in the second quarter by 26.8% to $2.0 million. Noninterest Expense. Total noninterest expense increased to $21.9 million in the three-month period ended June 30, 2002 as compared to $12.6 million for the same period in 2001. For the first six months of 2002 total noninterest expense was $33.5 million as compared to $23.8 million in 2001. A significant portion of the increase is due to a one-time impairment charge of $8.8 million taken against premises and equipment. Personnel related expenses decreased $651 thousand and $607 thousand in the three- and six-month periods ended June 30, 2002, respectively, as compared to the same periods in 2001. These decreases are due to a 12% reduction in headcount, achieved primarily through attrition in the last year. The Company announced an efficiency program during the second quarter of 2002 that will further reduce headcount and continue to reduce the Company's personnel related expenses. Occupancy costs decreased $380 thousand and $485 thousand in the three- and six-month periods ended June 30, 2002, respectively, over the same periods in 2001. Since no new offices have been opened in 2002 the Company's occupancy costs have stabilized over the last 12 months. The Company is not planning to open any new facilities in the near future, which will allow occupancy costs to remain stable. Data processing expense increased $32 thousand and $7 thousand in the three- and six-month periods ended June 30, 2002, respectively, as compared to the same periods in 2001. Data processing costs have stabilized in 2002 after seeing significant growth in 2001 due to the Bank's systems conversion in September 2000. Data processing costs should remain stable in the foreseeable future. Marketing expense decreased $46 thousand and $103 thousand in the three- and six-month periods ended June 30, 2002, respectively, compared to the same periods in the prior year. Marketing costs in 2002 are limited to more routine activities as compared to prior years. State franchise taxes decreased $259 thousand and $443 thousand in the three- and six-month periods ended June 30, 2002, respectively, as compared to the same periods in 2001. The primary reason for the decrease was a refund from the 23 State of Ohio that was received in May of 2002 and a refinement of the allocation of taxes among the various states where the Bank conducts business. At June 30, 2002 premises and equipment held for sale included certain parcels of land and buildings and various works of art owned by the Company. During June, 2002, the Company reclassified these properties as held for sale. Previously, the Company had planned to sell other properties whose fair value met or exceeded carrying value. However, after reevaluating the strategic options available to the Company and the Supervisory Directive management decided to revise its plan to sell properties and, therefore, moved certain additional properties into held for sale and removed other properties from held for sale. In conjunction with the reclassification of these properties , the Company determined that the carrying value of certain properties was less than the estimated net proceeds expected from the sale of these properties. Accordingly, the Company recognized an $8.8 million loss on the valuation impairment of these properties. The fair value of these properties was estimated based on either a present value analysis of the current and expected revenues and expenses based on the properties being considered as income producing or third party purchase offers. Management has not obtained an independent appraisal in arriving at these values. Any future valuation of these assets may result in additional adjustment in their carrying values. No valuation allowance has been recorded on the art held for sale based on an appraisal, which indicates the art's fair value exceeds its current carrying value. Other operating expenses, which include miscellaneous general and administrative costs such as loan servicing, loan processing costs, business development, check processing, ATM expenses, and expenses pertaining to real estate owned and professional expenses, increased $1.9 million and $2.7 million for the three- and six-month periods ended June 30, 2002, respectively, as compared to the same period in 2001. These increases were generally the result of increases in expenses pertaining to real estate owned and legal expense. On June 6, 2002, the Company announced that it was undergoing a restructuring plan that would be concluded by year-end. The Company currently projects annualized cost savings of $3.0 million as a result of improved process efficiencies and personnel reductions. The Company originally expected to incur costs in connection with the restructuring, primarily personnel related, of $0.5 million to $1.0 million, to be taken in the third quarter of 2002. Since most of the personnel reductions were the result of attrition, the Company now expects restructuring costs not to exceed $200 thousand. Provision for Income