<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
April 1, 1996 (April 1, 1996)
------------------------------------------
Date of Report (Date of earliest event reported)
UNION PLANTERS CORPORATION
-------------------------------------------------
(Exact name of registrant as specified in charter)
TENNESSEE 1-10160 62-0859007
---------------------- ------------- -------------------
(State of incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
UNION PLANTERS ADMINISTRATIVE CENTER
7130 GOODLETT FARMS PARKWAY
MEMPHIS, TENNESSEE 38018
-----------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (901) 383-6000
----------------
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
Union Planters Corporation (the "Corporation") has entered into a
definitive agreement to acquire Leader Financial Corporation ("LFC"). This
acquisition is considered probable and meets the test for a significant
subsidiary. Item 7 below presents the consolidated financial statements for LFC
as of and for the years ended December 31, 1995, 1994, and 1993. Reference is
also made to the Corporation's Current Report on Form 8-K dated March 8, 1996,
which contains the Agreement and Plan of Merger dated as of March 8, 1996 by
and between Union Planters Corporation and Leader Financial Corporation.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND
EXHIBITS
(c) Exhibits
23(a) Consent of KPMG Peat Marwick
99 Additional Exhibits
(a) Leader Financial Corporation and Subsidiary
Consolidated Financial Statements for the years
ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Page
---------
<S> <C> <C>
1. Consolidated Statements of Financial Position
for years ended December 31, 1995 and 1994 1
2. Consolidated Statements of Operations for the
years ended December 31, 1995, 1994, and 1993 2
3. Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1995, 1994, and 1993 3
4. Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1994, and 1993 4
5. Notes to Consolidated Financial Statements 5
6. Independent Auditors' Report 17
</TABLE>
2
<PAGE> 3
SIGNATURE
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 hereunto duly authorized.
Union Planters Corporation
----------------------------------
Registrant
Date: April 1, 1996 /s/ M. Kirk Walters
------------------- ----------------------------------
M. Kirk Walters
Senior Vice President, Treasurer,
and Chief Accounting Officer
3
<PAGE> 1
EXHIBIT 23 (a)
Accountants' Consent
The Board of Directors
Leader Financial Corporation:
We consent to incorporation by reference in the registration statements (No.
33-27814) on Form S-3 and (Nos. 2-87392, 33-23306, 33-35928, 33-53454, 33-55257,
33-56269, and 33-65467) on Form S-8 of Union Planters Corporation of our report
dated February 2, 1996, to the consolidated statements of financial position of
Leader Financial Corporation and subsidiary as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1995, which report appears in the Current Report on Form 8-K dated April 1,
1996 of Union Planters Corporation.
Our report refers to changes in accounting principles related to the adoption in
1994 of the provisions of the American Institute of Certified Accountants'
Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership
Plans, and in 1993 of the provisions of the Financial Accounting Standards
Board's Statements of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other than Pensions, and No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
/s/ KPMG Peat Marwick
Memphis, Tennessee
March 25, 1996
<PAGE> 1
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, 1995 and 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
-----------------------------------
1995 1994
---------------- ---------------
<S> <C> <C>
ASSETS
Cash equivalents and due from banks $ 27,558 30,155
Federal funds sold 90,000 20,000
Securities available-for-sale at fair value, amortized cost of $596,247 and
$52,511 at December 31, 1995 and 1994 respectively (note 2) 611,895 52,003
Securities held-to-maturity, fair value of $157,095 and $415,718 at
December 31, 1995 and 1994, respectively (note 2) 154,931 433,869
Investment in Federal Home Loan Bank, at cost 31,875 22,500
Loans receivable, net (notes 3, 7 and 14) 1,941,121 1,694,888
Loans held for sale 19,060 7,931
FHA/VA claims receivable, net (note 14) 46,174 23,345
Premises and equipment, net (note 4) 18,613 17,993
Mortgage servicing rights, net (note 14) 53,740 53,232
Accrued interest receivable (note 5) 72,059 37,665
Other assets, net (notes 10 and 14) 31,551 46,462
------------ -----------
TOTAL ASSETS $ 3,098,577 2,440,043
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (note 6) $ 1,577,230 1,449,404
Federal Home Loan Bank advances and other borrowings (note 7) 541,318 451,784
Federal funds purchased and securities sold under agreements to
repurchase (note 8) 597,260 244,828
Advance payments by borrowers for taxes and insurance 47,564 39,561
Accrued interest payable 23,451 15,566
Accrued expenses and other liabilities (note 10) 64,924 35,453
------------ -----------
TOTAL LIABILITIES 2,851,747 2,236,596
------------ -----------
STOCKHOLDERS' EQUITY (NOTES 9, 10, 11, 14):
Common stock $1 par value, 35,000,000 shares authorized;
10,752,500 shares issued at December 31, 1995 and 1994 10,753 10,753
Additional paid-in capital 94,415 93,952
Unearned compensation (6,086) (7,426)
Unrealized gain (loss) on securities available-for-sale,
net of taxes of $(5,946) and $192 9,702 (316)
Retained earnings 156,032 124,397
Treasury stock, at cost; 858,422 and 866,488 shares at
December 31, 1995 and 1994, respectively (17,986) (17,913)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 246,830 203,447
------------ -----------
Commitments and contingencies (notes 4 and 14)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,098,577 2,440,043
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 2
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(In thousands)
------------------------------------------------
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 169,104 128,481 106,175
Securities:
Available-for-sale 10,535 3,922 1,849
Held-to-maturity 26,683 25,749 26,257
Federal funds sold 4,946 2,390 2,394
Other 3,124 2,023 1,568
----------- ------- -------
Total interest income 214,392 162,565 138,243
----------- ------- -------
INTEREST EXPENSE:
Deposits (note 6) 74,501 55,149 60,293
Federal Home Loan Bank advances and other borrowings
(note 7) 30,350 17,948 13,693
Federal funds purchased and securities sold under
agreements to repurchase (note 8) 21,031 6,977 --
----------- ------- -------
TOTAL INTEREST EXPENSE 125,882 80,074 73,986
----------- ------- -------
NET INTEREST INCOME 88,510 82,491 64,257
Provision for loan losses (note 3) 5,150 4,767 4,710
----------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 83,360 77,724 59,547
NON-INTEREST INCOME:
Loan fees (note 13) 559 273 (22)
Loan servicing revenue (note 13) 13,904 9,176 (528)
Gains (losses), net:
Securities available-for-sale (note 2) (67) (2,217) (998)
Loans originated for sale 787 2,944 6,850
Gain (loss) on real estate activities (503) 1,982 (65)
Foreclosed real estate operations 401 875 (4,733)
Deposit account operations 4,083 4,013 4,233
Life insurance benefit -- 2,015 --
Other 4,327 4,360 6,264
----------- ------- -------
23,491 23,421 11,001
----------- ------- -------
OPERATING EXPENSES:
Compensation and benefits (note 10) 26,530 26,314 22,992
Office occupancy and equipment 5,257 5,360 4,770
Advertising 2,172 2,010 1,777
Federal insurance premiums 3,490 3,302 4,020
Office supplies, postage and telephone 3,012 2,433 2,496
Data processing 2,247 2,157 2,669
Other 5,427 5,300 4,515
----------- ------- -------
TOTAL OPERATING EXPENSES 48,135 46,876 43,239
----------- ------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 58,716 54,269 27,309
Income tax expense (note 9) 21,363 19,707 10,696
----------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 37,353 34,562 16,613
Extraordinary item - early extinguishment of debt (note 7) -- -- (1,054)
Cumulative effect of change in accounting for
postretirement benefits, net of related income
taxes of $(542) (notes 9 and 10) -- -- (885)
NET INCOME $ 37,353 34,562 14,674
=========== ======= =======
EARNINGS PER COMMON SHARE (NOTE 1):
Income from operations $ 3.70 3.33 0.57
=========== ======= =======
Extraordinary items $ -- -- (0.06)
=========== ======= =======
Net income $ 3.70 3.33 0.51
=========== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
-------------------------------------------------------------------------
Unrealized
gain (loss) on Total
Additional Unearned securities stock-
Common paid-in compen- available- Retained Treasury holders'
stock capital sation for-sale, net earnings stock equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ - - - - 75,161 - 75,161
Net income - - - - 14,674 - 14,674
Issuance of common stock 10,323 89,511 - - - - 99,834
ESOP debt - - (4,800) - - - (4,800)
ESOP debt repayment - - 120 - - - 120
Common shares reserved for
Management Recognition Plan (MRP) 430 3,871 (4,301) - - - -
Amortization of MRP - - 215 - - - 215
Adoption of FAS 115, net unrealized gain
on securities available-for-sale (net
of income taxes of $257) - - - 419 - - 419
Purchase of treasury stock - - - - - (1,737) (1,737)
------- ------- ------- ------- -------- --------- --------
Balance at December 31, 1993 10,753 93,382 (8,766) 419 89,835 (1,737) 183,886
Net income - - - - 34,562 - 34,562
Amortization of MRP - - 860 - - - 860
ESOP excess compensation cost - 647 - - - - 647
ESOP debt payment - - 480 - - - 480
Change in unrealized loss on securities
available-for-sale (net of income
taxes of $(449)) - - - (735) - - (735)
Exercise of stock options - (77) - - - 153 76
Purchase of treasury stock - - - - - (16,329) (16,329)
------- ------- ------- ------- -------- --------- --------
Balance at December 31, 1994 10,753 93,952 (7,426) (316) 124,397 (17,913) 203,447
NET INCOME - - - - 37,353 - 37,353
AMORTIZATION OF MRP - - 860 - - - 860
ESOP EXCESS COMPENSATION COST - 988 - - - - 988
ESOP DEBT PAYMENT - - 480 - - - 480
CHANGE IN UNREALIZED GAIN ON SECURITIES
AVAILABLE-FOR-SALE (NET OF INCOME
TAXES OF $6,138) - - - 10,018 - - 10,018
EXERCISE OF STOCK OPTIONS - (525) - - - 1,103 578
DIVIDEND PAYMENTS ($.60 PER SHARE) - - - - (5,718) - (5,718)
PURCHASE OF TREASURY STOCK - - - - - (1,176) (1,176)
------- ------- ------- ------- -------- --------- --------
BALANCE AT DECEMBER 31, 1995 $10,753 94,415 (6,086) 9,702 156,032 (17,986) 246,830
