________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the quarterly period ended December 31, 2001

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the transition period from to

Commission file number 001-15595

Metropolitan Mortgage & Securities Co., Inc.

(Exact name of registrant as specified in its charter)


Washington		91-0609840
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

601 W. 1st Avenue, Spokane, Washington (Address of principal executive offices)		99201-5015 (Zip Code)

Registrant’s telephone number, including area code: (509) 838-3111

Former name, former address and former fiscal year, if changed since last report: N/ A.

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 þ No o

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: N/ A.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common “A”: 97 shares at January 31, 2002.

Common “B”: 0 shares at January 31, 2002.

TABLE OF CONTENTS


PART I -- FINANCIAL INFORMATION
	Item 1.Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
		CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.Quantitative and Qualitative Disclosures About Market Risk
PART II -- OTHER INFORMATION
	Item 6.Exhibits and Reports on Form 8-K
SIGNATURES

METROPOLITAN MORTGAGE & SECURITIES CO., INC.

INDEX

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


		Page

Consolidated Balance Sheets As of December 31, 2001 and September 30, 2001
Consolidated Statements of Operations Three Months Ended December 31, 2001 and 2000
Consolidated Statements of Comprehensive Income (Loss) Three Months Ended December 31, 2001 and 2000
Consolidated Statement of Stockholders’ Equity Three Months Ended December 31, 2001
Consolidated Statements of Cash Flows Three Months Ended December 31, 2001 and 2000
Notes to Consolidated Financial Statements

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


			December 31,			September 30,
			2001			2001

			(Unaudited)
ASSETS:
Cash and cash equivalents			$	51,431,049		$	68,019,397
Investments:
	Trading securities, at fair value			1,200,674			48,832,529
	Available-for-sale securities, at fair value			390,456,252			311,803,378
	Accrued interest on investments			2,872,875			2,734,943

		Total investments		394,529,801			363,370,850

Real estate contracts and mortgage notes receivable, net of discounts and origination fees and net of allowances of $11,606,705 and $11,241,981				438,529,786			426,376,243
Real estate held for sale and development at the lower of cost or market, net of allowances of $3,314,864 and $3,661,247				84,473,318			81,934,751
Other receivable investments, net of discounts and origination fees and net of allowances of $2,369,577 and $2,267,996				177,882,112			173,836,770

		Net real estate assets and other receivable investments		700,885,216			682,147,764

Other assets:
	Reinsurance receivable			107,883,112			109,608,025
	Deferred costs, net			66,746,779			66,755,118
	Land, buildings and equipment, net			28,905,152			29,411,423
	Mortgage servicing rights, net			899,510			3,994,096
	Deferred income taxes			23,492,745			20,894,075
	Other assets, net			49,689,052			49,927,066

		Total other assets		277,616,350			280,589,803

		Total assets	$	1,424,462,416		$	1,394,127,814

LIABILITIES:
Life insurance and annuity reserves			$	996,620,091		$	971,216,178
Debenture bonds and accrued interest				325,338,851			300,367,995
Debt payable				49,422,034			39,628,517
Accounts payable and accrued expenses				16,646,097			39,625,703
Minority interest in consolidated subsidiaries				2,465,713			2,376,931

		Total liabilities		1,390,492,786			1,353,215,324

STOCKHOLDERS’ EQUITY:
Preferred stock, Series A, B, C, D, E, G and H cumulative with variable rate, $10 par value, authorized 13,325,000, issued 1,272,528 shares and 1,299,254 shares (liquidation preference $35,379,080 and $35,973,840)				12,725,277			12,992,547
Preferred stock, Series E-7 cumulative with variable rate, $2.50 par value, authorized 10,000,000, issued 676,876 shares (liquidation preference $16,921,890)				1,692,189			1,692,189
Common stock, Class A, $2,250 par, authorized 222 shares, 97 shares issued and outstanding				218,250			218,250
Additional paid-in capital				25,129,230			26,024,897
Accumulated other comprehensive loss				(9,317,110	)		(4,474,411	)
Retained earnings				3,521,794			4,459,018

		Total stockholders’ equity		33,969,630			40,912,490

		Total liabilities and stockholders’ equity	$	1,424,462,416		$	1,394,127,814

The accompanying notes are an integral part

of the consolidated financial statements.

METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



			Three Months Ended
			December 31,

			2001			2000


			(Unaudited)
Revenues:
	Insurance premiums		$	358,612		$	397,505
	Interest on receivables			12,267,586			9,389,363
	Earned discount on receivables and investments			8,944,487			4,897,593
	Other investment income			7,699,902			7,704,442
	Real estate sales			2,339,414			5,907,870
	Fees, commissions, service and other income			1,961,705			3,607,449
	Net gains (losses) on investments			1,203,177			(812,264	)
	Net gains on sales of receivables			347,975			2,828,767

		Total revenues		35,122,858			33,920,725

Expenses:
	Insurance policy and annuity benefits			13,055,764			11,812,029
	Interest, net			7,647,475			6,124,946
	Cost of real estate sold			2,299,911			5,731,986
	Provision for losses on real estate assets			861,249			1,864,557
	Provision for losses on other assets			101,582			677,989
	Salaries and employee benefits			4,120,931			6,445,207
	Commissions to agents			2,022,372			3,151,036
	Other operating and underwriting expenses			4,115,605			4,044,479
	Amortization of deferred costs, net of costs capitalized			720,160			635,440

		Total expenses		34,945,049			40,487,669

Income (loss) before income taxes and minority interest				177,809			(6,566,944	)
Income tax (provision) benefit				(31,460	)		2,304,861

Income (loss) before minority interest				146,349			(4,262,083	)
(Income) loss of consolidated subsidiaries allocated to minority stockholders				(88,782	)		11,848

Net income (loss)				57,567			(4,250,235	)
Preferred stock dividends				(936,346	)		(1,161,303	)

Loss applicable to common stockholders			$	(878,779	)	$	(5,411,538	)

The accompanying notes are an integral part

of the consolidated financial statements.

METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



			Three Months Ended
			December 31,

			2001			2000


			(Unaudited)
Net income (loss)			$	57,567		$	(4,250,235	)

Other comprehensive income (loss), net of income tax:
	Cumulative effect of accounting change, net of tax			0			(240,994	)
	Unrealized gains (losses) on investments:
		Unrealized holding gains (losses) arising during period		(4,136,059	)		1,301,540
		Less: reclassification adjustment for (gains) losses included in net income		(706,640	)		82,067

		Unrealized gains (losses) on investments		(4,842,699	)		1,383,607

	Net other comprehensive (loss) income			(4,842,699	)		1,142,613

Comprehensive loss			$	(4,785,132	)	$	(3,107,622	)

The accompanying notes are an integral part

of the consolidated financial statements.

METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


									Accumulated
						Additional			Other
	Preferred			Common		Paid-in			Comprehensive			Retained
	Stock			Stock		Capital			Loss			Earnings			Total


	(Unaudited)
Balance, October 1, 2001	$	14,684,736		$	218,250	$	26,024,897		$	(4,474,411	)	$	4,459,018		$	40,912,490
Net income													57,567			57,567
Net unrealized losses on available-for-sale securities, net of income tax benefit of $2,598,670										(4,842,699	)					(4,842,699	)
Cash dividends, common ($603 per share)													(58,445	)		(58,445	)
Cash dividends, preferred (variable rate)													(936,346	)		(936,346	)
Redemption and retirement of preferred stock (32,312 shares)		(323,134	)				(1,261,623	)								(1,584,757	)
Sale of variable rate preferred stock, net (5,586 shares)		55,864					365,956									421,820

Balance, December 31, 2001	$	14,417,466		$	218,250	$	25,129,230		$	(9,317,110	)	$	3,521,794		$	33,969,630

The accompanying notes are an integral part

of the consolidated financial statements.

METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



					Three Months Ended
					December 31,

					2001			2000


					(Unaudited)
Cash flow from operating activities:
	Net income (loss)				$	57,567		$	(4,250,235	)
	Adjustments to reconcile net income (loss) to net cash from operating activities:
		Proceeds from sales of trading securities				13,590,118			6,441,537
		Proceeds from maturities of trading securities				1,020,171			1,177,439
		Acquisition of trading securities				(4,669,459	)		(3,674,892	)
		Earned discount on receivables and investments				(8,944,487	)		(4,944,525	)
		Gains on investments and receivables, net				(1,551,153	)		(2,016,503	)
		Gains on sales of real estate				(39,503	)		(175,884	)
		Provision for losses on real estate assets				861,249			1,864,557
		Provision for losses on other assets				101,582			677,989
		Depreciation and amortization				1,253,064			1,360,506
		Minority interests				88,782			(11,848	)
		Deferred income tax benefit				(2,598,670	)		(2,815,566	)
		Changes in assets and liabilities:
			Deferred cost, net			8,339			472,450
			Life insurance and annuity reserves			13,349,168			11,065,684
			Compound and accrued interest on debenture bonds and debt payable			593,142			1,508,640
			Accrued interest on receivables and investments			(3,101,863	)		(798,004	)
			Other assets			5,926,818			15,182,111
			Accounts payable and accrued expenses			(3,405,044	)		39,342
			Other, net			(767,909	)		(654,244	)

				Net cash provided by operating activities		11,771,912			20,448,554

Cash flow from investing activities:
	Principal payments received on real estate contracts and mortgage notes receivable and other receivable investments					44,709,760			32,469,055
	Proceeds from sales of real estate contracts and mortgage notes receivable and other receivable investments					3,491,257			78,179,895
	Proceeds from sales of real estate					2,339,414			5,332,280
	Proceeds from maturities of available-for-sale investments					18,988,551			1,525,701
	Proceeds from sales of available-for-sale investments					37,484,332			36,853,397
	Acquisition of real estate contracts and mortgage notes receivable					(42,030,125	)		(105,892,823	)
	Acquisition of other receivable investments					(10,444,564	)		(4,161,993	)
	Purchases of available-for-sale investments					(126,629,165	)		(1,782,943	)
	Purchases of and costs associated with real estate held for sale and development					(1,926,899	)		(1,972,113	)
	Capital expenditures					(135,982	)		(273,768	)

				Net cash provided by (used in) investing activities	$	(74,153,421	)	$	40,276,688

Cash flow from financing activities:
	Increase (decrease) in borrowings				$	10,000,000		$	(9,302,217	)
	Repayments of debt payable					(230,316	)		(122,222	)
	Receipts from life and annuity products					40,013,211			30,126,169
	Withdrawals of life and annuity products					(29,367,103	)		(30,450,803	)
	Ceding of life and annuity products to reinsurers					3,133,550			1,898,873
	Issuance of debenture bonds					37,644,483			16,624,472
	Repayment of debenture bonds					(13,242,936	)		(4,328,623	)
	Issuance of preferred stock					421,820			689,732
	Redemption and retirement of preferred stock					(1,584,757	)		(2,738,734	)
	Cash dividends					(994,791	)		(1,219,747	)

				Net cash provided by financing activities		45,793,161			1,176,900

Net change in cash and cash equivalents						(16,588,348	)		61,902,142
Cash and cash equivalents:
	Beginning of period					68,019,397			2,664,035

	End of period				$	51,431,049		$	64,566,177

Non cash investing and financing activities of Company:
	Real estate acquired through foreclosure					2,842,296			3,699,851
	Receivables originated to facilitate the sale of real estate					0			575,590
	Transfer of investments from held-to-maturity to available-for-sale					0			59,415,992
	Transfer of investments from trading to available-for-sale					37,396,757			0
	Mortgage servicing rights retained from securitizations					0			1,046,116

The accompanying notes are an integral part

of the consolidated financial statements.

METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Metropolitan Mortgage & Securities Co., Inc. and subsidiaries (the “Company” or “Consolidated Group”) as of December 31, 2001, the results of operations for the three months ended December 31, 2001 and 2000 and the cash flows for the three months ended December 31, 2001 and 2000. The results of operations for the three months ended December 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements including notes thereto included in the Company’s fiscal 2001 Form 10-K.

Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on net income (loss) or retained earnings as previously reported.

2. Segment Reporting

The Company principally operates in three industry segments which encompass: (1) investing in real estate contracts and mortgage notes receivable, other receivables and investment securities; (2) insurance and annuity operations; and (3) property development activities. The insurance segment also invests a substantial portion of the proceeds from insurance and annuity operations in real estate contracts and mortgage notes receivables, other receivables and investment securities. All transactions between segments are eliminated. The Company allocates certain overhead and operating expenses amongst its segments.

