SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 1, 1998
First Defiance Financial Corp.
(Exact name of registrant as specified in its charter)
Ohio 0-26850 34-1803915
- ------------------------ --------------------- -------------------
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
601 Clinton Street, Defiance, Ohio 43512
(Address of principal executive offices)
Registrant's telephone number, including area code: 419-782-5015.
<PAGE>
FORM 8-K/A
Item 2. Acquisition or Disposition of Assets.
On July 1, 1998 First Defiance Financial Corp. ("First
Defiance") completed the acquisition of The Leader Mortgage Company ("Leader"),
a privately held, Cleveland, Ohio-based mortgage banking company. First Defiance
paid $33 million in cash to the Leader shareholders at the closing and will pay
an additional $2 million upon the resolution of certain contingencies within a
two-year period and will pay up to an additional $4.5 million in retention and
non-compete payments to certain key employees. The source of funds for the
acquisition was operating capital.
Leader is operating as a subsidiary of First Defiance's wholly
owned subsidiary, First Federal Savings and Loan ("First Federal"), Defiance,
Ohio. Leader maintains its Cleveland headquarters and continues to operate under
The Leader Mortgage Company name.
As of June 30, 1998, Leader had a total servicing portfolio of
approximately 81,000 loans and $4.7 billion.
The completion of the acquisition was previously reported by
First Defiance on a Form 8-K filed July 16, 1998.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
(1) The following financial statements of The Leader
Mortgage Company are filed as exhibits to this Form 8-K:
Balance Sheet as of June 30, 1998
Statement of Operations for the Nine Month Period Ended June
30, 1998
Statement of Changes in Stockholders' Equity for the Nine
Month Period Ended June 30, 1998
Statement of Cash Flows for the Nine Month Period Ended June
30, 1998
Notes to the Financial Statements
Balance Sheet as of September 30, 1997
Statement of Income for the Year Ended September 30, 1997
Statement of Changes in Stockholders' Equity for the Year
Ended September 30, 1997
Statement of Cash Flows for the Year Ended September 30, 1997
Notes to the Financial Statements
<PAGE>
(b) Pro Forma Financial Information.
(1) The following pro forma financial information is
filed as an exhibit to this Form 8-K:
Unaudited Proforma Condensed Consolidated Balance Sheet at
June 30, 1998
Notes to the Unaudited Proforma Condensed Consolidated Balance
Sheet at June 30, 1998
Unaudited Proforma Condensed Consolidated Statement of Income
for the Six Months Ended June 30, 1998
Unaudited Proforma Condensed Consolidated Statement of Income
for the Year Ended December 31, 1997
Notes to the Unaudited Proforma Condensed Consolidated
Statements of Income for the Six Months Ended June 30, 1998
and the Year Ended December 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Date: September 14, 1998 FIRST DEFIANCE FINANCIAL CORP.
By:/s/ John C. Wahl
----------------
John C. Wahl
Senior Vice President,
Chief Financial Officer
<PAGE>
EXHIBITS
Exhibit
Number Description
2 Agreement and Plan of Reorganization, dated April 10, 1998, by and
among First Defiance Financial Corp., First Federal Savings and Loan
Association and The Leader Mortgage Company
Previously filed as Exhibit (2) to the Form 8-K filed by the Registrant
on July 16, 1998
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
99.1 Financial Statements of The Leader Mortgage Company as of and for the
Nine Months Ended June 30, 1998
99.2 Financial Statements of The Leader Mortgage Company as of and for the
Year Ended September 30, 1997
99.3 First Defiance Financial Corp. and The Leader Mortgage Company:
Unaudited Proforma Condensed Consolidated Balance Sheet at June 30,
1998
Notes to the Unaudited Proforma Condensed Consolidated Balance Sheet at
June 30, 1998
Unaudited Proforma Condensed Consolidated Statement of Income for the
Six Months Ended June 30, 1998
Unaudited Proforma Condensed Consolidated Statement of Income for the
Year Ended December 31, 1997
Notes to the Unaudited Proforma Condensed Consolidated Statements of
Income for the Six Months Ended June 30, 1998 and the Year Ended
December 31, 1997
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-98506) pertaining to the 1993 Stock Incentive Plan and the 1993
Directors' Stock Option Plan of First Defiance Financial Corp. of our report
dated August 28, 1998, with respect to the financial statements of The Leader
Mortgage Company for the nine months ended June 30, 1998, included in First
Defiance Financial Corp.'s Current Report on Form 8-K/A related to the
acquisition of The Leader Mortgage Company filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Cleveland, Ohio
September 15, 1998
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statement No. 33-98506 of First Defiance Financial Corp. on Form S-8 of
our report dated August 20, 1998 on the financial statements of The
Leader Mortgage Company for the year ended September 30, 1997,
appearing in the Report on Form 8-K/A dated July 1, 1998 of First
Defiance Financial Corp.
/s/DELOITTE & TOUCHE LLP
------------------------
DELOITTE & TOUCHE LLP
Cleveland, Ohio
September 22, 1998
Exhibit 99.1
The Leader Mortgage Company
Financial Statements as of and for the Nine Months Ended June 30, 1998
Report of Independent Auditors
The Board of Directors
The Leader Mortgage Company
We have audited the accompanying balance sheet of The Leader Mortgage Company,
as of June 30, 1998, and the related statements of operations, changes in
stockholders' equity and cash flows for the nine month period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Leader Mortgage Company at
June 30, 1998, and the results of its operations and its cash flows for the nine
month period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Cleveland, Ohio
August 28, 1998
<PAGE>
<TABLE>
<CAPTION>
The Leader Mortgage Company
Balance Sheet
June 30, 1998
<S> <C>
Assets
Cash ............................................................. $ 4,425,808
Marketable securities ............................................ 311,511
Accounts receivable .............................................. 7,430,551
Mortgage loans held for sale ..................................... 116,672,048
Residential first mortgages in foreclosure, net
of allowance of $805,600 ...................................... 9,536,993
Prepaid expenses ................................................. 314,943
Loans receivable, net of allowance of $4,087,124 ................. 5,263,342
Furniture, equipment and leasehold improvements, net ............. 905,282
Mortgage servicing rights, net of amortization of $29,739,965 .... 50,113,521
Real estate owned ................................................ 614,458
Deferred income taxes ............................................ 392,486
Other assets ..................................................... 1,327,193
-------------
Total assets ..................................................... $ 197,308,136
=============
Liabilities and stockholders' equity
Warehouse lines of credit ........................................ $ 125,489,814
Accounts payable ................................................. 1,560,581
Accrued liabilities .............................................. 1,988,478
Subordinated debt ................................................ 2,704,670
Notes payable .................................................... 51,591,906
-------------
Total liabilities ................................................ 183,335,449
Stockholders' equity:
Class A common stock, no par value, stated value $.841; 350,000
shares authorized; 144,625 shares issued and outstanding .... 121,620
Class E common stock, no par value, stated value $.841; 250,000
shares authorized; 61,404 shares issued and outstanding ..... 53,930
Additional paid in capital .................................... 5,902,942
Retained earnings ............................................. 10,747,137
Common stock held in treasury, 35,701 shares .................. (2,852,942)
-------------
Total stockholders' equity ....................................... 13,972,687
-------------
Total liabilities and stockholders' equity ....................... $ 197,308,136
=============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
The Leader Mortgage Company
Statement of Operations
Nine Month Period Ended June 30, 1998
<S> <C>
Revenues
Mortgage servicing ............................................ $ 16,546,958
Interest income from mortgage operations (net of
interest expense of $4,575,344) ............................ 1,643,670
Loan origination .............................................. 151,012
Gain on sale of mortgages ..................................... 2,590,820
Other ......................................................... 486,552
------------
Total revenues ................................................ 21,419,012
Expenses
Salaries and related costs .................................... 5,703,519
Stock compensation expense .................................... 5,515,500
Occupancy ..................................................... 344,719
Amortization of servicing rights .............................. 5,015,416
Other depreciation and amortization ........................... 393,321
Interest expense on working capital ........................... 2,462,854
Loan loss provision ........................................... 582,921
Foreclosure provision ......................................... 931,494
General and administrative .................................... 2,692,160
Other expenses ................................................ 1,319,883
------------
Total expenses ................................................ 24,961,787
------------
Loss before income taxes and extraordinary item ............... (3,542,775)
Income tax benefit ............................................ 859,251
------------
Net loss before extraordinary item ............................ (2,683,524)
Extraordinary item, net of tax benefit of $51,000 ............. (601,500)
------------
Net loss ...................................................... $ (3,285,024)
============
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
The Leader Mortgage Company
Statement of Changes in Stockholders' Equity
Common
Additional Stock
Preferred Common Paid in Retained Held in
Stock Stock Capital Earnings Treasury Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1997 .... $ 90,000 $ 175,550 $ 412,335 $14,037,332 $(2,601,641) $12,113,576
Net loss .................... (3,285,024) (3,285,024)
Stock options ............... 5,515,500 5,515,500
Dividends ................... (5,171) (5,171)
Purchase 2,722 shares of .... (251,301) (251,301)
treasury stock
Redemption of preferred stock (90,000) (24,893) (114,893)
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1998 ...... $ 0 $ 175,550 $ 5,902,942 $10,747,137 $(2,852,942) $13,972,687
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
The Leader Mortgage Company
Statement of Cash Flows
Nine Month Period Ended June 30, 1998
<S> <C>
Operating activities
Net loss ................................................... $ (3,285,024)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of servicing rights ...................... 5,015,416
Net decrease in mortgage loans held for sale .......... 2,445,030
Depreciation and amortization ......................... 393,321
Unrealized gain on marketable securities .............. (54,325)
Stock compensation expense ............................ 5,515,500
Deferred income taxes ................................. (643,890)
Changes in operating assets and liabilities:
Receivables ......................................... (3,216,162)
Other assets ........................................ 1,461,750
Restricted cash ..................................... 862,050
Accounts payable and accrued liabilities ............ (1,430,139)
------------
Net cash provided by operating activities .................. 7,063,527
Investing activities
Net increase in loans receivable ........................... (6,515,501)
Net increase in real estate owned .......................... (286,073)
Payments for servicing rights .............................. (15,135,958)
Purchase of furniture, equipment and
leasehold improvements, net ............................. (374,094)
------------
Net cash used for investing activities ..................... (22,311,626)
Financing activities
Net advances on subordinated debt .......................... 1,842,671
Dividends paid ............................................. (5,171)
Net advances on notes payable .............................. 8,592,356
Net advances on lines of credit ............................ 7,621,521
Acquisition of treasury stock .............................. (251,301)
Redemption of preferred stock .............................. (114,893)
------------
Net cash provided by financing activities .................. 17,685,183
------------
Net increase in cash balances .............................. 2,437,084
Cash at beginning of period ................................ 1,988,724
------------
Cash at end of period ...................................... $ 4,425,808
============
Cash paid for
Income taxes ............................................... $ 2,713,717
============
Interest ................................................... $ 6,950,167
============
</TABLE>
See notes to financial statements
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements
June 30, 1998
A. Summary of Significant Accounting Policies and Additional Information
Organization
The Leader Mortgage Company (the Company), an Ohio Corporation, primarily
operates in the continental United States and is engaged in the mortgage banking
business, which includes the origination, purchase, packaging and sale of
mortgage loans to permanent investors; the servicing of these and other mortgage
loans; and the providing of other related services for investors and customers.