======= ======= ======= ======= ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
-----------------------------------
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,353 34,562 14,674
Adjustments to reconcile net income to cash provided by operating activities:
Cumulative effect of changes in accounting principle -- -- 885
Amortization of:
Mortgage servicing rights 12,906 12,263 19,199
Premiums and discounts on loans and securities, net (315) (466) (283)
Other, net 90 350 555
Federal Home Loan Bank stock dividend (1,800) (905) (593)
Deferred income taxes (1,490) (2,099) (4,003)
ESOP excess compensation cost 988 647 --
Provision for losses 7,558 6,364 9,268
Net gain on asset sales (217) (3,899) (5,847)
Loss on early extinguishment of debt -- -- 1,700
Depreciation and amortization, including amortization of MRP expense 2,722 2,875 1,636
Increase in cash surrender value of life insurance policies (893) (505) (1,775)
Life insurance benefit -- (2,015) --
Proceeds from sales of loans originated for sale 104,386 113,222 298,786
Loans originated for sale, net of principal repayments (110,577) (96,589) (303,714)
Purchase of loans held for sale (5,774) (7,789) (4,089)
Changes in:
Accrued interest receivable (34,394) (19,392) (3,613)
Accrued interest payable 7,885 4,945 (4,403)
Other assets 13,359 12,366 (24,686)
Accrued expense and other liabilities 29,463 5,457 9,685
-------- -------- --------
TOTAL ADJUSTMENTS 23,897 24,830 (11,292)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 61,250 59,392 3,382
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net of principal repayments (5,688) (102,720) 7,778
Purchase of loans held for investment (26,686) (27,674) --
Purchase of FHA/VA delinquent loans (708,026) (427,611) (200,176)
Purchase of mortgage-backed securities -- (41,240) (13,425)
Principal payments on mortgage-backed securities 43,910 66,880 105,722
Purchase of securities held-to-maturity -- (31,282) (55,291)
Proceeds from maturities and principal repayments of securities held-to-maturity 31,016 27,883 71,024
Purchase of securities available-for-sale (5,156) (11,474) (57,809)
Proceeds from sales of securities available-for-sale 28,455 4,806 2,802
Proceeds from maturities and principal repayments of securities available for sale 14,889 5,374 15,896
Sale (Purchase) of Federal Home Loan Bank stock (7,575) (8,291) 757
Purchase of mortgage servicing rights (13,414) (23,251) (27,095)
Advances on FHA/VA claims receivable (7,773) (12,516) (1,273)
Proceeds from the settlement of FHA/VA claims receivable 92,910 55,651 38,337
Purchase of premises and equipment (3,016) (5,633) (798)
Other -- (1,039) 105
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (566,154) (532,137) (113,446)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 127,826 15,384 (99,666)
Net increase in borrowings with original maturities less than three months 302,381 243,028 567
Payments on Federal Home Loan Bank advances and other borrowings (133,717) (227,726) (80,047)
Proceeds from Federal Home Loan Bank advances and other borrowings 273,746 430,290 163,840
Net increase (decrease) in advance payments by borrowers for taxes and insurance 7,907 5,718 (6,784)
Proceeds from issuance of common stock, net 578 76 95,034
Purchase of treasury stock (1,176) (16,329) (1,737)
Dividends paid (5,718) -- --
ESOP debt repayment 480 480 120
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 572,307 450,921 71,327
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 67,403 (21,824) (38,737)
Cash and cash equivalents at beginning of year 50,155 71,979 110,716
-------- -------- --------
Cash and cash equivalents at end of year $117,558 50,155 71,979
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $117,997 75,129 78,609
Income taxes paid $ 22,553 21,468 12,055
Additions to mortgage-backed securities due to loan securitization $378,905 111,140 59,046
Additions to other assets for unsettled security transactions and death benefits $ -- 13,891 --
Additions to real estate acquired in settlement of loans or through foreclosures $ 1,822 2,304 3,295
Loans originated to finance the sale of real estate $ 1,093 593 1,812
Transfers to securities available-for-sale $201,327 -- --
Unrealized gain (loss) on securities available-for-sale $ 10,018 (735) 419
Other than temporary market declines on securities available-for-sale $ -- -- 1,131
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
---------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
---------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Leader Financial Corporation and subsidiary (the "Company") is a
Tennessee-chartered Unified Thrift Holding Company. The Company was
organized on March 18, 1993, in connection with the conversion of its
principal subsidiary, Leader Federal Bank for Savings and subsidiaries
(the "Bank"), from a federal mutual savings bank to a federally-chartered
capital stock savings bank. The accounting and reporting policies of the
Company conform to generally accepted accounting principles and to general
practice within the thrift industry.
Company operations are conducted through the Company and the Company's
principal wholly-owned subsidiaries, as follows:
<TABLE>
<S> <C>
Leader Federal
Mortgage, Inc. ............................................................. Mortgage banking
Leader Services, Inc..............................Insurance and Alternative Investment products
Leader Leasing, Inc...........................................................Equipment Leasing
</TABLE>
All significant intercompany accounts and transactions have been
eliminated and certain 1994 and 1993 amounts have been reclassified to
conform to 1995 presentation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported balances of
assets and liabilities as of the date of the consolidated statements of
financial position and income and expenses for the period. Actual results
could differ significantly from these estimates.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with maturities
when purchased of three months or less to be cash equivalents.
SECURITIES HELD-TO-MATURITY
If at the time of purchase, management has the positive intent and the
Company has the ability to hold securities until maturity, they are
classified as held-to-maturity and are carried at amortized cost.
Premiums and discounts are amortized using the interest method. Declines
in value other than temporary in nature are recognized in the consolidated
statements of operations.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale include non-mortgage, mortgage derivative
and mortgage-backed securities which may be sold in response to, or in
anticipation of, changes in interest rates and/or prepayments, liquidity
considerations, or other factors. Gains and losses on the sale of
securities available-for-sale are determined on the identified-certificate
basis. Declines in value other than temporary in nature are recognized in
the consolidated statements of operations.
LOANS HELD FOR SALE
Loans originated for sale are carried at the lower of aggregate cost or
estimated market value. Market value is based on actual investor
commitments or, in the absence of such commitments, on current investor
yield requirements.
LOANS RECEIVABLE AND INCOME RECOGNITION THEREON
Loans are reported net of (i) unearned discount and net deferred loan
origination costs, (ii) undisbursed portion of loans in process and (iii)
allowance for loan losses. A loan is impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement or there can be no assurance of collection through a third party
guarantee. The Company measures impairment based on the fair value of the
loan's collateral. Changes in fair value are recorded through a valuation
allowance. Charge-offs occur in the event of foreclosure if fair value is
less than book value. The Company's policy for recognizing income on
impaired loans is to accrue earnings unless a loan is in foreclosure or
becomes nonperforming, at which time a reserve for uncollectable interest
is established. Cash receipts for impaired loans are allocated to
principal and interest in accordance with the contractual terms of the
loan.
Loan fees and certain direct loan origination costs are offset and the net
amount deferred and amortized as a yield adjustment to the related loans
over the expected life of the loans.
ALLOWANCES FOR LOSSES
The Company's portfolios of loans and real estate are reviewed monthly,
considering such factors as current/anticipated economic conditions, loss
experience with various loan types, industry, geographic or other
concentrations and the credit quality of individual borrowers. Based upon
this review, provisions for losses are charged to operations when losses
are probable of occurrence and reasonably estimable. While management
uses all available information to estimate losses on loans and real estate
owned, further additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
allowances for loans and real estate. Such agencies may require the
Company to recognize additions to the allowances based on their judgments
about information available to them at the time of their examination.
INTEREST RATE INSTRUMENTS
Various forms of interest rate instruments are used to adjust the maturity
structure of liabilities and assets in order to manage the Company's
exposure to fluctuating interest rates. These instruments include
interest rate swap agreements and interest rate caps. These instruments
are used only to hedge specifically identified assets and liabilities and
are not used for speculative purposes. Fees associated with these
agreements are accreted into income or amortized to expense on a
straight-line basis over the lives of the agreements. In the event of a
termination of these instruments, any resulting gains or losses will be
deferred and amortized over the shorter of the remaining term to maturity
of the related hedged asset or liability or the remaining life of the
instrument. Interest paid or received associated with the swap or cap
agreements is reflected a component of net interest margin.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost less accumulated depreciation
provided for on a straight-line basis over the estimated useful lives of
the related assets.
REAL ESTATE OWNED OR HELD FOR DEVELOPMENT
Upon acquisition, real estate acquired in foreclosure is recorded at the
lower of cost or discounted fair value less estimated selling costs.