Taxes. The Company's income tax benefit increased $5.4 million and $5.0 million for the three and six months ended June 30, 2002, respectively, as compared to the prior year period. The primary reason for the increase in the benefit was due to the fact that the Company had a larger pre-tax loss during the three- and six-month periods ended June 30, 2002 as compared to the same periods in the prior year. ASSET QUALITY The Bank undertakes detailed reviews of the loan portfolio regularly to identify potential problem loans or trends and to provide for adequate estimates of probable losses. In performing these reviews, management considers, among other things, current economic conditions, portfolio characteristics, delinquency trends, and historical loss experiences. The Company normally consider loans to be nonperforming when payments are 90 days or more past due or when the loan review analysis indicates that repossession of the collateral may be necessary to satisfy the loan. In addition, a loan is considered impaired when, in management's opinion, it is probable that the borrower will be unable to meet the contractual terms of the loan. When loans are classified as nonperforming, the Company assesses the collectibility of the unpaid interest. Interest determined to be uncollectible is reversed from interest income. Future interest income is recorded only if the loan principal and interest due is considered collectible and is less than the estimated fair value of the underlying collateral. The following table provides information concerning the Company's nonperforming assets and the allowance for losses on loans as of the dates indicated. All loans classified by management as impaired were also classified as nonperforming. 24

(1) Annualized for comparative purposes. Nonperforming loans at June 30, 2002 increased $900 thousand to $31.6 million as compared to $30.7 million at December 31, 2001. Real estate owned increased $2.3 million over the same period. These changes were primarily due to a transfer of $3.1 million of loans to real estate owned during the first quarter of 2002. On March 26, 2001, based on financial projections provided by the borrowers on March 12, 2001, $14.7 million of business loans to several entities affiliated with each other were put on nonaccrual and calculated to be impaired in the amount of $3.5 million. These loans are business loans secured by junior liens on several nursing homes and assisted living centers. The borrowers did not make any payments on these loans during the first quarter of 2001. The estimate of the impairment was the result of comparing the book value of the loans to the present value of cash flows expected to be received based on the most likely workout scenario. In May 2001, the borrowers began making interest payments on these loans. These loans were brought current as of June 30, 2002 through payments by the borrowers and a reduction in the rates charged on these loans. However, due to the continuing weakness of the borrowers, these loans are still considered impaired and nonperforming at June 30, 2002. Management determined the amount of the impairment of these loans to be $3.2 million as of June 30, 2002. Management will charge off these balances if it becomes clear that the borrowers have exhausted all possible efforts to improve the value of the underlying collateral through enhancement of the businesses' operating performance or the possibility of the borrowers obtaining alternate sources of financing. The provision for loan losses increased for the three-month period ended June 30, 2002 as compared to the same period in 2001. Management increased the loan loss provision primarily due to a credit quality deterioration of $11 million in the commercial business loan portfolio and a further deterioration of $5.2 million in the commercial real estate loan portfolio. Additionally, increased risk in the business and commercial real estate markets caused the Company to increase the factors used in determining the loan loss provision for these classified loan categories. In addition to the nonperforming assets included in the table above, the Company identifies potential problem loans, which are still performing but have a weakness which causes it to classify those loans as substandard for regulatory purposes. There were $5.1 million of loans in this category at June 30, 2002 compared to $1.3 million of such loans at December 31, 2001. 