Revenue Recognition
Mortgage loans held for sale are committed for sale to secondary market
investors under firm agreements at or prior to closing date of the individual
loan. Loan sales and the related gains or losses are recorded at the settlement
date. Loan administration fees earned for servicing loans for investors are
generally calculated based on the outstanding principal balances of the loans
serviced and are recorded as revenue when received. Sales of servicing rights
are recorded when all risks and rewards of ownership have transferred and no
significant unresolved contingencies exist. Loan origination fees are deferred
as a component of the loan balance. Since mortgage loans originated or acquired
are generally sold within 60 days, any related fees are not amortized during
that period, but are effectively recognized when the loan is ultimately sold.
Mortgage loans held for sale are reported at the lower of cost or estimated
market as determined on an aggregate basis, including consideration of all open
designated delivery commitment positions. The Company separately evaluates the
estimated fair value of its commitments to lend, including consideration of all
designated open delivery commitment positions, for impairment. If impairment
exists, the Company records a charge to earnings in the current period. The
Company generally sells whole loans and mortgage-backed securities with
servicing retained. Gains or losses on such sales are generally recognized at
the time of settlement based upon the difference between the sales proceeds and
the allocated basis of loans sold, adjusted for loan fees, mortgage servicing
rights, retained interests and the cost of issuing securities.
Mortgage Servicing Rights, Net
The Company purchases and originates mortgage loans for sale to the secondary
market, and sells the loans on either a servicing retained or servicing released
basis. The total cost of mortgage loans purchased or originated with the intent
to sell is allocated between the loan servicing right and the mortgage loan
without servicing, based on their relative fair values. The capitalized cost of
loan servicing rights is amortized in proportion to, and over the period of,
estimated net future servicing revenue. The expected lives of the estimated net
servicing income are based, in part, on the expected prepayment rate of the
underlying mortgages.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
A. Summary of Significant Accounting Policies and Additional
Information--Continued
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage servicing rights are stratified based
on predominant risk characteristics of the underlying serviced loans. These risk
characteristics include loan type (fixed or adjustable rate) and interest rate.
Impairment represents the excess of cost of an individual mortgage servicing
rights stratum over its fair value, and is recognized through a valuation
allowance.
Fair values for individual stratum are based on the present value of estimated
future cash flows using a discount rate (11%) commensurate with the risks
involved. Estimates of fair value include assumptions about prepayment (154%
PSA), default and interest rates, and other factors which are subject to change
over time. Changes in these underlying assumptions could cause the fair value of
mortgage servicing rights, and the related valuation allowance, to change
significantly in the future.
Mortgage Loans in Foreclosure and Other Real Estate
Mortgage loans in foreclosure and other real estate are carried at fair market
value, less estimated costs to sell.
Loans Receivable
Loans receivable are reported at the principal amount outstanding net of an
allowance for loan losses. The allowance for loan losses is that amount believed
adequate to absorb estimated credit losses based on an analysis of individual
credits, prior and current loss experience, and current and anticipated economic
conditions. A provision for loan losses is charged to operations based on
management's periodic evaluation.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent current available evidence raises doubt about the future
realization of a deferred tax asset, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enacted date.
Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are carried at cost less
accumulated depreciation. Depreciation of furniture and equipment is computed
using the straight-line method over the estimated useful lives of the assets.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
A. Summary of Significant Accounting Policies and Additional
Information--Continued
Leasehold improvements are amortized using the straight-line method over the
estimated useful life of the improvement or the lease term, whichever is
shorter.
Deferred Finance Fees
Deferred finance fees and expenses on the Company's debt are stated at cost and
are being amortized over the life of the related debt.
Marketable Securities
The Company's marketable securities are defined as trading securities under the
provisions of Statements of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities (SFAS 115). Accordingly,
unrealized holding gains or losses on the securities are reflected in current
earnings.
Cash and Cash Equivalents
For purposes of cash flow, the Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
Impact of Interest Rate Fluctuations
Interest rate fluctuations generally have a direct impact on a mortgage banking
institution's financial performance. Significant increases in interest rates may
make it more difficult for potential borrowers to purchase residential property
and to qualify for mortgage loans. As a result, the volume and related income
from loan originations may be reduced. This may be mitigated by the increase in
first-time home buyer bond programs which generally offer mortgage rates at one
percent or more below prevailing market rates. In addition, the Company is not
required to assume interest rate risk on loans acquired from state-sponsored
first time home buyer programs. Significant increases in interest rates will
also generally increase the value of the Company's servicing portfolio as a
result of slower anticipated prepayment activity. Significant decreases in
interest rates may enable more potential borrowers to qualify for a mortgage
loan, resulting in higher income related to the loan originations. In addition,
significant decreases in interest rates may result in higher than anticipated
loan prepayment activity and, therefore, reduce the value of the loan servicing
portfolio. This may also be mitigated by the below market-rate loans in the
servicing portfolio previously originated under the first-time home buyer bond
program.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
A. Summary of Significant Accounting Policies and Additional
Information--Continued
Recent Account Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This statement establishes new rules for the
reporting and display of comprehensive income and its components. The new rules
require that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The statement
does not specify a format for the financial statement that portrays the
components of comprehensive income but requires that a company display an amount
representing total comprehensive income for the periods reported in that
financial statement. Application of the statement will not impact amounts
previously reported for net income or affect the comparability of previously
issued financial statements. The Statement is effective for fiscal years
beginning after December 15, 1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and for Hedging Activities. The Statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments
(referred to as fair value hedges); hedges of the variable cash flows of
forecasted transactions (cash flow hedges); and hedges of foreign currency
exposures of net investments in foreign operations. Changes in the fair value of
derivatives that do not meet the criteria of one of these three categories of
hedges are included in earnings in the period of the change. The Company is
evaluating the impact of the Statement on its financial position and results of
operations. Statement 133 is effective for years beginning after June 15, 1999.
B. Servicing of Mortgage Loans and Mortgage Servicing Rights
Servicing of Mortgage Loans
The Company originates, purchases and sells to investors, without recourse,
loans secured by mortgages, principally on single family residential property.
The Company generally retains the servicing of certain loans sold to investors
and collects the monthly principal and interest payments and performs certain
escrow service generally related to insurance and real estate tax payments. The
Company's aggregate net servicing portfolio, including loans serviced for
related parties, was $4,681,355,757 at June 30, 1998, representing 81,062
mortgages. Included in the Company's servicing portfolio is 7,477 single-family
mortgage loans being serviced under subservicing agreements at June 30, 1998.