Subsequent declines in value are recognized through charges to the
Company's valuation allowance accounts. Costs of developing or improving
such properties are capitalized. Operating income or expenses are
recognized when incurred. The carrying value of real estate held for
development includes capital contributions, loans to and operating results
from joint venture entities and capitalized development costs.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights acquired in bulk from third parties are
recorded at cost and are amortized using the interest method over the
expected lives of the underlying mortgages based upon current estimates of
prepayments. Adjustments to amortized cost are made when unanticipated
prepayments reduce the estimated future net servicing income, discounted
at the anticipated yield at date of acquisition, below the current
carrying value of the servicing rights. Amortization of purchased
servicing rights is charged against loan servicing revenue in the
accompanying consolidated financial statements.
RETIREMENT PLAN
Substantially all employees of the Company participate in a
non-contributory, defined benefit plan. Annual funding is based on an
actuarially determined amount using the projected unit credit cost method.
EARNINGS PER COMMON SHARE
Earnings per common share is based on the weighted average number of
common shares outstanding assuming exercise of in-the-money stock options
using the treasury stock method. The weighted average number of shares
outstanding at December 31, 1995, 1994 and 1993 is 10,083,219, 10,391,254
and 11,129,094, respectively. The 1993 computation is based on fourth
quarter income since the stock conversion occurred on September 30, 1993.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("FAS") No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," issued in March, 1995, provides guidance for recognition of
impairment losses related to long-lived assets, and certain intangibles
and related goodwill. The Statement is effective for fiscal years
beginning after December 15, 1995.
FAS No. 122 "Accounting for Mortgage Servicing Rights, an amendment of FAS
No. 65" was issued in May, 1995. The Statement requires a mortgage
banking enterprise to recognize as seperate assets the rights to service
mortgage loans for others, however those servicing rights are acquired.
It also requires the fair value assessment of capitalized mortgage
servicing rights with impairment recognized as a charge to earnings. The
Statement is to be applied prospectively in fiscal years beginning after
December 15, 1995.
FAS No. 123 "Accounting for Stock-Based Compensation" was issued in
October, 1995, and provides for a fair value method of accounting for
stock-based compensation arrangements rather than the intrinsic value
method now followed. Adoption of the fair value method for purposes of
preparing basic financial statements is not required although disclosure
or the effect of such adoption is. The Statement is effective for options
awarded after December 15, 1995.
Management believes the adoption of the above-mentioned Statements will
not have a material impact on the Company's consolidated financial
statements.
5
<PAGE> 6
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
- --------------------------------------------------------------------------
NOTE 2: SECURITIES
The amortized cost and fair value of securities at December 31, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
(In thousands)
-------------------------------------------------------------
1995 1994
--------------------------------------------------------------
AMORTIZED FAIR Amortized Fair
COST VALUE cost value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. federal agencies $ 2,000 $ 2,020 $ 2,000 $ 1,988
U.S. state and political subdivisions 8,221 8,106 -- --
FHLMC preferred stock 2,441 2,514 2,457 2,369
Collateralized mortgage obligations 38,056 38,670 38,517 37,112
Other 543 1,372 909 1,922
-------- -------- -------- --------
51,261 52,682 43,883 43,391
Mortgage-backed securities:
FHLMC 29,162 29,795 -- --
FNMA 343,518 353,356 8,628 8,612
GNMA 172,306 176,062 -- --
-------- -------- -------- --------
544,986 559,213 8,628 8,612
-------- -------- -------- --------
Securities available-for-sale 596,247 611,895 52,511 52,003
-------- -------- -------- --------
Securities held-to-maturity:
U.S. federal agencies -- -- 26,979 26,915
U.S. state and political subdivisions -- -- 8,578 8,113
Collateralized mortgage obligations 12,406 12,381 17,735 16,793
Other 2,132 2,043 174 180
-------- -------- -------- --------
14,538 14,424 53,466 52,001
-------- -------- -------- --------
Mortgage-backed securities:
FHLMC 43,917 45,152 91,288 88,381
FNMA 7,392 7,522 19,972 19,449
GNMA 83,304 84,217 262,939 249,719
Non-agency 5,780 5,780 6,204 6,168
-------- -------- -------- --------
140,393 142,671 380,403 363,717
-------- -------- -------- --------
Securities held-to-maturity 154,931 157,095 433,869 415,718
-------- -------- -------- --------
Total securities $751,178 $768,990 $486,380 $467,721
======== ======== ======== ========
</TABLE>
The net unrealized gain (loss) of all securities at December 31, 1995 and
1994, was $17,812,000 and $(18,659,000), respectively. The table below shows
the gross components of these gains and losses, by security type, at those
dates:
<TABLE>
<CAPTION>
(In thousands)
--------------------------------------------------------
1995
--------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------------------------------------------------
<S> <C> <C> <C> <C>
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
Mortgage-backed securities 544,986 15,098 (871) 559,213
-------- ------- ------- --------
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
Mortgage-backed securities 140,393 2,323 (45) 142,671
-------- ------- ------- --------
154,931 2,377 (213) 157,095
-------- ------- ------- --------
Total securities $751,178 $19,112 $(1,300) $768,990
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. federal agencies $ 2,000 $ -- $ (12) $ 1,988
FHLMC preferred stock 2,457 -- (88) 2,369
Collateralized mortgage obligations 38,517 125 (1,530) 37,112
Other 909 1,013 -- 1,922
Mortgage-backed securities 8,628 -- (16) 8,612
-------- ------ -------- -------
52,511 1,138 (1,646) 52,003
-------- ------ -------- -------
Securities held-to-maturity:
U.S. federal agencies 26,979 -- (64) 26,915
U.S. state and political subdivisions 8,578 7 (472) 8,113
Collateralized mortgage obligations 17,735 -- (942) 16,793
Other 174 6 -- 180
Mortgage-backed securities 380,403 544 (17,230) 363,717
-------- ------ -------- -------
433,869 557 (18,708) 415,718
-------- ------ -------- -------
Total securities $486,380 $1,695 $(20,354) $467,721
======== ====== ======== ========
</TABLE>
The amortized cost and estimated fair value of securities at December 31, 1995,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities due to normal amortization and because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
(In thousands)
-----------------------------------------------------
1995
-----------------------------------------------------
Securities Securities
available-for-sale held-to-maturity
-----------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
-----------------------------------------------------
<S> <C> <C> <C> <C>
Maturities in one year or less $ 747 $ 748 $ 1,438 $ 1,435
Maturities after one year through five years 8,963 8,987 2,715 2,704
Maturities after five years through ten years 16,492 16,875 6,498 6,696
Maturities after ten years 570,045 585,285 144,280 146,260
-------- -------- -------- --------
Total securities $596,247 $611,895 $154,931 $157,095
======== ======== ======== ========
</TABLE>
Gross realized gains (losses) on securities during the years ended December
31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------------------------------------
Gains Losses Gains Losses Gains Losses
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale $ -- $(67) $1 $(2,218) $133 (1,131)
</TABLE>
On November 15, 1995, the Financial Accounting Standards Board ("FASB") issued
a special report pertaining to the implementation of Statement of Financial
Accounting Standards No. 115 Accounting for Certain Investments in Debt and
Equity Securities (FAS 115). Concurrent with the issuance of the report but no
later than December 31, 1995, the FASB allowed for a reassessment of the
appropriateness of the classification of securities held at that time and to
account for any resulting reclassification at fair value. Reclassifications
from the held-to-maturity category that were a result of this one-time
assessment would not call into question the intent of the Company to hold other
debt securities until maturity in the future. Based upon this guidance, the
Company transferred municipal and mortgage-backed securities with an amortized
cost of $189,989,000 and an estimated fair value of $193,388,000 to the
available-for-sale category with a resulting unrealized gain of $3,399,000.
In addition, the Company transferred mortgage-backed securities with an
amortized cost of $11,338,000 from the held-to-maturity category to the
available-for-sale category because the underlying principal balances had paid
down by more than 85%. The resulting unrealized gain on this transfer was
$292,000.
6
<PAGE> 7
- --------------------------------------------------------------------------------
NOTE 3: LOANS RECEIVABLE AND ALLOWANCES FOR LOSSES
Loans receivable at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
----------------------
1995 1994
----------------------
<S> <C> <C>
REAL ESTATE LOANS:
One to four family residential:
Conventional $ 563,507 $ 633,888
FHA/VA 906,980 636,441
Construction, primarily one to four family 130,590 112,690
Undisbursed portion of construction
loans in process (49,799) (52,698)
Commercial, primary real estate 123,739 88,278
Home equity loans 43,611 41,528
Home improvement/second mortgage loans 102,206 121,063
---------- ----------
TOTAL REAL ESTATE LOANS 1,820,834 1,581,190
Mobile home 49,862 61,095
Loans secured by deposits 7,609 7,374
Credit card balances 38,796 31,558
Lease receivables, net 14,151 9,956
Other loans 42,068 27,859
---------- ----------
1,973,320 1,719,032
DEDUCT:
Allowances for loan losses (22,901) (20,165)
Unearned discounts and net
deferred loan origination fees (9,298) (3,979)
---------- ----------
(32,199) (24,144)
---------- ----------
$1,941,121 $1,694,888
========== ==========
</TABLE>
The Company's portfolio of conventional one to four family loans, construction
loans, home equity loans and home improvement/second mortgage loans are
substantially concentrated in loans secured by real estate within the State of
Tennessee. As such, economic conditions in that state will directly impact
borrower delinquencies, collateral values and ultimate realization of the
carrying value of a majority of the Company's loans. Other loan categories are
not concentrated in any one state or region.