25 FINANCIAL CONDITION Total assets amounted to $1.519 billion at June 30, 2002 as compared to $1.608 billion at December 31, 2001, a decrease of $89 million. The decrease in assets was concentrated in loans and was partially offset by increases in securities. Under the supervisory agreement, the Company has committed that quarter end assets for the Bank will not exceed $1.702 billion during the term of the agreement. Securities available for sale increased $27.9 million to $122.2 million at June 30, 2002 as compared to $94.3 million at December 31, 2001. The reasons for the increase were the transfer of $13.8 million in tax-exempt bonds to available for sale from held to maturity and the purchase of $138.3 million of U.S. agency notes and bills partially offset by $125.3 million of maturities of U.S. agency notes and bills. Loans receivable, net increased $25.5 million, or 2.6%, to 1.0 billion at June 30, 2002 from $974.5 million at December 31, 2001. This increase was due to transfers of commercial and multi-family loans of $81.5 million from held for sale to loans receivable. This was partially offset by decreases due to loan sales and repayments in the first six months of 2002. Loans held for sale decreased $121.9 million to $47.4 million at June 30, 2002 from $169.3 million at December 31, 2001. The primary reasons for the decrease in this category are the loans sales that have occurred in the first three months of 2002 and the decision to transfer all multi-family and commercial real estate loans from the loans held for sale category back into the loan portfolio, due to an improvement in the Bank's capital position. Federal Home Loan Bank stock increased $390 thousand to $17.3 million at June 30, 2002 as compared to the December 31, 2001 balance. The reason for the increase was the payment of stock dividends to the Bank from the Federal Home Loan Bank. Real estate owned increased $2.3 million, or 83.7%, to $5.1 million at June 30, 2002. The primary reason for the increase was the $3.1 million transfer into real estate owned of two properties in the first quarter of 2002. This was partially offset by a $709 thousand additional provision taken in the first six months. Total deposits were $1.073 billion at June 30, 2002, a decrease of $69.3 million from the balance of $1.142 billion at December 31, 2001. The decrease resulted principally from decreased certificates of deposit balances of $62.8 million, including a decrease of $37.8 million of out of state and brokered certificates of deposit, and non-interest bearing checking accounts of $20.9 million, which were partially offset by an increase of $15.9 million of interest-bearing checking and savings accounts. During 2001 and continuing through the first quarter of 2002, the Bank increased the proportion of certificates of deposit due to mature more than one year in the future in order to reduce interest rate risk. Borrowings decreased $14.6 million, or 4.3%, from December 31, 2001 to June 30, 2002. The decrease was the result of the paydown of Federal Home Loan Bank advances and the $2.0 million repayment of the loan to the Company's majority shareholder. LIQUIDITY AND CAPITAL RESOURCES Liquidity. The term "liquidity" refers to the ability to generate adequate amounts of cash for funding loan originations, loan purchases, deposit withdrawals, maturities of borrowings, and operating expenses. The Bank's primary sources of internally generated funds are principal repayments and payoffs of loans, cash flows from operations, and proceeds from sales of assets. External sources of funds include increases in deposits and borrowings, and public or private securities offerings by the Company. The Company's primary sources of funds currently are dividends from the Bank, which are subject to restrictions imposed by federal bank regulatory agencies and debt and equity offerings. The Company's primary use of funds is for interest 26 payments on its existing debt. At June 30, 2002, the Company, excluding the Bank, had cash and readily convertible investments of $7.0 million. This includes $672 thousand the Company holds in liquid assets as a requirement of the subordinated notes due January 1, 2005. The Company was required to make a $1.0 million principal payment on its commercial bank note payable on July 25, 2002 so that the commercial bank would waive the minimum return on assets covenant on the note payable. The remaining $4.0 million balance is due on December 31, 2002. The Company is currently in negotiations to refinance the commercial bank note to extend the final principal payment beyond December 31, 2002. In addition, the Company made the quarterly scheduled $1.0 million interest payments on the Guaranteed Preferred Beneficial Interest in the Company's Junior Subordinated Debentures on July 1, 2002. After making these payments and paying other normal business expenses, the Company, excluding the Bank, had cash and readily convertible investments of $4.7 million as of July 31, 2002. The Bank's liquidity ratio (average daily balance of liquid assets to average daily balance of net withdrawable accounts and short-term borrowings) for the quarter ending June 30, 2002 was 23.42%. Historically, the Company has maintained its liquidity close to 4.0% since the yield available on qualifying investments is lower than alternative uses of funds and is generally not at an attractive spread over incremental cost of funds. However, the balance of liquid assets during the first six months of 2002 was substantially higher because the volume of loan payoffs was high while the demand for loans was only high