UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ____________ TO _____________ .
Commission File No. 0-22484
LEADER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 62-1527337
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
158 Madison Avenue, Memphis, TN 38103
(Address of principal executive office) (Zip code)
(901) 578-2000
(Registrant s telephone number, including area code)
N/A
(Former name, address and fiscal year, if changed since last year)
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 [ ].
On April 30, 1996, the registrant had outstanding _________ shares of common
stock, par value $1.00 per share.
2
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
March 31, 1996 and December 31, 1995 . . . . . . . 3
Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995 . . . . 4
Consolidated Statement of Stockholders Equity
Three Months Ended March 31, 1996 . . . . . . . . 6
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 . . . . 7
Notes to Consolidated Financial Statements . . . . . 8
Item 2. Management s Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 22
3
PART I
FINANCIAL INFORMATION
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
(In Thousands)
March 31, December 31,
1996 1995
Assets
Cash and due from banks $ 29,428 $ 27,558
Federal funds sold 93,000 90,000
Securities available-for-sale 576,711 611,895
Securities held-to-maturity 145,200 154,931
Investment in Federal Home Loan Bank 32,429 31,875
Loans receivable, net 2,044,444 1,941,121
Loans held for sale 30,139 19,060
FHA/VA Claims receivable, net 48,505 46,174
Premises and equipment, net 19,274 18,613
Mortgage servicing rights 50,927 53,740
Accrued interest receivable 74,408 72,059
Other assets, net 33,347 31,551
_________ _________
Total assets $3,177,812 $3,098,577
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $1,582,691 $1,577,230
Federal Home Loan Bank advances
and other borrowings 592,760 541,318
Federal funds purchased and securities
sold under agreements to repurchase 589,120 597,260
Advance payments by borrowers for
taxes and insurance 64,167 47,564
Accrued interest payable 20,510 23,451
Accrued expenses and other liabilities 73,393 64,924
_________ _________
Total liabilities 2,922,641 2,851,747
_________ _________
Stockholders' equity:
Common stock, $1 par value,
35,000,000 shares authorized;
10,752,500 shares issued 10,753 10,753
Additional paid-in capital 94,454 94,415
Unearned compensation (5,799) (6,086)
Unrealized gain on securities
available-for-sale 7,348 9,702
Retained earnings 165,779 156,032
Treasury stock, at cost; 828,688
and 858,422 shares at March 31,
1996 and December 31, 1995,
respectively (17,364) (17,986)
________ ________
Total stockholders' equity 255,171 246,830
________ ________
Total liabilities and
stockholders' equity $3,177,812 $3,098,577
========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
PART I
FINANCIAL INFORMATION
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(In Thousands)
Three months ended
March 31,
1996 1995
Interest income:
Loans receivable $46,677 $38,790
Securities:
Available-for-sale 10,610 1,086
Held-to-maturity 2,811 7,107
Federal funds sold 1,351 1,096
Other 511 649
_______ _______
Total interest income 61,960 48,728
_______ _______
Interest expense:
Deposits 18,925 17,242
Federal Home Loan Bank advances and
other borrowings 8,459 6,614
Federal funds purchased and securities
sold under agreements to repurchase 8,369 4,505
_______ _______
Total interest expense 35,753 28,361
_______ _______
Net interest income 26,207 20,367
Provision for loan losses 1,511 1,206
_______ _______
Net interest income after provision
for loan losses 24,696 19,161
Non-interest income:
Loan fees 105 51
Loan servicing revenue 3,037 4,052
Gains (losses), net:
Securities - -
Loans originated for sale 541 48
Gain (loss) on real estate activities (112) (135)
Real estate operations (96) (94)
Deposit account operations 1,129 975
Other 1,581 947
______ ______
Total non-interest income 6,185 5,844
______ ______
Operating expenses:
Compensation and benefits 7,149 6,135
Office occupancy and equipment 1,348 1,317
Advertising 621 456
Federal insurance premiums 932 844
Office supplies, postage and telephone 1,055 750
Data processing rental and maintenance 596 501
Other 1,341 1,120
______ ______
Total operating expenses 13,042 11,123
______ ______
Income before income taxes 17,839 13,882
Income tax expense 6,379 5,135
______ ______
Net income $11,460 $ 8,747
======= =======
Earnings per common share $1.11 $0.87
===== =====
See accompanying notes to unaudited consolidated financial statements.