The Company purchases certain delinquent FHA/VA insured/guaranteed loans from
third parties and out of GNMA pools it services for others. The accounts in the
table above include approximately $833.0 million and $538.5 million of purchased
FHA/VA loans of which $334.0 million and $210.6 million were contractually
delinquent more than three months at December 31, 1995 and 1994, respectively.
The Company has advanced payments for taxes and insurance totalling $10.1
million on behalf of these borrowers as of December 31, 1995.
The Company adopted the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors of Impairment of Loans ("FAS 114"), as amended
by Statement of Financial Accounting Standard No. 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures ("FAS 118"),
effective January 1, 1995. Prior periods have not been restated. All
applicable loans receivable, primarily commercial, have been evaluated for
collectibility under the provision of these statements. The adoption of these
statements had no material impact on the Company's consolidated financial
statements.
Non-accrual loans and in-substance foreclosures totaled approximately
$10,452,000 and $9,083,000 at December 31, 1995 and 1994, respectively.
Interest income not recognized by the Company on non-accrual loans approximated
$881,000, $821,000 and $397,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
ALLOWANCES FOR LOSSES
Following is a summary of the allowances available to absorb estimated losses on
loans, mortgage-backed securities serviced with recourse and real estate:
<TABLE>
<CAPTION>
LOANS (in thousands)
-------------------------
1995 1994 1993
-------------------------
<S> <C> <C> <C>
Beginning balance $20,165 $16,500 $13,848
Provision for losses 5,150 4,767 4,710
Charge-offs (3,309) (2,329) (3,486)
Recoveries 895 1,227 1,428
------- ------- -------
Ending balance $22,901 $20,165 $16,500
======= ======= =======
REAL ESTATE (In thousands)
-------------------------
1995 1994 1993
-------------------------
Beginning balance $ 1,879 $ 2,107 $ 2,161
Provision for losses (376) -- 3,980
Charge-offs (861) (228) (4,332)
Recoveries 209 -- 298
------- ------- -------
Ending balance $ 851 $ 1,879 $ 2,107
======= ======= =======
</TABLE>
NOTE 4: PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
(In thousands)
-----------------------
Estimated useful December 31,
lives-years 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Land and land improvements -- $ 5,466 $ 5,543
Office buildings 25 - 40 12,395 11,922
Leasehold improvements 5 - 7 2,556 2,064
Furniture, fixtures and equipment 5 7,286 6,886
Data procesing and other equipment 3 - 5 3,125 3,660
------- -------
30,828 30,075
Less accumulated depreciation and amortization (12,215) (12,082)
------- -------
$18,613 $17,993
======= =======
</TABLE>
The present value of future minimum lease payments under all capital leases and
commitments for future payments under non-cancelable operating leases for
premises and equipment are not significant at December 31, 1995. Total rental
expense relating to operating leases was approximately $1,483,000, $1,572,000
and $2,283,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The Company has approved the construction of a new corporate headquarters
building which will house a majority of its employee base. Construction on the
185,000 square foot building is tentatively scheduled for completion during the
spring of 1997 at an estimated cost of between $13 and $15 million, including
approximately 22 acres of land.
NOTE 5: ACCRUED INTEREST RECEIVABLE
Following is a summary of accrued interest receivable as of December 31, 1995
and 1994:
<TABLE>
<CAPTION>
(In thousands)
------------------------
1995 1994
------------------------
<S> <C> <C>
Cash equivalents and due from banks $ 10 $ 15
Securities available-for-sale 3,636 234
Securities held to maturity 1,294 2,509
Loans:
FHA/VA 46,006 25,605
Other 21,113 9,302
------- -------
$72,059 $37,665
======= =======
</TABLE>
7
<PAGE> 8
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 6: DEPOSITS
Deposit balances at December 31, 1995 and 1994 are summarized by type as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
------------------------------------------------------------------
1995 1994
------------------------------------------------------------------
AVERAGE Average
ACCOUNT TYPE: AMOUNT RATE PERCENT Amount Rate Percent
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 227,347 1.06% 14.42% 183,926 1.07% 12.69%
Passbook 91,276 2.62 5.79 153,496 3.60 10.59
Money Market 38,555 3.10 2.44 41,743 3.19 2.88
Instant Access 127,885 4.69 8.11 91,626 4.17 6.32
Super Passbook 16,299 2.18 1.03 22,926 2.30 1.58
---------- ---- ------ ---------- ---- ------
501,362 2.46% 31.79% 493,717 2.67 34.06
---------- ---- ------ ---------- ---- ------
Certificate accounts:
Brokered CD's 10,000 6.17% 0.63% -- -- --
91-day 31,390 5.12 1.99 17,756 4.36 1.23
6-month 128,901 5.27 8.17 96,101 4.51 6.63
7-month 33,207 4.99 2.11 58,076 4.99 4.01
11-month 36,929 6.04 2.34 99,776 4.50 6.88
1-year 134,990 5.80 8.56 71,251 4.65 4.92
15-month 128,932 6.09 8.17 87,572 5.51 6.04
1-1/2 year 36,739 5.72 2.33 19,389 5.00 1.34
2-year 59,982 5.81 3.80 81,452 4.89 5.62
2-1/2 year 111,590 6.39 7.08 59,755 4.84 4.12
3-1/2 year 26,842 5.92 1.70 28,970 5.73 2.00
4-5 year 175,424 6.36 11.12 195,357 6.53 13.46
6-10 year 9,098 7.58 0.58 11,813 8.03 0.82
IRA 126,983 5.56 8.05 122,113 5.54 8.43
Negotiated rate 24,861 5.59 1.58 6,306 5.16 0.44
---------- ---- ------ --------- ---- ------
1,075,868 5.89 68.21 955,687 5.33 65.94
---------- ---- ------ --------- ---- ------
Total $1,577,230 4.80% 100.00% 1,449,404 4.42% 100.00%
========== ==== ====== ========= ==== ======
</TABLE>
Interest expense on deposits by type is summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
-----------------------------
1995 1994 1993
-----------------------------
<S> <C> <C> <C>
Demand $ 2,525 1,825 4,458
Savings 10,627 9,771 8,498
Certificates of deposit 61,349 43,553 47,337
------- ------ ------
$74,501 55,149 60,293
======= ====== ======
Contractual maturities of certificate accounts at December 31, 1995 are as follows:
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
---------------------------------
1995
---------------------------------
AVERAGE PERCENT
AMOUNT RATE OF TOTAL
---------------------------------
MATURITY
<S> <C> <C> <C>
Within one year $ 699,564 5.73% 65.03%
Two years 242,448 6.26 22.54
Three years 75,890 5.88 7.05
Four years 41,686 6.35 3.87
Five years 11,322 6.29 1.05
After 4,958 6.49 0.46
---------- ---- ------
$1,075,868 5.89% 100.00%
========== ==== ======
</TABLE>
Time deposits of $100,000 and over, were $160,572,000 and $127,922,000 at
December 31,1995 and 1994, respectively.
8
<PAGE> 9
- --------------------------------------------------------------------------------
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Advances from Federal Home Loan Bank of Cincinnati at December 31, 1995 and
1994 consisted of:
<TABLE>
<CAPTION>
(In thousands)
-----------------------------------------------
FINAL DUE DATE Interest Rate 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Within one year 4.55% - 8.60% $157,500 170,000
Two years 5.77% - 5.88% 74,000 72,500
Three years 4.55% - 5.94% 56,485 4,000
Four years 4.55% - 6.95% 32,964 2,075
Five years 5.88% - 6.95% 30,000 9,719
After five years 5.20% - 8.95% 178,198 177,849
-------- --------
529,147 436,143
</TABLE>
Other borrowings consisted of:
Series 1987-A Mortgage Collateralized Bonds secured
by mortgage-backed securities with a book value of
$10,739,000 and $13,377,000 at December 31, 1995
and 1994, respectively. Interest payable quarterly.
<TABLE>
<CAPTION>
Class Due date Rate
----- -------- ----
<S> <C> <C> <C> <C> <C>
C July 1, 2006 8.50% 2,186 5,908
Z April 1, 2011 8.50% 9,231 8,486
Other 912 1,495
Unamortized discount
and issuance cost (158) (248)
------ -------
$541,318 451,784
======== =======
</TABLE>
The Company has entered into a blanket floating lien security agreement with the
Federal Home Loan Bank (FHLB) of Cincinnati. Under the terms of this
agreement, the Company is required to maintain unencumbered, qualifying first
mortgage loans in an amount equal to 150% of outstanding advances and its
investment in FHLB stock as collateral for those advances. At December 31,
1995, the Company had available collateral for additional borrowings under this
agreement of approximately $129,500,000.
At December 31, 1995 and 1994, approximately $173,239,000 and $135,234,000,
respectively, of FHLB advances were repayable in monthly installments over terms
not exceeding 180 months. All other advances are payable at maturity.
EXTRAORDINARY ITEM
During 1993, the Company reacquired its 14-3/4% subordinated debentures due in
1997 and elected early prepayment of selected above market rate Federal Home
Loan Bank advances. A pretax loss of $1.7 million was incurred on the
extinguishment of $43.8 million of such debts. The loss is included in the
accompanying financial statements, net of tax benefits of approximately
$646,000.