Information about the Company’s separate business segments and in total as of and for the three month period ended December 31, 2001 and 2000 is as follows:



	As of and for the Three Month Period Ended December 31, 2001

						Property		Intersegment
	Investing			Insurance		Development		Eliminations			Total

Revenues	$	6,969,710		$	28,404,514	$	501,524	$	(752,890	)	$	35,122,858
Income (loss) from operations		(6,858,660	)		6,580,682		335,545		—			57,567
Identifiable assets, net		174,838,052			1,178,244,775		71,221,987		157,602			1,424,462,416
Depreciation and amortization		894,709			81,255		277,100		—			1,253,064
Capital expenditures		113,641			22,341		—		—			135,982



	As of and for the Three Month Period Ended December 31, 2000

						Property			Intersegment
	Investing			Insurance		Development			Eliminations			Total

Revenues	$	10,384,419		$	24,228,870	$	1,529,971		$	(2,222,535	)	$	33,920,725
Income (loss) from operations		(6,742,072	)		190,867		(15,739	)		—			(6,566,944	)
Identifiable assets, net		321,359,420			1,037,033,890		57,297,096			(154,421,085	)		1,261,269,321
Depreciation and amortization		1,003,191			88,609		268,100			—			1,359,900
Capital expenditures		246,578			27,190		—			—			273,768

METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Preferred Stock Split

On October 22, 2001, the Company’s Board of Directors declared a stock split for the Company’s Variable Rate Cumulative Preferred Stock, Series E-7 (the “Series E-7 Preferred Stock”). On November 5, 2001, each outstanding share of Series E-7 Preferred Stock was converted into four shares of Series E-7 Preferred Stock. Accordingly, the par value of each such share was adjusted from $10.00 per share to $2.50 per share and the liquidation preference and dividend calculation amount of each such share was adjusted from $100.00 per share to $25.00 per share to reflect the split.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

These discussions may contain forward-looking statements. A forward-looking statement may contain words such as “will continue to be,” “will be,” “continue to,” “expect to,” “anticipates that,” “to be,” or “can impact.” Management cautions that forward-looking statements are subject to risks and uncertainties that could cause the Company’s actual results to differ materially from those projected in forward-looking statements.

General

Metropolitan was established in 1953. Through growth and acquisitions it has developed into a diversified institution with assets exceeding $1 billion. Its principal subsidiaries are Western United Life Assurance Company (“Western” or “WULA”), an annuity and life insurance company, and Metwest Mortgage Services, Inc. (“Metwest”), a receivable servicer and loan originator. The Company provides services to certain affiliated entities (the “Affiliated Companies”) for a fee and engages in various business transactions with these entities. The Affiliated Companies are National Summit Corp. and its principal subsidiaries which include Summit Securities, Inc. (“Summit”), Old Standard Life Insurance Company (“Old Standard”), Old West Life Insurance & Annuity Company (“Old West”), Summit Property Development and Metropolitan Investment Securities, Inc. (“MIS”). The Affiliated Companies are affiliated with the Consolidated Group because of the common control of the Consolidated Group and the Affiliated Companies by C. Paul Sandifur, Jr.

The Company and its subsidiaries principal business activity is investing in cash flowing assets, consisting of obligations collateralized by real estate, structured settlements, annuities, lottery prizes, and other investments (“Receivables”). The Receivables primarily consist of real estate contracts and promissory notes collateralized by first position liens on real estate. The Company predominantly invests in Receivables where the borrower or the collateral does not qualify for conventional financing or the seller or the buyer chose to use non-conventional financing. This market is commonly referred to as the non-conventional market. Obligors on the Consolidated Group’s real estate receivables include A-, B and C credit quality obligors.

Individual and Pool Receivable Acquisition Sources

Historically, the majority of the Company’s real estate receivables were acquired as individual receivable acquisitions. The Company’s principal source for private market receivables is independent brokers located throughout the United States. These independent brokers typically deal directly with private individuals or organizations that own and wish to sell a Receivable. The Company may periodically acquire pools of Receivables from the secondary market through brokers or directly from other financial institutions. Additionally, the Company may originate jumbo residential loans through Metwest. The Company may also originate first lien residential loans as a result of reselling real estate acquired through foreclosure.

