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 JUNE 30, 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 July 31, 1996, the registrant had outstanding 9,962,544 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,
June 30, 1996 and December 31, 1995 . . . . . . . 3
Consolidated Statements of Operations
Three Months and Six Months Ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . 4
Consolidated Statement of Stockholders Equity
Six Months Ended June 30, 1996 . . . . . . . . . . 6
Consolidated Statements of Cash Flows
Three Months and Six Months Ended
June 30, 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)
June 30, December 31,
1996 1995
Assets
Cash and due from banks $ 31,244 $ 27,558
Federal funds sold 82,000 90,000
Securities available-for-sale 717,419 611,895
Securities held-to-maturity 136,922 154,931
Investment in Federal Home Loan Bank 32,994 31,875
Loans receivable, net 1,953,694 1,941,121
Loans held for sale 18,791 19,060
FHA/VA Claims receivable, net 54,698 46,174
Premises and equipment, net 19,311 18,613
Mortgage servicing rights 56,807 53,740
Accrued interest receivable 74,362 72,059
Other assets, net 32,822 31,551
--------- ---------
Total assets $3,211,064 $3,098,577
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $1,569,722 $1,577,230
Federal Home Loan Bank advances
and other borrowings 594,314 541,318
Federal funds purchased and securities
sold under agreements to repurchase 641,167 597,260
Advance payments by borrowers for
taxes and insurance 73,301 47,564
Accrued interest payable 19,529 23,451
Accrued expenses and other liabilities 46,641 64,924
--------- ---------
Total liabilities 2,944,674 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 94,627 94,415
Unearned compensation (5,584) (6,086)
Unrealized gain on securities
available-for-sale 5,929 9,702
Retained earnings 177,527 156,032
Treasury stock, at cost; 804,706
and 858,422 shares at June 30,
1996 and December 31, 1995,
respectively (16,862) (17,986)
-------- --------
Total stockholders' equity 266,390 246,830
-------- --------
Total liabilities and
stockholders' equity $3,211,064 $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 Six months ended
June 30, June 30,
1996 1995 1996 1995
Interest income:
Loans receivable $45,462 $41,843 $ 92,139 $80,633
Securities:
Available-for-sale 13,543 1,345 24,153 2,431
Held-to-maturity 2,808 6,895 5,619 14,022
Federal funds sold 1,016 1,266 2,367 2,362
Other 792 650 1,303 1,279
------- ------- ------- -------
Total interest income 63,621 51,999 125,581 100,727
Interest expense:
Deposits 18,831 18,463 37,756 35,705
Federal Home Loan Bank advances
and other borrowings 8,578 6,853 17,037 13,467
Federal funds purchased and
securities sold under agreements
to repurchase 8,124 5,335 16,493 9,840
------- ------- ------- -------
Total interest expense 35,533 30,651 71,286 59,012
------- ------- ------- -------
Net interest income 28,088 21,348 54,295 41,715
Provision for loan losses 1,410 1,356 2,921 2,562
------- ------- ------- -------
Net interest income after
provision for loan losses 26,678 19,992 51,374 39,153
Non-interest income:
Loan fees 161 148 266 224
Loan servicing revenue 3,947 3,704 6,984 7,756
Gains (losses), net:
Securities - - - -
Loans originated for sale 527 108 1,068 131
Gain (loss) on real estate
activities (88) (120) (200) (255)
Real estate operations (46) (96) (142) (190)
Deposit account operations 1,247 1,011 2,376 1,986
Other 1,493 1,233 3,074 2,180
------- ------- ------- -------
Total non-interest income 7,241 5,988 13,426 11,832
------- ------- ------- -------
Operating expenses:
Compensation and benefits 7,052 6,398 14,201 12,533
Office occupancy and equipment 1,275 1,308 2,623 2,625
Advertising 577 430 1,198 886
Federal insurance premiums 932 844 1,864 1,688
Office supplies, postage and
telephone 892 746 1,947 1,496
Data processing rental and
maintenance 602 524 1,198 1,025
Other 1,375 998 2,716 2,118
------- ------- ------- -------
Total operating expenses 12,705 11,248 25,747 22,371
------- ------- ------- -------
Income before income taxes 21,214 14,732 39,053 28,614
Income tax expense 7,530 5,635 13,909 10,770
------- ------- ------- -------
5
Net income $13,684 $9,097 $25,144 $17,844
======= ======= ======= =======
Earnings per common share $1.34 $0.90 $2.46 $1.78
===== ===== ===== =====
See accompanying notes to unaudited consolidated financial statements.