5
PART I
FINANCIAL INFORMATION
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Three months ended March 31, 1996
(Unaudited)
(In Thousands)
Unrealized
gain(loss)
on Total
Addn'l Unearned securities Stock-
Common paid-in Compen- available- Retained Treasury holder's
stock capital sation for-sale earnings stock equity
Balance at
12/31/95 $10,753 $94,415 $(6,086) $9,702 $156,032 $(17,986) $246,830
Net income - - - - 11,460 - 11,460
Amortization
of Management
Recognition
Plan - - 215 - - - 215
ESOP excess
compensation
cost - 348 - - - - 348
ESOP debt
payment - - 72 - - - 72
Change in
unrealized
gain on
securities
available-
for-sale - - - (2,354) - - (2,354)
Exercise of
stock options - (309) - - - 622 313
Dividend
payments - - - - (1,713) - (1,713)
Purchase of
treasury stock - - - - - - -
______ ______ ______ ______ ________ _______ _______
Balance at
3/31/96 $10,753 $94,454 $(5,799) $7,348 $165,779 $(17,364) $255,171
======= ======= ======= ====== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
6
PART I
FINANCIAL INFORMATION
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
Three months ended
March 31,
1996 1995
Net cash provided by operating activities 9,069 31,032
Cash flows from investing activities:
Loan originations, net of principal
repayments 1,409 (4,562)
Purchase of loans held for investment (6,030) (11,795)
Purchases of FHA/VA delinquent loans (135,603) (90,489)
Repayments on mortgage-backed securities 37,875 7,958
Proceeds from maturities and principal
repayments of securities held-to-maturity 977 25,772
Purchases of securities available-for-sale - (5,156)
Proceeds from maturities and principal
repayments of securities available-for-sale 2,342 758
Purchase of Federal Home Loan Bank stock - (819)
Purchases of mortgage servicing rights (40) (3)
Advances on FHA/VA claims receivable (1,254) (1,161)
Proceeds from the settlement of FHA/VA
claims receivable 33,294 11,364
Purchases of premises and equipment (1,247) (623)
Other - 110
________ ________
Net cash used in investing activities (68,277) (68,646)
________ ________
Cash flows from financing activities:
Net increase in deposits 5,461 51,264
Net change in borrowings with original
maturities less than three months (32,506) 72,120
Payments on Federal Home Loan Bank advances
and other borrowings (29,151) (154,878)
Proceeds from Federal Home Loan Bank
advances and other borrowings 105,000 75,000
Net increase in advance payments by
borrowers for taxes and insurance 16,603 18,702
Proceeds from issuance of common stock, net 313 161
Dividends paid (1,714) (1,487)
ESOP debt repayment 72 -
________ ________
Net cash provided by financing activities 64,078 60,882
________ ________
Net increase in cash and cash equivalents 4,870 23,268
Cash and cash equivalents at beginning
of period 117,558 50,155
________ ________
Cash and cash equivalents at end of period $122,428 $ 73,423
======== ========
See accompanying notes to unaudited consolidated financial statements.
7
PART I, ITEM 1.
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the accounting policies in effect at
December 31, 1995 as set forth in the annual consolidated financial
statements of Leader Financial Corporation (the "Company"). In the
opinion of Management, all adjustments necessary for a fair
presentation of the unaudited consolidated financial statements are of
a normal recurring nature and have been included.
The results of operations for the three months ended March 31, 1996 and
1995, are not necessarily indicative of the results to be expected for
the full year.
(2) Earnings Per Share
The computation of primary and fully diluted earnings per share is
based upon the weighted average number of common shares outstanding
during the period adjusted for the assumed exercise of all outstanding
stock options using the treasury stock method. The primary weighted
average number of shares outstanding for the three month periods ended
March 31, 1996 and 1995, is 10,322,888 and 10,033,260, respectively.
The fully diluted weighted average number of shares outstanding for
these respective periods is 10,357,118 and 10,039,128. The reduction
of earnings per share on a fully diluted basis is less than three
percent.
(3) Legal Proceedings
The Company and/or various subsidiaries are parties to various pending
civil actions, all of which are being defended vigorously.
Additionally, the Company and/or various subsidiaries are parties to
various legal proceedings that have arisen in the ordinary course of
business. Management is of the opinion, based upon present
information, including evaluations of outside counsel, that neither the
Company's financial position, results of operations, nor liquidity will
be materially affected by the ultimate resolution of pending or
threatened legal proceedings.
Currently, the Company and/or various subsidiaries are named defendants
in four (4) Alabama lawsuits involving the placement of collateral
insurance on mobile home loans as follows:
In June 1995, several plaintiffs filed a suit in the Circuit
Court of Greene County, Alabama (Jeri Lynn Plowman, Albert
Finch and Frances Finch, et al. v. The American Bankers
Insurance Company of Florida, Leader Federal Savings and Loan
Association of Memphis, Inc. ("Leader Federal"), et al.,
herein, the "Plowman suit") against the Bank and eighteen
other named defendants who sold, financed, insured or acted as
an agent in the sale of insurance for mobile homes in the
State of Alabama. The Complaint requests certification of a
class and seeks to have an unknown number of additional
defendants added to the suit, including other lenders,
insurance companies, dealers and insurance agents who were
engaged in the sale and insuring of mobile homes from the
period of January 1, 1983 to the present. The plaintiffs
8
PART I, ITEM 1.
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(unaudited)
(3) Legal Proceedings, continued
allege a variety of types of wrongdoing in connection with the
sale of insurance, including force-placed insurance. It is
alleged, among other things, that insurance was sold for an
amount greater than permitted by law, that defendants charged
excessive premiums, that insurance premiums were paid to persons
not licensed to receive them, and that plaintiffs paid for
insurance that was greater than the value of the collateral. It
is alleged that the defendant financial institutions, including
the Bank, wrongfully benefited from the sale of this insurance.