Commercial Loans

The Company, through Old Standard, originates commercial loans collateralized by various types of commercial properties. These commercial loans are generally small to mid-sized loans that are originated for less than $15 million. The Company currently projects continued expansion of the origination of commercial loans during 2002. This projection is in part due to management’s current perception that this market may be inadequately served by current lenders, who are not flexible in their underwriting and pricing policies and who are not able to quickly underwrite and close such loans, particularly in the temporary, bridge and development commercial loan markets.

Non Real Estate Receivable Sources

Metropolitan also negotiates the purchase of Receivables which are not collateralized by real estate, such as annuities, lottery prizes and business notes. The lottery prizes generally arise out of state operated lottery games which are typically paid in annual installments to the prize winner. The structured settlements generally arise out of the settlement of legal disputes where the prevailing party is awarded a sum of money, payable

over a period of time, generally through the creation of an annuity. Other annuities generally consist of investments that cannot be cashed in directly with the issuing insurance company. Business notes are cashflow instruments that are paid to a seller for the purchase of a business operation. Metropolitan’s source for these investments is generally private brokers who specialize in these types of Receivables.

Delinquency

The principal amount of real estate receivables as to which payments were in arrears more than three months was $47.6 million at December 31, 2001 and $24.6 million at December 31, 2000.

The principal amount of other receivables as to which payments were in arrears more than three months was $10.4 million at December 31, 2001 and $6.8 million at December 31, 2000.

Liquidity and Capital Resources

In addition to the liquidity provided through internal sources which include the sale and maturity of receivables and investments; receivable and portfolio earnings; and the sale of real estate, the following liquidity sources are available to the Company:

Federal Home Loan Bank of Seattle (FHLB)

The Company has secured a line of credit agreement with the FHLB through its subsidiary, WULA. When an institution becomes a stockholder in the FHLB, it can borrow from the FHLB at a stock to borrowing ratio of 1 to 20. At December 31, 2001, WULA had a stock investment in the FHLB of $3.1 million, which resulted in a borrowing capacity of $61.9 million. The collateral eligible to be used to secure the borrowing is predefined by the FHLB and generally consists of eligible securities and mortgage loans. Additionally, each type of collateral has a minimum pledge requirement that ranges from 100% to 125%. At December 31, 2001, WULA had pledged $128.5 million in eligible collateral with a market value of $112.1 million and a borrowing potential of $83.2 million. At December 31, 2001 WULA had borrowed $32.0 million leaving an unused borrowing potential of $51.2 million. In the event that WULA wanted to increase the borrowing capacity of the FHLB line of credit, it could purchase additional stock and pledge additional eligible collateral.

Issuance of Annuity and Life Insurance Products

The Company, through its WULA subsidiary, generates liquidity through the sale of annuities and to a lesser degree whole life and term insurance. Currently, the products that WULA offers are targeted to the middle income senior market. Generally, younger purchasers direct their savings and investment dollars to mutual funds and/or variable annuities, in light of a strong financial market; while senior citizens tend to be more conservative with their retirement dollars and may favor fixed annuity products. Nonetheless, Management anticipates that some younger buyers could be inclined to reallocate their retirement funds if the stock markets continue to be volatile or if market returns decline.

The life insurance and annuity business is highly competitive. WULA competes with other financial institutions including ones with greater resources and greater name recognition. Premium volumes, annuity crediting rates and commissions to agents are particularly sensitive to competitive forces. WULA management believes it is in an advantageous position in this regard because of its earnings capability through investments in receivables compared to that of most other life insurance companies. WULA has been assigned a rating of “B” (“Fair”) by A.M. Best Co., a nationally recognized insurance company rating organization. A.M. Best bases its ratings on a number of complex financial analyses, the length of time a company has been in business, the nature, quality, and liquidity of investments in its portfolio, depth and experience of management and various other factors. A.M. Best’s ratings are supplied primarily for the benefit of policyholders and insurance agents.