The outstanding principal balance of these subserviced loans is $406,228,541.
The Company maintains escrow funds comprised primarily of funds to be
transferred to third party investors as well as funds to pay real estate taxes
and insurance of borrowers aggregating approximately $73 million at June 30,
1998. These funds are segregated in noninterest-bearing deposit accounts and are
not included as assets and liabilities of the Company.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
B. Servicing of Mortgage Loans and Mortgage Servicing Rights--Continued
A summary of mortgage servicing rights for the nine month period ended June 30,
1998 is as follows:
Mortgage servicing rights:
Balance--October 1 ................................. $39,992,979
Additions .......................................... 15,135,958
Amortization ....................................... 5,015,416
-----------
Balance--June 30 ................................... $50,113,521
===========
Accumulated amortization at June 30, 1998 was $29,739,965.
At June 30, 1998, the estimated fair market value of the servicing portfolio was
$72.3 million, as determined using a mortgage servicing valuation model.
C. Mortgage Loans Held for Sale
Mortgage loans held for sale include the following at June 30, 1998:
Residential mortgage loans:
Principal balance:
FHA/VA insured .................................. $ 85,148,679
Conventional .................................... 30,242,558
------------
115,391,237
Origination premiums ................................. 1,280,811
------------
$116,672,048
============
D. Accounts Receivable
Receivables at June 30, 1998 include the following:
Advances on behalf of mortgagors ............................. $2,645,779
Accrued interest ............................................. 1,288,795
Federal income tax refund .................................... 2,262,065
Other ........................................................ 1,233,912
----------
$7,430,551
==========
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
E. Property and Equipment
Property, equipment and leashold improvements at June 30, 1998 include the
following major classifications:
Leasehold improvements ............................... $ 186,426
Furniture and fixtures ............................... 1,019,848
Computer equipment ................................... 2,189,467
Automobiles .......................................... 81,527
-----------
Total ................................................ 3,477,268
Accumulated depreciation ............................. (2,571,986)
-----------
Total ................................................ $ 905,282
===========
Depreciation expense for the nine months ended June 30, 1998 was $294,562.
F. Related Party Transactions
The Company leases office space from a partnership whose controlling partners
are officers of the Company. The five year lease agreement provides for annual
base rents of $436,000 plus additional rents based on increases in operating
expenses and taxes. There we no outstanding amounts due under the lease
agreement as of June 30, 1998.
G. Income Taxes
The Company accounts for income taxes under FASB Statement No. 109, Accounting
for Income Taxes (FASB 109). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The components of the income tax benefit for the period ended June 30, 1998 are
as follows:
Current ........................................... $(215,361)
Deferred .......................................... (643,890)
---------
Total ............................................. $(859,251)
=========
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
G. Income Taxes--Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes as of June 30, 1998 are as follows:
Deferred tax assets:
Loan loss reserves ................................. $ 1,389,622
Foreclosure reserve ................................ 273,904
Other .............................................. 146,026
-----------
Total deferred tax assets ............................. 1,809,552
Deferred tax liabilities:
Mortgage servicing rights .......................... (1,224,227)
Mark to market ..................................... (100,448)
Depreciation ....................................... (92,391)
-----------
Total deferred tax liabilities ........................ (1,417,066)
-----------
Total net deferred taxes .............................. $ 392,486
===========
G. Income Taxes--Continued
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting and taxable
income as shown below for the nine month period ended June 30, 1998:
Tax (benefit) at statutory rate ........................... (34.00)%
Officer life insurance .................................... 2.99
Other ..................................................... 6.76
-----
Effective tax (benefit) rate .............................. (24.25)%
=====
Cash paid for income taxes was $2,713,717 for the nine month period ended June
30, 1998.
H. Employee Benefit Plans
The Company's Savings and Investment Plan and Trust (401(k) plan) offers all
employees, who meet certain age and eligibility requirements, a program of
regular savings and investment funded by their own contributions and
discretionary matching contributions of the Company. The amount charged to
expense for the nine month period ended June 30, 1998 was $198,029.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
H. Employee Benefit Plans--Continued
The Company maintains an Employee Stock Ownership Plan and Trust in which
eligible employees accumulated capital ownership in the Company. The Company has
received a determination letter from the Internal Revenue Service that the plan
is frozen as of October 1, 1995, and no future contributions are being made.
There were no Company cash contributions to the Plan for the nine month period
ended June 30, 1998.
Since its inception the Trust has, from time to time, acquired shares of Class
E, no par value, common stock of the Company. For the period ended June 30,
1998, no dividends were paid on the Class E common stock. See subsequent event
footnote.
The Company granted stock options during the fiscal year ended September 30,
1995 to certain key employees of the Company. The options are for the purchase
of 35,000 shares of Class A stock at $1.00 per share. The stock option
agreements provide, among other items, for exercise only in the event of a
substantial ownership change in the Company as defined in the agreements. See
Subsequent Event footnote.
I. Borrowings
Warehouse lines of credit at June 30, 1998 consisted of the following:
Notes due to banks maturing at various dates through May, 1999, secured
principally by mortgage loans held for sale:
Bond program and conventional ............................. $120,411,663
Foreclosure ............................................... 5,078,151
------------
Total .......................................................... $125,489,814
============
Short-term notes due to banks provide for maximum borrowings of $232,000,000
secured principally by mortgage loans held for sale have variable interest rates
which ranged from .80% to 7.7% for the nine month period ended June 30, 1998.
The Company has a compensating balance arrangement with lenders to reduce
interest on certain borrowings by the amount of the deposit balance maintained
at the bank (approximately $73 million at June 30, 1998). Certain loan
agreements contain financial covenants, including net worth requirements and
restriction on dividends that limits the amount available for dividends to
$3,766,225 at June 30, 1998. Commitment fees of up to 12.5 basis points are paid
on unutilized balances.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
I. Borrowings--Continued
Notes payable--other at June 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
Short Long
Term Term Total
----------- ----------- -----------
<S> <C> <C> <C>
Credit/term loan agreement due various banks under
a co-agent agreement ........................... $ 6,101,691 $36,642,363 $42,744,054
Note, secured by a multifamily mortgage, due a bank 4,279,000 4,279,000
Note, secured by receivables, due a bank having a
maturity date of October 1, 2003 ............... 480,000 2,500,000 2,980,000
Note, secured by pledged mortgage servicing rights
on GNMA pools due a bank ....................... 370,320 1,018,532 1,388,852
Unsecured note due October 31, 1998, to a related
party with interest computed at 15% per annum .. 200,000 200,000
----------- ----------- -----------
Total notes payable ............................... $ 7,152,011 $44,439,895 $51,591,906
=========== =========== ===========
Note, secured by pledged mortgage servicing rights. $ 2,000,000 $ 2,000,000
Credit agreement due a corporation, secured by
beneficial interest in specified mortgage
servicing rights on GNMA pools ................. 704,671 704,671
----------- ----------- -----------
Total subordinated debt ........................... $ 2,704,671 $ 0 $ 2,704,671
=========== =========== ===========
</TABLE>
The Company has entered into a Credit/Term Loan Agreement with several lending
institutions to provide for revolving loans and term credit for a maximum amount
as amended of $51,744,051. Amendments to this credit agreement were made during
1998 to provide for increases in the revolving loans and term credit facility.
Loans outstanding under this agreement totaled $42,744,054 at June 30, 1998. The
agreement provides for tranches which have a one year revolver and a five year
amortization period. There are currently two tranches in the facility. Repayment
dates for these tranches commenced October 20, 1995 and continue through July 1,
2003. New tranches can be added provided the total outstanding balance does not
exceed 70% of the value of the Company's eligible mortgage servicing rights as
valued by a third party appraiser acceptable to the several lending
institutions. The Company obtains independent valuations of mortgage servicing
on a semi-annual basis. The Company pledges current and future mortgage
servicing rights as collateral for the facility.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
I. Borrowings--Continued
In June 1997, the Company borrowed $4,279,000 from a lending institution,
collateralized with a multifamily mortgage loan. Loan payments are based on a 20
year amortization schedule with interest only payable for the first 24 months
and a balloon payment due on July 31, 2002.
In December 1996, the Company entered into a loan agreement with a lending
institution to provide for a maximum amount based on 65% of the market value of
the pledged mortgage servicing rights of certain GNMA pools for which the
current outstanding balance is $1,388,852. Repayment is to be made in quarterly
installments of $92,580 from April 1, 1997 to January 1, 2002 when the balance,
if any, shall become due.
Maturities of long-term debt at June 30:
1999 $ 7,152,011
2000 9,982,038
2001 9,999,868
2002 9,907,440
Thereafter 14,550,549
------------
Total $ 51,591,906
============
In June 1998, the Company entered into a credit agreement which allowed the
Company to borrow up to $3,000,000 until September 1998 at a fixed rate of 7.75%
per annum. Obligations under this agreement are subordinated to the Credit/Term
Loan Agreement.
