Exhibit 99.2
THE LEADER MORTGAGE COMPANY
Financial Statements
for the Year Ended
September 30, 1997
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
The Leader Mortgage Company
Cleveland, Ohio
We have audited the accompanying statement of financial condition of The Leader
Mortgage Company (the "Company") as of September 30, 1997, and the related
statements of income, shareholders' equity and cash flows for the year 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 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 Company at September 30,
1997, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3 to the financial statements, the Company adopted
recently issued Statements of Financial Accounting Standards "SFAS" Nos. 122 and
125 and, accordingly, changed its method of accounting for mortgage servicing
rights effective October 1, 1996 for SFAS No. 122 and effective January 1, 1997
for SFAS No. 125.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Cleveland, Ohio
December 5, 1997
(August 20, 1998 as to the fourth paragraph
of Note 15 and as to Note 16)
THE LEADER MORTGAGE COMPANY
STATEMENT OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1997
ASSETS:
Cash and cash equivalents ........................................ $ 1,988,724
Cash - restricted ................................................ 862,050
Marketable securities ............................................ 257,186
Accounts receivable .............................................. 4,529,332
Mortgage loans held for sale ..................................... 119,117,078
Residential first mortgages in foreclosure ....................... 8,284,834
Property and equipment, net ...................................... 825,750
Mortgage servicing rights, net of amortization of $24,724,550 .... 39,992,979
Other assets ..................................................... 3,177,426
-------------
Total assets ........................................ $ 179,035,359
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Borrowings under warehouse lines of credit ....................... $ 117,868,293
Notes payable - other ............................................ 42,999,550
Subordinated debt ................................................ 861,999
Accounts payable ................................................. 2,805,939
Accrued expenses and other liabilities ........................... 2,134,599
Deferred income taxes ............................................ 251,403
-------------
Total liabilities ........................................ 166,921,783
SHAREHOLDERS' EQUITY:
Series A preferred stock, 7.56% cumulative; $100 par value;
900 shares authorized; 900 shares issued and outstanding ....... 90,000
Class A common stock, no par value, stated value $.841;
350,000 shares authorized; 144,525 shares issued and outstanding 121,620
Class E common stock, no par value, stated value $.841;
250,000 shares authorized; 61,309 shares issued and outstanding 53,930
Additional paid-in capital ....................................... 412,335
Retained earnings ................................................ 14,037,332
Common stock held in treasury, 32,978 shares, at cost............. (2,601,641)
-------------
Total shareholders' equity ............................... 12,113,576
-------------
Total liabilities and shareholders' equity .......... $ 179,035,359
=============
See accompanying notes to financial statements.
THE LEADER MORTGAGE COMPANY
STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1997
REVENUES:
Loan servicing ........................................... $18,083,156
Loan origination ......................................... 162,564
Gain on sale of mortgages ................................ 2,834,978
Interest income from mortgage operations
(net of interest expense of $8,792,056) ................ 1,461,419
Rental income ............................................ 197,340
Other income ............................................. 845,335
-----------
Total revenue .................................... 23,584,792
EXPENSES:
Salaries, commissions and employee benefits .............. 7,074,736
Occupancy and equipment .................................. 542,322
Amortization of servicing rights ......................... 4,638,920
Other depreciation and amortization ...................... 416,594
Interest on working capital .............................. 2,318,579
Funding of related party operations....................... 628,541
Loss on foreclosures ..................................... 886,696
Other expenses ........................................... 3,399,068
-----------
Total expenses ................................... 19,905,456
-----------
INCOME BEFORE INCOME TAXES ................................. 3,679,336
INCOME TAX EXPENSE ......................................... 1,250,975
-----------
NET INCOME ................................................. $ 2,428,361
===========
See accompanying notes to financial statements.