The plaintiffs are seeking to have the contracts under which the
defendants have profited declared void, seeking to enjoin the
defendants from taking further action to collect on the insurance
and financing contracts, demanding judgment for the amount of
undisclosed commissions and excess insurance premiums, and
seeking a forfeiture of all finance charges and a judgment for
punitive damages in the sum of $200 million for each defendant.
In July 1995, the Bank filed a Notice of Removal to move the
action to the United States District Court for the Northern
District of Alabama, Western Division. The Bank then filed a
Motion to Dismiss in the District Court, which was denied. The
Plowman suit was remanded to Circuit Court. However, prior to
remand, other defendants filed a Notice of Removal to the United
States Bankruptcy Court for the Northern District of Alabama
Western Division, and petitions for remand are pending before
that court.
In June 1995, George and Jessica Brown filed a counter-claim in
the Circuit Court of Tuscaloosa County, Alabama in response to a
foreclosure suit filed by the Bank on the Browns' mobile home
loan. The counter-plaintiffs allege that the Bank is in
violation of Alabama disclosure laws related to insurance
purchased in connection with the loan. The Browns further allege
misrepresentations were made to them at the time of purchase
concerning insurance coverage, and that they were paying
excessive insurance premiums for the coverage. The counter-
plaintiffs are demanding judgment for: (i) the amount of
insurance premiums paid for insurance in excess of the value of
the underlying collateral, or (ii) the amount of the payoff of
the loan at the time the insurance was issued and collected
during the terms of the Browns' loan, plus (iii) further judgment
for the excess premiums paid for insurance which was issued to
them for an amount greater than the fair market value of the
collateral, plus punitive damages of $10 million.
In January 1996, a suit was filed by Queen Ford in the Circuit
Court of Greene County, Alabama against the Bank, a subsidiary of
the Bank (together, the Bank ) and a separate insurance company
alleging that insurance was wrongfully force placed on Ms. Ford s
mobile home loan account for more insurance coverage than was
required and that Ms. Ford paid double payments for several years
to the Bank and another insurance company. Ms. Ford's
allegations include intent by the Bank to deceive and defraud,
and she is demanding judgment against the Bank for $5,000 in
compensatory damages and $20 million in punitive damages.
9
PART I, ITEM 1.
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(unaudited)
(3) Legal Proceedings, continued
In January 1996, Queen Ford filed a second suit in the Circuit
Court of Greene County, Alabama, with similar allegations as
outlined above, along with additional allegations relating to
adjacent structure coverage which Ms. Ford is claiming was
neither requested nor necessary. The second suit also has
additional defendants, including the insurance company which
issued the policy on the mobile home. Ms. Ford is demanding
judgment against the Bank for $10,000 in compensatory damages and
$50 million in punitive damages. In March 1996, the Bank sought
to have the case removed to federal court; however, the case was
remanded to Circuit Court.
In July 1991, a suit was filed by numerous plaintiffs in the Circuit
Court of Shelby County, Tennessee (April Wallace, et al. v. Leader
Federal Bank for Savings, et al, herein, the "Wallace suit"), against
several financial institutions, including the Bank, alleging excessive
fees charged by the defendants for processing checks drawn on accounts
with insufficient funds and for processing third party checks deposited
by the plaintiffs to their accounts which were subsequently returned
unpaid by the maker s bank. Plaintiffs are seeking to include in their
class all customers who have had insufficient funds or return item
charges assessed. In September 1991, the defendants filed a Joint
Motion to Dismiss. In April 1992, the court granted the defendants
motion. In May 1992, plaintiffs appealed to the Tennessee Court of
Appeals which reversed, in part, the lower court s ruling. The Court
of Appeals remanded the Wallace suit to the Circuit Court, which
granted the defendants subsequent Motion for Summary Judgment. The
plaintiffs appealed, and in January 1995, the Tennessee Court of
Appeals affirmed the lower court ruling in favor of the defendants.
The plaintiffs then appealed to the Tennessee Supreme Court, which
denied certiorari in June 1995. Plaintiffs immediately filed a
Petition to Rehear and Application for Permission to Appeal to the
Tennessee Supreme Court, which was granted. A hearing on the petition
was held on April 2, 1996, but no action has been taken by the Court.
In August 1991, a suit was filed in the Chancery Court of Shelby
County, Tennessee by National Bank of Commerce, as Trustee for Leader
Federal Savings and Loan Association Umbrella Trust, requesting the
court to adjudicate the rights of James L. Ross, former President and
Chief Operating Officer of the Bank and member of the Compensation
Committee of the Board of Directors, with respect to certain benefits
which Mr. Ross alleges he is due in connection with the termination of
his employment by the Bank. The Bank and the Compensation Committee
claim that the Bank is owed damages and has the right to certain
offsets as a result of actions taken by Mr. Ross during his employment.
Mr. Ross is seeking compensatory and consequential damages against the
Bank in the amount of $1.25 million, compensatory damages against Mr.
Bailey in the amount of $2.5 million, punitive damages against Mr.
Bailey in the amount of $1.5 million, plus all other damages sustained
10
PART I, ITEM 1.
