Exhibit 99.1
The Leader Mortgage Company
Financial Statements as of and for the Nine Months Ended June 30, 1998
Report of Independent Auditors
The Board of Directors
The Leader Mortgage Company
We have audited the accompanying balance sheet of The Leader Mortgage Company,
as of June 30, 1998, and the related statements of operations, changes in
stockholders' equity and cash flows for the nine month period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Leader Mortgage Company at
June 30, 1998, and the results of its operations and its cash flows for the nine
month period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Cleveland, Ohio
August 28, 1998
The Leader Mortgage Company
Balance Sheet
June 30, 1998
Assets
Cash ............................................................. $ 4,425,808
Marketable securities ............................................ 311,511
Accounts receivable .............................................. 7,430,551
Mortgage loans held for sale ..................................... 116,672,048
Residential first mortgages in foreclosure, net
of allowance of $805,600 ...................................... 9,536,993
Prepaid expenses ................................................. 314,943
Loans receivable, net of allowance of $4,087,124 ................. 5,263,342
Furniture, equipment and leasehold improvements, net ............. 905,282
Mortgage servicing rights, net of amortization of $29,739,965 .... 50,113,521
Real estate owned ................................................ 614,458
Deferred income taxes ............................................ 392,486
Other assets ..................................................... 1,327,193
-------------
Total assets ..................................................... $ 197,308,136
=============
Liabilities and stockholders' equity
Warehouse lines of credit ........................................ $ 125,489,814
Accounts payable ................................................. 1,560,581
Accrued liabilities .............................................. 1,988,478
Subordinated debt ................................................ 2,704,670
Notes payable .................................................... 51,591,906
-------------
Total liabilities ................................................ 183,335,449
Stockholders' equity:
Class A common stock, no par value, stated value $.841; 350,000
shares authorized; 144,625 shares issued and outstanding .... 121,620
Class E common stock, no par value, stated value $.841; 250,000
shares authorized; 61,404 shares issued and outstanding ..... 53,930
Additional paid in capital .................................... 5,902,942
Retained earnings ............................................. 10,747,137
Common stock held in treasury, 35,701 shares .................. (2,852,942)
-------------
Total stockholders' equity ....................................... 13,972,687
-------------
Total liabilities and stockholders' equity ....................... $ 197,308,136
=============
See notes to financial statements.
The Leader Mortgage Company
Statement of Operations
Nine Month Period Ended June 30, 1998
Revenues
Mortgage servicing ............................................ $ 16,546,958
Interest income from mortgage operations (net of
interest expense of $4,575,344) ............................ 1,643,670
Loan origination .............................................. 151,012
Gain on sale of mortgages ..................................... 2,590,820
Other ......................................................... 486,552
------------
Total revenues ................................................ 21,419,012
Expenses
Salaries and related costs .................................... 5,703,519
Stock compensation expense .................................... 5,515,500
Occupancy ..................................................... 344,719
Amortization of servicing rights .............................. 5,015,416
Other depreciation and amortization ........................... 393,321
Interest expense on working capital ........................... 2,462,854
Loan loss provision ........................................... 582,921
Foreclosure provision ......................................... 931,494
General and administrative .................................... 2,692,160
Other expenses ................................................ 1,319,883
------------
Total expenses ................................................ 24,961,787
------------
Loss before income taxes and extraordinary item ............... (3,542,775)
Income tax benefit ............................................ 859,251
------------
Net loss before extraordinary item ............................ (2,683,524)
Extraordinary item, net of tax benefit of $51,000 ............. (601,500)
------------
Net loss ...................................................... $ (3,285,024)
============
See notes to financial statements.