THE LEADER MORTGAGE COMPANY
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997
Additional Common
Preferred Common Paid-In Retained Stock Held
Stock Stock Capital Earnings In Treasury Total
-------- --------- --------- ------------ ------------ -----------
Balance, September 30, 1996 90,000 175,550 412,335 11,615,865 (2,342,248) 9,951,502
Net income 2,428,361 2,428,361
Dividends paid (6,894) (6,894)
Purchase 2,816 treasury shares (259,393) (259,393)
-------- --------- --------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1997 $ 90,000 $ 175,550 $ 412,335 $ 14,037,332 $ (2,601,641) $ 12,113,576
======== ========= ========= ============ ============ ============
See accompanying notes to financial statements.
THE LEADER MORTGAGE COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 2,428,361
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 416,594
Amortization of mortgage servicing rights ..................................... 4,638,920
Unrealized gain on marketable securities ...................................... (60,199)
Loss on investment sale ....................................................... 122,830
Increase in mortgage loans held for sale, net of warehouse advances ........... (7,016,616)
Increase in accounts receivable - servicing operations ........................ (152,579)
Increase in accounts payable and accrued expenses ............................. 1,393,766
Deferred income tax benefits .................................................. (284,341)
Increase in restricted cash ................................................... (862,050)
Other ......................................................................... 933,658
------------
Cash provided by operating activities ........................................... 1,558,344
------------
CASH FLOW FROM INVESTING ACTIVITIES:
Payments for the acquisition of fixed assets .................................... (57,600)
Payments for mortgage servicing rights .......................................... (16,860,255)
Proceeds from sale of real estate investment .................................... 1,853,767
Advances to escrows with governmental agencies and third party trustee .......... (375,000)
Collections on mortgage notes ................................................... 270,033
Proceeds from investment sale ................................................... 183,029
------------
Cash used in investing activities ............................................... (14,986,026)
------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from notes payable ..................................................... 18,863,726
Payments on notes payable ....................................................... (8,776,097)
Proceeds of subordinated debt ................................................... 861,999
Increase in finance fees ........................................................ (59,060)
Increase in line of credit ...................................................... 120,000
Payments on capitalized lease obligation ........................................ (24,663)
Dividends paid .................................................................. (6,894)
Acquisition of treasury stock ................................................... (259,393)
------------
Cash provided by financing activities ........................................... 10,719,618
------------
NET DECREASE IN CASH .............................................................. (2,708,064)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................................... 4,696,788
------------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................................ $ 1,988,724
============
CASH PAYMENTS FOR THE YEAR:
Interest ........................................................................ $ 11,495,157
============
Income taxes .................................................................... $ 516,000
============
See accompanying notes to financial statements.
THE LEADER MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The Leader Mortgage (the "Company"), an Ohio
corporation, was incorporated February 16, 1960 to provide complete
mortgage banking service for residential and commercial mortgages.
The Company's principal office is located in Cleveland, Ohio.
Mortgage Loans Held for Sale - 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, excess servicing fees, 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. Effective October
1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 122 ("SFAS 122") Accounting for Mortgage Servicing Rights. Under the
statement, 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 at
the date of purchase or origination. 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 Company adopted Statement of Financial Accounting Standards No. 125
("SFAS 125"), Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities as of January 1, 1997. This statement
supersedes SFAS 122 but does not significantly change the Company's
accounting for mortgage servicing rights as the accounting requirements of
SFAS 125 for mortgage servicing rights are substantially consistent with
the requirements of SFAS 122.
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 commensurate with the
risks involved. Estimates of fair value include assumptions about
prepayment 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.
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 balances. 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.
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed on a straight line
basis over the estimated useful lives of the related assets.
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.
Cash Held in Escrow and Restricted Cash - Cash held in escrows represents
amounts the Company agreed to set aside to satisfy agreements entered into
with the Federal Home Loan Mortgage Corporation (See Note 15).
Deferred Finance Fees - Deferred finance fees and expenses, which are
included in other assets, 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." 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.