6
PART I
FINANCIAL INFORMATION
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Six months ended June 30, 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 - - - - 25,144 - 25,144
Amortization
of Management
Recognition
Plan - - 430 - - - 430
ESOP excess
compensation
cost - 766 - - - - 766
ESOP debt
payment - - 72 - - - 72
Change in
unrealized
gain on
securities
available-
for-sale - - - (3,773) - - (3,773)
Exercise of
stock options - (554) - - - 1,124 570
Dividend
payments - - - - (3,649) - (3,649)
------- ------- ------- ------ -------- -------- --------
Balance at
6/30/96 $10,753 $94,627 $(5,584) $5,929 $177,527 $(16,862) $266,390
======= ======= ======= ====== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
7
PART I
FINANCIAL INFORMATION
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
Six months ended
June 30,
1996 1995
Net cash provided by operating activities 3,363 13,100
Cash flows from investing activities:
Loan originations, net of principal
repayments (16,189) (14,942)
Purchases of FHA/VA delinquent loans (259,097) (263,658)
Repayments on mortgage-backed securities 79,166 16,608
Proceeds from maturities and principal
repayments of securities held-to-maturity 104,367 26,485
Purchase of securities held-for-maturity (102,225) -
Purchases of securities available-for-sale - (5,156)
Proceeds from maturities and principal
repayments of securities available-for-sale 2,958 1,758
Purchase of Federal Home Loan Bank stock - (2,196)
Purchases of mortgage servicing rights - (4,055)
Advances on FHA/VA claims receivable (3,805) (2,286)
Proceeds from the settlement of FHA/VA
claims receivable 76,750 36,776
Purchases of premises and equipment (1,824) (1,157)
Other - 243
------- -------
Net cash used in investing activities (119,899) (211,580)
------- -------
Cash flows from financing activities:
Net increase(decrease) in deposits (7,508) 75,291
Net change in borrowings with original
maturities less than three months 24,919 76,911
Payments on Federal Home Loan Bank advances
and other borrowings (87,419) (352,264)
Proceeds from Federal Home Loan Bank
advances and other borrowings 159,500 395,000
Net increase in advance payments by
borrowers for taxes and insurance 25,737 40,453
Proceeds from issuance of common stock, net 570 (887)
Dividends paid (3,649) (2,967)
Proceeds from ESOP debt repayment 72 -
------- -------
Net cash provided by financing activities 112,222 231,537
------- -------
Net increase (decrease) in cash and cash
equivalents (4,314) 33,057
Cash and cash equivalents at beginning
of period 117,558 50,155
------- -------
Cash and cash equivalents at end of period $113,244 $ 83,212
======= =======
See accompanying notes to unaudited consolidated financial statements.
8
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 six months ended June 30, 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 six month periods ended
June 30, 1996 and 1995, is 10,216,514 and 10,058,866, respectively.
The fully diluted weighted average number of shares outstanding for
these respective periods is 10,233,678 and 10,073,192. 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
9
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.
10
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 the members 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 Compensation
Committee and Mr. Ross disagree on the amount of benefits to which he
is entitled under various compensation plans. 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
11
PART I, ITEM 1.
LEADER FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidtaed Financial Statements, continued
(unaudited)
(3) Legal Proceedings, continued
all other damages sustained 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
June 30, 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
in the Exhibits to the Company's Annual Report on Form 10K for 1995.
12
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 June 30, 1996 and December 31, 1995 was
$10,018,000 and $17,812,000, respectively. The table below shows the
gross components of these gains, by security type, at those dates.