The Leader Mortgage Company
Statement of Changes in Stockholders' Equity
Common
Additional Stock
Preferred Common Paid in Retained Held in
Stock Stock Capital Earnings Treasury Total
----------- ----------- ----------- ----------- ----------- -----------
Balance, October 1, 1997 .... $ 90,000 $ 175,550 $ 412,335 $14,037,332 $(2,601,641) $12,113,576
Net loss .................... (3,285,024) (3,285,024)
Stock options ............... 5,515,500 5,515,500
Dividends ................... (5,171) (5,171)
Purchase 2,722 shares of .... (251,301) (251,301)
treasury stock
Redemption of preferred stock (90,000) (24,893) (114,893)
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 ...... $ 0 $ 175,550 $ 5,902,942 $10,747,137 $(2,852,942) $13,972,687
=========== =========== =========== =========== =========== ===========
See notes to financial statements.
The Leader Mortgage Company
Statement of Cash Flows
Nine Month Period Ended June 30, 1998
Operating activities
Net loss ................................................... $ (3,285,024)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of servicing rights ...................... 5,015,416
Net decrease in mortgage loans held for sale .......... 2,445,030
Depreciation and amortization ......................... 393,321
Unrealized gain on marketable securities .............. (54,325)
Stock compensation expense ............................ 5,515,500
Deferred income taxes ................................. (643,890)
Changes in operating assets and liabilities:
Receivables ......................................... (3,216,162)
Other assets ........................................ 1,461,750
Restricted cash ..................................... 862,050
Accounts payable and accrued liabilities ............ (1,430,139)
------------
Net cash provided by operating activities .................. 7,063,527
Investing activities
Net increase in loans receivable ........................... (6,515,501)
Net increase in real estate owned .......................... (286,073)
Payments for servicing rights .............................. (15,135,958)
Purchase of furniture, equipment and
leasehold improvements, net ............................. (374,094)
------------
Net cash used for investing activities ..................... (22,311,626)
Financing activities
Net advances on subordinated debt .......................... 1,842,671
Dividends paid ............................................. (5,171)
Net advances on notes payable .............................. 8,592,356
Net advances on lines of credit ............................ 7,621,521
Acquisition of treasury stock .............................. (251,301)
Redemption of preferred stock .............................. (114,893)
------------
Net cash provided by financing activities .................. 17,685,183
------------
Net increase in cash balances .............................. 2,437,084
Cash at beginning of period ................................ 1,988,724
------------
Cash at end of period ...................................... $ 4,425,808
============
Cash paid for
Income taxes ............................................... $ 2,713,717
============
Interest ................................................... $ 6,950,167
============
See notes to financial statements
The Leader Mortgage Company
Notes to Financial Statements
June 30, 1998
A. Summary of Significant Accounting Policies and Additional Information
Organization
The Leader Mortgage Company (the Company), an Ohio Corporation, primarily
operates in the continental United States and is engaged in the mortgage banking
business, which includes the origination, purchase, packaging and sale of
mortgage loans to permanent investors; the servicing of these and other mortgage
loans; and the providing of other related services for investors and customers.
Revenue Recognition
Mortgage loans held for sale are committed for sale to secondary market
investors under firm agreements at or prior to closing date of the individual
loan. Loan sales and the related gains or losses are recorded at the settlement
date. Loan administration fees earned for servicing loans for investors are
generally calculated based on the outstanding principal balances of the loans
serviced and are recorded as revenue when received. Sales of servicing rights
are recorded when all risks and rewards of ownership have transferred and no
significant unresolved contingencies exist. Loan origination fees are deferred
as a component of the loan balance. Since mortgage loans originated or acquired
are generally sold within 60 days, any related fees are not amortized during
that period, but are effectively recognized when the loan is ultimately sold.
Mortgage loans held for sale are reported at the lower of cost or estimated
market as determined on an aggregate basis, including consideration of all open
designated delivery commitment positions. The Company separately evaluates the
estimated fair value of its commitments to lend, including consideration of all
designated open delivery commitment positions, for impairment. If impairment
exists, the Company records a charge to earnings in the current period. The
Company generally sells whole loans and mortgage-backed securities with
servicing retained. Gains or losses on such sales are generally recognized at
the time of settlement based upon the difference between the sales proceeds and
the allocated basis of loans sold, adjusted for loan fees, mortgage servicing
rights, retained interests and the cost of issuing securities.