Use of Estimates in Preparation of the Financial Statements - Management
uses estimates and assumptions in preparing these financial statements in
accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
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 homebuyer 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 originated under the
first-time homebuyer bond program.
2. MORTGAGE LOANS HELD FOR SALE
The following summarizes loans held for sale as of September 30, 1997:
Residential first mortgages - bond program and conventional $114,391,684
Multi-family mortgages ..................................... 4,725,394
------------
Total .............................................. $119,117,078
============
3. MORTGAGE LOAN SERVICING
Mortgage Servicing Rights - As discussed in Note 1, the Company adopted
SFAS 122 on October 1, 1996 and SFAS 125 on January 1, 1997. The effect of
adoption of these statements was not material. Activity related to
mortgage servicing rights is summarized as follows:
Balance October 1, 1996 ....................... $ 27,771,644
Additions ..................................... 16,860,255
Amortization .................................. (4,638,920)
------------
Balance September 30, 1997 .................... $ 39,992,979
============
The estimated fair value of mortgage servicing rights as of September 30,
1997 was $64,530,217.
The Company had a valuation allowance for mortgage servicing rights of
$17,122 as of September 30, 1997.
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 $4,156,602,041 at September 30, 1997, representing 74,104
mortgages. Included in the Company's servicing portfolio is 6,142
single-family mortgage loans being serviced under subservicing agreements
at September 30, 1997. The outstanding principal balance of these loans is
$338,349,925.
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 $65,137,693 at
September 30, 1997. These funds are segregated in noninterest-bearing
deposit accounts and are not included as assets and liabilities of the
Company.
4. ACCOUNTS RECEIVABLE
Accounts receivable as of September 30, 1997 consisted of the following:
Foreclosure receivables, net of reserves of $55,125 $ 877,498
Advances made on behalf of mortgagors ............. 1,142,542
Accrued interest .................................. 1,054,646
Notes receivable .................................. 30,357
Servicing and production .......................... 1,424,289
----------
Total ......................................... $4,529,332
==========
5. PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1997 consisted of the
following:
Leasehold improvements ......... $ 170,344
Furniture and fixtures ......... 957,296
Computer equipment ............. 1,879,772
Automobiles .................... 81,527
----------
Total ...................... 3,088,939
Accumulated depreciation ....... 2,263,189
----------
Property and equipment - net $ 825,750
==========
Depreciation expense for 1997 was $410,615.
6. OTHER ASSETS
Other assets at September 30, 1997 consisted of the following:
Cash held in escrow ..................... $1,763,966
Deferred finance fees (net of accumulated
amortization of $312,627) ............. 147,123
Prepaid expenses ........................ 378,048
Other ................................... 888,289
----------
Total ............................... $3,177,426
==========
7. RELATED PARTY TRANSACTIONS
The Company leases office space from a partnership whose controlling
partners are officers of the Company. The lease agreement provides for
annual base rents of $365,400 plus additional rents based on increases in
operating expenses and taxes. There were no outstanding amounts due under
the lease agreement as of September 30, 1997.
The Company advances funds to an affiliated partnership that are used to
fund operations of the real estate owned by the partnership.
8. WAREHOUSE LINES OF CREDIT
Borrowings under warehouse lines of credit at September 30, 1997 consisted
of the following:
Notes due to banks maturing at various dates through
May 1998 secured principally by mortgage loans held for sale:
Bond program and conventional ...................................... $ 111,092,376
Foreclosure ........................................................ 6,775,917
-------------
Total ............................................................... $ 117,868,293
=============
Short-term notes due to banks secured principally by mortgage loans held
for sale have an interest rate range from .8% to 7.375% for the year ended
September 30, 1997. 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. Certain loan agreements contain
financial covenants, including net worth requirements.