In December 1996, the Company entered into a credit agreement which provided for
an advance of $1,000,000 in exchange for a beneficial interest in specified
mortgage servicing rights on GNMA pools. As a result of the change of control
discussed in subsequent event footnote, the counterparty has exercised its
option under the agreement to cause the sale of its beneficial interest and
repayment of the remaining advance in September 1998. Obligations under this
agreement are subordinated to the Credit/Term Loan Agreement. Included in
interest expense on working capital is a charge of approximately $236,000
relating to the acceleration.
Interest rates pertaining to this footnote, unless specifically identified, are
variable and ranged from 1.75% to 9.88% for the nine month period ending June
30, 1998. The Company has arrangements with lenders to reduce interest on
certain borrowings based on deposits maintained at the banks. Total interest was
approximately $7,038,000 for the nine month period ended June 30, 1998. Certain
loan agreements contain financial covenants, including net worth requirements.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
J. Off-Balance Sheet Financial Instruments
The Company is a party to off-balance sheet financial agreements in the normal
course of business to meet the financing needs of its customers and to reduce
exposure of its mortgage loan inventory and committed pipeline to interest rate
fluctuations. These financial agreements include commitments to extend credit
and forward sales of whole loans.
These agreements involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract
amounts reflect the extent of involvement the Company has in particular classes
of financial instruments. All gains or losses realized from these transactions
are recorded at the time of settlement. All changes in market value prior to
settlement are considered when establishing the mortgage valuation allowance.
A summary of gross contract amounts for off-balance sheet financial instruments
(excluding first time home buyer bond program) is as follows:
Commitments:
To fund residential loans $ 7.1 million
To sell whole loans $ 6.2 million
Commitments to make residential loans should be disbursed within 60 days.
K. Fair Values of Financial Instruments
The Company has various financial instruments that require disclosure as to fair
value under generally accepted accounting principles. The estimated fair value
amounts have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
The carrying amount of cash, cash held in escrows, marketable securities,
accounts receivable, accounts payable, loans receivable, accrued expenses, notes
payable, and subordinated debt are reasonable estimates of their fair market
value.
The carrying amount of loans held for sale is a reasonable approximation of fair
market value due to the short time frame (generally 60 days or less) until these
loans are sold and, as discussed in Note A, due to the interest rate risk
protection provided by loans originated under the first-time home buyer bond
programs.
The fair value estimate presented herein are based on pertinent information
available to management as of June 30, 1998. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented above.
<PAGE>
The Leader Mortgage Company
Notes to Financial Statements--Continued
L. Freddie Mac Indemnification Agreement
In 1991 due to irregularities identified in multi-family residential real estate
mortgages sold by the Company to the Federal Home Loan Mortgage Corporation
("Freddie Mac") during the period 1987 through 1989, the Company and Freddie Mac
entered into an agreement referenced to as the Freddie Mac Indemnification
Agreement (the "Agreement") whereby the Company has indemnified Freddie Mac for
certain losses on these mortgages. The Agreement provided, among other things,
that the Company place in escrow cash deposits not to exceed $7,500,000. This
amount would be reduced to the extent of any payments received from third
parties.
In February 1998, the Company and Freddie Mac approved the Settlement Agreement
and Release (the "Settlement"). The Settlement provides that Freddie Mac will
retain $1,000,000 to continue to be held in escrow and accrue interest and that
the Company will continue to indemnify Freddie Mac for one specified loan. The
Company's indemnification obligation is limited to the balance of the escrow
account.
The total escrow balance included in Other Assets at Freddie Mac on June 30,
1998 is $1,018,886. In the event that no default or acceleration occurs prior to
February 11, 2001, the balance of the escrow account will be returned to the
Company.
M. Subsequent Event
On April 10, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with First Defiance Financial Corp. ("FDFC")
whereby the Company would acquire all of the issued and outstanding Preferred
Shares, $100 par value for $114,894 and FDFC would acquire all of the
outstanding Class A and Class E stock of the Company for $32,935,106 plus an
additional $2,000,000, payable upon satisfactory resolution of certain
contingencies within two years of the effective date. Shareholders of the
Company approved the Agreement at a special meeting on June 15, 1998, and the
acquisition was completed on July 1, 1998, the effective date.
As a result of the above transaction, the stock options described in Footnote H
became exercisable at $1 per share and the Company recorded a charge to
compensation expense for approximately $5.5 million in June 1998.
In addition, the Company incurred approximately $601,500, net of tax benefit, in
costs associated with the transaction. Such costs have been recognized as an
extraordinary item in the statement of operations.
N. Impact of Year 2000 (Unaudited)
The Company is currently completing an assessment of it's computer systems to
determine the impact that the year 2000 will have on its operating systems. The
assessment is estimated to be completed no later than December 31, 1998, which
is prior to any anticipated impact on the operating systems. The total year 2000
cost is not expected to be significant.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. There is no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not have an adverse
effect on the Company's systems.
Exhibit 99.2
THE LEADER MORTGAGE COMPANY
Financial Statements
for the Year Ended
September 30, 1997
and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
The Leader Mortgage Company
Cleveland, Ohio
We have audited the accompanying statement of financial condition of The Leader
Mortgage Company (the "Company") as of September 30, 1997, and the related
statements of income, shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at September 30,
1997, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3 to the financial statements, the Company adopted
recently issued Statements of Financial Accounting Standards "SFAS" Nos. 122 and
125 and, accordingly, changed its method of accounting for mortgage servicing
rights effective October 1, 1996 for SFAS No. 122 and effective January 1, 1997
for SFAS No. 125.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Cleveland, Ohio
December 5, 1997
(August 20, 1998 as to the fourth paragraph
of Note 15 and as to Note 16)
<PAGE>
<TABLE>
<CAPTION>
THE LEADER MORTGAGE COMPANY
STATEMENT OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1997
<S> <C>
ASSETS:
Cash and cash equivalents ........................................ $ 1,988,724
Cash - restricted ................................................ 862,050
Marketable securities ............................................ 257,186
Accounts receivable .............................................. 4,529,332
Mortgage loans held for sale ..................................... 119,117,078
Residential first mortgages in foreclosure ....................... 8,284,834
Property and equipment, net ...................................... 825,750
Mortgage servicing rights, net of amortization of $24,724,550 .... 39,992,979
Other assets ..................................................... 3,177,426
-------------
Total assets ........................................ $ 179,035,359
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Borrowings under warehouse lines of credit ....................... $ 117,868,293
Notes payable - other ............................................ 42,999,550
Subordinated debt ................................................ 861,999
Accounts payable ................................................. 2,805,939
Accrued expenses and other liabilities ........................... 2,134,599
Deferred income taxes ............................................ 251,403
-------------
Total liabilities ........................................ 166,921,783
SHAREHOLDERS' EQUITY:
Series A preferred stock, 7.56% cumulative; $100 par value;
900 shares authorized; 900 shares issued and outstanding ....... 90,000
Class A common stock, no par value, stated value $.841;
350,000 shares authorized; 144,525 shares issued and outstanding 121,620
Class E common stock, no par value, stated value $.841;
250,000 shares authorized; 61,309 shares issued and outstanding 53,930
Additional paid-in capital ....................................... 412,335
Retained earnings ................................................ 14,037,332
Common stock held in treasury, 32,978 shares, at cost............. (2,601,641)
-------------
Total shareholders' equity ............................... 12,113,576
-------------
Total liabilities and shareholders' equity .......... $ 179,035,359
=============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE LEADER MORTGAGE COMPANY
STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<S> <C>
REVENUES:
Loan servicing ........................................... $18,083,156
Loan origination ......................................... 162,564
Gain on sale of mortgages ................................ 2,834,978
Interest income from mortgage operations
(net of interest expense of $8,792,056) ................ 1,461,419
Rental income ............................................ 197,340
Other income ............................................. 845,335
-----------
Total revenue .................................... 23,584,792
EXPENSES:
Salaries, commissions and employee benefits .............. 7,074,736
Occupancy and equipment .................................. 542,322
Amortization of servicing rights ......................... 4,638,920
Other depreciation and amortization ...................... 416,594
Interest on working capital .............................. 2,318,579
Funding of related party operations....................... 628,541
Loss on foreclosures ..................................... 886,696
Other expenses ........................................... 3,399,068
-----------
Total expenses ................................... 19,905,456
-----------
INCOME BEFORE INCOME TAXES ................................. 3,679,336
INCOME TAX EXPENSE ......................................... 1,250,975
-----------
NET INCOME ................................................. $ 2,428,361
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE LEADER MORTGAGE COMPANY
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997
Additional Common
Preferred Common Paid-In Retained Stock Held
Stock Stock Capital Earnings In Treasury Total
-------- --------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 90,000 175,550 412,335 11,615,865 (2,342,248) 9,951,502
Net income 2,428,361 2,428,361
Dividends paid (6,894) (6,894)
Purchase 2,816 treasury shares (259,393) (259,393)
-------- --------- --------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1997 $ 90,000 $ 175,550 $ 412,335 $ 14,037,332 $ (2,601,641) $ 12,113,576
======== ========= ========= ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE LEADER MORTGAGE COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<S> <C>
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 2,428,361
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 416,594
Amortization of mortgage servicing rights ..................................... 4,638,920
Unrealized gain on marketable securities ...................................... (60,199)
Loss on investment sale ....................................................... 122,830
Increase in mortgage loans held for sale, net of warehouse advances ........... (7,016,616)
Increase in accounts receivable - servicing operations ........................ (152,579)
Increase in accounts payable and accrued expenses ............................. 1,393,766
Deferred income tax benefits .................................................. (284,341)
Increase in restricted cash ................................................... (862,050)
Other ......................................................................... 933,658
------------
Cash provided by operating activities ........................................... 1,558,344
------------
CASH FLOW FROM INVESTING ACTIVITIES:
Payments for the acquisition of fixed assets .................................... (57,600)
Payments for mortgage servicing rights .......................................... (16,860,255)
Proceeds from sale of real estate investment .................................... 1,853,767
Advances to escrows with governmental agencies and third party trustee .......... (375,000)
Collections on mortgage notes ................................................... 270,033
Proceeds from investment sale ................................................... 183,029
------------
Cash used in investing activities ............................................... (14,986,026)
------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from notes payable ..................................................... 18,863,726
Payments on notes payable ....................................................... (8,776,097)
Proceeds of subordinated debt ................................................... 861,999
Increase in finance fees ........................................................ (59,060)
Increase in line of credit ...................................................... 120,000
Payments on capitalized lease obligation ........................................ (24,663)
Dividends paid .................................................................. (6,894)
Acquisition of treasury stock ................................................... (259,393)
------------
Cash provided by financing activities ........................................... 10,719,618
------------
NET DECREASE IN CASH .............................................................. (2,708,064)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................................... 4,696,788
------------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................................ $ 1,988,724
============
CASH PAYMENTS FOR THE YEAR:
Interest ........................................................................ $ 11,495,157
============
Income taxes .................................................................... $ 516,000
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
THE LEADER MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The Leader Mortgage (the "Company"), an Ohio
corporation, was incorporated February 16, 1960 to provide complete
mortgage banking service for residential and commercial mortgages.