Mortgage Servicing Rights, Net
The Company purchases and originates mortgage loans for sale to the secondary
market, and sells the loans on either a servicing retained or servicing released
basis. The total cost of mortgage loans purchased or originated with the intent
to sell is allocated between the loan servicing right and the mortgage loan
without servicing, based on their relative fair values. The capitalized cost of
loan servicing rights is amortized in proportion to, and over the period of,
estimated net future servicing revenue. The expected lives of the estimated net
servicing income are based, in part, on the expected prepayment rate of the
underlying mortgages.
The Leader Mortgage Company
Notes to Financial Statements--Continued
A. Summary of Significant Accounting Policies and Additional
Information--Continued
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage servicing rights are stratified based
on predominant risk characteristics of the underlying serviced loans. These risk
characteristics include loan type (fixed or adjustable rate) and interest rate.
Impairment represents the excess of cost of an individual mortgage servicing
rights stratum over its fair value, and is recognized through a valuation
allowance.
Fair values for individual stratum are based on the present value of estimated
future cash flows using a discount rate (11%) commensurate with the risks
involved. Estimates of fair value include assumptions about prepayment (154%
PSA), default and interest rates, and other factors which are subject to change
over time. Changes in these underlying assumptions could cause the fair value of
mortgage servicing rights, and the related valuation allowance, to change
significantly in the future.
Mortgage Loans in Foreclosure and Other Real Estate
Mortgage loans in foreclosure and other real estate are carried at fair market
value, less estimated costs to sell.
Loans Receivable
Loans receivable are reported at the principal amount outstanding net of an
allowance for loan losses. The allowance for loan losses is that amount believed
adequate to absorb estimated credit losses based on an analysis of individual
credits, prior and current loss experience, and current and anticipated economic
conditions. A provision for loan losses is charged to operations based on
management's periodic evaluation.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent current available evidence raises doubt about the future
realization of a deferred tax asset, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enacted date.
Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are carried at cost less
accumulated depreciation. Depreciation of furniture and equipment is computed
using the straight-line method over the estimated useful lives of the assets.
The Leader Mortgage Company
Notes to Financial Statements--Continued
A. Summary of Significant Accounting Policies and Additional
Information--Continued
Leasehold improvements are amortized using the straight-line method over the
estimated useful life of the improvement or the lease term, whichever is
shorter.
Deferred Finance Fees
Deferred finance fees and expenses on the Company's debt are stated at cost and
are being amortized over the life of the related debt.
Marketable Securities
The Company's marketable securities are defined as trading securities under the
provisions of Statements of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities (SFAS 115). Accordingly,
unrealized holding gains or losses on the securities are reflected in current
earnings.
Cash and Cash Equivalents
For purposes of cash flow, the Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
Impact of Interest Rate Fluctuations
Interest rate fluctuations generally have a direct impact on a mortgage banking
institution's financial performance. Significant increases in interest rates may
make it more difficult for potential borrowers to purchase residential property
and to qualify for mortgage loans. As a result, the volume and related income
from loan originations may be reduced. This may be mitigated by the increase in
first-time home buyer bond programs which generally offer mortgage rates at one
percent or more below prevailing market rates. In addition, the Company is not
required to assume interest rate risk on loans acquired from state-sponsored
first time home buyer programs. Significant increases in interest rates will
also generally increase the value of the Company's servicing portfolio as a
result of slower anticipated prepayment activity. Significant decreases in
interest rates may enable more potential borrowers to qualify for a mortgage
loan, resulting in higher income related to the loan originations. In addition,
significant decreases in interest rates may result in higher than anticipated
loan prepayment activity and, therefore, reduce the value of the loan servicing
portfolio. This may also be mitigated by the below market-rate loans in the
servicing portfolio previously originated under the first-time home buyer bond
program.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
The Leader Mortgage Company
Notes to Financial Statements--Continued
A. Summary of Significant Accounting Policies and Additional
Information--Continued
Recent Account Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This statement establishes new rules for the
reporting and display of comprehensive income and its components. The new rules
require that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The statement
does not specify a format for the financial statement that portrays the
components of comprehensive income but requires that a company display an amount
representing total comprehensive income for the periods reported in that
financial statement. Application of the statement will not impact amounts
previously reported for net income or affect the comparability of previously
issued financial statements. The Statement is effective for fiscal years
beginning after December 15, 1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and for Hedging Activities. The Statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments
(referred to as fair value hedges); hedges of the variable cash flows of
forecasted transactions (cash flow hedges); and hedges of foreign currency
exposures of net investments in foreign operations. Changes in the fair value of
derivatives that do not meet the criteria of one of these three categories of
hedges are included in earnings in the period of the change. The Company is
evaluating the impact of the Statement on its financial position and results of
operations. Statement 133 is effective for years beginning after June 15, 1999.