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidtaed Financial Statements, continued
(unaudited)
(3) Legal Proceedings, continued
by Mr. Ross, attorneys fees and other relief the court may deem
proper.
(4) Pending Federal Legislation
A number of proposals regarding the future of the Savings Association
Insurance Fund ("SAIF") are under debate in Congress. Proposed
legislation recently approved by the U.S. House of Representatives
Banking Committee provides for a one-time special assessment of eighty-
five to ninety basis points of the insured deposits of SAIF insured
savings institutions.
If such a special assessment were to be required, it would result in a
one-time pre-tax charge to earnings of $13.2 to $14.0 million, assuming
such charge would be tax deductible and the special assessment is based
on deposits held at March 31, 1995, as is currently proposed. As of
March 31, 1996, this legislation had not been enacted and the potential
charge has not been reflected in the Company's consolidated financial
statements.
(5) Acquisition of The Company by Union Planters Corporation
On March 8, 1996, Leader Financial Corporation's Board of Directors
voted to enter into a Definitive Agreement and Plan of Merger (the
Agreement) with Union Planters Corporation. This transaction is
contingent upon stockholder and regulatory approval and, if approved,
is expected to close during the fourth quarter of 1996.
For additional information regarding the Agreement, refer to the copy
Exhibits to the Company's Annual Report on Form 10K for 1995.
11
PART I, ITEM 1.
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(Unaudited)
(6) Securities
The net unrealized gain between amortized cost and approximate fair
value of all securities at March 31, 1996 and December 31, 1995 was
$13,504,000 and $17,812,000, respectively. The table below shows the
gross components of these gains, by security type, at those dates.
March 31, 1996
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Securities available-for-sale
U.S. federal agencies $ 8,131 $ 17 $ (123) $ 8,025
FHLMC preferred stock 2,437 53 - 2,490
Collateralized mortgage
obligations 37,998 617 (162) 38,453
Other 449 885 - 1,334
_______ ______ _______ _______
49,015 1,572 (285) 50,302
_______ ______ _______ _______
Mortgage-backed securities:
FHLMC 27,225 589 (182) 27,632
FNMA 321,615 9,076 (606) 330,085
GNMA 167,003 2,395 (706) 168,692
_______ ______ _______ _______
515,843 12,060 (1,494) 526,409
_______ ______ _______ _______
Securities available-
for-sale 564,858 13,632 (1,779) 576,711
_______ ______ _______ _______
Securities held-to-maturity:
Collateralized mortgage
obligations 11,583 31 (56) 11,558
Other 2,000 20 (125) 1,895
_______ ______ _______ _______
13,583 51 (181) 13,453
_______ ______ _______ _______
Mortgage-backed securities:
FHLMC 40,541 1,009 (13) 41,537
FNMA 6,488 113 - 6,601
GNMA 78,843 696 (24) 79,515
Non-agency 5,745 - - 5,745
_______ ______ _______ _______
131,617 1,818 (37) 133,398
_______ ______ _______ _______
Securities held-to-maturity 145,200 1,869 (218) 146,851
_______ ______ _______ _______
Total investment securities $710,058 $15,501 $(1,997) $723,562
======== ======= ======== ========
12
PART I, ITEM 1.
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(Unaudited)
(6) Securities, continued
December 31, 1995
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Securities available-for-sale
U.S. federal agencies $ 2,000 $ 20 $ - $ 2,020
U.S. state and political
subdivisions 8,221 15 (130) 8,106
FHLMC preferred stock 2,441 73 - 2,514
Collateralized mortgage
obligations 38,056 700 (86) 38,670
Other 543 829 - 1,372
_______ _____ ______ _______
51,261 1,637 (216) 52,682
_______ _____ ______ _______
Mortgage-backed securities:
FHLMC 29,162 724 (91) 29,795
FNMA 343,518 10,166 (329) 353,355
GNMA 172,306 4,208 (451) 176,063
_______ ______ ______ _______
544,986 15,098 (871) 559,213
_______ ______ ______ _______
Securities available-for-sale 596,247 16,735 (1,087) 611,895
_______ ______ ______ _______
Securities held-to-maturity:
Collateralized mortgage
obligations 12,406 28 (53) 12,381
Other 2,132 26 (115) 2,043
_______ ______ ______ _______
14,538 54 (168) 14,424
_______ ______ ______ _______
Mortgage-backed securities:
FHLMC 43,917 1,273 (38) 45,152
FNMA 7,392 130 - 7,522
GNMA 83,304 920 (7) 84,217
Non-agency 5,780 - - 5,780
_______ ______ ______ _______
140,393 2,323 (45) 142,671
_______ ______ ______ _______
Securities held-to-maturity 154,931 2,377 (213) 157,095
_______ ______ ______ _______
Total investment securities $751,178 $19,112 $(1,300) $768,990
======= ====== ======= =======
13
PART I, ITEM 1.