June 30, 1996
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Securities available-for-sale
U.S. State and Political
subdivisions $ 7,747 $ 13 $ (164) $ 7,596
FHLMC preferred stock 2,433 32 - 2,465
Collateralized mortgage
obligations 37,696 513 (244) 37,965
Other 371 196 - 567
------- ------ ------ -------
48,247 754 (408) 48,593
------- ------ ------ -------
Mortgage-backed securities:
FHLMC 24,927 337 (308) 24,956
FNMA 467,333 11,930 (1,792) 477,471
GNMA 167,348 995 (1,944) 166,399
------- ------ ------ -------
659,608 13,262 (4,044) 668,826
------- ------ ------ -------
Securities available-
for-sale 707,855 14,016 (4,452) 717,419
------- ------ ------ -------
Securities held-to-maturity:
Collateralized mortgage
obligations 10,881 12 (99) 10,794
Other 1,835 13 (116) 1,732
------- ------ ------ -------
12,716 25 (215) 12,526
------- ------ ------ -------
Mortgage-backed securities:
FHLMC 37,596 636 (29) 38,203
FNMA 6,098 106 (1) 6,203
GNMA 74,804 1,323 (1,391) 74,736
Non-agency 5,708 - - 5,708
------- ------ ------ -------
124,206 2,065 (1,421) 124,850
------- ------ ------ -------
Securities held-to-maturity 136,922 2,090 (1,636) 137,376
------- ------ ------ -------
Total investment securities $844,777 $16,106 $(6,088) $854,795
======= ====== ====== =======
13
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
======= ====== ====== =======
14
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 June 30, 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 $ 1,534 $ 1,528 $ 1,440 $ 1,440
Maturing after one year
through five years 8,063 7,996 1,683 1,675
Maturing after five years
through ten years 14,055 14,149 8,335 8,452
Maturing after ten years 684,203 693,746 125,464 125,809
------- ------- ------- -------
Total $707,855 $717,419 $136,922 $137,376
======= ======= ======= =======
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
SIX MONTHS ENDED JUNE 30, 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 $13.7 million, or
$1.34 per share, for the three months ended June 30, 1996, compared to $9.1
million, or $.90 per share, for the same period in 1995. This 50.5%
improvement was attributable to a $6.7 million (31.6%) increase in net
interest income and to a $1.3 million (20.9%) increase in non-interest
income. The improvement in net interest income was attributable to the
increase in the volume of interest earning assets owned in each of the two
periods, along with a decline in interest costs associated with borrowings as
a result of lower short-term interest rates.
For the six months ended June 30, 1996, net income increased by $7.3 million
(40.9%) to $25.1 million from $17.8 million for the same period in 1995.
Earnings per share increased 38.2% to $2.46 per share. The same factors that
positively affected the second quarter's results affected the year to date
amounts.
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 June 30, 1996, these ratios were 21.04% and 1.85%, respectively,
compared to 16.91% and 1.49% for the comparable period in 1995. For the six
months ended June 30, 1996, these ratios were 19.65% and 1.71%, respectively,
compared to 16.91% and 1.50% for 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 June
30, 1996 was 36.0% compared to 41.1% for the comparable quarter of 1995. For
the six months ended June 30, 1996 and 1995, these ratios were 38.0% and
41.8%, respectively.
The paragraphs below analyze the Company's financial condition and results of
operations for the six months ended June 30, 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.
16
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 June 30,
(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 $76,363 $1,016 5.32% $83,593 $1,266 6.06%
Securities available-
for-sale (1) 736,503 13,591 7.38% 73,442 1,378 7.51%
Securities held-to-
maturity 162,893 2,244 5.51% 391,287 6,493 6.64%
Investment in Federal
Home Loan Bank 32,448 564 6.95% 24,340 402 6.61%
Loans receivable,
net 1,931,581 45,462 9.41% 1,849,348 41,843 9.05%
Other interest
earning asset 17,944 792 17.65% 16,750 650 15.52%
--------- ------ ----- --------- ------ -----
Total interest-
earning assets 2,957,732 63,669 8.61% 2,438,760 52,032 8.53%
Non-interest earning
assets 236,712 178,494
--------- ---------
Total Assets $3,194,444 $2,617,254
========= =========
Interest-bearing
liabilities:
Demand $106,188 $496 1.87% $99,330 $451 1.82%
Savings 129,122 931 2.88% 184,235 1,704 3.70%
Time and other
deposits 1,218,385 17,404 5.71% 1,124,306 16,308 5.80%
FHLB advances and
other borrowings 601,903 8,578 5.70% 430,216 6,853 6.37%
Securities sold under
agreement to
repurchase 597,823 8,124 5.44% 336,841 5,335 6.34%
--------- ------ ---- --------- ------ ----
Total interest-bearing
liabilities 2,653,421 35,533 5.36% 2,174,928 30,651 5.64%
Non-interest-bearing
liabilities 280,929 227,094
--------- ---------
Total liabilities 2,934,350 2,402,022
Stockholders' Equity 260,094 215,232
--------- ---------
Total liabilities
and stockholders'
equity $3,194,444 $2,617,254
========= =========
17
Results of Operations, continued,
Net interest
income/interest
rate spread $28,136 3.25% $21,381 2.89%
Net yield on interest-
earning assets 3.81% 3.51%
Ratio of interest-
earning assets
to interest-bearing
liabilities 1.11X 1.12X
(1) Includes taxable equivalent adjustment of $48,000 and $33,000 for the
three month periods ending June 30, 1996 and 1995, respectively, using an
effective tax rate of 38%.