B. Servicing of Mortgage Loans and Mortgage Servicing Rights
Servicing of Mortgage Loans
The Company originates, purchases and sells to investors, without recourse,
loans secured by mortgages, principally on single family residential property.
The Company generally retains the servicing of certain loans sold to investors
and collects the monthly principal and interest payments and performs certain
escrow service generally related to insurance and real estate tax payments. The
Company's aggregate net servicing portfolio, including loans serviced for
related parties, was $4,681,355,757 at June 30, 1998, representing 81,062
mortgages. Included in the Company's servicing portfolio is 7,477 single-family
mortgage loans being serviced under subservicing agreements at June 30, 1998.
The outstanding principal balance of these subserviced loans is $406,228,541.
The Company maintains escrow funds comprised primarily of funds to be
transferred to third party investors as well as funds to pay real estate taxes
and insurance of borrowers aggregating approximately $73 million at June 30,
1998. These funds are segregated in noninterest-bearing deposit accounts and are
not included as assets and liabilities of the Company.
The Leader Mortgage Company
Notes to Financial Statements--Continued
B. Servicing of Mortgage Loans and Mortgage Servicing Rights--Continued
A summary of mortgage servicing rights for the nine month period ended June 30,
1998 is as follows:
Mortgage servicing rights:
Balance--October 1 ................................. $39,992,979
Additions .......................................... 15,135,958
Amortization ....................................... 5,015,416
-----------
Balance--June 30 ................................... $50,113,521
===========
Accumulated amortization at June 30, 1998 was $29,739,965.
At June 30, 1998, the estimated fair market value of the servicing portfolio was
$72.3 million, as determined using a mortgage servicing valuation model.
C. Mortgage Loans Held for Sale
Mortgage loans held for sale include the following at June 30, 1998:
Residential mortgage loans:
Principal balance:
FHA/VA insured .................................. $ 85,148,679
Conventional .................................... 30,242,558
------------
115,391,237
Origination premiums ................................. 1,280,811
------------
$116,672,048
============
D. Accounts Receivable
Receivables at June 30, 1998 include the following:
Advances on behalf of mortgagors ............................. $2,645,779
Accrued interest ............................................. 1,288,795
Federal income tax refund .................................... 2,262,065
Other ........................................................ 1,233,912
----------
$7,430,551
==========
The Leader Mortgage Company
Notes to Financial Statements--Continued
E. Property and Equipment
Property, equipment and leashold improvements at June 30, 1998 include the
following major classifications:
Leasehold improvements ............................... $ 186,426
Furniture and fixtures ............................... 1,019,848
Computer equipment ................................... 2,189,467
Automobiles .......................................... 81,527
-----------
Total ................................................ 3,477,268
Accumulated depreciation ............................. (2,571,986)
-----------
Total ................................................ $ 905,282
===========
Depreciation expense for the nine months ended June 30, 1998 was $294,562.
F. Related Party Transactions
The Company leases office space from a partnership whose controlling partners
are officers of the Company. The five year lease agreement provides for annual
base rents of $436,000 plus additional rents based on increases in operating
expenses and taxes. There we no outstanding amounts due under the lease
agreement as of June 30, 1998.