The Company's principal office is located in Cleveland, Ohio.
Mortgage Loans Held for Sale - Mortgage loans held for sale are reported
at the lower of cost or estimated market as determined on an aggregate
basis, including consideration of all open designated delivery commitment
positions. The Company separately evaluates the estimated fair value of
its commitments to lend, including consideration of all designated open
delivery commitment positions, for impairment. If impairment exists, the
Company records a charge to earnings in the current period. The Company
generally sells whole loans and mortgage-backed securities with servicing
retained. Gains or losses on such sales are generally recognized at the
time of settlement based upon the difference between the sales proceeds
and the allocated basis of loans sold, adjusted for loan fees, mortgage
servicing rights, excess servicing fees, retained interests and the cost
of issuing securities.
Mortgage Servicing Rights, Net - The Company purchases and originates
mortgage loans for sale to the secondary market, and sells the loans on
either a servicing retained or servicing released basis. Effective October
1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 122 ("SFAS 122") Accounting for Mortgage Servicing Rights. Under the
statement, the total cost of mortgage loans purchased or originated with
the intent to sell is allocated between the loan servicing right and the
mortgage loan without servicing, based on their relative fair values at
the date of purchase or origination. The capitalized cost of loan
servicing rights is amortized in proportion to, and over the period of,
estimated net future servicing revenue. The expected lives of the
estimated net servicing income are based, in part, on the expected
prepayment rate of the underlying mortgages.
The Company adopted Statement of Financial Accounting Standards No. 125
("SFAS 125"), Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities as of January 1, 1997. This statement
supersedes SFAS 122 but does not significantly change the Company's
accounting for mortgage servicing rights as the accounting requirements of
SFAS 125 for mortgage servicing rights are substantially consistent with
the requirements of SFAS 122.
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage servicing rights are stratified
based on predominant risk characteristics of the underlying serviced
loans. These risk characteristics include loan type (fixed or adjustable
rate) and interest rate. Impairment represents the excess of cost of an
individual mortgage servicing rights stratum over its fair value, and is
recognized through a valuation allowance.
<PAGE>
Fair values for individual stratum are based on the present value of
estimated future cash flows using a discount rate commensurate with the
risks involved. Estimates of fair value include assumptions about
prepayment default and interest rates, and other factors which are subject
to change over time. Changes in these underlying assumptions could cause
the fair value of mortgage servicing rights, and the related valuation
allowance, to change significantly in the future.
Mortgage Loans in Foreclosure and Other Real Estate - Mortgage loans in
foreclosure and other real estate are carried at fair market value, less
estimated costs to sell.
Revenue Recognition - Mortgage loans held for sale are committed for sale
to secondary market investors under firm agreements at or prior to closing
date of the individual loan. Loan sales and the related gains or losses
are recorded at the settlement date. Loan administration fees earned for
servicing loans for investors are generally calculated based on the
outstanding principal balances of the loans serviced and are recorded as
revenue when received. Sales of servicing rights are recorded when all
risks and rewards of ownership have transferred and no significant
unresolved contingencies exist. Loan origination fees are deferred as a
component of the loan balances. Since mortgage loans originated or
acquired are generally sold within 60 days, any related fees are not
amortized during that period, but are effectively recognized when the loan
is ultimately sold.
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed on a straight line
basis over the estimated useful lives of the related assets.
Income Taxes - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. To the extent current available evidence raises
doubt about the future realization of a deferred tax asset, a valuation
allowance is established. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enacted
date.
Cash Held in Escrow and Restricted Cash - Cash held in escrows represents
amounts the Company agreed to set aside to satisfy agreements entered into
with the Federal Home Loan Mortgage Corporation (See Note 15).
Deferred Finance Fees - Deferred finance fees and expenses, which are
included in other assets, on the Company's debt are stated at cost and are
being amortized over the life of the related debt.
Marketable Securities - The Company's marketable securities are defined as
trading securities under the provisions of Statements of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Accordingly, unrealized holding gains or losses on
the securities are reflected in current earnings.
<PAGE>
Cash and Cash Equivalents - For purposes of cash flow, the Company
considers all highly liquid investments purchased with original maturities
of three months or less to be cash equivalents.
Use of Estimates in Preparation of the Financial Statements - Management
uses estimates and assumptions in preparing these financial statements in
accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
Impact of Interest Rate Fluctuations - Interest rate fluctuations
generally have a direct impact on a mortgage banking institution's
financial performance. Significant increases in interest rates may make it
more difficult for potential borrowers to purchase residential property
and to qualify for mortgage loans. As a result, the volume and related
income from loan originations may be reduced. This may be mitigated by the
increase in first-time homebuyer bond programs which generally offer
mortgage rates at one percent or more below prevailing market rates. In
addition, the Company is not required to assume interest rate risk on
loans acquired from state - sponsored first time home buyer programs.
Significant increases in interest rates will also generally increase the
value of the Company's servicing portfolio as a result of slower
anticipated prepayment activity. Significant decreases in interest rates
may enable more potential borrowers to qualify for a mortgage loan,
resulting in higher income related to the loan originations. In addition,
significant decreases in interest rates may result in higher than
anticipated loan prepayment activity and, therefore, reduce the value of
the loan servicing portfolio. This may also be mitigated by the below
market - rate loans in the servicing portfolio originated under the
first-time homebuyer bond program.
2. MORTGAGE LOANS HELD FOR SALE
The following summarizes loans held for sale as of September 30, 1997:
Residential first mortgages - bond program and conventional $114,391,684
Multi-family mortgages ..................................... 4,725,394
------------
Total .............................................. $119,117,078
============
3. MORTGAGE LOAN SERVICING
Mortgage Servicing Rights - As discussed in Note 1, the Company adopted
SFAS 122 on October 1, 1996 and SFAS 125 on January 1, 1997. The effect of
adoption of these statements was not material. Activity related to
mortgage servicing rights is summarized as follows:
Balance October 1, 1996 ....................... $ 27,771,644
Additions ..................................... 16,860,255
Amortization .................................. (4,638,920)
------------
Balance September 30, 1997 .................... $ 39,992,979
============
The estimated fair value of mortgage servicing rights as of September 30,
1997 was $64,530,217.
The Company had a valuation allowance for mortgage servicing rights of
$17,122 as of September 30, 1997.