NOTE 8: FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Federal funds purchased and securities sold under agreements to repurchase
are as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------------------
1995 1994
--------------------------
<S> <C> <C>
Federal funds purchased:
Balance at year end $ -- 42,000
Maximum outstanding at any month end 39,000 42,000
Average balance outstanding 19,279 18,263
Weighted average rate during the year 5.94% 4.90%
Weighted average rate at year end -- 6.14%
Securities sold under agreements to repurchase:
Balance at year end $597,260 202,828
Maximum outstanding at any month end 597,260 206,593
Average balance outstanding 325,318 126,461
Weighted average rate during the year 5.95% 4.81%
Weighted average rate at year end 5.71% 5.88%
</TABLE>
Maturity information regarding securities sold under agreements to
repurchase as of December 31, 1995 follows:
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------------------------
Collateral Weighted
------------------------------ Average
Book Value Fair Value Balance of Interest
of Asset (1) of Asset Liability Rate
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities
30 days $122,224 121,791 115,991 5.978%
30 - 90 days 424,176 423,676 401,747 5.720%
Over 90 days 83,124 83,183 79,522 5.496%
-------- -------- -------- -----
$629,524 628,650 597,260 5.710%
======== ======== ======== =====
</TABLE>
(1) Includes accrued interest.
The counterparties have agreed to resell to the Company the same
securities upon maturity of such agreements.
NOTE 9: INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1995,
1994 and 1993 was allocated as follows:
<TABLE>
<CAPTION>
(In thousands)
------------------------------
1995 1994 1993
------------------------------
<S> <C> <C> <C>
Income from continuing operations $21,363 19,707 10,696
Extraordinary item -- -- (646)
Cumulative effect of accounting change -- -- (542)
------- ------ ------
$21,363 19,707 9,508
======= ====== ======
</TABLE>
Income tax expense (benefit) attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
(In thousands)
------------------------------
December 31,
1995 1994 1993
------------------------------
<S> <C> <C> <C>
Current:
Federal $20,118 19,264 12,650
State 2,735 2,542 1,506
------- ------ ------
22,853 21,806 14,156
------- ------ ------
Deferred:
Federal (1,330) (1,738) (3,250)
State (160) (361) (210)
------- ------ ------
(1,490) (2,099) (3,460)
------- ------ ------
$21,363 19,707 10,696
======= ====== ======
</TABLE>
9
<PAGE> 10
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 9: INCOME TAXES (continued)
Income tax expense attributable to income from continuing operations differed
from the amounts computed by applying the U.S. federal income tax rate of 35
percent in 1995, 1994 and 1993 to pretax income from continuing operations as a
result of the following:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------
December 31,
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $20,551 18,994 9,558
Increase (decrease) in taxes resulting from:
Tax exempt interest (153) (151) (88)
State income taxes, net of federal benefits 1,674 1,418 792
Acquisition adjustments (21) 39 74
Cash surrender value in excess of
insurance expense (247) (153) (210)
Insurance benefit -- (705) --
Miscellaneous, net (441) 265 570
------- ------ ------
INCOME TAX EXPENSE $21,363 19,707 10,696
======= ====== ======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
(In thousands)
-----------------------
1995 1994
-----------------------
<S> <C> <C>
Deferred tax assets:
Loans receivable, principally due to allowance for losses $ 5,797 5,938
Investments, principally due to market adjustments for financial reporting
purposes -- 1,642
Investments in real estate, principally due to allowance for losses net of capitalized
interest 226 207
Mortgage servicing rights, principally due to amortization methods 2,203 623
Deferred liabilities, principally due to compensation arrangements and state
excise taxes 2,670 2,176
------- -------
Total gross deferred tax assets 10,896 10,586
Less valuation allowance -- --
------- -------
Deferred tax assets $10,896 10,586
------- -------
Deferred tax liabilities:
Securities, principally due to losses recognized for tax purposes but not for financial
reporting purposes (288) (416)
Investments, principally due to market adjustments for financial reporting purposes (7,662) (2,408)
Property, plant and equipment, principally due to differences in depreciation and
lease transactions (992) (1,152)
Deferred assets, principally due to the capitalization of excess servicing rights for
financial reporting purposes (212) (214)
Federal Home Loan Bank advances and other borrowerings, principally due to fees
deferred for financial reporting purposes (133) (139)
------- -------
Total gross deferred liabilities (9,287) (4,329)
------- -------
Net deferred tax asset $ 1,609 6,257
======= =======
</TABLE>
Retained earnings at December 31, 1995, includes approximately $15,000,000 of
statutory bad debt deductions for which no provision for federal income taxes
has been made. If, in the future, this portion of retained earnings is used
for any purpose other than to absorb bad debt losses, federal income taxes may
be imposed at the then current rates.
NOTE 10: EMPLOYEE BENEFIT AND POST RETIREMENT PLANS
The Company maintains a non-contributory defined benefit pension plan (the
"Plan") which covers substantially all employees. Annual funding is based on an
actuarially determined amount using the projected unit credit cost method.
Benefits are based on years of service and the employees' compensation. Pension
plan assets consist principally of listed stocks and bonds and United States
Government securities. The Company makes contributions to the Plan which equal
or exceed the minimum amounts required by the Employee Retirement Income
Security Act of 1974.
Pension expense amounted to approximately $257,000, $298,000 and $260,000 for
1995, 1994, and 1993, respectively, and included the following components:
<TABLE>
<CAPTION>
(In thousands)
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Actual gain on plan assets $(4,011) (697) (2,136)
Service cost earned during the year 507 620 531
Interest cost on projected benefit obligation 837 744 655
Net amortization and deferral 2,924 (369) 1,210
------- ----- -------
$ 257 298 260
======= ===== =======
</TABLE>
At December 31, 1995, 1994 and 1993, the actuarial present value of vested
benefit obligations was $9,921,000, $8,248,000 and $7,820,000 and the actuarial
present value of accumulated benefit obligations was $10,195,000, $8,417,000 and
$8,006,000, respectively. The funded status of the Plan at December 31, 1995,
1994 and 1993 was as follows:
<TABLE>
<CAPTION>
(In thousands)
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Plan assets at market value $15,955 12,411 12,108
Actuarial present value of projected benefit obligation 13,556 10,363 9,928
------- ------ ------
Funded status 2,399 2,048 2,180
Unrecognized net transition asset (638) (735) (832)
Prior service cost (464) (535) (495)
Net gain from past experience different
from that assumed and effects of changes in
assumptions (1,339) (564) (341)
------- ------ ------
Prepaid (accrued) pension expense recorded in the financial
statements $ (42) 214 512
======= ====== ======
</TABLE>
Principal assumptions used in determining the projected benefit obligations
and the expected return on assets were as follows:
<TABLE>
<CAPTION>
Discount Compensation Expected Return
Rate Increase on Plan Assets
----------------------------------------------
<S> <C> <C> <C>
1993 7.5% 5.0% 7.5%
1994 8.0% 5.0% 7.5%
1995 7.0% 5.0% 7.5%
</TABLE>
The unrecognized net transition asset is being amortized over 16.55 years, the
remaining average service life of the eligible employees at January 1, 1986.
10
<PAGE> 11
- ------------------------------------------------------------------------------
NOTE 10: EMPLOYEE BENEFIT AND POST RETIREMENT PLANS (continued)
The Company provides a savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all full-time employees.
Employee contributions are partially matched by the Company and the
Company pays all plan expenses. Total savings plan expense was
$311,000, $244,000 and $306,000 for 1995, 1994 and 1993, respectively.
The Company maintains a self-insured, unfunded contributory employee
welfare plan which provides both medical and dental benefits to eligible
employees, retirees and their dependents.
The following table sets forth the plan's unfunded status as of December
31, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands)
------------------------
1995 1994
------------------------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retiree participants $ (606) (674)
Fully eligible active plan participants (1,300) (1,066)
-------- -------
Accumulated postretirement benefit
obligation in excess of plan assets (1,906) (1,740)
Unrecognized prior service cost (488) --
Unrecognized net (gain) loss from past
experience different from that
assumed and from change in assumptions 280 (132)
-------- -------
Accrued postretirement benefit cost
included in other liabilities $ (2,114) (1,872)
======== =======
</TABLE>
Net periodic postretirement benefit cost for the years ended December 31,
1995 and 1994 include the following components:
<TABLE>
<CAPTION>
(In thousands)
------------------------
1995 1994
------------------------
<S> <C> <C>
Service cost $ 101 104
Interest cost 156 126
-------- --------
Net periodic postretirement benefit cost $ 257 230
======== ========
</TABLE>
For measurement purposes, a 12 percent and 15 percent annual rate of increase in
the per capita cost of covered health care benefits was assumed for pre-age 65
participants and a 10 percent and 13 percent for post-age 65 participants for
1995 and 1994, respectively. These rates were assumed to decrease gradually to
5.5 percent in the year 2005 and remain at that level thereafter. The health
care cost trend rate assumption has a significant effect on the amounts
reported. Increasing the assumed health care cost trend rates by 1 percentage
point in each year would increase the accumulated postretirement benefit
obligation by $392,000 and $324,000 for 1995 and 1994, respectively, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost by $56,000 and $54,000 for 1995 and 1994,
respectively. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7 percent and 8 percent in
1995 and 1994, respectively.