G. Income Taxes
The Company accounts for income taxes under FASB Statement No. 109, Accounting
for Income Taxes (FASB 109). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The components of the income tax benefit for the period ended June 30, 1998 are
as follows:
Current ........................................... $(215,361)
Deferred .......................................... (643,890)
---------
Total ............................................. $(859,251)
=========
The Leader Mortgage Company
Notes to Financial Statements--Continued
G. Income Taxes--Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes as of June 30, 1998 are as follows:
Deferred tax assets:
Loan loss reserves ................................. $ 1,389,622
Foreclosure reserve ................................ 273,904
Other .............................................. 146,026
-----------
Total deferred tax assets ............................. 1,809,552
Deferred tax liabilities:
Mortgage servicing rights .......................... (1,224,227)
Mark to market ..................................... (100,448)
Depreciation ....................................... (92,391)
-----------
Total deferred tax liabilities ........................ (1,417,066)
-----------
Total net deferred taxes .............................. $ 392,486
===========
G. Income Taxes--Continued
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting and taxable
income as shown below for the nine month period ended June 30, 1998:
Tax (benefit) at statutory rate ........................... (34.00)%
Officer life insurance .................................... 2.99
Other ..................................................... 6.76
-----
Effective tax (benefit) rate .............................. (24.25)%
=====
Cash paid for income taxes was $2,713,717 for the nine month period ended June
30, 1998.
H. Employee Benefit Plans
The Company's Savings and Investment Plan and Trust (401(k) plan) offers all
employees, who meet certain age and eligibility requirements, a program of
regular savings and investment funded by their own contributions and
discretionary matching contributions of the Company. The amount charged to
expense for the nine month period ended June 30, 1998 was $198,029.
The Leader Mortgage Company
Notes to Financial Statements--Continued
H. Employee Benefit Plans--Continued
The Company maintains an Employee Stock Ownership Plan and Trust in which
eligible employees accumulated capital ownership in the Company. The Company has
received a determination letter from the Internal Revenue Service that the plan
is frozen as of October 1, 1995, and no future contributions are being made.
There were no Company cash contributions to the Plan for the nine month period
ended June 30, 1998.
Since its inception the Trust has, from time to time, acquired shares of Class
E, no par value, common stock of the Company. For the period ended June 30,
1998, no dividends were paid on the Class E common stock. See subsequent event
footnote.
The Company granted stock options during the fiscal year ended September 30,
1995 to certain key employees of the Company. The options are for the purchase
of 35,000 shares of Class A stock at $1.00 per share. The stock option
agreements provide, among other items, for exercise only in the event of a
substantial ownership change in the Company as defined in the agreements. See
Subsequent Event footnote.
I. Borrowings
Warehouse lines of credit at June 30, 1998 consisted of the following:
Notes due to banks maturing at various dates through May, 1999, secured
principally by mortgage loans held for sale:
Bond program and conventional ............................. $120,411,663
Foreclosure ............................................... 5,078,151
------------
Total .......................................................... $125,489,814
============
Short-term notes due to banks provide for maximum borrowings of $232,000,000
secured principally by mortgage loans held for sale have variable interest rates
which ranged from .80% to 7.7% for the nine month period ended June 30, 1998.
The Company has a compensating balance arrangement with lenders to reduce
interest on certain borrowings by the amount of the deposit balance maintained
at the bank (approximately $73 million at June 30, 1998). Certain loan
agreements contain financial covenants, including net worth requirements and
restriction on dividends that limits the amount available for dividends to
$3,766,225 at June 30, 1998. Commitment fees of up to 12.5 basis points are paid
on unutilized balances.