9. NOTES PAYABLE - OTHER
Notes payable - other at September 30, 1997 consisted of the following:
Credit/Term Loan Agreement borrowings due to various banks
under a Co-Agent Agreement ................................. $33,513,537
Note, secured by a multifamily mortgage, due a bank .......... 4,279,000
Note, secured by receivables, due a bank having a maturity
date of Ocober 1, 2003 ..................................... 3,340,000
Note, secured by pledged mortgage servicing rights on
GNMA pools due a bank ...................................... 1,667,013
Unsecured note due October 31, 1998, to a related party
with interest computed at 15% per annum .................... 200,000
-----------
Total notes payable - other ....................... $42,999,550
===========
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 $43,013,536. Amendments to this credit
agreement were made during 1997 to provide for increases in the revolving
loans and term credit facility. Loans outstanding under this agreement
totaled $33,513,537 at September 30, 1997. The agreement provides for
tranches which have a one year revolver and a five year amortization
period. There are currently seven 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.
In June 1997, the Company borrowed $4,279,000 from a lending institution,
collateralized with a multifamily mortgage loan. The loan matures on July
31, 2002, with interest only payable for the first 24 months; thereafter,
amortizing on a 20 year schedule.
In December 1996, the Company entered into a loan agreement with a lending
institution to provide for a maximum loan based on 65% of the market value
of the pledged mortgage servicing rights of certain GNMA pools for which
the current outstanding balance is $1,667,013. Repayment of the principal
amount borrowed to be made in equal quarterly installments in the amount
of $92,580 commencing April 1, 1997 and continuing to January 1, 2002 when
the balance, if any, shall become due and payable.
The Company has provided a guarantee on behalf of Eexcel Cleveland Limited
Partnership (an affiliated company)with respect to an Ohio Adjustable Rate
Industrial Revenue Bond in the event of default. In the event of default,
the Company has guaranteed the difference between the unpaid principal
balance of the bonds and the value of the underlying assets securing the
bonds. The outstanding balance of the issue was $5,321,975 at September
30, 1997 and the issue matures March 1, 2019.
Interest rates on borrowings described in this footnote, unless
specifically identified, range from 1.75% to 8.75% for the year ended
September 30, 1997. The Company has arrangements with lenders to reduce
interest on certain borrowings based on deposits maintained at the banks.
Total interest was approximately $10,100,000 for the year ended September
30, 1997. Certain loan agreements contain financial covenants, including
net worth requirements, which have been consistently met.
Maturities of notes payable other at September 30, 1997 are as follows:
Fiscal Year End
1998 $ 7,353,702
1999 9,833,384
2000 9,704,253
2001 7,008,519
2002 3,564,492
Thereafter 5,535,200
------------
Total $ 42,999,550
============
10. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses at September 30, 1997 consisted of the following:
Interest ...................... $ 819,091
Salaries and other compensation 601,502
Income taxes .................. 714,006
----------
Total ..................... $2,134,599
==========
11. FEDERAL INCOME TAXES
The provision for federal income taxes for the year ended September 30,
1997 consists of the following:
Current provision .............. $1,535,316
Deferred provision (benefit).... (284,341)
----------
Total ...................... $1,250,975
==========
The deferred tax assets as of September 30, 1997 were $1,383,598 and
related to deductible temporary differences primarily market valuation
differences on loans, cost associated with mortgage loans held for sale,
and accrued bonuses. The deferred tax liability as of September 30, 1997
was $1,635,002 and consisted of taxable temporary differences relating to
deferred discounts, mortgage servicing rights and market valuation
differences on loans.
12. EMPLOYEE STOCK OWNERSHIP PLAN/SAVINGS
AND INVESTMENT PLAN
The Company maintains an Employee Stock Ownership Plan 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
year ended September 30, 1997.
The Employee Stock Ownership Plan has, from time to time, acquired shares
of Class E common stock of the Company. For the year ended September 30,
1997, no dividends were paid on the Class E common stock.