The Leader Financial Corporation Employee Stock Ownership Plan and Trust (the
"ESOP") covers substantially all full-time employees who have attained age 21
and completed a year of service. The ESOP borrowed $4.8 million from the
Company to purchase 480,000 shares of the Company's common stock. The
receivable from the ESOP is included in unearned compensation in stockholders'
equity of the accompanying consolidated financial statements. Such shares are
held in suspense pending repayment of the debt, at which time they are released
and allocated to participants in proportion to the principal amount of the debt
retired. The debt is repayable in annual installments over a ten year period,
bears interest at prime plus one percent and may be prepaid at any time without
penalty. Although annual contributions are not required, it is anticipated that
the Company will contribute sufficient funds to the ESOP to provide for debt
repayment. Dividends paid by the Company with respect to both allocated and
unallocated shares are used first to repay all acquisition indebtedness and are
then paid directly to plan participants. Although the Company retains the right
to repurchase shares distributed under the ESOP, it is under no obligation to do
so. The following table summarizes activity in the ESOP since its inception:
<TABLE>
<CAPTION>
Shares
--------------------------------------
In Committed to
suspense be released Allocated
--------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1993 468,000 12,000 --
Shares allocated -- (12,000) 12,000
Debt repaid (48,000) 48,000 --
------- ------ ------
Balance, December 31, 1994 420,000 48,000 12,000
SHARES ALLOCATED -- (48,000) 48,000
DEBT REPAID (48,000) 48,000 --
SHARES DISBURSED (587) 587 --
------- ------ ------
BALANCE, DECEMBER 31, 1995 371,413 48,587 60,000
======= ====== ======
</TABLE>
At December 31, 1995 and 1994, unearned compensation attributable to the ESOP
included in stockholders' equity in the accompanying consolidated financial
statements was $3,720,000 and $4,200,000, respectively.
During 1994, Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans," required employers to recognize compensation expense
equal to the fair value of shares committed to be released. Under the previous
method, compensation expense was recognized at cost. The amount of
compensation expense recognized during 1995 and 1994 was $1,468,000 and
$1,127,000, respectively. The difference between the fair value of the shares
committed to be released and the cost of the shares was credited to additional
paid-in capital in the accompanying consolidated financial statements. The
excess cost for 1995 and 1994 was $988,000 and $647,000, respectively.
At December 31, 1995, the ESOP held 479,413 shares with a fair market value of
approximately $17,918,000.
NOTE 11: STOCK OPTION AND STOCK AWARD PLANS
During 1993, the Company adopted the Leader Financial Corporation 1993 Stock
Option and Incentive Plan (the "Option Plan") which provides for the granting of
qualifying and non-qualifying options to purchase shares of the Company's common
stock to directors and key employees of the Company and its subsidiary. All
options are granted at market value on the date of grant, include a three-year
vesting period and are exercisable for a ten-year period.
Also during 1993, the Company adopted the Leader Financial Corporation
Management Recognition Plan (the "MRP Plan") which provides for the awarding of
shares to directors and key employees contingent upon meeting certain vesting
provisions. The Company recorded approximately $860,000, $860,000 and $215,000
in compensation expense in 1995, 1994 and 1993, respectively, related to the
grants awarded under this plan.
The following table summarizes the changes in outstanding options and grants
during the years ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
MRP Plan
------------------------
Available
for award Awarded
------------------------
<S> <C> <C>
Balance December 31, 1993 40,859 389,241
Vested/exercised -- (77,848)
Cancelled -- --
------- -------
Balance December 31, 1994 40,859 311,393
GRANTED (14,000) 14,000
VESTED/EXERCISED -- (81,964)
CANCELLED 5,807 (5,807)
------- -------
BALANCE December 31, 1995 32,666 237,622
======= =======
</TABLE>
11
<PAGE> 12
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Option Plan
- -----------------------------------------------------------------------
Available Price
for award Awarded per share
--------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1993 108,009 967,241
Granted (38,844) 38,844 $26.00
Vested/exercised -- (8,512) $10.00
Cancelled 17,024 (17,024) $10.00
------- -------
Balance at December 31, 1994 86,189 980,549
GRANTED (49,500) 49,500 $26.00-35.50
VESTED/EXERCISED -- (53,066)
CANCELLED 14,857 (14,857)
------- -------
BALANCE at
DECEMBER 31, 1995 51,546 962,126
======= =======
EXERCISABLE AT
DECEMBER 31, 1995 424,390
=======
</TABLE>
NOTE 12: REGULATORY CAPITAL MATTERS
FEDERAL DEPOSIT INSURANCE CORPORATION
IMPROVEMENT ACT OF 1991 ("FDICIA")
FDICIA governs the legal and regulatory operating environment of insured
depository institutions, including provisions for reductions in insurance
coverage for certain kinds of deposits, supervision by federal regulatory
agencies, reporting requirements for insured institutions, and regulations
concerning capital maintenance, internal controls, accounting, and operations.
The capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be considered "adequately capitalized," an
institution must generally have a leverage ratio of at least 4 percent, a Tier 1
risk-based capital ratio of at least 4 percent, and a total risk-based capital
ratio of at least 8 percent. An institution is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of 2 percent or less.
The following table summarizes the Company's capital categories at December 31,
1995 (dollars in thousands):
<TABLE>
<S> <C>
Leverage ratio 5.95%
Tier 1 risk-based ratio 13.41
Risk-based ratio 14.51
Tangible equity ratio 5.95
Tier 1 capital $184,150
Risk-based capital $199,313
</TABLE>
The following tables summarize the Bank's compliance with regulatory capital
standards at December 31, 1995:
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------------
Tangible % of
captial assets
----------------------------
<S> <C> <C>
Consolidated net worth $196,460 6.34%
General loss reserves -- --
Unrealized gain on securities
available-for-sale (9,702) (0.31)
Less:
Non-includable investment
in subsidiaries (2,608) (0.08)
-------- -----
Regulatory capital 184,150 5.95
Required capital 46,423 1.50
-------- -----
Excess capital $137,727 4.45%
======== =====
<CAPTION>
(Dollars in thousands)
----------------------------
Core % of
capital assets
----------------------------
<S> <C> <C>
Consolidated net worth $196,460 6.34%
General loss reserves -- --
Unrealized gain on securities
available-for-sale (9,702) (0.31)
Less:
Non-includable investment
in subsidiaries (2,608) (0.08)
-------- -----
Regulatory capital 184,150 5.95
Required capital 93,138 3.00
-------- -----
Excess capital $ 91,012 2.95%
======== =====
<CAPTION>
(Dollars in thousands)
-----------------------------
Risk based % of risk-
captial based assets
-----------------------------
<S> <C> <C>
Consolidated net worth $196,460 14.31%
General loss reserves 15,163 1.10
Unrealized gain on securities
available-for-sale (9,702) (0.71)
Less:
Non-includable investment
in subsidiaries (2,608) (0.19)
-------- -----
Regulatory capital 199,313 14.51
Required capital 109,893 8.00
-------- -----
Excess capital $ 89,420 6.51%
======== =====
</TABLE>
NOTE 13: FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table lists the financial instruments for which estimated fair
values approximate carrying values:
<TABLE>
<CAPTION>
(In thousands)
----------------------------
December 31,
1995 1994
----------------------------
<S> <C> <C>
ASSETS
Cash equivalents and due from banks $ 27,558 30,155
Federal funds sold 90,000 20,000
Investment in Federal Home Loan Bank 31,875 22,500
Loans:
Construction, primarily single family 80,791 59,992
Home equity loans 43,611 41,528
Secured by deposits 7,609 7,374
Lease receivable, net 14,151 9,956
Loans held for sale 19,060 7,931
---------- --------
$ 314,655 199,436
========== ========
LIABILITIES
Demand $ 227,347 183,926
Passbook 91,276 153,496
Money Market 38,555 41,743
Instant Access 127,885 91,626
Super Passbook 16,299 22,926
Federal funds purchased -- 42,000
Securities sold under agreements to repurchase 597,260 202,828
---------- --------
$1,098,622 738,545
========== ========
</TABLE>
The fair value of securities available-for-sale and securities held to maturity
is included in Note 2.
12
<PAGE> 13
- --------------------------------------------------------------------------------
NOTE 13: FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The following table presents estimated fair value information for financial
instruments for which no organized market exists. The estimated fair values for
these financial instruments were calculated by discounting expected cash flows
using the assumptions presented. Because no organized market exists for these
financial instruments and because management does not intend to sell them, it is
not known whether the estimated fair values shown below represent values at
which the respective financial instruments could be sold.
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------------------------------------------------------
December 31, 1995
----------------------------------------------------------------------
Book Average Average Estimated fair value
Value Yield Maturity Rate Amount
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Loans:
First mortgage conventional $ 563,507 7.99% 22.7(years) 6.51% $ 585,619
First mortgage FHA/VA 906,980 9.62 19.9 7.87 944,622
Commercial 123,739 8.65 7.9 8.56 124,282
Home improvement/second mortgage 102,206 8.03 6.9 7.60 103,496
Mobile home 49,862 11.63 8.5 9.74 50,942
Credit cards 38,796 12.17 1.8 6.14 42,220
Other Consumer 42,068 8.03 6.9 7.60 42,601
Liabilities:
Time deposits 1,075,868 5.89 1.0 5.14 1,086,685
FHLB advances 529,147 5.95 2.3 5.84 528,596
Series 87-A mortgage collateralized bonds:
Class C 2,186 8.50 0.5 7.28 2,200
Class Z 9,231 8.50 6.6 7.28 9,623
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
----------------------------------------------------------------------
December 31, 1994
----------------------------------------------------------------------
Book Average Average Estimated fair value
Value Yield Maturity Rate Amount
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Loans:
First mortgage conventional $633,888 6.96% 23.8(years) 8.65% 618,611
First mortgage FHA/VA 636,441 9.97 20.3 10.14 634,207
Commercial 88,278 8.44 9.7 10.80 82,454
Home improvement/second mortgage 121,063 7.68 7.5 9.75 114,599
Mobile home 61,095 11.18 9.0 11.75 60,976
Credit cards 31,558 10.86 1.9 4.49 34,500
Other consumer 27,859 7.68 7.5 9.75 28,778
Liabilities:
Time deposits 955,687 5.33 1.2 6.68 940,949
FHLB advances 436,143 5.81 1.5 7.17 420,617
Series 87-A mortgage collateralized bonds:
Class C 5,908 8.50 1.0 8.00 5,938
Class Z 8,486 8.50 6.1 9.00 8,306
</TABLE>
Management has made estimates, excluding the effect of income taxes, of fair
value (discount) rates that it believes to be reasonable. However, because
there is no market for these financial instruments, management has no basis to
determine whether the rates shown would be indicated in an actual sale. The
reader is encouraged to use different discount rates to calculate fair values
for the Company's financial instruments if such rates are believed to be more
appropriate.