for one-to four-family fixed rate loans, which are sold after they are originated. At June 30, 2002, the Bank had approximately $41.5 million in cash, $52.2 million in U.S. Treasury securities and $17.7 million in Fannie Mae and Ginnie Mae mortgage-backed securities, which were available to sell or to pledge to meet liquidity needs. While principal repayments and Federal Home Loan Bank advances had been fairly stable sources of funds, deposit flows and loan prepayments are greatly influenced by prevailing interest rates, economic conditions, and competition. the Company regularly reviews cash flow needed to fund its operations and adjusts loan and deposit rates as needed to balance cash available with cash needs. We had access to wholesale borrowings based on the availability of eligible collateral. The Federal Home Loan Bank makes funds available for housing finance based upon the blanket or specific pledge of certain one- to four-family and multifamily loans and various types of investment and mortgage-backed securities. The Bank had borrowing capacity at the Federal Home Loan Bank under its blanket pledge agreement of approximately $20 million at June 30, 2002. At June 30, 2002, $267.0 million, or 24.8%, of the Company's deposits were in the form of certificates of deposit of $100,000 and over. The Company has also accepted out-of-state time deposits from individuals and entities, predominantly credit unions. These deposits typically have balances of $90,000 to $100,000 and have a term of one year or more. At June 30, 2002, approximately $9.0 million, or 0.8%, of deposits were held by these individuals and entities. Of these out-of-state time deposits, $2.3 million were also included in the $100,000 and over time deposits discussed above. During 2001, the Bank received regulatory approval and began accepting brokered deposits. At June 30, 2002, brokered deposits totaled $81.0 million. The total of all certificates of deposits from brokers, out-of-state sources, and other certificates of deposit of $100,000 and over was $273.8 million at June 30, 2002, or 25.5%, of total deposits. The supervisory agreement requires that the Bank reduce its reliance on volatile funding sources, including but not limited to, brokered and out-of-state deposits. Brokered and out-of-state deposits have decreased from $127.8 million at December 31, 2001 to $90.0 million at June 30, 2002. The supervisory agreement does not call for a specific amount of reduction or a specific time frame in which to make the reduction. Since many of these depositors are not located near the Bank's retail sales offices and do not have other accounts, these deposits tend to be less stable and less likely to renew if the Company's rates are not competitive with national rates. The Company's dependence on these wholesale types of deposits creates the risk that the Company might experience a liquidity shortage if it stopped issuing or renewing these types of certificates of deposit or that it would have to pay high rates to renew or replace these funds which would negatively impact profitability. In order to minimize these risks, the Company monitors the maturity of these types of funds so their maturities are staggered. The Company also deals with several brokers and compares rates among them to help ensure the Company is paying competitive rates. However, based on the Federal Home Loan Bank collateral requirements, the Bank may have to use brokered or out-of-state certificates of deposit for liquidity purposes. If a liquidity shortage occurs despite all of these steps, the Company has the ability to generate additional liquidity beyond the cash and securities mentioned above by stopping the issuance of commitments to make new loans and selling some or all 27 of the $47.4 million of loans the Company owns that are classified as held for sale at June 30, 2002. Such a liquidation of loans held for sale could have a negative impact on net interest income. The financial market makes funds available through reverse repurchase agreements by accepting various investment and mortgage-backed securities as collateral. The Bank had borrowings through reverse repurchase agreements of $41.0 million at June 30, 2002. Capital. The OTS imposes capital requirements on savings associations. Savings associations are required to meet three minimum capital standards: (i) a core requirement, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. Such standards must be no less stringent than those applicable to national banks. In addition, the OTS is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The Bank's regulatory capital ratios at June 30, 2002 were in excess of the "well capitalized" capital requirements. The following table summarizes the Bank's position against the "well capitalized" requirements:

FORWARD LOOKING STATEMENTS Certain statements contained in this report that are not historical facts are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, that are subject to assumptions, risks and uncertainties. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "anticipate," "likely," "intend," "plan," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Actual results could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including: o changes in interest rates; o continued weakening in the economy and other factors that would materially impact credit quality trends, real estate lending and the ability of the Bank to generate loans; o business and other factors affecting the economic outlook of individual borrowers of the Bank and their ability to repay loans as agreed; o the ability of the Company and the Bank to timely meet their obligations under their respective supervisory agreements; o the status of the relevant markets in which the Company and the Bank may sell various assets; 28 o increase in the dollar amount of nonperforming loans held by the Bank; o increased competition, which raises rates paid on demand and time deposits offered by the Bank; o adverse developments of a material nature in collection and other lawsuits involving the Bank; o delay in or inability to execute strategic initiatives designed to grow revenues and/or manage expenses; o changes in law imposing new legal obligations or restrictions or unfavorable resolution of litigation; o the ability of the Bank to continue to use the Federal Home Loan Bank as a source of liquidity; and o changes in accounting, tax, or regulatory practices or requirements. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter business strategy or capital expenditure plans that may, in turn, affect the results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this prospectus, you should not regard the inclusion of such information as the Company's representation that it will achieve any strategy, objectives or other plans. The forward-looking statements contained in this prospectus speak only as of the date of this prospectus as stated on the front cover, and the Company has no obligation to update publicly or revise any of these forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company, like other financial institutions, is subject to market risk. Market risk is the risk that a company can suffer economic loss due to changes in the market values of various types of assets or liabilities. As a financial institution, a profit is made by accepting and managing various types of risks. The most significant of these risks are credit risk and interest rate risk. The principal market risk for the Company is interest rate risk. Interest rate risk is the risk that changes in market interest rates will cause significant changes in net interest income because interest-bearing assets and interest-bearing liabilities mature at different intervals and reprice at different times. The OTS currently looks to the Thrift Bulletin 13a, issued December 1, 1998, to evaluate interest rate risk at institutions they supervise. The OTS categorizes interest rate risk as minimal, moderate, significant, or high based on a combination of the projected Net Portfolio Value ("NPV") after a 200 basis point change in interest rates and the size of that change in NPV due to a 200 basis point change in interest rates. The Company manages interest rate risk in a number of ways. Some of the tools used to monitor and quantify interest rate risk include: o annual budgeting process; o quarterly forecasting process; o monthly review of listing of liability rates and maturities by month; o monthly shock report of effect of sudden interest rate changes on net interest income; o monthly shock report of effect of sudden interest rate changes on net value of portfolio equity; o monthly analysis of rate and volume changes in historic net interest income; o semi-monthly forecast of balance sheet activity. 29 o weekly review of certificate of deposit offering rates and maturities by day; and The Bank has established an asset and liability committee to monitor interest rate risk. This committee has representation from finance, lending and deposit operations. This committee meets at least twice a month, reviews the current interest rate risk position, and determines strategies to pursue for both long- and short-term horizons. The activities of this committee are reported to the Board of Directors of the Bank. Between meetings the members of this committee are involved in setting rates on deposits, setting rates on loans and serving on loan committees where they work on implementing the established strategies. One of the ways the Bank monitors interest rate risk quantitatively is to measure the potential change in net interest income based on various immediate changes in market interest rates. The following table shows the change in net interest income for immediate sustained parallel shifts of 1% and 2% in market interest rates for year-end 2001 and the most recent quarter. The results for a downward parallel shift of 2% at June 30, 2002 and December 31, 2001 are not meaningful because some rates such as the Federal Funds Rate are already less than 2%.