Servicing of Mortgage Loans - The Company originates, purchases and sells
to investors, without recourse, loans secured by mortgages, principally on
single family residential property. The Company generally retains the
servicing of certain loans sold to investors and collects the monthly
principal and interest payments and performs certain escrow service
generally related to insurance and real estate tax payments. The Company's
<PAGE>
aggregate net servicing portfolio, including loans serviced for related
parties, was $4,156,602,041 at September 30, 1997, representing 74,104
mortgages. Included in the Company's servicing portfolio is 6,142
single-family mortgage loans being serviced under subservicing agreements
at September 30, 1997. The outstanding principal balance of these loans is
$338,349,925.
The Company maintains escrow funds comprised primarily of funds to be
transferred to third party investors as well as funds to pay real estate
taxes and insurance of borrowers aggregating approximately $65,137,693 at
September 30, 1997. These funds are segregated in noninterest-bearing
deposit accounts and are not included as assets and liabilities of the
Company.
4. ACCOUNTS RECEIVABLE
Accounts receivable as of September 30, 1997 consisted of the following:
Foreclosure receivables, net of reserves of $55,125 $ 877,498
Advances made on behalf of mortgagors ............. 1,142,542
Accrued interest .................................. 1,054,646
Notes receivable .................................. 30,357
Servicing and production .......................... 1,424,289
----------
Total ......................................... $4,529,332
==========
5. PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1997 consisted of the
following:
Leasehold improvements ......... $ 170,344
Furniture and fixtures ......... 957,296
Computer equipment ............. 1,879,772
Automobiles .................... 81,527
----------
Total ...................... 3,088,939
Accumulated depreciation ....... 2,263,189
----------
Property and equipment - net $ 825,750
==========
Depreciation expense for 1997 was $410,615.
<PAGE>
6. OTHER ASSETS
Other assets at September 30, 1997 consisted of the following:
Cash held in escrow ..................... $1,763,966
Deferred finance fees (net of accumulated
amortization of $312,627) ............. 147,123
Prepaid expenses ........................ 378,048
Other ................................... 888,289
----------
Total ............................... $3,177,426
==========
7. RELATED PARTY TRANSACTIONS
The Company leases office space from a partnership whose controlling
partners are officers of the Company. The lease agreement provides for
annual base rents of $365,400 plus additional rents based on increases in
operating expenses and taxes. There were no outstanding amounts due under
the lease agreement as of September 30, 1997.
The Company advances funds to an affiliated partnership that are used to
fund operations of the real estate owned by the partnership.
8. WAREHOUSE LINES OF CREDIT
Borrowings under warehouse lines of credit at September 30, 1997 consisted
of the following:
<TABLE>
<CAPTION>
<S> <C>
Notes due to banks maturing at various dates through
May 1998 secured principally by mortgage loans held for sale:
Bond program and conventional ...................................... $ 111,092,376
Foreclosure ........................................................ 6,775,917
-------------
Total ............................................................... $ 117,868,293
=============
</TABLE>
Short-term notes due to banks secured principally by mortgage loans held
for sale have an interest rate range from .8% to 7.375% for the year ended
September 30, 1997. The Company has a compensating balance arrangement
with lenders to reduce interest on certain borrowings by the amount of the
deposit balance maintained at the bank. Certain loan agreements contain
financial covenants, including net worth requirements.
<PAGE>
9. NOTES PAYABLE - OTHER
Notes payable - other at September 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Credit/Term Loan Agreement borrowings due to various banks
under a Co-Agent Agreement ................................. $33,513,537
Note, secured by a multifamily mortgage, due a bank .......... 4,279,000
Note, secured by receivables, due a bank having a maturity
date of Ocober 1, 2003 ..................................... 3,340,000
Note, secured by pledged mortgage servicing rights on
GNMA pools due a bank ...................................... 1,667,013
Unsecured note due October 31, 1998, to a related party
with interest computed at 15% per annum .................... 200,000
-----------
Total notes payable - other ....................... $42,999,550
===========
</TABLE>
The Company has entered into a Credit/Term Loan Agreement with several
lending institutions to provide for revolving loans and term credit for a
maximum amount as amended of $43,013,536. Amendments to this credit
agreement were made during 1997 to provide for increases in the revolving
loans and term credit facility. Loans outstanding under this agreement
totaled $33,513,537 at September 30, 1997. The agreement provides for
tranches which have a one year revolver and a five year amortization
period. There are currently seven tranches in the facility. Repayment
dates for these tranches commenced October 20, 1995 and continue through
July 1, 2003. New tranches can be added provided the total outstanding
balance does not exceed 70% of the value of the Company's eligible
mortgage servicing rights as valued by a third party appraiser acceptable
to the several lending institutions. The Company obtains independent
valuations of mortgage servicing on a semi-annual basis. The Company
pledges current and future mortgage servicing rights as collateral for the
facility.
In June 1997, the Company borrowed $4,279,000 from a lending institution,
collateralized with a multifamily mortgage loan. The loan matures on July
31, 2002, with interest only payable for the first 24 months; thereafter,
amortizing on a 20 year schedule.
In December 1996, the Company entered into a loan agreement with a lending
institution to provide for a maximum loan based on 65% of the market value
of the pledged mortgage servicing rights of certain GNMA pools for which
the current outstanding balance is $1,667,013. Repayment of the principal
amount borrowed to be made in equal quarterly installments in the amount
of $92,580 commencing April 1, 1997 and continuing to January 1, 2002 when
the balance, if any, shall become due and payable.
<PAGE>
The Company has provided a guarantee on behalf of Eexcel Cleveland Limited
Partnership (an affiliated company)with respect to an Ohio Adjustable Rate
Industrial Revenue Bond in the event of default. In the event of default,
the Company has guaranteed the difference between the unpaid principal
balance of the bonds and the value of the underlying assets securing the
bonds. The outstanding balance of the issue was $5,321,975 at September
30, 1997 and the issue matures March 1, 2019.
Interest rates on borrowings described in this footnote, unless
specifically identified, range from 1.75% to 8.75% for the year ended
September 30, 1997. The Company has arrangements with lenders to reduce
interest on certain borrowings based on deposits maintained at the banks.
Total interest was approximately $10,100,000 for the year ended September
30, 1997. Certain loan agreements contain financial covenants, including
net worth requirements, which have been consistently met.
Maturities of notes payable other at September 30, 1997 are as follows:
Fiscal Year End
1998 $ 7,353,702
1999 9,833,384
2000 9,704,253
2001 7,008,519
2002 3,564,492
Thereafter 5,535,200
------------
Total $ 42,999,550
============
10. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses at September 30, 1997 consisted of the following:
Interest ...................... $ 819,091
Salaries and other compensation 601,502
Income taxes .................. 714,006
----------
Total ..................... $2,134,599
==========
11. FEDERAL INCOME TAXES
The provision for federal income taxes for the year ended September 30,
1997 consists of the following:
Current provision .............. $1,535,316
Deferred provision (benefit).... (284,341)
----------
Total ...................... $1,250,975
==========
<PAGE>
The deferred tax assets as of September 30, 1997 were $1,383,598 and
related to deductible temporary differences primarily market valuation
differences on loans, cost associated with mortgage loans held for sale,
and accrued bonuses. The deferred tax liability as of September 30, 1997
was $1,635,002 and consisted of taxable temporary differences relating to
deferred discounts, mortgage servicing rights and market valuation
differences on loans.
12. EMPLOYEE STOCK OWNERSHIP PLAN/SAVINGS
AND INVESTMENT PLAN
The Company maintains an Employee Stock Ownership Plan in which eligible
employees accumulated capital ownership in the Company. The Company has
received a determination letter from the Internal Revenue Service that the
Plan is frozen as of October 1, 1995, and no future contributions are
being made. There were no Company cash contributions to the Plan for the
year ended September 30, 1997.
The Employee Stock Ownership Plan has, from time to time, acquired shares
of Class E common stock of the Company. For the year ended September 30,
1997, no dividends were paid on the Class E common stock.
The Company has a Savings and Investment Plan ("401(k) plan") covering all
eligible employees as defined by the plan. The 401(k) plan provides, among
other items, for matching contributions by the Company up to 50% of
eligible employee contributions. For the year ended September 30, 1997,
the Company incurred expenses of $130,840 that were contributed to the
401(k) plan. At September 30, 1997, no amounts were due to the 401(k)
plan.
13. STOCK OPTIONS
The Company granted stock options during the fiscal year ended September
30, 1995 to certain key employees of the Company. The options are for the
purchase of 35,000 shares of Class A stock at $1.00 per share. The stock
option agreements provide, among other items, for exercise only in the
event of a substantial ownership change in the Company as defined in the
agreements. No options were granted during 1997.
14. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has various financial instruments that require disclosure as
to fair value under generally accepted accounting principles. The
estimated fair value amounts have been determined using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates presented herein
<PAGE>
are not necessarily indicative of the amount that the Company could
realize in a current market exchange. The use of different assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The carrying amount of cash, cash held in escrows, marketable securities,
accounts and notes receivable, accounts payable, accrued expenses, notes
payable, and subordinated debt are reasonable estimates of their fair
market value.