13
<PAGE> 14
LEADER FINANCIAL CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 14: OFF-BALANCE SHEET AND OTHER RISK ASSESSMENT
In the normal course of business, the Company enters into financial agreements
not included in the accompanying consolidated statements of financial position
which contain elements of both credit and market risk. These agreements, which
include commitments to extend credit, standby letters of credit, lines of
credit, interest rate swaps, interest rate caps and forward sales of mortgage
products, are executed in order to meet the financing needs of customers or to
reduce the Company's exposure to interest rate fluctuations.
COMMITMENTS TO ORIGINATE/SELL LOANS - At December 31, 1995 and 1994, the
Company had outstanding unfunded commitments to originate loans (including
revolving arrangements under credit card and home equity lines) totaling
approximately $173,940,000 and $149,895,000, respectively, as follows:
<TABLE>
<CAPTION>
(In thousands)
------------------
December 31,
1995 1994
------------------
<S> <C> <C>
Consumer $110,556 93,184
Residential 26,641 32,717
Mortgage warehouse lines 34,358 21,302
Construction 1,303 1,945
Commercial/corporate 1,082 747
--------- ---------
TOTAL $173,940 $149,895
========= =========
</TABLE>
Outstanding commitments under fixed rate, revolving credit card arrangements
were approximately $64,784,000 and $50,560,000 at December 31, 1995 and 1994,
respectively. Interest rates on these commitments were 12.0 - 14.9 percent and
12.4 - 17.9 percent, respectively. Approximately $8,914,000 and $2,948,000 of
commitments to originate fixed rate residential loans were outstanding at
December 31, 1995 and 1994, respectively. Interest rates on these commitments
ranged from 5.5 - 7.6 percent and 7.1 - 9.2 percent, respectively. Commitments
to originate residential loans are normally outstanding for sixty days.
At December 31,1995 and 1994, the Company has outstanding commitments under
warehouse lines of credit totaling $54,000,000 and $24,000,000, respectively.
Interest rates on these arrangements range from 6.0 - 9.5 percent and 6.1-9.5
percent, respectively and may be fixed or variable. Interest is charged on the
outstanding principal balance which is approximately $19,642,000 at December
31, 1995. These commitments generally have terms to 12 months and may be
renewed contingent on the customer continuing to meet certain lending criteria.
The fair value of commitments to originate loans is considered to be the
original fee charged for the commitment.
Noncancellable commitments to sell loans at December 31, 1995 and 1994, all of
which related to residential loans, totaled approximately $17,796,000 and
$4,018,000, respectively.
Loan commitments have off-balance sheet credit risk because only origination
fees and accruals for possible losses are recognized in the accompanying
consolidated financial statements until the commitments are fulfilled. Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed to perform as contracted. The credit risk
amounts are equal to the contractual amounts, assuming the amounts are fully
advanced and collateral or other security is of no value.
The Company's policy requires adherence to specific underwriting requirements
and generally obtaining adequate collateral prior to the disbursement of
approved loans. The Company does not anticipate any significant gains or
losses from these transactions.
STANDBY LETTERS OF CREDIT
Standby letters of credit are commitments issued by the Company to guarantee
the provided performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Company provided a standby
letter of credit for a Multifamily Industrial Development Revenue Bond issue
totaling approximately $5,990,000 at December 31, 1994. Fees collected for
providing letters of credit amounted to approximately $690,000, $378,000 and
$624,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
These fees have been reflected in loan fees in the accompanying consolidated
statement of operations. Other Company obligations under letters of credit are
not significant.
INTEREST RATE SWAPS/CAPS
The Company has contractually agreed to pay fixed rates of interest on several
swap agreements which function as an offset against rising rates of interest on
Federal Home Loan Bank advances. The notional amount of these swap agreements
is $330,000,000 and $30,000,000 at December 31, 1995 and 1994. In exchange,
the Company receives interest on the notional amount principally at the
three-month Libor rate, which is 5.875 percent at December 31, 1995. Notional
principal amounts are used to express the volume of these transactions, but the
amounts potentially subject to credit risk are much smaller. The differential
to be paid or received, including any fees paid, is recognized over the life of
the agreements. The $330,000,000 notional agreements have maturities from
February 14, 1996 to June 12, 2001, and fixed interest payment rates ranging
from 5.46 to 7.11 percent.
The fair value of interest rate swaps is the cost that would be incurred to
terminate the agreements. The unrealized loss for the swaps at December 31,
1995 and 1994 was approximately $4,072,000 and $352,000, respectively.
The Company is required to maintain letters of credit as collateral to be drawn
upon in the event the Company were to default on scheduled payments. At
December 31, 1995, the outstanding letters of credit totaled $1,600,000.
Interest rate exchange agreements as of December 31, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
Interest Rates
Notional Principal ---------------------------------------
Amount Agreement Paid by Received by
(in thousands) Termination the Company the Company
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 20,000 1996 Fixed Indexed to
7.11% 3 month Treasury Bill
$ 125,000 1996 - 1997 Fixed Indexed to
Range 5.46-6.13% 3 month LIBOR
Average 5.89%
$ 80,000 1998 - 1999 Fixed Indexed to
Range 5.27-6.38% 3 month LIBOR
Average 5.93%
$ 105,000 2000 - 2001 Fixed Indexed to
Range 5.84-6.45% 3 month LIBOR
Average 6.08%
----------
$ 330,000
==========
</TABLE>
The Company purchased an interest rate cap during 1995 with a notional
principal amount of $50,000,000 for approximately $400,000. The cap also
functions as an offset against rising interest rates. If the three-month Libor
rate exceeds 6.9375%, the Company will receive a payment for the difference
between the actual rate and 6.9375%. These payments would be received
quarterly. If the three-month Libor rate does not exceed 6.9375%, the Company
will not receive any payments. The cost of this agreement is being amortized
over the life of the agreement, which will mature in November, 1998.
The Company's primary exposure to credit related losses would be in the event
of non-performance by the counterparties involved in these swap and cap
agreements since the Company has not obtained collateral. To limit potential
loss, the Company has arranged netting agreements with the counterparties and
deals with only highly rated primary government security dealers.
The Company's net cost under these agreements was approximately $508,000,
$838,000 and $1,227,000, respectively, for the years ended December 31, 1995,
1994 and 1993. These costs are reflected as interest expense in the
accompanying consolidated statements of operations.
14
<PAGE> 15
- --------------------------------------------------------------------------------
Note 14: Off-Balance Sheet and Other Risk Assessment (continued)
LOANS SERVICED FOR OTHERS
The Company acts as servicing agent for mortgage loans totaling approximately
$6.35 billion, $5.48 billion and $3.05 billion at December 31, 1995, 1994 and
1993, respectively, which are owned by others (primarily through GNMA
mortgage-backed securities). Following is an analysis of the changes in
mortgage servicing rights for the years ended December 31, 1995, 1994, and
1993, respectively:
<TABLE>
<CAPTION>
(In thousands)
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Beginning balance $ 53,232 $ 42,244 $ 34,348
Additions 13,414 23,251 27,095
Amortization (12,906) (12,263) (19,199)
-------- -------- --------
Ending balance $ 53,740 $ 53,232 $ 42,244
======== ======== ========
</TABLE>
Also included in mortgage servicing rights in the consolidated statements of
financial condition is $1,359,000, $1,578,000 and $1,875,000 of excess
servicing rights at December 31, 1995, 1994 and 1993, respectively.
The Company collects and processes payments made by borrowers, remits funds to
investors, taxing authorities and insurors and acts as fiduciary in foreclosing
and disposing of collateral properties. In connection with its fiduciary
responsibilities, the Company advances funds which are repaid through sale
proceeds and through claims submitted to the Federal Housing Administration
and/or the Veterans Administration ("FHA/VA Claims"). Such claims in process
totaled approximately $48,851,000 and $25,215,000 at December 31, 1995 and
1994, respectively, and are shown net of an allowance for uncollectible claims
in the accompanying consolidated statements of financial position. Under
certain circumstances, FHA/VA claims are rejected or otherwise cannot be
collected in full. To recognize the estimate of loss attributable to these
current and future claims, the Company has established an allowance for
uncollectible claims with provisions for losses charged against loan servicing
revenue in the accompanying consolidated statements of operations.
A summary of activity in the allowance account is as follows:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------
December 31,
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Beginning balance $1,870 1,296 1,701
Provisions for uncollectible claims 2,784 1,597 578
Uncollected claims charged off,
net of recoveries (1,977) (1,023) (983)
------ ------ ------
Ending balance $2,677 1,870 1,296
====== ====== ======
</TABLE>
Included in loans serviced for others at December 31, 1995 and 1994 are
approximately $15,145,000 and $18,420,000 of loans with recourse provisions.