The change in net interest income from a change in market rates is a short-term measure of interest rate risk. The results above indicate that at December 31, 2001 the Company had exposure to falling rates but would benefit from rising rates. The expected change in net interest income at June 30, 2002 was impacted by a shift in the balance sheet towards short-term liabilities. During the quarter, short-term interest-earning assets decreased in dollar amount to a greater extent than short-term interest-bearing liabilities. The net result was a reduction of the benefit in a rising rate scenario. The Company's exposure to falling rates has remained unchanged. Another quantitative measure of interest rate risk is the change in the market value of all financial assets and liabilities based on various immediate sustained shifts in market interest rates. This concept is also known as NPV and is the methodology used by the OTS in measuring interest rate risk. The following table shows the change in net portfolio value for immediate sustained parallel shifts of 1% and 2% in market interest rates for year-end 2001 and the most recent quarter. The results for a downward parallel shift of 2% at June 30, 2002 and December 31, 2001 are not meaningful because some rates such as the Federal Funds Rate are already less than 2%

The change in net portfolio value is a long-term measure of interest rate risk. It assumes that no significant changes in assets or liabilities held would take place if there were a sudden change in interest rates. Because interest rate risk is monitored regularly and the Company actively manages that risk, these projections serve as a worst-case scenario assuming no reaction to changing rates. The results above indicate that exposure to rising rates as measured by post-shock NPV has decreased while exposure to falling rates has increased marginally. Under Thrift Bulletin 13a, the Company 30 falls in the minimal interest rate risk category as of June 30, 2002, based upon current sensitivity to interest rate changes and the current level of regulatory capital. The Company's strategies to limit interest rate risk from rising interest rates are as follows: o originate one- to four-family loans primarily for sale; o originate the majority of business loans to float with prime rates; o increase core deposits, which have low interest rate sensitivity; o borrow funds with maturities greater than a year; o borrow funds with maturities matched to new long-term assets acquired; o consider the use of derivatives to reduce interest rate risk when economically practical. The Company also follows strategies that increase interest rate risk in limited ways including: o originating and purchasing fixed rate multifamily and commercial real estate loans limited to five year maturities or five year terms to repricing; and o originating and purchasing fixed rate consumer loans with terms from two to fifteen years. The Company is also aware that any method of measuring interest rate risk, including the two used above, has certain shortcomings. For example, certain assets and liabilities may have similar maturities or repricing dates but their repricing rates may not follow the general trend in market interest rates. Also, as a result of competition, the interest rates on certain assets and liabilities may fluctuate in advance of changes in market interest rates while rates on other assets and liabilities may lag market rates. In addition, any projection of a change in market rates requires that prepayment rates on loans and early withdrawal of certificates of deposits be projected and those projections may be inaccurate. The Company focuses on the change in net interest income and the change in net portfolio value as a result of immediate and sustained parallel shifts in interest rates as a balanced approach to monitoring interest rate risk when used with budgeting and the other tools noted above. At the present time the Company does not hold any trading positions, foreign currency positions, or commodity positions. Equity investments are approximately 1.6% of assets and 71.4% of that amount is held in Federal Home Loan Bank stock which can be sold to the Federal Home Loan Bank of Cincinnati at par. Therefore, the Company does not consider any of these areas to be a source of significant market risk. PART II. OTHER INFORMATION Items 1, 2, 3, and 5 are not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of Metropolitan Financial Corp. was held on April 23, 2002 at 9:00 a.m., (the "Annual Meeting") at 22901 Millcreek Blvd., Highland Hills, Ohio. At the Annual Meeting, the shareholders of the Company considered and voted upon proposals to (i) elect Malvin E. Bank, Robert M. Kaye, and David P. Miller as directors of The Company to serve for the term expiring at the Annual Meeting of Shareholders to be held in the year 2005 and (ii) ratify the appointment of Crowe, Chizek and Company LLP as independent auditors for the fiscal year ending December 31, 2002. The terms of (a) Lois K. Goodman, Marguerite B. Humphrey, Kenneth T. Kohler, and Alfonse M. Mattia, which expire at the 2003 annual meeting and (b) Robert R. 31 Broadbent, Marjorie M. Carlson, James A. Karman, and Ralph D. Ketchum, which expire at the 2004 annual meeting, continued after the meeting. The shares represented at the Annual Meeting in person or by proxy were voted as follows with respect to each of the proposals:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits

32 METROPOLITAN FINANCIAL CORP. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. METROPOLITAN FINANCIAL CORP. By: /s/ Kenneth T. Koehler ----------------------- Kenneth T. Koehler, President & Operating Officer (on behalf of the Registrant) By: /s/ Marcus Faust ----------------------- Marcus Faust, Executive President & Chief Financial Officer By: /s/Timothy W. Esson ----------------------- Timothy W. Esson, Vice President-Finance for the Bank (as Principal Accounting Officer) Date: August 15, 2002 33

METROPOLITAN FINANCIAL CORP /OH/ 10-Q