WULA prices its new annuity products and renewals in order to achieve a positive spread between its annuity costs and yields available on Receivable and other investments while also considering current annuity

market rates of interest and competitive pressures. Flexible and single premium annuities are offered with surrender charges for periods that vary from one year to ten years. Management believes that the surrender charges in conjunction with current pricing policies enable the company to manage its insurance lapse rates and underlying interest rate risk.

Reverse Repurchase Agreements

In order to increase liquidity, the Company may sell a group of securities to a broker-dealer under the provision that the Company will buy them back by a predetermined date for a specific price. The difference between the amount the Company received for the securities and the amount the Company will pay the broker-dealer when buying them back represents the interest. At December 31, 2001, the Company did not have any reverse repurchase agreements outstanding.

Issuance of Debt Securities and Preferred Stock

Metropolitan engages in public offerings of debt securities and preferred stock. These investments are typically offered to the public on a continuous best efforts basis through Metropolitan Investment Securities, Inc., an affiliated company. At December 31, 2001, the Company had registered $100 million of Series III and Series III-A Debenture Bonds. This debenture bond registration expires April 30, 2002. At December 31, 2001, the Company had registered 6,000,000 shares of preferred stock that carry a $25 issue price for a total preferred stock offering price of $150,000,000. This preferred stock registration expires October 31, 2002.

For the three month period ended December 31, 2001, $210.0 million in funds provided by the Company’s various liquidity sources were used to (1) invest $181.2 million primarily in receivables, investments and capital expenditures and (2) fund $45.4 million in debt maturities, life and annuity product surrenders, redemption of preferred stock, and the payment of dividends.

For the three month period ended December 31, 2000, $224.1 million in funds provided by the Company’s various liquidity sources were used to (1) invest $114.1 million primarily in receivables, investments and capital expenditures and (2) fund $48.1 million in debt maturities, life and annuity product surrenders, redemption of preferred stock, and the payment of dividends.

Management believes that cash, cash equivalents and liquidity provided through the Company’s liquidity sources will be adequate to meet planned asset additions, debt retirements and other business operational requirements during the next twelve months.

Results of Operations


	*Three Months Ended December 31, 2001 Compared to Three Months Ended December 31, 2000*

Net income for the three month period ended December 31, 2001 was approximately $0.1 million on $35.1 million in revenues compared to a net loss of $4.3 million on $33.9 million in revenues for the three month period ended December 31, 2000. Income before income taxes and minority interest for the three months ended December 31, 2001 was approximately $0.2 million compared to a loss of approximately $6.6 million for the three months ended December 31, 2000.

The increase in income before income taxes and minority interest of $6.8 million was primarily due to:


	•	an increase in net interest spread of $4.1 million,

	•	an increase in gains on investments of $2.0 million,

	•	a decrease in loan loss provisions of $1.5 million,

	•	a decrease in non-interest expense of $3.3 million.

These changes were partially offset by:


	•	a reduction in gains on sales of receivables of $2.5 million,

	•	a reduction of fees, commissions, service and other income of $1.6 million

Management monitors interest sensitive income and expenses as it manages the objectives for the Company’s results of operations. Interest sensitive income consists of interest and earned discounts on receivables, insurance revenues and other investment interest. Interest sensitive expense consists of interest expense on borrowed money and insurance policy and annuity benefits.

The Company is in a “liability sensitive” position in that its interest sensitive liabilities reprice or mature more quickly than do its interest sensitive assets. Consequently, in a rising interest rate environment, the net return from interest sensitive assets and liabilities will tend to decrease. Conversely, in a falling interest rate environment, the net return from interest sensitive assets and liabilities will tend to improve. The Company believes there has not been a material change in its market risk since the end of its last fiscal year.

During the three month period ended December 31, 2001, the excess of interest sensitive income over interest sensitive expense was approximately $8.6 million compared to $4.5 million in the prior year’s period. The increase between periods is primarily the result of an increase in fees associated with the Company’s commercial lending activities. Additionally, the average net interest margin increased to 4.17% through December 2001 compared to 2.61% through December 2000. As a result of the increase in the net interest margin, the Company unlocked approximately $0.4 million of deferred acquisition costs at December 31, 2001.