Included in mortgage-backed securities at December 31, 1995 are approximately
$346,874,000 of securities with recourse provisions. In addition, the Company
sold approximately $28,522,000 of mortgage-backed securities with recourse
provisions. Loans repurchased by the Company under these provisions have not
been material.
PENDING LITIGATION
A suit has been filed in the Circuit Court of Greene County, Alabama (the
"Circuit Court") naming 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 allege a variety of types of
wrongdoing in connection with the sale of insurance, including "force-placed"
insurance, for an amount greater than permitted by law and charging excessive
premiums. 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 declare 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 "District Court"). The Bank
then filed a Motion to dismiss in the District Court, which was denied. The
case has since been remanded to the 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, where the case is
currently pending. Because discovery has not formally commenced, the Bank
cannot evaluate the probability or amount of the potential loss as a result of
this litigation.
In July 1991, a suit was filed in the Circuit Court of Shelby County,
Tennessee, against a majority of the financial institutions conducting business
in Memphis, 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 have the case certified as a class action, with the class to
constitute 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 case to the
Circuit Court, which granted the defendants' 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 the case to the Tennessee Supreme Court, which denied certiorari
in June of 1995. Plaintiffs immediately filed a Petition to Rehear and
Application for Permission to Appeal to the Tennessee Supreme Court, which was
granted. A hearing date has not been set, and the Bank cannot at this time
evaluate the probability or amount of any potential loss resulting from this
litigation.
In May 1992, the plaintiffs in the above described suit filed a class action
suit against the Bank and a majority of the other financial institutions
conducting business in Memphis in the United States District Court for the
Western District of Tennessee, seeking an unspecified amount of damages for,
among other things, violation of the Clayton and Sherman Acts. In July 1992,
the defendants filed a joint motion to dismiss. In March 1993, the court
denied this motion. In March 1994, the District Court granted the defendants'
Motion for Summary Judgment. The plaintiffs appealed the decision to the Sixth
Circuit Court of Appeals. In March 1995, the Sixth Circuit upheld the District
Court's ruling in favor of the defendants. The plaintiffs have recently filed
a Petition for Writ of Certiorari with United States Supreme Court. The Bank
cannot evaluate the likelihood that the appeal will be granted or the
probability or amount of any potential loss resulting from this litigation.
In August 1991, a suit was filed in the Chancery Court of Shelby County,
Tennessee, requesting the court to adjudicate the rights of James L. Ross,
former President and Chief Operating Officer of the Bank and member of the
Compensation Committee of the Board of Directors, with respect to certain
benefits which Mr. Ross alleges he is due in connection with the termination of
his employment by the Bank. The Bank and the Compensation Committee claim that
the Bank is owed damages and has the right to certain offsets as a result of
actions taken by Mr. Ross during his employment. Mr. Ross is seeking
compensatory and consequential damages against the Bank in the amount of $1.25
million, compensatory damages against Mr. Bailey in the amount of $2.5 million,
punitive damages against Mr. Bailey in the amount of $1.5 million, plus all
other damages sustained by Mr. Ross, attorneys' fees and other relief the court
may deem proper. Certain preliminary discovery activities took place in late
1991 and ending 1992 and settlement discussions are pending. However, it is
too early to assess the likelihood that this case will be settled or the amount
of potential loss as a result of this litigation.
Management of the Company does not consider any of these legal proceedings
material to the Bank's financial condition or results of operations beyond
amounts accrued in the accompanying consolidated financial statements.
15
<PAGE> 16
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
NOTE 15: CONDENSED FINANCIAL STATEMENT INFORMATION OF LEADER
FINANCIAL CORPORATION, INC. (PARENT COMPANY ONLY)
The following condensed financial information reflects the accounts and
transactions of Leader Financial Corporation (parent company only) for December
31, 1995 and 1994:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS (In thousands)
------------------
1995 1994
------------------
Assets:
<S> <C> <C>
Cash on deposit with subsidiary bank and others $ 1,114 756
Securities available-for-sale, amortized cost of $ 8,221 8,106 --
Note receivable from subsidiary bank 39,703 34,700
Investment in subsidiary 196,460 165,684
Other assets 2,616 3,739
-------- -------
Total assets $247,999 204,879
======== =======
Liabilities and stockholders' equity:
Other liabilities 1,169 1,432
Stockholders' equity 246,830 203,447
-------- -------
Total liabilities and
stockholders' equity $247,999 204,879
======== =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME (In thousands)
------------------
1995 1994
------------------
<S> <C> <C>
Income:
Dividend from subsidiary $ 15,000 7,250
Interest income from subsidiary 2,804 2,025
Nontaxable investment securities 218 --
-------- -------
Total income 18,022 9,275
Operating expenses 1,428 972
-------- -------
Income before equity in undistributed
earnings of subsidiary 16,594 8,303
Equity in undistributed earnings of subsidiary 20,759 26,259
-------- -------
Net income $ 37,353 34,562
======== =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
------------------
1995 1994
------------------
<S> <C> <C>
Operating activities:
Net income $ 37,353 34,562
Cash provided by operating activities (17,927) (33,774)
-------- -------
Net cash provided by operating activities 19,426 788
Investing activities (13,232) 6,475
Financing activities (5,836) (8,576)
-------- -------
Increase (decrease) in cash and cash equivalents 358 (1,313)
Cash and cash equivalents at beginning of year 756 2,069
-------- -------
Cash and cash equivalents at end of year $ 1,114 756
======== =======
</TABLE>
NOTE 16: QUARTERLY FINANCIAL DATA
The following table represents summarized (unaudited) quarterly data for the
years ended December 31, 1995 and 1994 (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
March 31 June 30 September 30 December 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
1995:
INTEREST INCOME $48,728 51,999 55,225 58,440
NET INTEREST INCOME 20,367 21,348 22,732 24,063
PROVISION FOR LOAN LOSSES 1,206 1,356 1,382 1,206
INCOME BEFORE INCOME TAXES 13,882 14,732 14,490 15,612
NET INCOME 8,747 9,097 9,455 10,054
EARNINGS PER COMMON SHARE 0.87 0.90 0.94 0.99
1994:
Interest income $36,181 38,971 42,049 45,364
Net interest income 20,089 20,687 21,013 20,702
Provision for loan losses 428 1,371 1,220 1,748
Income before income taxes 14,515 12,687 13,420 13,647
Net income 9,143 7,803 8,153 9,463
Earnings per common share: 0.87 0.75 0.79 0.92
</TABLE>
NOTE 17: SEGMENT INFORMATION
The following table provides summarized information by business segment:
<TABLE>
<CAPTION>
(In thousands)
-----------------------------------------------
December 31,
1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C>
Revenue from unaffiliated customers:
Mortgage banking $ 92,519 59,445 28,339
Other 145,364 126,162 120,905
------------ --------- ---------
$ 237,883 185,607 149,244
============ ========= =========
Intersegment revenue:
Mortgage banking 2,384 3,023 1,940
Other 2,458 1,968 2,985
------------ --------- ---------
$ 4,842 4,991 4,925
============ ========= =========
Total revenue:
Mortgage banking 94,903 62,468 30,279
Other 147,822 128,130 123,890
------------ --------- ---------
242,725 190,598 154,169
Eliminations (4,842) (4,991) (4,925)
------------ --------- ---------
Consolidated $ 237,883 185,607 149,244
============ ========= =========
Depreciation and amortization:
Mortgage banking 247 165 173
Other 1,615 1,850 1,248
------------ --------- ---------
$ 1,862 2,015 1,421
============ ========= =========
Operating profit (loss):
Mortgage banking 31,364 24,087 5,862
Other 27,352 30,182 21,447
------------ --------- ---------
Consolidated $ 58,716 54,269 27,309
============ ========= =========
Capital expenditures:
Mortgage banking 582 151 326
Other 2,434 5,482 472
------------ --------- ---------
$ 3,016 5,633 798
============ ========= ========
Indentifiable assets:
Mortgage banking 992,394 634,950 368,934
Other 2,195,426 1,876,877 1,653,591
------------ --------- ---------
3,187,820 2,511,827 2,022,525
Eliminations (74,187) (65,342) (75,860)
------------ --------- ---------
Consolidated $ 3,113,633 2,446,485 1,946,665
============ ========= =========
</TABLE>
Revenues are comprised of interest income, loan fees and loan servicing revenue,
net gains on interest-earning assets and real estate activities, deposit account
operations and other income. Intersegment revenue consists of gains recorded on
loan sales from the Mortgage banking segment and management fees. This revenue
is eliminated in consolidation.
Depreciation and amortization is the depreciation and amortization of those
premises and equipment that are used exclusively by such segment.
Operating profit is revenue less interest expense, provisions for losses and
operating expenses. General corporate overhead expenses not directly
attributable to a segment are allocated to all segments.
Capital expenditures represents the purchase of those premises and equipment
that are used exclusively by such segment.
Identifiable assets by segment are those assets that are used exclusively by
such segment.
16
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Leader Financial Corporation
and Subsidiary:
We have audited the accompanying consolidated statements of financial position
of Leader Financial Corporation and Subsidiary (the Company) as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Leader Financial
Corporation and Subsidiary as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 12 to the consolidated financial statements, the Company
adopted in 1994 the provisions of Statement of Position 93-6, Employers'
Accounting for Employee Stock Ownership Plans. As discussed in notes 1, and
12, the Company adopted in 1993 the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards (SFAS) No. 106,
Employers' Accounting for Postretirement Benefits Other than Pensions; and No.
115, Accounting for Certain Investments in Debt and Equity Securities.
/s/ KPMG Peat Marwick LLP
Memphis, Tennessee
February 2, 1996
17