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(Unaudited)
(6) Securities, continued
Contractual maturities of securities as of March 31, 1996 are summarized as
follows (in thousands):
Securities Securities
available- held-to-
for-sale maturity
Amortized Fair Amortized Fair
cost value cost value
Maturing in one year or less $ 727 $ 727 $ 917 $ 916
Maturing after one year
through five years 9,476 9,468 2,682 2,665
Maturing after five years
through ten years 15,421 15,713 5,625 5,799
Maturing after ten years 539,234 550,803 135,976 137,471
_______ _______ _______ _______
Total $564,858 $576,711 $145,200 $146,851
======= ======= ======= =======
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE MONTHS ENDED MARCH 31, 1996
General. Leader Financial Corporation (the Company ) has no significant
business other than that of its subsidiary Leader Federal Bank for Savings
(the "Bank"), which is a federally chartered, stock organized savings bank.
As such, the discussion which follows as it pertains to the Company s
operations relates substantively to information pertaining to Leader Federal
Bank for Savings and its subsidiaries.
Performance Summary. The Company reported net earnings of $11.5 million, or
$1.11 per share, for the three months ended March 31, 1996, compared to $8.7
million, or $.87 per share, for the same period in 1995. This 31.0%
improvement was attributable to a $5.8 million (28.7%) increase in net
interest income combined with a $341,000 (5.8%) increase in non-interest
income and a $1.9 million (12.3%) increase operating expenses. The
improvement in net interest income was primarily attributable to the increase
in the volume of interest earning assets owned between two periods. The
Company's spread between interest yields and interest costs for the quarter
ended March 31, 1996, increased only slightly as compared to the same period
in 1995. Increased staffing, primarily in the loan servicing area, along
with the increased cost of employee incentive programs contributed to the
increase in operating expenses.
The principal measures of performance for the Company and other financial
institutions are return on average equity and return on average assets which
are the ratios of net income to average shareholder investment and average
assets employed in the production of income, respectively. For the three
months ended March 31, 1996, these ratios were 18.26% and 1.46%,
respectively, compared to 16.83% and 1.41% for the comparable period in 1995.
In addition, financial institution performance is often measured by the
efficiency ratio, which measures the amount of operating expense incurred to
generate each dollar of pretax income. The Company's efficiency ratio for
the three month period ended March 31, 1996 was 40.3% compared to 42.4% for
the comparable quarter of 1995.
The paragraphs below analyze the Company's financial condition and results of
operations for the three months ended March 31, 1996 and 1995. Such
discussion should be read only in conjunction with the accompanying unaudited
financial statements and notes thereto, which are considered an integral part
hereof.
15
RESULTS OF OPERATIONS
The following table sets forth information relating to the Company s average
balance sheet and reflects the average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, derived by
dividing income or expense by the average monthly balances of such assets and
liabilities, for the periods indicated.
Three Months Ended March 31,
(TAXABLE EQUIVALENT BASIS) 1996 1995
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
(Dollars in thousands)
Interest-earning assets:
Federal funds sold $98,846 $1,351 5.47% $75,433 $1,096 5.81%
Securities available-
for-sale (1) 599,518 10,658 7.11% 55,222 1,134 8.21%
Securities held-to-
maturity 151,359 2,811 7.43% 411,427 7,107 6.91%
Investment in Federal
Home Loan Bank 31,893 562 7.05% 23,280 380 6.53%
Loans receivable,
net 2,015,606 46,677 9.26% 1,743,241 38,790 8.90%
Other interest
earning assets 17,642 (51) -1.16% 16,692 269 6.45%
_________ ______ _____ _________ ______ _____
Total interest-
earning assets 2,914,864 $62,008 8.51% 2,325,295 $48,776 8.39%
Non-interest earning
assets 224,538 170,672
_________ _________
Total Assets $3,139,402 $2,495,967
========= =========
Interest-bearing
liabilities:
Demand $104,032 $496 1.91% $95,343 $451 1.89%
Savings 141,098 931 2.64% 206,053 1,704 3.31%
Time and other
deposits 1,192,737 17,498 5.87% 1,094,268 15,087 5.51%
FHLB advances and
other borrowings 573,779 8,459 5.90% 420,703 6,614 6.29%
Securities sold under
agreement to
repurchase 597,477 8,369 5.60% 290,461 4,505 6.20%
_________ ______ _____ ________ ______ _____
Total interest-bearing
liabilities 2,609,123 35,753 5.48% 2,106,828 28,361 5.38%
Non-interest-bearing
liabilities 278,637 182,350
_________ _________
Total liabilities 2,887,760 2,289,178
Stockholders' Equity 251,642 206,789
_________ _________
16
Results of Operations, continued
Total liabilities
and stockholders'
equity $3,139,402 $2,495,967
========= =========
Net interest
income/interest
rate spread $26,255 3.03% $20,415 3.01%
Net yield on interest-
earning assets 3.60% 3.51%
Ratio of interest-
earning assets
to interest-bearing
liabilities 1.12X 1.10X
(1) Includes taxable equivalent adjustment of $48,000 for each of the three
month periods ending March 31, 1996 and 1995, using an effective tax rate
of 38%.