The Leader Mortgage Company
Notes to Financial Statements--Continued
I. Borrowings--Continued
Notes payable--other at June 30, 1998 consisted of the following:
Short Long
Term Term Total
----------- ----------- -----------
Credit/term loan agreement due various banks under
a co-agent agreement ........................... $ 6,101,691 $36,642,363 $42,744,054
Note, secured by a multifamily mortgage, due a bank 4,279,000 4,279,000
Note, secured by receivables, due a bank having a
maturity date of October 1, 2003 ............... 480,000 2,500,000 2,980,000
Note, secured by pledged mortgage servicing rights
on GNMA pools due a bank ....................... 370,320 1,018,532 1,388,852
Unsecured note due October 31, 1998, to a related
party with interest computed at 15% per annum .. 200,000 200,000
----------- ----------- -----------
Total notes payable ............................... $ 7,152,011 $44,439,895 $51,591,906
=========== =========== ===========
Note, secured by pledged mortgage servicing rights. $ 2,000,000 $ 2,000,000
Credit agreement due a corporation, secured by
beneficial interest in specified mortgage
servicing rights on GNMA pools ................. 704,671 704,671
----------- ----------- -----------
Total subordinated debt ........................... $ 2,704,671 $ 0 $ 2,704,671
=========== =========== ===========
The Company has entered into a Credit/Term Loan Agreement with several lending
institutions to provide for revolving loans and term credit for a maximum amount
as amended of $51,744,051. Amendments to this credit agreement were made during
1998 to provide for increases in the revolving loans and term credit facility.
Loans outstanding under this agreement totaled $42,744,054 at June 30, 1998. The
agreement provides for tranches which have a one year revolver and a five year
amortization period. There are currently two tranches in the facility. Repayment
dates for these tranches commenced October 20, 1995 and continue through July 1,
2003. New tranches can be added provided the total outstanding balance does not
exceed 70% of the value of the Company's eligible mortgage servicing rights as
valued by a third party appraiser acceptable to the several lending
institutions. The Company obtains independent valuations of mortgage servicing
on a semi-annual basis. The Company pledges current and future mortgage
servicing rights as collateral for the facility.
The Leader Mortgage Company
Notes to Financial Statements--Continued
I. Borrowings--Continued
In June 1997, the Company borrowed $4,279,000 from a lending institution,
collateralized with a multifamily mortgage loan. Loan payments are based on a 20
year amortization schedule with interest only payable for the first 24 months
and a balloon payment due on July 31, 2002.
In December 1996, the Company entered into a loan agreement with a lending
institution to provide for a maximum amount based on 65% of the market value of
the pledged mortgage servicing rights of certain GNMA pools for which the
current outstanding balance is $1,388,852. Repayment is to be made in quarterly
installments of $92,580 from April 1, 1997 to January 1, 2002 when the balance,
if any, shall become due.
Maturities of long-term debt at June 30:
1999 $ 7,152,011
2000 9,982,038
2001 9,999,868
2002 9,907,440
Thereafter 14,550,549
------------
Total $ 51,591,906
============
In June 1998, the Company entered into a credit agreement which allowed the
Company to borrow up to $3,000,000 until September 1998 at a fixed rate of 7.75%
per annum. Obligations under this agreement are subordinated to the Credit/Term
Loan Agreement.
In December 1996, the Company entered into a credit agreement which provided for
an advance of $1,000,000 in exchange for a beneficial interest in specified
mortgage servicing rights on GNMA pools. As a result of the change of control
discussed in subsequent event footnote, the counterparty has exercised its
option under the agreement to cause the sale of its beneficial interest and
repayment of the remaining advance in September 1998. Obligations under this
agreement are subordinated to the Credit/Term Loan Agreement. Included in
interest expense on working capital is a charge of approximately $236,000
relating to the acceleration.
Interest rates pertaining to this footnote, unless specifically identified, are
variable and ranged from 1.75% to 9.88% for the nine month period ending June
30, 1998. The Company has arrangements with lenders to reduce interest on
certain borrowings based on deposits maintained at the banks. Total interest was
approximately $7,038,000 for the nine month period ended June 30, 1998. Certain
loan agreements contain financial covenants, including net worth requirements.