The carrying amount of loans held for sale is a reasonable approximation
of fair market value due to the short time frame (generally 60 days or
less) until these loans are sold and, as discussed in Note 1, due to the
interest rate risk protection provided by loans originated under the
first-time homebuyer bond programs.
The fair value estimate presented herein are based on pertinent
information available to management as of September 30, 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
current estimates of fair value may differ significantly from the amounts
presented above.
15. FREDDIE MAC INDEMNIFICATION AGREEMENT
In 1991, due to irregularities identified in multi-family residential real
estate mortgages sold by the Company to the Federal Home Loan Mortgage
Corporation ("Freddie Mac") during the period 1987 through 1989, the
Company and Freddie Mac entered into an agreement referred to as the
Freddie Mac Indemnification Agreement (the "Agreement") whereby the
Company has indemnified Freddie Mac for certain losses on these mortgages.
The Agreement provided, among other things, that the Company place in
escrow cash deposits not to exceed $7,500,000. This amount would be
reduced to the extent of any payments received from third parties. A total
of $3,020,573 was funded to the Freddie Mac escrow account as of September
30, 1997. The Company was notified during this past fiscal year that
additional losses related to these loans totaled $52,066. These funds were
removed from the account on September 12, 1997. The total escrow balance
at Freddie Mac through September 30, 1997 is $1,763,966.
Management believes that the Company has satisfied its obligations under
the terms of the Agreement and monies held in escrow should be returned to
the Company. The agreement provides, among other items, that upon
termination, to the extent escrow funds are available therein, Freddie Mac
is to return the funded amounts together with interest earned from
investment of the funds. Freddie Mac asserts the Agreement is still in
effect and the Company is responsible to continue funding the Freddie Mac
escrow account and deposit the funds with a Trustee. Total escrow deposits
funded with the Trustee amounted to $843,750 at September 30, 1997. The
Trustee account balance at September 30, 1997 amounted to $862,050.
<PAGE>
The Company was notified November 1, 1995 of a civil lawsuit filed by
Freddie Mac. Freddie Mac claims the Company is in violation of the
Indemnification and Resolution Agreement entered into January 15, 1991 and
subsequent Tripartite Agreements. On August 14, 1997, the Judge rendered a
written opinion denying Freddie Mac's motion for Summary Judgment and
favorable to The Leader Mortgage Company. Further, Freddie Mac informed
the Company that on October 9, 1997 fourteen of the seventeen loans in
question representing $60 million out of $67 million were refinanced away
from Freddie Mac. This leaves three loans in the amount of $7 million in
dispute.
In February 1998, the Company and Freddie Mac entered into an agreement
referenced to as the Settlement Agreement and Release ("Settlement
Agreement") whereby the Company and Freddie Mac settle all differences
related to the Agreement noted above. Escrow deposits funded to the
Trustee were returned to the Company, and funds held in the escrow account
with Freddie Mac in excess of $1 million were returned to the Company in
February 1998. Freddie Mac will continue to retain $1 million dollars and
accrue interest in the same manner set forth in the Agreement. No
additional deposits from the Company will be required for the remaining
term of the Settlement Agreement. The Company will continue to indemnify
Freddie Mac with respect to one loan. No other loans will be subject to
the terms of the Agreement. The Agreement will expire on February 11,
2001. In the event of default, the Company's obligation will be limited to
the funds on deposit with Freddie Mac at the time Freddie Mac determines
its loss and makes its withdrawal. If the balance of the loss is less than
the balance held in the escrow, excess funds will be returned to the
Company. If there is no event of default, Freddie Mac will return all
funds on deposit.
16. SUBSEQUENT EVENTS
On July 1, 1998, the Company was acquired by First Defiance Financial
Corp. ("First Defiance"), a publicly held corporation with its
headquarters in Defiance, Ohio. First Defiance is a holding company of
First Federal Savings and Loan which primarily focuses on single family
residential mortgage lending, consumer and business loans. Under the terms
of the agreement, the purchase price was $39.6 million in cash.
In connection with the acquisition by First Defiance, the Employee Stock
Ownership Plan received a cash payment of approximately $9,200,000 in
exchange for the common stock of the Company in the Plan.
Upon the consummation of the merger, the stock options became exercisable
at $1 per share.
* * * * * *
Exhibit 99.3
Unaudited Pro Forma Condensed Consolidated
Financial Statements
First Defiance Financial Corp.
The Leader Mortgage Company
On April 10, 1998, The Leader Mortgage Company ("Leader") entered into an
Agreement and Plan of Reorganization (the "Agreement") with First Defiance
Financial Corp. ("FDFC") whereby Leader would retire all of the issued and
outstanding Preferred Shares, $100 par value, for $114,894 and FDFC would then
acquire all of the outstanding Class A and Class E stock of Leader for
$32,935,106 plus an additional $2,000,000, payable upon satisfactory resolution
of certain contingencies within two years of the effective date (the "Merger").
In addition, FDFC will pay up to an additional $4,500,000 in retention and
non-compete payments to certain key employees. Shareholders of Leader approved
the Agreement at a special meeting on June 15, 1998, and the Merger was
completed on July 1, 1998, the effective date. The Merger was accounted for
under the purchase method of accounting.
FDFC has a fiscal year end of December 31 and Leader has a fiscal year end of
September 30. Accordingly, the unaudited pro forma condensed consolidated
statement of income for the six months ended June 30, 1998, presents the
historical results of operations of FDFC for the six months ended June 30, 1998,
combined with the historical results of operations for Leader for the six months
ended March 31, 1998, and the unaudited pro forma condensed consolidated
statement of income for the year ended December 31, 1997, presents the
historical results of operations of FDFC for the year ended December 31, 1997,
combined with the historical results of operations of Leader for the year ended
September 30, 1997, both as if the Merger had occurred as of the beginning of
the respective periods. The unaudited pro forma condensed consolidated balance
sheet as of June 30, 1998, presents the historical balance sheet of FDFC as of
June 30, 1998, combined with the historical balance sheet of Leader as of March
31, 1998, as if the Merger occurred on June 30, 1998.
For purposes of the pro forma condensed consolidated financial statements, the
purchase price of Leader has been allocated to the acquired net assets based on
information currently available with regard to the values of such net assets.
Pro forma adjustments have been made only for those assets and liabilities
which, based solely on preliminary estimates, may have fair values different
from historical amounts. As such, final adjustments to recorded amounts may
differ from the pro forma adjustments presented herein.
The pro forma financial information presented are not necessarily indicative of
the results of operations that would have resulted had the Merger been
consummated at the beginning of the periods presented, nor is it necessarily
indicative of the results of operations of future periods. The pro forma
financial information should be read in connection with the note thereto.
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
The Leader Mortgage Company
Unaudited Pro Forma Condensed Consolidated Balance Sheet
at June 30, 1998
(In Thousands)
FDFC Leader Pro Forma
June 30, March 31, ----------------------
1998 1998 Adjustments Combined
--------- ---------- ----------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents:
Cash and amounts due from
depository institutions ................. $ 5,666 $ 3,007 $ 8,673
-------- -------- -------- --------
5,666 3,007 8,673
Securities:
Marketable securities ..................... 257 257
Available-for-sale, carried at fair value . 66,670 66,670
Held-to-maturity, carried at amortized cost
(approximate fair value $16,977 at
June 30, 1998) .......................... 16,660 16,660
-------- -------- -------- --------
83,330 257 83,587
Loans held for sale (at lower of cost
or fair value, approximate fair value
$3,358 at June 30, 1998) .................. 3,309 97,479 100,788
Loans receivable, net ........................ 462,229 462,229
Mortgage servicing rights .................... 47,540 $ 22,574 (1) 70,114
Goodwill ..................................... 8,697 (2) 8,697
Accrued interest receivable .................. 3,293 3,293
Federal Home Loan Bank Stock ................. 3,901 3,901
Office properties and equipment .............. 18,114 885 18,999
Deferred federal income taxes ................ 234 234
Other assets ................................. 2,048 10,204 12,252
-------- -------- -------- --------
Total assets ................................. $582,124 $159,372 $ 31,271 $772,767
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
The Leader Mortgage Company
Unaudited Pro Forma Condensed Consolidated Balance Sheet--Continued
FDFC Leader Pro Forma
June 30, March 31, -----------------------------
1998 1998 Adjustments Combined
--------- ---------- -----------------------------
<S> <C> <C> <C> <C>
Liabilities and stockholders' equity
Deposits ............................................ $ 404,493 $ 404,493
Advances from Federal Home Loan Bank and other
borrowings ........................................ 66,140 $ 141,355 $ 34,935 (3) 242,430
Other liabilities ................................... 8,219 4,179 8,578 (1)
850 (4) 21,826
Subordinated Debt ................................... 746 746
--------- --------- --------- ---------
Total liabilities ................................... 478,852 146,280 44,363 669,495
--------- --------- --------- ---------
Stockholders' Equity:
Preferred stock ..................................... 90 (90) (5)
Common stock ........................................ 82 176 (176) (5) 82
Additional paid-in capital .......................... 62,536 412 (412) (5) 62,536
Stock acquired by ESOP .............................. (4,196) (4,196)
Stock acquired by Management
Recognition Plan ................................. (1,111) (1,111)
Net unrealized losses on available-for-
sale securities, net of income taxes of $7 at June
30, 1998 ......................................... (14) (14)
Retained earnings - substantially restricted ........ 45,975 15,191 (15,191) (5) 45,975
Treasury ............................................ (2,777) 2,777 (5)
--------- --------- --------- ---------
Total stockholders' equity .......................... 103,272 13,092 (13,092) 103,272
--------- --------- --------- ---------
Total liabilities and stockholders' equity .......... $ 582,124 $ 159,372 $ 31,271 $ 772,767
========= ========= ========= =========
</TABLE>
<PAGE>
Notes To Unaudited Pro Forma Condensed Consolidated Balance Sheet
at June 30, 1998
(In Thousands)
1. Represents the mark to market adjustment of $22,574 to adjust the carrying
amount of the mortgage servicing rights to fair value and the related
effect on deferred taxes of $8,578.