Average interest earning assets during the first quarter of 1996 were
$589.6 million (25.4%) higher than the $2.325 billion averaged during the
comparable period of 1995. A substantial portion of this growth (46%)
occurred in the Company's loan portfolio, where average balances increased
by $272.4 million. The largest component of the growth in average loans
continued to be delinquent single family FHA/VA loans acquired from the
Company's mortgage loan servicing portfolio and/or from third party
servicers. In addition, the average balances of investment securities
increased by $284.2 million from the first quarter of 1995 to 1996
principally due to the securitization of approximately $324.8 million of
loans into mortgage-backed securities held in the available-for-sale
portfolio. Approximately 78% of the growth in average interest earning
assets was funded with advances from the Federal Home Loan Bank of
Cincinnati ("FHLB") or short term wholesale borrowings. Interest bearing
deposits funded the remaining 22% of asset growth with a $42.2 million
increase in average balances outstanding between the quarters. The average
balance of non-interest bearing liabilities, principally escrow balances
and demand deposits, also increased between the first quarters of 1995 and
1996, as $1.408 billion of mortgage servicing was converted to the
Company's servicing system between these quarter ends.
Net interest income. On a taxable equivalent basis, net interest income
totaled $26.2 million for the three months ended March 31, 1996, up from
$20.4 million for 1995. Substantially all of this increase is attributable
to growth in the volume of interest earning assets, because the spread
between the average interest rate earned on interest-earning assets and the
average rate paid on interest-bearing liabilities increased by only .02%.
Net interest margin, which is defined as the ratio of net interest income
to average interest-earning assets, increased from 3.51% to 3.60%.
17
The table below sets forth certain information regarding changes in the
components of net interest income for the first quarter of 1996 compared to
1995:
Net Interest Income 3 Months Ended March 31,
Volume/Rate Analysis 1996 vs 1995
Increase (Decrease) Due to
(Tax equivalent yield-
In thousands) Volume Rate Total
Interest income:
Federal fund sold $ 322 $ (67) $ 255
Securities available-for-sale 9,696 (172) 9,524
Securities held-to-maturity (4,795) 499 (4,296)
Investment in Federal
Home Loan Bank 150 32 182
Loans receivable, net 6,265 1,622 7,887
Other interest earning assets 14 (334) (320)
_______ ______ _______
Total interest income 11,652 1,580 13,232
Interest expense:
Demand 40 5 45
Savings (471) (302) (773)
Time and other deposits 1,397 1,014 2,411
FHLB advances and
other borrowings 2,277 (432) 1,845
Securities sold under
agreement to repurchase 4,339 (475) 3,864
_______ ______ ______
Total interest expense 7,582 (190) 7,392
_______ ______ ______
Change in net
interest income $4,070 $1,770 $5,840
======= ====== ======
Interest earned on average interest-earning assets increased by $13.2
million for the three month period ended March 31, 1996, with approximately
88% of such growth attributable to the volume of such assets. The
Company's leverage strategy continued to focus on agency-conforming
adjustable rate first mortgage loan originations, securitization of such
originations into mortgage-backed securities and the purchase of above
market coupon delinquent FHA/VA insured or guaranteed loans. There were no
open market purchases of investment securities during the quarter ended
March 31, 1996, and management does not anticipate any significant open-
market investment security purchases in the near future. The decline in
interest on other interest earning assets was primarily attributable to the
recognition of surrender charges on life insurance policies. Interest
expense increased by $7.4 million for the three month period ended March
31, 1996. This growth was entirely attributable to increased volume.
Between the first quarter of 1995 and the first quarter of 1996, the
Company's yield on interest-earning assets increased from 8.39% to 8.51%,
or by .12%, while the cost of interest-bearing liabilities increased from
5.38% to 5.48%, or by .10%. Net interest margin for the first quarter
totaled 3.60%, a 2.6% increase from the 3.51% achieved during the first
quarter of 1995.
18
Non-interest Income. Non-interest income increased by $341,000 for the three
month period ended March 31, 1996 compared to 1995, primarily as a result of
the following factors:
- - - The acquisition of additional mortgage loan servicing rights coupled with
increasing rates of prepayments on mortgage loans underlying mortgage
servicing rights resulted in a decrease in loan servicing fee income of
$1.0 million in a quarter-to-quarter comparison. At March 31, 1995, the
Company serviced $5.289 billion of mortgage loans. At March 31, 1996,
that amount was $6.010 billion. Amortization of mortgage servicing rights
totaled $2.9 million during the three months ended March 31, 1996 compared
to $2.1 million in the year earlier period.
- - - The increasing level of demand for fixed rate mortgage loans resulted in
an increase in the origination of such loans for sale in the secondary
market to $70.4 million for the three months ended March 31, 1996 from
$10.4 million for comparable 1995 period. The growth in such originations
resulted in increased gain on sales of loans totaling $493,000 for the
three month period ended March 31, 1996 compared to 1995.
- - - A decline in the level of interest rates paid on deposits at March 31,
1996 caused many customers to seek higher returns through uninsured
alternative investment products, thus increasing the Company's commission
and fee income. Accordingly, other non-interest income increased by
$634,000 during the first quarter of 1996 compared to the same period in
1995.