Average interest earning assets grew by $519.0 million (21.3%) to $2.958
billion during the quarter ended June 30, 1996, from $2.439 billion during
the comparable period of 1995. A portion of this growth (15.8%) occured in
the Company's loan portfolio, where average balances increased by $82.2
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 $434.7
million from the second 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
83% 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
17% of asset growth with a $45.8 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 second quarters of 1995 and 1996, as $1.267 billion
of mortgage servicing was converted to the Company's servicing system
between these quarter ends.
Six Months Ended June 30,
(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 $87,604 $2,367 5.40% $79,536 $2,362 5.94%
Securities available-
for-sale (1) 668,011 24,248 7.26% 64,382 2,507 7.79%
Securities held-to-
maturity 157,125 4,492 5.72% 401,313 13,254 6.61%
Investment in Federal
Home Loan Bank 32,170 1,127 7.01% 23,813 768 6.45%
Loans receivable,
net 1,973,594 92,139 9.34% 1,796,587 80,633 8.98%
Other interest
earning assets 17,792 1,303 14.65% 16,721 1,279 15.30%
--------- ------ ----- --------- ------ -----
18
Total interest-
earning assets 2,936,296 125,676 8.56% 2,382,352 100,803 8.46%
Non-interest earning
assets 230,413 174,818
--------- ---------
Total Assets $3,166,709 $2,557,170
========= =========
Interest-bearing
liabilities:
Demand $104,956 1,000 1.91% $97,052 923 1.90%
Savings 135,965 1,766 2.60% 196,703 3,176 3.23%
Time and other
deposits 1,204,433 34,990 5.81% 1,111,273 31,606 5.69%
FHLB advances and
other borrowings 587,797 17,037 5.80% 425,487 13,467 6.33%
Securities sold under
agreement to
repurchase 597,650 16,493 5.52% 313,779 9,840 6.27%
--------- ------ ---- --------- ------ ----
Total interest-bearing
liabilities 2,630,801 71,286 5.42% 2,144,294 59,012 5.50%
Non-interest-bearing
liabilities 280,040 201,843
--------- ---------
Total liabilities 2,910,841 2,346,137
Stockholders' Equity 255,868 211,033
--------- ---------
Total liabilities
and stockholders'
equity $3,166,709 $2,557,170
========= =========
Net interest
income/interest
rate spread $54,390 3.14% $41,791 2.96%
Net yield on interest-
earning assets 3.70% 3.51%
Ratio of interest-
earning assets
to interest-bearing
liabilities 1.12X 1.11X
(1) Includes taxable equivalent adjustment of $95,000 and $76,000 for the
six month periods ending June 30, 1996 and 1995, respectively, using an
effective tax rate of 38%.
Average interest earning assets grew by $553.9 million (23.3%) to $2.936
billion during the six months ended June 30, 1996, from $2.382 billion
during the comparable period of 1995. The same factors and strategies
which affected the growth in such assets for the second quarter of 1996
compared to 1995 were responsible for the increase in the year-to-date
comparative amounts.
Net interest income. On a taxable equivalent basis, net interest income
totaled $28.1 million for the three months ended June 30, 1996, up from
$21.4 million for 1995. Approximately $3.9 million of this increase is
attributable to growth in the volume of interest earning assets. In
addition, the spread between the average interest rate earned on interest-
earning assets and the average rate paid on interest-bearing liabilities
19
increased by .36%. Net interest margin, which is defined as the ratio of
net interest income to average interest-earning assets, increased from 3.51%
to 3.81%. The Company's net interest margin is anticipated to continue to
increase during the remainder of 1996 due to anticipated growth in the level
of interest-earning assets.