2. Represents the excess of the purchase price paid for Leader over the fair
market value of the tangible and identifiable assets acquired and the fair
value of the liabilities assumed (goodwill) under the purchase method of
accounting. Goodwill is assumed to amortize on a straight-line basis over
20 years.
The merger consideration of $34,935 was allocated as follows:
Mortgage servicing rights $ 22,574
Goodwill ................ 8,697
Transaction costs ....... (850)
Deferred taxes .......... (8,578)
Elimination of net assets 13,092
--------
Purchase price .......... $ 34,935
========
3 Represents borrowings of $34,935 to fund the purchase at a rate of 5.75%.
Each 1/8% change in interest rates would result in a change in interest
expense of approximately $44 per year and $22 per six month period and
result in a change in net income of approximately $27 per year and $14 per
six month period.
4. Represents accruals for other Merger related costs such as professional
fees including investment banker, accountants and attorneys fees of $850.
5. Represents the elimination of the stockholders' equity of Leader under the
purchase method of accounting.
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
The Leader Mortgage Company
Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Six Months Ended June 30, 1998
(In Thousands)
For the Six Months Ended
June 30, March 31,
1998 1998
------------------------- Pro Forma
------------------------
FDFC Leader Adjustments Combined
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Mortgage and other loans .......... $ 19,647 $ 4,157 $ 23,804
Investment securities ............. 3,005 3,005
Deposits with banks ............... 12 12
-------- -------- -------- --------
Total interest income ................ 22,664 4,157 26,821
Interest expense:
Deposits .......................... 9,180 9,180
Federal Home Loan Bank advances and
other borrowings ................ 1,935 4,856 $ 1,004 (1) 7,795
-------- -------- -------- --------
Total interest expense ............... 11,115 4,856 1,004 16,975
-------- -------- -------- --------
Net interest income .................. 11,549 (699) (1,004) 9,846
Provision for loan losses ............ 688 383 1,071
-------- -------- -------- --------
Net interest income after provision
for loan losses ................... 10,861 (1,082) (1,004) 8,775
Non-interest income:
Service fees and other charges .... 594 12,630 13,224
Dividends on Federal Home Loan Bank 137 137
Other ............................. 338 393 731
-------- -------- -------- --------
1,069 13,023 14,092
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
The Leader Mortgage Company
Unaudited Pro Forma Condensed Consolidated Statement of Income
For the Six Months Ended June 30, 1998--Continued
(In Thousands)
For the Six Months Ended
June 30, March 31,
1998 1998
------------------------- Pro Forma
------------------------
FDFC Leader Adjustments Combined
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Non-interest expense:
Amortization of servicing rights . 3,011 941 (2) 3,952
Compensation and benefits ........ 3,770 3,756 642 (3) 8,168
Loss on foreclosures ............. 364 364
Occupancy ........................ 840 316 1,156
SAIF deposit insurance premiums .. 122 122
State franchise tax .............. 618 618
Data processing .................. 471 471
Mobile home loan servicing ....... 255 255
Other ............................ 1,246 2,485 217 (4) 3,948
-------- -------- -------- --------
7,322 9,932 1,800 19,054
-------- -------- -------- --------
Income before income taxes .......... 4,608 2,009 (2,804) 3,813
Income tax expense .................. 1,555 855 (983) 1,427
-------- -------- -------- --------
Net income .......................... $ 3,053 $ 1,154 $ (1,821) $ 2,386
======== ======== ======== ========
Earnings per share:
Basic ............................ $ 0.40 $ 0.32
Diluted .......................... $ 0.39 $ 0.30
Average number of shares outstanding:
Basic ............................ 7,553 7,553
Diluted .......................... 7,907 7,907
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
The Leader Mortgage Company
Unaudited Pro Forma Condensed Consolidated Statements Of Income
For The Year Ended December 31, 1997
(In Thousands)
For the Year Ended
December 31, September 30,
1997 1997
-------------------------
Pro Forma
---------------------------
FDFC Leader Adjustments Combined
-----------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Mortgage and other loans ................ $ 37,302 $ 1,461 $ 38,763
Investment securities ................... 6,458 6,458
Deposits with banks ..................... 98 98
-------- -------- -------- --------
Total interest income ...................... 43,858 1,461 45,319
Interest expense:
Deposits ................................... 17,992 17,992
Federal Home Loan Bank advances and other
borrowings .............................. 3,395 2,318 $ 2,009 (1) 7,722
-------- -------- -------- --------
Total interest expense ..................... 21,387 2,318 2,009 25,714
-------- -------- -------- --------
Net interest income ........................ 22,471 (857) (2,009) 19,605
Provision for loan losses .................. 1,613 1,613
-------- -------- -------- --------
Net interest income after provision
for loan losses ......................... 20,858 (857) (2,009) 17,992
Non-interest income:
Service fees and other charges .......... 1,036 18,245 19,281
Dividends on Federal Home Loan Bank stock 242 242
Net gain on sale of available-for-sale
securities ............................ 103 103
Other ................................... 246 3,878 4,124
-------- -------- -------- --------
1,627 22,123 23,750
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
The Leader Mortgage Company
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Year Ended December 31,1997--Continued
(In Thousands)
For the Year Ended
December 31, September 30,
1997 1997
------------------------------
Pro Forma
---------------------------
FDFC Leader Adjustments Combined
--------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest expense:
Amortization of servicing rights .......... 4,639 1,881 (2) 6,520
Compensation and benefits ................. 7,905 7,075 1,283 (3) 16,263
Loss on foreclosures ...................... 963 963
Occupancy ................................. 1,241 542 1,783
SAIF deposit insurance premiums ........... 194 194
State franchise tax ....................... 1,101 1,101
Data processing ........................... 780 780
Mobile home loan servicing ................ 457 457
Other ..................................... 2,415 4,368 435 (4) 7,218
-------- -------- -------- --------
14,093 17,587 3,599 35,279
-------- -------- -------- --------
Income (loss) before income taxes ............ 8,392 3,679 (5,608) 6,463
Income tax expense ........................... 2,985 1,251 (1,966) 2,270
-------- -------- -------- --------
Net income ................................... $ 5,407 $ 2,428 $ (3,642) $ 4,193
======== ======== ======== ========
Earnings per share:
Basic ..................................... $ 0.65 $ 0.50
Diluted ................................... $ 0.62 $ 0.48
Average number of shares outstanding:
Basic ..................................... 8,360 8,360
Diluted ................................... 8,706 8,706
</TABLE>
<PAGE>
First Defiance Financial Corp.
The Leader Mortgage Company
Notes To Unaudited Pro Forma Condensed Consolidated
Statements of Income for the Six Months Ended June 30, 1998 and the
Year Ended December 31,1997
(In Thousands)
FDFC expects to achieve operating cost savings primarily through the utilization
of lower cost sources of funding, consolidation of back office functions and
elimination of redundant professional fees, and other redundant expenses. The
operating cost savings are expected to be achieved in various amounts at various
times during the years subsequent to the acquisition of Leader and not ratably
over, or at the beginning or end of, such periods. No adjustment has been
reflected in the Unaudited Pro Forma Combined Condensed Statement of Income for
the year ended December 31, 1997, or for the six months ended June 30, 1998, for
the anticipated cost savings.
1. Represents borrowings of $34,935 to fund the purchase at a rate of 5.75%.
Each 1/8% change in interest rates would result in a change in interest
expense of approximately $44 per year and $22 per six month period and
result in a change in net income of approximately $27 per year and $14 per
six month period.
2. Represents amortization of mark-to-market adjustments related to mortgage
servicing rights.
3. Represents compensation expense associated with 4,500 in retention and
noncomplete payments to certain key employees covering periods of up to
four years. The expenses will be in addition to recurring compensation
costs and are directly attributable to the merger.
4. Represents amortization of goodwill of over 20 years.