The Company has a Savings and Investment Plan ("401(k) plan") covering all
eligible employees as defined by the plan. The 401(k) plan provides, among
other items, for matching contributions by the Company up to 50% of
eligible employee contributions. For the year ended September 30, 1997,
the Company incurred expenses of $130,840 that were contributed to the
401(k) plan. At September 30, 1997, no amounts were due to the 401(k)
plan.
13. STOCK OPTIONS
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. No options were granted during 1997.
14. DISCLOSURE OF FAIR VALUE 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 amount 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 and notes receivable, accounts payable, 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 1, due to the
interest rate risk protection provided by loans originated under the
first-time homebuyer bond programs.
The fair value estimate presented herein are based on pertinent
information available to management as of September 30, 1997. 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.
15. 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 referred 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. A total
of $3,020,573 was funded to the Freddie Mac escrow account as of September
30, 1997. The Company was notified during this past fiscal year that
additional losses related to these loans totaled $52,066. These funds were
removed from the account on September 12, 1997. The total escrow balance
at Freddie Mac through September 30, 1997 is $1,763,966.
Management believes that the Company has satisfied its obligations under
the terms of the Agreement and monies held in escrow should be returned to
the Company. The agreement provides, among other items, that upon
termination, to the extent escrow funds are available therein, Freddie Mac
is to return the funded amounts together with interest earned from
investment of the funds. Freddie Mac asserts the Agreement is still in
effect and the Company is responsible to continue funding the Freddie Mac
escrow account and deposit the funds with a Trustee. Total escrow deposits
funded with the Trustee amounted to $843,750 at September 30, 1997. The
Trustee account balance at September 30, 1997 amounted to $862,050.
The Company was notified November 1, 1995 of a civil lawsuit filed by
Freddie Mac. Freddie Mac claims the Company is in violation of the
Indemnification and Resolution Agreement entered into January 15, 1991 and
subsequent Tripartite Agreements. On August 14, 1997, the Judge rendered a
written opinion denying Freddie Mac's motion for Summary Judgment and
favorable to The Leader Mortgage Company. Further, Freddie Mac informed
the Company that on October 9, 1997 fourteen of the seventeen loans in
question representing $60 million out of $67 million were refinanced away
from Freddie Mac. This leaves three loans in the amount of $7 million in
dispute.
In February 1998, the Company and Freddie Mac entered into an agreement
referenced to as the Settlement Agreement and Release ("Settlement
Agreement") whereby the Company and Freddie Mac settle all differences
related to the Agreement noted above. Escrow deposits funded to the
Trustee were returned to the Company, and funds held in the escrow account
with Freddie Mac in excess of $1 million were returned to the Company in
February 1998. Freddie Mac will continue to retain $1 million dollars and
accrue interest in the same manner set forth in the Agreement. No
additional deposits from the Company will be required for the remaining
term of the Settlement Agreement. The Company will continue to indemnify
Freddie Mac with respect to one loan. No other loans will be subject to
the terms of the Agreement. The Agreement will expire on February 11,
2001. In the event of default, the Company's obligation will be limited to
the funds on deposit with Freddie Mac at the time Freddie Mac determines
its loss and makes its withdrawal. If the balance of the loss is less than
the balance held in the escrow, excess funds will be returned to the
Company. If there is no event of default, Freddie Mac will return all
funds on deposit.
16. SUBSEQUENT EVENTS
On July 1, 1998, the Company was acquired by First Defiance Financial
Corp. ("First Defiance"), a publicly held corporation with its
headquarters in Defiance, Ohio. First Defiance is a holding company of
First Federal Savings and Loan which primarily focuses on single family
residential mortgage lending, consumer and business loans. Under the terms
of the agreement, the purchase price was $39.6 million in cash.
In connection with the acquisition by First Defiance, the Employee Stock
Ownership Plan received a cash payment of approximately $9,200,000 in
exchange for the common stock of the Company in the Plan.
Upon the consummation of the merger, the stock options became exercisable
at $1 per share.
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