The Company classifies its investments in debt and equity securities as either “trading” or “available-for-sale”. From time to time, gains or losses are recognized on trading positions and securities classified as “available-for-sale” may be sold at a gain or loss. During the three month periods ended December 31, 2001 and 2000, the Company realized gains of approximately $1.9 million and $1.0 million respectively. Additionally, during the three month period ended December 31, 2000, the Company determined that certain “available-for-sale” investments had other than temporary declines in value. Accordingly, the carrying value of the investments were decreased by approximately $0.9 million, representing the amount impaired. This amount has been recorded in the statement of operations as a loss on investments. The Company continues to periodically assess the assumptions used in valuing the cash flows and the related carrying value of its residuals and subordinated securities.

During the three month period ended December 31, 2001 and 2000, the change in unrealized losses on trading securities, recorded in the Statements of Operations, were approximately $0.7 million and $0.9 million, respectively.

Loan loss provisions decreased to approximately $1.0 million during the three month period ended December 31, 2001 compared to $2.5 million during the similar three month period ended December 30, 2000. The decrease during the current period was primarily due to a reduction in the acquisitions of real estate contracts and mortgage notes receivable and other receivables from approximately $110.1 million during the three month period ended December 30, 2000 to approximately $52.5 million during the three month period ended December 30, 2001. The reduction in the acquisition and origination of receivables was primarily due to the Company’s planned exit from real estate backed securitization activities. The exit from securitization activities also contributed to a reduction in gains on sales of receivables to approximately $0.3 million during the three month period ended December 31, 2001 compared to gains of approximately $2.8 million during the similar period ended December 31, 2000.

The following table summarizes changes in the Consolidated Group’s allowance for losses on real estate and other assets for the three month periods ended December 31, 2001 and 2000:



	December 31,

	2001			2000

Beginning balance	$	17,171,224		$	15,050,115
Provisions		962,831			2,542,546
Charge-offs		(842,909	)		(3,106,631	)

Ending balance	$	17,291,146		$	14,486,030

Non-interest expense consists of all non-interest expenses except the cost of real estate sold and the provision adjustments. Non-interest expense was approximately $11.0 million for the three month period ended December 30, 2001 compared to $14.3 million for the similar period ended December 31, 2000. The reduction in non-interest expenses during the current period was primarily the result of (1) a $1.6 million increase in administrative expenses charged to affiliates in accordance with established cost sharing agreements, (2) a reduction in full time equivalent employees and other operating expenses as a result of the Company’s planned exit from loan servicing and certain loan origination functions, and (3) a $0.4 million unlocking of deferred acquisition costs. The $3.3 million reduction in non-interest expenses was partially offset by a $1.5 million reduction in loan servicing fee income.

New Accounting Rules

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses accounting and reporting of long-lived assets, except goodwill, that are either held and used or disposed of through sale or other means. The Company is currently evaluating the impact of this statement on the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the three month period ended December 31, 2001, the excess of interest sensitive income over interest sensitive expense was approximately $8.6 million in 2001, compared to $4.5 million in the prior year’s period. The increase between periods is primarily the result of an increase in fees associated with the Company’s commercial lending activities. Additionally, the average net interest margin increased to 4.17% through December 2001 compared to 2.61% through December 2000.

PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) During the quarter ended December 31, 2001, the Registrant filed or furnished the following reports on Form 8-K:


	Form 8-K dated October 22, 2001, filed October 26, 2001, reporting the declaration of a stock split for the Registrant’s Variable Rate Cumulative Preferred Stock, Series E-7, under Item 5, Other Events.

	Form 8-K dated December 19, 2001, filed December 19, 2001, reporting the unaudited operating results for fiscal quarter ending September 30, 2001, under Item 9, Regulation FD Disclosure.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on this 13th day of February, 2002 on its behalf by the undersigned, thereunto duly authorized.


	METROPOLITAN MORTGAGE & SECURITIES CO., INC.

	/s/ C. PAUL SANDIFUR, JR.

	C. Paul Sandifur, Jr.
	Chairman, President, Chief Executive Officer

	/s/ STERLING GALLAGHER

	Sterling Gallagher
	Chief Financial Officer

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METROPOLITAN MORTGAGE & SECURITIES CO INC 10-Q