Net Interest Income Three Months Ended Six Months Ended
Volume/Rate Analysis June 30, June 30
1996 vs 1995 1996 vs 1995
Increase(Decrease)Due to Increase(Decrease)Due to
(Taxable Equivalent
yield in thousands) Volume Rate Total Volume Rate Total
Interest income:
Federal funds sold ($104) ($146) ($250) $229 ($224) $ 5
Securities available-
for-sale (1) 12,237 (24) 12,213 21,924 (183) 21,741
Securities held-to-
maturity (3,290) (959) (4,249) (7,174) (1,588) (8,762)
Investment in Federal
Home Loan Bank 140 22 162 288 71 359
Loans receivable,
net 1,911 1,708 3,619 8,178 3,328 11,506
Other interest
earning asset 48 94 142 80 (56) 24
------ ------ ------ ------ ------ ------
Total interest income 10,942 695 11,637 23,525 1,348 24,873
------ ------ ------ ------ ------ ------
Interest expense:
Demand 32 13 45 72 5 77
Savings (444) (329) (773) (864) (546) (1,410)
Time and other
deposits 1,351 (255) 1,096 2,704 680 3,384
FHLB advances and
other borrowings 2,506 (781) 1,725 4,777 (1,207) 3,570
Securities sold under
agreement to
repurchase 3,638 (849) 2,789 7,955 (1,302) 6,653
------ ------ ------ ------ ------ ------
Total interest expense 7,083 (2,201) 4,882 14,644 (2,370) 12,274
Change in net interest ------ ------ ------ ------ ------ ------
income $3,859 $2,896 $6,755 $8,881 $3,718 $12,599
====== ====== ====== ====== ====== =======
Interest earned on average interest-earning assets increased by $11.6
million and $24.9 million for the three and six month periods ended June
30, 1996, respectively, with approximately 94% of such growth attributable
to the volume of such assets. The Company's leverage strategy continued to
focus on agency-conforming 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 June 30, 1996, and management does not anticipate any significant
such activity in the near future. Interest expense increased by $4.9
million and $12.3 million for three and six month periods ended June 30,
1996, respectively. For both periods, this growth was predominately
attributable to increases in volume. Between the second quarter of 1995
and the second quarter of 1996, the Company's yield on interest-earning
assets increased from 8.53% to 8.61% or by .08%, while the cost of
20
interest-bearing liabilities decreased from 5.64% to 5.36%, or by .28%. Net
interest margin for the second quarter totaled 3.81%, a .30% increase from
the 3.51% achieved during the second quarter of 1995.
Non-interest Income. Non-interest income increased by $1.3 million for the
three month period ended June 30, 1996 compared to 1995, as a result of the
following factors:
- - - 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 $53.0 million for the three months ended June 30, 1996 from
$33.7 million for comparable 1995 period. The growth in such originations
resulted in increased gain on sales of loans totaling $419,000 for the
three month period ended June 30, 1996 compared to 1995.
- - - A decline in the level of interest rates paid on deposits at June 30, 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 $260,000
during the second quarter of 1996 compared to the same period in 1995.
- - - During September 1995, the Company revised its demand deposit structure by
offering low cost checking accounts in order to increase the demand
deposit account base. Net fees generated by the increase in the number of
accounts obtained through this promotion have increased by approximately
$250,000.
- - - Declining rates of prepayments on mortgage loans underlying mortgage
servicing rights resulted in a net increase in loan servicing fee income
for the second quarter of 1996 of approximately $250,000.
Year-to-date comparisons for the six months ended June 30, 1996 and 1995 show
a $1.6 million (13.5%) improvement in non-interest income. The above
mentioned factors also affected this change.
Operating Expenses. Operating expenses for the quarter ended June 30, 1996,
were $12.7 million compared to $11.2 million in the second quarter of 1995,
a $1.5 million increase. The majority of this, a $654,000 increase in
compensation and benefits, was related to increased staffing in loan
servicing operations and an increase in the cost of employee incentive
programs.