Operating Expenses. Operating expenses for the quarter ended March 31, 1996,
were $13.0 million compared to $11.1 million in the first quarter of 1995, a
$1.9 million increase. The majority of this, a $1.0 million increase in
compensation and benefits, was related to increased staffing in loan
servicing operations and an increase in the cost of employee incentive
programs.
Financial Condition. Total assets increased to $3.178 billion at March 31,
1996, compared to $3.099 billion and $2.530 billion at December 31, 1995, and
March 31, 1995, respectively, for an annualized growth rate of 10.2%.
Management anticipates further leveraging of equity through asset growth,
although the extent to which such growth is achievable is uncertain.
Single family residential loans, the largest category of interest-earning
assets, increased to $1.572 billion at March 31, 1996, up $101.9 million from
$1.470 billion at December 31, 1995 and up $217.9 million from $1.355 billion
at March 31, 1995. Most of this growth occurred in the FHA/VA portfolio
where loans increased by $118.6 million for the quarter and by $332.7 million
from the year earlier period to a total of $1.026 billion. In addition, the
Company s conventional single family loan portfolio decreased by $16.7 million
and $114.8 million for the same periods to a total of $546.8 million,
primarily due the securitization of first mortgage loans into mortgage-backed
securities held in the Company's securities available-for-sale portfolio.
The Company continued its policy of acquiring delinquent FHA/VA loans out of
GNMA pools that it services for others and of acquiring these loans from
third parties on both a servicing released and servicing retained basis.
These purchases totaled $135.6 million during the three months ended March
31, 1996, compared to $90.5 million for the same period in 1995. Of the
total FHA/VA loans outstanding at March 31, 1996 and December 31, 1995,
19
$360.4 million and $321.6 million, respectively, were delinquent 90 or more
days and still accruing interest, contributing to a $2.3 million increase in
accrued interest receivable. In addition, the level of FHA/VA claims in
process has increased proportionately with the acquisition of additional
delinquent FHA/VA loans. At March 31, 1996, such claims in process totaled
$48.5 million, net of loss reserves, compared to $46.2 million at December
31, 1995. Management believes that the above market return on investment in
such loans is adequate compensation for the credit and interest rate risks
associated with their acquisition.
Renewed demand for fixed rate mortgage loans during the first quarter of 1996
caused a reduction in the demand for adjustable rate mortgage loans which the
Company retains in its portfolio. Originations of such loans totaled $32.3
million in the three months ended March 31, 1996, compared to $45.6 million
in the same period of 1995.
Non-performing Assets. Non-performing assets include all nonaccrual loans
and real estate acquired through foreclosure, net of specific reserves for
losses on such properties. Nonperforming assets at March 31, 1996, were
$11.2 million, or .35% of total assets, compared to $11.9 million and $11.0
million, or .39% and .44%, respectively, of total assets at December 31, and
March 31, 1995. The year-to-year change reflects normal recurring single
family residential foreclosure activity. Allowances for loan losses at March
31, 1996, and December 31, 1995, totaled $23.1 million and $22.9 million,
respectively, representing 206.23% and 191.67% of nonperforming assets.
The Company s investments are reviewed and reported upon monthly by the Asset
Review Department and those that warrant concern are classified as special
mention , substandard , doubtful , or loss based primarily on the likelihood
of future repayment. The likelihood of repayment is evaluated in light of
such factors as general economic conditions, concentrations of borrower or
industry credit, changes in borrower financial condition, the actual level of
chargeoffs being experienced, etc. After making these classifications,
allowances are then reviewed for adequacy and appropriate loan loss
provisions are charged to income. Provisions for losses totaled $1.5 million
and $1.2 million for the quarters ended March 31, 1996 and 1995,
respectively, while net chargeoffs of uncollectible loans totaled $1.3
million and $282,000 for the same periods.
Mortgage Servicing Rights. The Company's investment in mortgage servicing
rights decreased from $53.7 million at December 31, 1995 to $50.9 million at
March 31, 1996. Amortization of mortgage servicing rights totaled $2.9
million during the three months ended March 31, 1996 compared to $2.1 million
in the year earlier period.
20
The following table presents summary information, including prepayment data
stated as a percentage of the prepayment standard established by the Public
Securities Administration ( PSA ), regarding the mortgage loans which underlie
the Company s purchased mortgage servicing rights as of the dates indicated
(dollar amounts in thousands):
Principal Weighted Weighted 1 month 12 month
Serviced * Avg.Coupon Avg. Term PSA Avg. PSA
03/31/95 $4,597,562 8.99% 20.8 205.3% 252.3%
12/31/95 5,308,739 9.09% 19.8 282.3% 328.3%
03/31/96 5,014,479 9.07% 19.6 339.0% 321.6%
* Excludes loan being subserviced by others pending conversion to the
Company's loan Servicing system, if any.
Deposits. Total deposits increased by $5.5 million during the three
months ended March 31, 1996, from $1.577 billion at December 31, 1995, to
$1.583 billion at March 31, 1996, a .35% increase.
During September 1995, the Company entirely revised its demand account
structure which reflects a change in market strategy. This program is
aimed at growing the Company's demand account deposit base through low cost
checking accounts, thereby lowering the overall cost of funds.