The Leader Mortgage Company
Notes to Financial Statements--Continued
J. Off-Balance Sheet Financial Instruments
The Company is a party to off-balance sheet financial agreements in the normal
course of business to meet the financing needs of its customers and to reduce
exposure of its mortgage loan inventory and committed pipeline to interest rate
fluctuations. These financial agreements include commitments to extend credit
and forward sales of whole loans.
These agreements involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract
amounts reflect the extent of involvement the Company has in particular classes
of financial instruments. All gains or losses realized from these transactions
are recorded at the time of settlement. All changes in market value prior to
settlement are considered when establishing the mortgage valuation allowance.
A summary of gross contract amounts for off-balance sheet financial instruments
(excluding first time home buyer bond program) is as follows:
Commitments:
To fund residential loans $ 7.1 million
To sell whole loans $ 6.2 million
Commitments to make residential loans should be disbursed within 60 days.
K. Fair Values of Financial Instruments
The Company has various financial instruments that require disclosure as to fair
value under generally accepted accounting principles. The estimated fair value
amounts have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
The carrying amount of cash, cash held in escrows, marketable securities,
accounts receivable, accounts payable, loans receivable, accrued expenses, notes
payable, and subordinated debt are reasonable estimates of their fair market
value.
The carrying amount of loans held for sale is a reasonable approximation of fair
market value due to the short time frame (generally 60 days or less) until these
loans are sold and, as discussed in Note A, due to the interest rate risk
protection provided by loans originated under the first-time home buyer bond
programs.
The fair value estimate presented herein are based on pertinent information
available to management as of June 30, 1998. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented above.
The Leader Mortgage Company
Notes to Financial Statements--Continued
L. Freddie Mac Indemnification Agreement
In 1991 due to irregularities identified in multi-family residential real estate
mortgages sold by the Company to the Federal Home Loan Mortgage Corporation
("Freddie Mac") during the period 1987 through 1989, the Company and Freddie Mac
entered into an agreement referenced to as the Freddie Mac Indemnification
Agreement (the "Agreement") whereby the Company has indemnified Freddie Mac for
certain losses on these mortgages. The Agreement provided, among other things,
that the Company place in escrow cash deposits not to exceed $7,500,000. This
amount would be reduced to the extent of any payments received from third
parties.
In February 1998, the Company and Freddie Mac approved the Settlement Agreement
and Release (the "Settlement"). The Settlement provides that Freddie Mac will
retain $1,000,000 to continue to be held in escrow and accrue interest and that
the Company will continue to indemnify Freddie Mac for one specified loan. The
Company's indemnification obligation is limited to the balance of the escrow
account.
The total escrow balance included in Other Assets at Freddie Mac on June 30,
1998 is $1,018,886. In the event that no default or acceleration occurs prior to
February 11, 2001, the balance of the escrow account will be returned to the
Company.
M. Subsequent Event
On April 10, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with First Defiance Financial Corp. ("FDFC")
whereby the Company would acquire all of the issued and outstanding Preferred
Shares, $100 par value for $114,894 and FDFC would acquire all of the
outstanding Class A and Class E stock of the Company for $32,935,106 plus an
additional $2,000,000, payable upon satisfactory resolution of certain
contingencies within two years of the effective date. Shareholders of the
Company approved the Agreement at a special meeting on June 15, 1998, and the
acquisition was completed on July 1, 1998, the effective date.
As a result of the above transaction, the stock options described in Footnote H
became exercisable at $1 per share and the Company recorded a charge to
compensation expense for approximately $5.5 million in June 1998.
In addition, the Company incurred approximately $601,500, net of tax benefit, in
costs associated with the transaction. Such costs have been recognized as an
extraordinary item in the statement of operations.
N. Impact of Year 2000 (Unaudited)
The Company is currently completing an assessment of it's computer systems to
determine the impact that the year 2000 will have on its operating systems. The
assessment is estimated to be completed no later than December 31, 1998, which
is prior to any anticipated impact on the operating systems. The total year 2000
cost is not expected to be significant.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. There is no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not have an adverse
effect on the Company's systems.