Operating expense for the six month period ended June 30, 1996, was $25.7
million, reflecting a $3.4 million increase for the same period in 1995. The
factors cited above which contributed to the increase during the second
quarter of 1996 were the same as those which affected the six month periods.
Financial Condition. Total assets increased to $3.211 billion at June 30,
1996, compared to $3.099 billion and $2.690 billion at December 31, 1995, and
June 30, 1995, respectively, for an annualized growth rate of 7.2%.
20
Single family residential loans, the largest category of interest-earning
assets, increased to $1.483 billion at June 30, 1996, up $13.0 million from
$1.470 billion at December 31, 1995 and up $7.0 million from $1.476 billion
at June 30, 1995. Most of this growth occurred in the FHA/VA portfolio where
loans increased by $64 million for the quarter and by $418.4 million from the
year earlier period to a total of $1.090 billion. In addition, the Company s
conventional single family loan portfolio decreased by $153.5 million and
$278.3 million for the same periods to a total of $393.3 million, primarily
due the securitization of first mortgage loans into mortgage-backed
21
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 $123.5 million during the three months ended June 30,
1996, compared to $200.9 million for the same period in 1995. Of the total
FHA/VA loans outstanding at June 30, 1996 and December 31, 1995,
$474.8 million and $334.0 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 June 30, 1996, such claims in process totaled
$54.7 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.
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 June 30, 1996, were $14.3
million, or .45% of total assets, compared to $11.9 million and $10.7
million, or .39% and .40%, respectively, of total assets at December 31, and
June 30, 1995. The year-to-year change reflects normal recurring single
family residential foreclosure activity. Allowances for loan losses at June
30, 1996, and December 31, 1995, totaled $22.4 million and $22.9 million,
respectively, representing 156.80% 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 $1.4 million
for the quarters ended June 30, 1996 and 1995, respectively, while net
chargeoffs of uncollectible loans totaled $2.1 million and $445,000 for the
same periods.
Mortgage Servicing Rights. The Company's investment in mortgage servicing
rights increased from $53.7 million at December 31, 1995 to $56.8 million at
June 30, 1996 as a result of a contract to purchase approximately $600
million of servicing during the quarter, which will be completed during the
third quarter. Amortization of mortgage servicing rights totaled $2.6
million during the quarter ended June 30, 1996 compared to $2.4 for the
comparable quarter in 1995. Amortization for the six months ended June 30,
1996 was $5.4 million compared to $4.5 million through June 30, 1995.
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):
22
Principal Weighted Weighted 1 month 12 month
Serviced * Avg.Coupon Avg. Term PSA Avg. PSA
06/30/95 $4,663,305 8.95% 20.9 307.3% 241.0%
12/31/95 5,308,739 9.09% 19.8 282.3% 328.3%
06/30/96 4,837,636 9.05% 19.4 288.0% 322.4%
* Excludes loans being subserviced by others pending conversion to the
Company's loan servicing system, if any.
Deposits. Total deposits increased by $7.5 million during the six months
ended June 30, 1996, from $1.577 billion at December 31, 1995, to $1.570
billion at June 30, 1996, a .47% 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 June 30, 1996, the cumulative one year repricing gap, as
a percent of total assets, was a negative 319.7 million, or 9.96%, compared
to a negative 333.2 million (10.75%) at December 31, 1995.
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 gap management, 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 income. The Company has established an
23
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 June 30, 1996, the
mismatch in these assets/liabilities was a positive $254.0 million, which
represents 4.5 times the investment in mortgage servicing rights.
Liquidity and Capital Resources. Cash and cash equivalents decreased by $4.3
million for the six months ending June 30, 1996, as investing activities,
principally originations and acquisitions of loans, exceeded cash supplied by
operations and financing activities, principally FHLB advances, short term
borrowings, and advance payments by borrowers for taxes and insurance.
Regulatory liquidity averaged 5.03% for the six months ended June 30, 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 $189.9
million, or 5.88% of adjusted assets and $207.4 million, or 14.67% of risk
adjusted assets, at June 30, 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 June 30, 1996, the Company s total GAAP capital was 8.30%.
24
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:
25
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
/S/David C. Wadlington
----------------------------
David C. Wadlington
Duly Authorized Officer and
Principal Financial Officer
Date: August 14, 1996