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE RISK
The Company s objective is to balance the sensitivity of its net interest
income to fluctuations in interest rates with the sensitivity of its fee
generating operations (principally its mortgage banking operations,
including loan servicing) to those same fluctuations in interest rates.
Management believes that, in this way, overall net income can be stabilized
over a broad array of interest rate scenarios. Part of this
asset/liability management strategy involves the retention of originated
adjustable rate mortgage loans and short term mortgage related consumer
loans, principally first/second mortgage amortizing loans. In addition,
the Company has acquired floating rate instruments for its available-for-
sale investment portfolio and has aggressively priced longer term consumer
time deposits. At March 31, 1996, the cumulative one year repricing gap,
as a percent of total assets, was a negative 171 million, or 5.38%,
compared to a negative 333.2 million (10.75%) at December 31, 1995. The
repricing gap was primarily influenced by three factors. First, the
assumed rate of prepayments on the Company's one-to-four family mortgage
loan portfolio, which varies inversely with the changes in interest rates,
reduces the average life of a mortgage loan to less than its contractual
term. The amount of the reduction in average life becomes greater in
higher the prepayment assumption. On January 31, 1996, the federal open
market committee took action to reduce the federal funds rate by .25%.
This was followed by a reduction in the prime rate of interest and the
overall level of interest rates in general. These changes in the interest
rates are expected to increase the rate of prepayments on the Company's
mortgage loan and mortgage servicing portfolios. Accordingly, prepayment
speed assumptions were increased, thus reducing the repricing gap estimates
between December 31, 1995 and March 31, 1996. Second, the Company
experienced an increase in the remaining maturities associated with time
deposits which resulted in a reduction of time deposits maturing in one
year or less by approximately $42 million; and thirdly, the Company
replaced short-term and variable rate borrowings of approximately $53
million with fixed rate longer term borrowings through the use of interest
rate swaps.
21
Since the inception of the Company s strategy of acquiring above market
coupon delinquent FHA/VA single family residential loans, the majority of
such loans acquired have been funded with short term, interest sensitive
borrowings. This is because a substantial portion of such loans are
liquidated, through foreclosure or otherwise, over a relatively short period
of time not related to the contractual term of the loan. To the extent such
loans become current, they form a part of the Company s greater-than-five-year
mismatch strategy, described below. The Company will reevaluate its
delinquent FHA/VA loan acquisition strategy in the event short term interest
rates increase to a point where the interest rate spread is no longer
consistent with the Company's overall objectives.
In addition to management of the one year cumulative gap, management seeks to
control the cumulative five year gap to a level that is consistent with the
Company s investment in mortgage servicing rights. Such rights are
susceptible to changes in interest rates in that the value of such rights,
and the amortization thereof, are based in large part on current and future
expectations of prepayments. As the general level of mortgage interest rates
rise, mortgage servicing rights tend to gain value as prepayments (and
therefore amortization expense) decrease. Conversely, long term fixed rate
investments, such as mortgage loans, tend to lose value in such a scenario,
thus balancing the overall change in the market value of portfolio assets and
change in net interest income. The Company has established an objective of
maintaining the funding mismatch between assets and liabilities with
maturities of greater than five years at an amount that is commensurate with
its investment in mortgage servicing rights. At March 31, 1996, the mismatch
in these assets/liabilities was a positive $184 million, which represents
3.6 times the investment in mortgage servicing rights.
Liquidity and Capital Resources. Cash and cash equivalents increased by $4.9
million for the three months ending March 31, 1996, as investing activities,
principally originations and acquisitions of loans, consumed less cash than
was supplied by operations and financing activities, principally FHLB
advances. Regulatory liquidity averaged 5.22% for the three months ended
March 31, 1996, as management sought to minimize the amount of excess cash
and cash equivalents on hand. The Company has available to it additional
borrowing capacity through various sources including the FHLB, reverse
repurchase agreements, broker supplied retail deposits, sale of investments
available-for-sale and from the Federal Reserve. As computed under OTS
regulations, Leader Federal Bank for Savings had tangible and core capital of
$195.4 million, or 6.13% of adjusted assets and $212.9 million, or 15.21% of
risk adjusted assets, at March 31, 1996. The OTS has adopted an interest
component factor for those institutions whose market value of portfolio
equity changes by more than 2% of assets assuming a change in interest rates
of plus/minus 2%, although the implementation date for such capital requirement
is pending the development and adoption of an appeals process. Based upon the
most recent computations completed by the OTS (December 31, 1995), the Bank
would not be subject to an interest rate risk capital component.
At March 31, 1996, the Company s total GAAP capital was 8.03%.
22
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K:
On March 12, 1996, the Company filed a Current Report on Form 8-K
dated March 8, 1996, disclosing the terms of an Agreement and Plan
of Merger pursuant to which the Company will be acquired by Union
Planters Corporation.
23
SIGNATURES
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.
LEADER FINANCIAL CORPORATION
David C. Wadlington
Duly Authorized Officer and
Principal Financial Officer
Date: