-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N3e+n62ukmDOsPlR2KSfwsCnHhYedqm+JVxG4uQRUNqJvrxLy2nI/f4cr9bkpSrx o7JFlUKPpzHTOa5rcmTNpA== 0000914317-98-000574.txt : 19980923 0000914317-98-000574.hdr.sgml : 19980923 ACCESSION NUMBER: 0000914317-98-000574 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980701 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980922 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST DEFIANCE FINANCIAL CORP CENTRAL INDEX KEY: 0000946647 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341803915 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-26850 FILM NUMBER: 98712812 BUSINESS ADDRESS: STREET 1: 601 CLINTON ST CITY: DEFIANCE STATE: OH ZIP: 43512 BUSINESS PHONE: 4107825015 MAIL ADDRESS: STREET 1: 601 CLINTON ST CITY: DEFIANCE STATE: OH ZIP: 43512 8-K/A 1 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. 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 (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 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 EX-23.1 2 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 EX-23.2 3 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 EX-99.1 4 Exhibit 99.1 The Leader Mortgage Company Financial Statements as of and for the Nine Months Ended June 30, 1998 Report of Independent Auditors The Board of Directors The Leader Mortgage Company We have audited the accompanying balance sheet of The Leader Mortgage Company, as of June 30, 1998, and the related statements of operations, changes in stockholders' equity and cash flows for the nine month period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Leader Mortgage Company at June 30, 1998, and the results of its operations and its cash flows for the nine month period then ended, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP --------------------- Ernst & Young LLP Cleveland, Ohio August 28, 1998
The Leader Mortgage Company Balance Sheet June 30, 1998 Assets Cash ............................................................. $ 4,425,808 Marketable securities ............................................ 311,511 Accounts receivable .............................................. 7,430,551 Mortgage loans held for sale ..................................... 116,672,048 Residential first mortgages in foreclosure, net of allowance of $805,600 ...................................... 9,536,993 Prepaid expenses ................................................. 314,943 Loans receivable, net of allowance of $4,087,124 ................. 5,263,342 Furniture, equipment and leasehold improvements, net ............. 905,282 Mortgage servicing rights, net of amortization of $29,739,965 .... 50,113,521 Real estate owned ................................................ 614,458 Deferred income taxes ............................................ 392,486 Other assets ..................................................... 1,327,193 ------------- Total assets ..................................................... $ 197,308,136 ============= Liabilities and stockholders' equity Warehouse lines of credit ........................................ $ 125,489,814 Accounts payable ................................................. 1,560,581 Accrued liabilities .............................................. 1,988,478 Subordinated debt ................................................ 2,704,670 Notes payable .................................................... 51,591,906 ------------- Total liabilities ................................................ 183,335,449 Stockholders' equity: Class A common stock, no par value, stated value $.841; 350,000 shares authorized; 144,625 shares issued and outstanding .... 121,620 Class E common stock, no par value, stated value $.841; 250,000 shares authorized; 61,404 shares issued and outstanding ..... 53,930 Additional paid in capital .................................... 5,902,942 Retained earnings ............................................. 10,747,137 Common stock held in treasury, 35,701 shares .................. (2,852,942) ------------- Total stockholders' equity ....................................... 13,972,687 ------------- Total liabilities and stockholders' equity ....................... $ 197,308,136 =============
See notes to financial statements.
The Leader Mortgage Company Statement of Operations Nine Month Period Ended June 30, 1998 Revenues Mortgage servicing ............................................ $ 16,546,958 Interest income from mortgage operations (net of interest expense of $4,575,344) ............................ 1,643,670 Loan origination .............................................. 151,012 Gain on sale of mortgages ..................................... 2,590,820 Other ......................................................... 486,552 ------------ Total revenues ................................................ 21,419,012 Expenses Salaries and related costs .................................... 5,703,519 Stock compensation expense .................................... 5,515,500 Occupancy ..................................................... 344,719 Amortization of servicing rights .............................. 5,015,416 Other depreciation and amortization ........................... 393,321 Interest expense on working capital ........................... 2,462,854 Loan loss provision ........................................... 582,921 Foreclosure provision ......................................... 931,494 General and administrative .................................... 2,692,160 Other expenses ................................................ 1,319,883 ------------ Total expenses ................................................ 24,961,787 ------------ Loss before income taxes and extraordinary item ............... (3,542,775) Income tax benefit ............................................ 859,251 ------------ Net loss before extraordinary item ............................ (2,683,524) Extraordinary item, net of tax benefit of $51,000 ............. (601,500) ------------ Net loss ...................................................... $ (3,285,024) ============
See notes to financial statements.
The Leader Mortgage Company Statement of Changes in Stockholders' Equity Common Additional Stock Preferred Common Paid in Retained Held in Stock Stock Capital Earnings Treasury Total ----------- ----------- ----------- ----------- ----------- ----------- Balance, October 1, 1997 .... $ 90,000 $ 175,550 $ 412,335 $14,037,332 $(2,601,641) $12,113,576 Net loss .................... (3,285,024) (3,285,024) Stock options ............... 5,515,500 5,515,500 Dividends ................... (5,171) (5,171) Purchase 2,722 shares of .... (251,301) (251,301) treasury stock Redemption of preferred stock (90,000) (24,893) (114,893) ----------- ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1998 ...... $ 0 $ 175,550 $ 5,902,942 $10,747,137 $(2,852,942) $13,972,687 =========== =========== =========== =========== =========== ===========
See notes to financial statements.
The Leader Mortgage Company Statement of Cash Flows Nine Month Period Ended June 30, 1998 Operating activities Net loss ................................................... $ (3,285,024) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of servicing rights ...................... 5,015,416 Net decrease in mortgage loans held for sale .......... 2,445,030 Depreciation and amortization ......................... 393,321 Unrealized gain on marketable securities .............. (54,325) Stock compensation expense ............................ 5,515,500 Deferred income taxes ................................. (643,890) Changes in operating assets and liabilities: Receivables ......................................... (3,216,162) Other assets ........................................ 1,461,750 Restricted cash ..................................... 862,050 Accounts payable and accrued liabilities ............ (1,430,139) ------------ Net cash provided by operating activities .................. 7,063,527 Investing activities Net increase in loans receivable ........................... (6,515,501) Net increase in real estate owned .......................... (286,073) Payments for servicing rights .............................. (15,135,958) Purchase of furniture, equipment and leasehold improvements, net ............................. (374,094) ------------ Net cash used for investing activities ..................... (22,311,626) Financing activities Net advances on subordinated debt .......................... 1,842,671 Dividends paid ............................................. (5,171) Net advances on notes payable .............................. 8,592,356 Net advances on lines of credit ............................ 7,621,521 Acquisition of treasury stock .............................. (251,301) Redemption of preferred stock .............................. (114,893) ------------ Net cash provided by financing activities .................. 17,685,183 ------------ Net increase in cash balances .............................. 2,437,084 Cash at beginning of period ................................ 1,988,724 ------------ Cash at end of period ...................................... $ 4,425,808 ============ Cash paid for Income taxes ............................................... $ 2,713,717 ============ Interest ................................................... $ 6,950,167 ============
See notes to financial statements The Leader Mortgage Company Notes to Financial Statements June 30, 1998 A. Summary of Significant Accounting Policies and Additional Information Organization The Leader Mortgage Company (the Company), an Ohio Corporation, primarily operates in the continental United States and is engaged in the mortgage banking business, which includes the origination, purchase, packaging and sale of mortgage loans to permanent investors; the servicing of these and other mortgage loans; and the providing of other related services for investors and customers. Revenue Recognition Mortgage loans held for sale are committed for sale to secondary market investors under firm agreements at or prior to closing date of the individual loan. Loan sales and the related gains or losses are recorded at the settlement date. Loan administration fees earned for servicing loans for investors are generally calculated based on the outstanding principal balances of the loans serviced and are recorded as revenue when received. Sales of servicing rights are recorded when all risks and rewards of ownership have transferred and no significant unresolved contingencies exist. Loan origination fees are deferred as a component of the loan balance. Since mortgage loans originated or acquired are generally sold within 60 days, any related fees are not amortized during that period, but are effectively recognized when the loan is ultimately sold. Mortgage loans held for sale are reported at the lower of cost or estimated market as determined on an aggregate basis, including consideration of all open designated delivery commitment positions. The Company separately evaluates the estimated fair value of its commitments to lend, including consideration of all designated open delivery commitment positions, for impairment. If impairment exists, the Company records a charge to earnings in the current period. The Company generally sells whole loans and mortgage-backed securities with servicing retained. Gains or losses on such sales are generally recognized at the time of settlement based upon the difference between the sales proceeds and the allocated basis of loans sold, adjusted for loan fees, mortgage servicing rights, retained interests and the cost of issuing securities. Mortgage Servicing Rights, Net The Company purchases and originates mortgage loans for sale to the secondary market, and sells the loans on either a servicing retained or servicing released basis. The total cost of mortgage loans purchased or originated with the intent to sell is allocated between the loan servicing right and the mortgage loan without servicing, based on their relative fair values. The capitalized cost of loan servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. The expected lives of the estimated net servicing income are based, in part, on the expected prepayment rate of the underlying mortgages. The Leader Mortgage Company Notes to Financial Statements--Continued A. Summary of Significant Accounting Policies and Additional Information--Continued Mortgage servicing rights are periodically evaluated for impairment. For purposes of measuring impairment, mortgage servicing rights are stratified based on predominant risk characteristics of the underlying serviced loans. These risk characteristics include loan type (fixed or adjustable rate) and interest rate. Impairment represents the excess of cost of an individual mortgage servicing rights stratum over its fair value, and is recognized through a valuation allowance. Fair values for individual stratum are based on the present value of estimated future cash flows using a discount rate (11%) commensurate with the risks involved. Estimates of fair value include assumptions about prepayment (154% PSA), default and interest rates, and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, to change significantly in the future. Mortgage Loans in Foreclosure and Other Real Estate Mortgage loans in foreclosure and other real estate are carried at fair market value, less estimated costs to sell. Loans Receivable Loans receivable are reported at the principal amount outstanding net of an allowance for loan losses. The allowance for loan losses is that amount believed adequate to absorb estimated credit losses based on an analysis of individual credits, prior and current loss experience, and current and anticipated economic conditions. A provision for loan losses is charged to operations based on management's periodic evaluation. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. To the extent current available evidence raises doubt about the future realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date. Furniture, Equipment, and Leasehold Improvements Furniture, equipment, and leasehold improvements are carried at cost less accumulated depreciation. Depreciation of furniture and equipment is computed using the straight-line method over the estimated useful lives of the assets. The Leader Mortgage Company Notes to Financial Statements--Continued A. Summary of Significant Accounting Policies and Additional Information--Continued Leasehold improvements are amortized using the straight-line method over the estimated useful life of the improvement or the lease term, whichever is shorter. Deferred Finance Fees Deferred finance fees and expenses on the Company's debt are stated at cost and are being amortized over the life of the related debt. Marketable Securities The Company's marketable securities are defined as trading securities under the provisions of Statements of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). Accordingly, unrealized holding gains or losses on the securities are reflected in current earnings. Cash and Cash Equivalents For purposes of cash flow, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Impact of Interest Rate Fluctuations Interest rate fluctuations generally have a direct impact on a mortgage banking institution's financial performance. Significant increases in interest rates may make it more difficult for potential borrowers to purchase residential property and to qualify for mortgage loans. As a result, the volume and related income from loan originations may be reduced. This may be mitigated by the increase in first-time home buyer bond programs which generally offer mortgage rates at one percent or more below prevailing market rates. In addition, the Company is not required to assume interest rate risk on loans acquired from state-sponsored first time home buyer programs. Significant increases in interest rates will also generally increase the value of the Company's servicing portfolio as a result of slower anticipated prepayment activity. Significant decreases in interest rates may enable more potential borrowers to qualify for a mortgage loan, resulting in higher income related to the loan originations. In addition, significant decreases in interest rates may result in higher than anticipated loan prepayment activity and, therefore, reduce the value of the loan servicing portfolio. This may also be mitigated by the below market-rate loans in the servicing portfolio previously originated under the first-time home buyer bond program. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The Leader Mortgage Company Notes to Financial Statements--Continued A. Summary of Significant Accounting Policies and Additional Information--Continued Recent Account Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes new rules for the reporting and display of comprehensive income and its components. The new rules require that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The statement does not specify a format for the financial statement that portrays the components of comprehensive income but requires that a company display an amount representing total comprehensive income for the periods reported in that financial statement. Application of the statement will not impact amounts previously reported for net income or affect the comparability of previously issued financial statements. The Statement is effective for fiscal years beginning after December 15, 1997. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and for Hedging Activities. The Statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The statement requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for the following three different types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments (referred to as fair value hedges); hedges of the variable cash flows of forecasted transactions (cash flow hedges); and hedges of foreign currency exposures of net investments in foreign operations. Changes in the fair value of derivatives that do not meet the criteria of one of these three categories of hedges are included in earnings in the period of the change. The Company is evaluating the impact of the Statement on its financial position and results of operations. Statement 133 is effective for years beginning after June 15, 1999. B. Servicing of Mortgage Loans and Mortgage Servicing Rights Servicing of Mortgage Loans The Company originates, purchases and sells to investors, without recourse, loans secured by mortgages, principally on single family residential property. The Company generally retains the servicing of certain loans sold to investors and collects the monthly principal and interest payments and performs certain escrow service generally related to insurance and real estate tax payments. The Company's aggregate net servicing portfolio, including loans serviced for related parties, was $4,681,355,757 at June 30, 1998, representing 81,062 mortgages. Included in the Company's servicing portfolio is 7,477 single-family mortgage loans being serviced under subservicing agreements at June 30, 1998. The outstanding principal balance of these subserviced loans is $406,228,541. The Company maintains escrow funds comprised primarily of funds to be transferred to third party investors as well as funds to pay real estate taxes and insurance of borrowers aggregating approximately $73 million at June 30, 1998. These funds are segregated in noninterest-bearing deposit accounts and are not included as assets and liabilities of the Company. The Leader Mortgage Company Notes to Financial Statements--Continued B. Servicing of Mortgage Loans and Mortgage Servicing Rights--Continued A summary of mortgage servicing rights for the nine month period ended June 30, 1998 is as follows: Mortgage servicing rights: Balance--October 1 ................................. $39,992,979 Additions .......................................... 15,135,958 Amortization ....................................... 5,015,416 ----------- Balance--June 30 ................................... $50,113,521 =========== Accumulated amortization at June 30, 1998 was $29,739,965. At June 30, 1998, the estimated fair market value of the servicing portfolio was $72.3 million, as determined using a mortgage servicing valuation model. C. Mortgage Loans Held for Sale Mortgage loans held for sale include the following at June 30, 1998: Residential mortgage loans: Principal balance: FHA/VA insured .................................. $ 85,148,679 Conventional .................................... 30,242,558 ------------ 115,391,237 Origination premiums ................................. 1,280,811 ------------ $116,672,048 ============ D. Accounts Receivable Receivables at June 30, 1998 include the following: Advances on behalf of mortgagors ............................. $2,645,779 Accrued interest ............................................. 1,288,795 Federal income tax refund .................................... 2,262,065 Other ........................................................ 1,233,912 ---------- $7,430,551 ========== The Leader Mortgage Company Notes to Financial Statements--Continued E. Property and Equipment Property, equipment and leashold improvements at June 30, 1998 include the following major classifications: Leasehold improvements ............................... $ 186,426 Furniture and fixtures ............................... 1,019,848 Computer equipment ................................... 2,189,467 Automobiles .......................................... 81,527 ----------- Total ................................................ 3,477,268 Accumulated depreciation ............................. (2,571,986) ----------- Total ................................................ $ 905,282 =========== Depreciation expense for the nine months ended June 30, 1998 was $294,562. F. Related Party Transactions The Company leases office space from a partnership whose controlling partners are officers of the Company. The five year lease agreement provides for annual base rents of $436,000 plus additional rents based on increases in operating expenses and taxes. There we no outstanding amounts due under the lease agreement as of June 30, 1998. G. Income Taxes The Company accounts for income taxes under FASB Statement No. 109, Accounting for Income Taxes (FASB 109). Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The components of the income tax benefit for the period ended June 30, 1998 are as follows: Current ........................................... $(215,361) Deferred .......................................... (643,890) --------- Total ............................................. $(859,251) ========= The Leader Mortgage Company Notes to Financial Statements--Continued G. Income Taxes--Continued Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred income taxes as of June 30, 1998 are as follows: Deferred tax assets: Loan loss reserves ................................. $ 1,389,622 Foreclosure reserve ................................ 273,904 Other .............................................. 146,026 ----------- Total deferred tax assets ............................. 1,809,552 Deferred tax liabilities: Mortgage servicing rights .......................... (1,224,227) Mark to market ..................................... (100,448) Depreciation ....................................... (92,391) ----------- Total deferred tax liabilities ........................ (1,417,066) ----------- Total net deferred taxes .............................. $ 392,486 =========== G. Income Taxes--Continued The effective tax rate differs from the statutory rate applicable to corporations as a result of permanent differences between accounting and taxable income as shown below for the nine month period ended June 30, 1998: Tax (benefit) at statutory rate ........................... (34.00)% Officer life insurance .................................... 2.99 Other ..................................................... 6.76 ----- Effective tax (benefit) rate .............................. (24.25)% ===== Cash paid for income taxes was $2,713,717 for the nine month period ended June 30, 1998. H. Employee Benefit Plans The Company's Savings and Investment Plan and Trust (401(k) plan) offers all employees, who meet certain age and eligibility requirements, a program of regular savings and investment funded by their own contributions and discretionary matching contributions of the Company. The amount charged to expense for the nine month period ended June 30, 1998 was $198,029. The Leader Mortgage Company Notes to Financial Statements--Continued H. Employee Benefit Plans--Continued The Company maintains an Employee Stock Ownership Plan and Trust in which eligible employees accumulated capital ownership in the Company. The Company has received a determination letter from the Internal Revenue Service that the plan is frozen as of October 1, 1995, and no future contributions are being made. There were no Company cash contributions to the Plan for the nine month period ended June 30, 1998. Since its inception the Trust has, from time to time, acquired shares of Class E, no par value, common stock of the Company. For the period ended June 30, 1998, no dividends were paid on the Class E common stock. See subsequent event footnote. The Company granted stock options during the fiscal year ended September 30, 1995 to certain key employees of the Company. The options are for the purchase of 35,000 shares of Class A stock at $1.00 per share. The stock option agreements provide, among other items, for exercise only in the event of a substantial ownership change in the Company as defined in the agreements. See Subsequent Event footnote. I. Borrowings Warehouse lines of credit at June 30, 1998 consisted of the following: Notes due to banks maturing at various dates through May, 1999, secured principally by mortgage loans held for sale: Bond program and conventional ............................. $120,411,663 Foreclosure ............................................... 5,078,151 ------------ Total .......................................................... $125,489,814 ============ Short-term notes due to banks provide for maximum borrowings of $232,000,000 secured principally by mortgage loans held for sale have variable interest rates which ranged from .80% to 7.7% for the nine month period ended June 30, 1998. The Company has a compensating balance arrangement with lenders to reduce interest on certain borrowings by the amount of the deposit balance maintained at the bank (approximately $73 million at June 30, 1998). Certain loan agreements contain financial covenants, including net worth requirements and restriction on dividends that limits the amount available for dividends to $3,766,225 at June 30, 1998. Commitment fees of up to 12.5 basis points are paid on unutilized balances. The Leader Mortgage Company Notes to Financial Statements--Continued I. Borrowings--Continued Notes payable--other at June 30, 1998 consisted of the following:
Short Long Term Term Total ----------- ----------- ----------- Credit/term loan agreement due various banks under a co-agent agreement ........................... $ 6,101,691 $36,642,363 $42,744,054 Note, secured by a multifamily mortgage, due a bank 4,279,000 4,279,000 Note, secured by receivables, due a bank having a maturity date of October 1, 2003 ............... 480,000 2,500,000 2,980,000 Note, secured by pledged mortgage servicing rights on GNMA pools due a bank ....................... 370,320 1,018,532 1,388,852 Unsecured note due October 31, 1998, to a related party with interest computed at 15% per annum .. 200,000 200,000 ----------- ----------- ----------- Total notes payable ............................... $ 7,152,011 $44,439,895 $51,591,906 =========== =========== =========== Note, secured by pledged mortgage servicing rights. $ 2,000,000 $ 2,000,000 Credit agreement due a corporation, secured by beneficial interest in specified mortgage servicing rights on GNMA pools ................. 704,671 704,671 ----------- ----------- ----------- Total subordinated debt ........................... $ 2,704,671 $ 0 $ 2,704,671 =========== =========== ===========
The Company has entered into a Credit/Term Loan Agreement with several lending institutions to provide for revolving loans and term credit for a maximum amount as amended of $51,744,051. Amendments to this credit agreement were made during 1998 to provide for increases in the revolving loans and term credit facility. Loans outstanding under this agreement totaled $42,744,054 at June 30, 1998. The agreement provides for tranches which have a one year revolver and a five year amortization period. There are currently two tranches in the facility. Repayment dates for these tranches commenced October 20, 1995 and continue through July 1, 2003. New tranches can be added provided the total outstanding balance does not exceed 70% of the value of the Company's eligible mortgage servicing rights as valued by a third party appraiser acceptable to the several lending institutions. The Company obtains independent valuations of mortgage servicing on a semi-annual basis. The Company pledges current and future mortgage servicing rights as collateral for the facility. The Leader Mortgage Company Notes to Financial Statements--Continued I. Borrowings--Continued In June 1997, the Company borrowed $4,279,000 from a lending institution, collateralized with a multifamily mortgage loan. Loan payments are based on a 20 year amortization schedule with interest only payable for the first 24 months and a balloon payment due on July 31, 2002. In December 1996, the Company entered into a loan agreement with a lending institution to provide for a maximum amount based on 65% of the market value of the pledged mortgage servicing rights of certain GNMA pools for which the current outstanding balance is $1,388,852. Repayment is to be made in quarterly installments of $92,580 from April 1, 1997 to January 1, 2002 when the balance, if any, shall become due. Maturities of long-term debt at June 30: 1999 $ 7,152,011 2000 9,982,038 2001 9,999,868 2002 9,907,440 Thereafter 14,550,549 ------------ Total $ 51,591,906 ============ In June 1998, the Company entered into a credit agreement which allowed the Company to borrow up to $3,000,000 until September 1998 at a fixed rate of 7.75% per annum. Obligations under this agreement are subordinated to the Credit/Term Loan Agreement. In December 1996, the Company entered into a credit agreement which provided for an advance of $1,000,000 in exchange for a beneficial interest in specified mortgage servicing rights on GNMA pools. As a result of the change of control discussed in subsequent event footnote, the counterparty has exercised its option under the agreement to cause the sale of its beneficial interest and repayment of the remaining advance in September 1998. Obligations under this agreement are subordinated to the Credit/Term Loan Agreement. Included in interest expense on working capital is a charge of approximately $236,000 relating to the acceleration. Interest rates pertaining to this footnote, unless specifically identified, are variable and ranged from 1.75% to 9.88% for the nine month period ending June 30, 1998. The Company has arrangements with lenders to reduce interest on certain borrowings based on deposits maintained at the banks. Total interest was approximately $7,038,000 for the nine month period ended June 30, 1998. Certain loan agreements contain financial covenants, including net worth requirements. The Leader Mortgage Company Notes to Financial Statements--Continued J. Off-Balance Sheet Financial Instruments The Company is a party to off-balance sheet financial agreements in the normal course of business to meet the financing needs of its customers and to reduce exposure of its mortgage loan inventory and committed pipeline to interest rate fluctuations. These financial agreements include commitments to extend credit and forward sales of whole loans. These agreements involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts reflect the extent of involvement the Company has in particular classes of financial instruments. All gains or losses realized from these transactions are recorded at the time of settlement. All changes in market value prior to settlement are considered when establishing the mortgage valuation allowance. A summary of gross contract amounts for off-balance sheet financial instruments (excluding first time home buyer bond program) is as follows: Commitments: To fund residential loans $ 7.1 million To sell whole loans $ 6.2 million Commitments to make residential loans should be disbursed within 60 days. K. Fair Values of Financial Instruments The Company has various financial instruments that require disclosure as to fair value under generally accepted accounting principles. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amount of cash, cash held in escrows, marketable securities, accounts receivable, accounts payable, loans receivable, accrued expenses, notes payable, and subordinated debt are reasonable estimates of their fair market value. The carrying amount of loans held for sale is a reasonable approximation of fair market value due to the short time frame (generally 60 days or less) until these loans are sold and, as discussed in Note A, due to the interest rate risk protection provided by loans originated under the first-time home buyer bond programs. The fair value estimate presented herein are based on pertinent information available to management as of June 30, 1998. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented above. The Leader Mortgage Company Notes to Financial Statements--Continued L. Freddie Mac Indemnification Agreement In 1991 due to irregularities identified in multi-family residential real estate mortgages sold by the Company to the Federal Home Loan Mortgage Corporation ("Freddie Mac") during the period 1987 through 1989, the Company and Freddie Mac entered into an agreement referenced to as the Freddie Mac Indemnification Agreement (the "Agreement") whereby the Company has indemnified Freddie Mac for certain losses on these mortgages. The Agreement provided, among other things, that the Company place in escrow cash deposits not to exceed $7,500,000. This amount would be reduced to the extent of any payments received from third parties. In February 1998, the Company and Freddie Mac approved the Settlement Agreement and Release (the "Settlement"). The Settlement provides that Freddie Mac will retain $1,000,000 to continue to be held in escrow and accrue interest and that the Company will continue to indemnify Freddie Mac for one specified loan. The Company's indemnification obligation is limited to the balance of the escrow account. The total escrow balance included in Other Assets at Freddie Mac on June 30, 1998 is $1,018,886. In the event that no default or acceleration occurs prior to February 11, 2001, the balance of the escrow account will be returned to the Company. M. Subsequent Event On April 10, 1998, the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with First Defiance Financial Corp. ("FDFC") whereby the Company would acquire all of the issued and outstanding Preferred Shares, $100 par value for $114,894 and FDFC would acquire all of the outstanding Class A and Class E stock of the Company for $32,935,106 plus an additional $2,000,000, payable upon satisfactory resolution of certain contingencies within two years of the effective date. Shareholders of the Company approved the Agreement at a special meeting on June 15, 1998, and the acquisition was completed on July 1, 1998, the effective date. As a result of the above transaction, the stock options described in Footnote H became exercisable at $1 per share and the Company recorded a charge to compensation expense for approximately $5.5 million in June 1998. In addition, the Company incurred approximately $601,500, net of tax benefit, in costs associated with the transaction. Such costs have been recognized as an extraordinary item in the statement of operations. N. Impact of Year 2000 (Unaudited) The Company is currently completing an assessment of it's computer systems to determine the impact that the year 2000 will have on its operating systems. The assessment is estimated to be completed no later than December 31, 1998, which is prior to any anticipated impact on the operating systems. The total year 2000 cost is not expected to be significant. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. There is no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. EX-99.2 5 Exhibit 99.2 THE LEADER MORTGAGE COMPANY Financial Statements for the Year Ended September 30, 1997 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders The Leader Mortgage Company Cleveland, Ohio We have audited the accompanying statement of financial condition of The Leader Mortgage Company (the "Company") as of September 30, 1997, and the related statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at September 30, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 3 to the financial statements, the Company adopted recently issued Statements of Financial Accounting Standards "SFAS" Nos. 122 and 125 and, accordingly, changed its method of accounting for mortgage servicing rights effective October 1, 1996 for SFAS No. 122 and effective January 1, 1997 for SFAS No. 125. /s/Deloitte & Touche LLP - ------------------------ Deloitte & Touche LLP Cleveland, Ohio December 5, 1997 (August 20, 1998 as to the fourth paragraph of Note 15 and as to Note 16)
THE LEADER MORTGAGE COMPANY STATEMENT OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 1997 ASSETS: Cash and cash equivalents ........................................ $ 1,988,724 Cash - restricted ................................................ 862,050 Marketable securities ............................................ 257,186 Accounts receivable .............................................. 4,529,332 Mortgage loans held for sale ..................................... 119,117,078 Residential first mortgages in foreclosure ....................... 8,284,834 Property and equipment, net ...................................... 825,750 Mortgage servicing rights, net of amortization of $24,724,550 .... 39,992,979 Other assets ..................................................... 3,177,426 ------------- Total assets ........................................ $ 179,035,359 ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Borrowings under warehouse lines of credit ....................... $ 117,868,293 Notes payable - other ............................................ 42,999,550 Subordinated debt ................................................ 861,999 Accounts payable ................................................. 2,805,939 Accrued expenses and other liabilities ........................... 2,134,599 Deferred income taxes ............................................ 251,403 ------------- Total liabilities ........................................ 166,921,783 SHAREHOLDERS' EQUITY: Series A preferred stock, 7.56% cumulative; $100 par value; 900 shares authorized; 900 shares issued and outstanding ....... 90,000 Class A common stock, no par value, stated value $.841; 350,000 shares authorized; 144,525 shares issued and outstanding 121,620 Class E common stock, no par value, stated value $.841; 250,000 shares authorized; 61,309 shares issued and outstanding 53,930 Additional paid-in capital ....................................... 412,335 Retained earnings ................................................ 14,037,332 Common stock held in treasury, 32,978 shares, at cost............. (2,601,641) ------------- Total shareholders' equity ............................... 12,113,576 ------------- Total liabilities and shareholders' equity .......... $ 179,035,359 =============
See accompanying notes to financial statements.
THE LEADER MORTGAGE COMPANY STATEMENT OF INCOME FOR THE YEAR ENDED SEPTEMBER 30, 1997 REVENUES: Loan servicing ........................................... $18,083,156 Loan origination ......................................... 162,564 Gain on sale of mortgages ................................ 2,834,978 Interest income from mortgage operations (net of interest expense of $8,792,056) ................ 1,461,419 Rental income ............................................ 197,340 Other income ............................................. 845,335 ----------- Total revenue .................................... 23,584,792 EXPENSES: Salaries, commissions and employee benefits .............. 7,074,736 Occupancy and equipment .................................. 542,322 Amortization of servicing rights ......................... 4,638,920 Other depreciation and amortization ...................... 416,594 Interest on working capital .............................. 2,318,579 Funding of related party operations....................... 628,541 Loss on foreclosures ..................................... 886,696 Other expenses ........................................... 3,399,068 ----------- Total expenses ................................... 19,905,456 ----------- INCOME BEFORE INCOME TAXES ................................. 3,679,336 INCOME TAX EXPENSE ......................................... 1,250,975 ----------- NET INCOME ................................................. $ 2,428,361 ===========
See accompanying notes to financial statements.
THE LEADER MORTGAGE COMPANY STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED SEPTEMBER 30, 1997 Additional Common Preferred Common Paid-In Retained Stock Held Stock Stock Capital Earnings In Treasury Total -------- --------- --------- ------------ ------------ ----------- Balance, September 30, 1996 90,000 175,550 412,335 11,615,865 (2,342,248) 9,951,502 Net income 2,428,361 2,428,361 Dividends paid (6,894) (6,894) Purchase 2,816 treasury shares (259,393) (259,393) -------- --------- --------- ------------ ------------ ----------- BALANCE, SEPTEMBER 30, 1997 $ 90,000 $ 175,550 $ 412,335 $ 14,037,332 $ (2,601,641) $ 12,113,576 ======== ========= ========= ============ ============ ============
See accompanying notes to financial statements.
THE LEADER MORTGAGE COMPANY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 1997 CASH FLOW PROVIDED FROM OPERATING ACTIVITIES: Net income ...................................................................... $ 2,428,361 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................. 416,594 Amortization of mortgage servicing rights ..................................... 4,638,920 Unrealized gain on marketable securities ...................................... (60,199) Loss on investment sale ....................................................... 122,830 Increase in mortgage loans held for sale, net of warehouse advances ........... (7,016,616) Increase in accounts receivable - servicing operations ........................ (152,579) Increase in accounts payable and accrued expenses ............................. 1,393,766 Deferred income tax benefits .................................................. (284,341) Increase in restricted cash ................................................... (862,050) Other ......................................................................... 933,658 ------------ Cash provided by operating activities ........................................... 1,558,344 ------------ CASH FLOW FROM INVESTING ACTIVITIES: Payments for the acquisition of fixed assets .................................... (57,600) Payments for mortgage servicing rights .......................................... (16,860,255) Proceeds from sale of real estate investment .................................... 1,853,767 Advances to escrows with governmental agencies and third party trustee .......... (375,000) Collections on mortgage notes ................................................... 270,033 Proceeds from investment sale ................................................... 183,029 ------------ Cash used in investing activities ............................................... (14,986,026) ------------ CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from notes payable ..................................................... 18,863,726 Payments on notes payable ....................................................... (8,776,097) Proceeds of subordinated debt ................................................... 861,999 Increase in finance fees ........................................................ (59,060) Increase in line of credit ...................................................... 120,000 Payments on capitalized lease obligation ........................................ (24,663) Dividends paid .................................................................. (6,894) Acquisition of treasury stock ................................................... (259,393) ------------ Cash provided by financing activities ........................................... 10,719,618 ------------ NET DECREASE IN CASH .............................................................. (2,708,064) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................................... 4,696,788 ------------ CASH AND CASH EQUIVALENTS, END OF YEAR ............................................ $ 1,988,724 ============ CASH PAYMENTS FOR THE YEAR: Interest ........................................................................ $ 11,495,157 ============ Income taxes .................................................................... $ 516,000 ============
See accompanying notes to financial statements. THE LEADER MORTGAGE COMPANY NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - The Leader Mortgage (the "Company"), an Ohio corporation, was incorporated February 16, 1960 to provide complete mortgage banking service for residential and commercial mortgages. The Company's principal office is located in Cleveland, Ohio. Mortgage Loans Held for Sale - Mortgage loans held for sale are reported at the lower of cost or estimated market as determined on an aggregate basis, including consideration of all open designated delivery commitment positions. The Company separately evaluates the estimated fair value of its commitments to lend, including consideration of all designated open delivery commitment positions, for impairment. If impairment exists, the Company records a charge to earnings in the current period. The Company generally sells whole loans and mortgage-backed securities with servicing retained. Gains or losses on such sales are generally recognized at the time of settlement based upon the difference between the sales proceeds and the allocated basis of loans sold, adjusted for loan fees, mortgage servicing rights, excess servicing fees, retained interests and the cost of issuing securities. Mortgage Servicing Rights, Net - The Company purchases and originates mortgage loans for sale to the secondary market, and sells the loans on either a servicing retained or servicing released basis. Effective October 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 122 ("SFAS 122") Accounting for Mortgage Servicing Rights. Under the statement, the total cost of mortgage loans purchased or originated with the intent to sell is allocated between the loan servicing right and the mortgage loan without servicing, based on their relative fair values at the date of purchase or origination. The capitalized cost of loan servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. The expected lives of the estimated net servicing income are based, in part, on the expected prepayment rate of the underlying mortgages. The Company adopted Statement of Financial Accounting Standards No. 125 ("SFAS 125"), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities as of January 1, 1997. This statement supersedes SFAS 122 but does not significantly change the Company's accounting for mortgage servicing rights as the accounting requirements of SFAS 125 for mortgage servicing rights are substantially consistent with the requirements of SFAS 122. Mortgage servicing rights are periodically evaluated for impairment. For purposes of measuring impairment, mortgage servicing rights are stratified based on predominant risk characteristics of the underlying serviced loans. These risk characteristics include loan type (fixed or adjustable rate) and interest rate. Impairment represents the excess of cost of an individual mortgage servicing rights stratum over its fair value, and is recognized through a valuation allowance. Fair values for individual stratum are based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved. Estimates of fair value include assumptions about prepayment default and interest rates, and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, to change significantly in the future. Mortgage Loans in Foreclosure and Other Real Estate - Mortgage loans in foreclosure and other real estate are carried at fair market value, less estimated costs to sell. Revenue Recognition - Mortgage loans held for sale are committed for sale to secondary market investors under firm agreements at or prior to closing date of the individual loan. Loan sales and the related gains or losses are recorded at the settlement date. Loan administration fees earned for servicing loans for investors are generally calculated based on the outstanding principal balances of the loans serviced and are recorded as revenue when received. Sales of servicing rights are recorded when all risks and rewards of ownership have transferred and no significant unresolved contingencies exist. Loan origination fees are deferred as a component of the loan balances. Since mortgage loans originated or acquired are generally sold within 60 days, any related fees are not amortized during that period, but are effectively recognized when the loan is ultimately sold. Property and Equipment - Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight line basis over the estimated useful lives of the related assets. Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. To the extent current available evidence raises doubt about the future realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date. Cash Held in Escrow and Restricted Cash - Cash held in escrows represents amounts the Company agreed to set aside to satisfy agreements entered into with the Federal Home Loan Mortgage Corporation (See Note 15). Deferred Finance Fees - Deferred finance fees and expenses, which are included in other assets, on the Company's debt are stated at cost and are being amortized over the life of the related debt. Marketable Securities - The Company's marketable securities are defined as trading securities under the provisions of Statements of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, unrealized holding gains or losses on the securities are reflected in current earnings. Cash and Cash Equivalents - For purposes of cash flow, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Use of Estimates in Preparation of the Financial Statements - Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Impact of Interest Rate Fluctuations - Interest rate fluctuations generally have a direct impact on a mortgage banking institution's financial performance. Significant increases in interest rates may make it more difficult for potential borrowers to purchase residential property and to qualify for mortgage loans. As a result, the volume and related income from loan originations may be reduced. This may be mitigated by the increase in first-time homebuyer bond programs which generally offer mortgage rates at one percent or more below prevailing market rates. In addition, the Company is not required to assume interest rate risk on loans acquired from state - sponsored first time home buyer programs. Significant increases in interest rates will also generally increase the value of the Company's servicing portfolio as a result of slower anticipated prepayment activity. Significant decreases in interest rates may enable more potential borrowers to qualify for a mortgage loan, resulting in higher income related to the loan originations. In addition, significant decreases in interest rates may result in higher than anticipated loan prepayment activity and, therefore, reduce the value of the loan servicing portfolio. This may also be mitigated by the below market - rate loans in the servicing portfolio originated under the first-time homebuyer bond program. 2. MORTGAGE LOANS HELD FOR SALE The following summarizes loans held for sale as of September 30, 1997: Residential first mortgages - bond program and conventional $114,391,684 Multi-family mortgages ..................................... 4,725,394 ------------ Total .............................................. $119,117,078 ============ 3. MORTGAGE LOAN SERVICING Mortgage Servicing Rights - As discussed in Note 1, the Company adopted SFAS 122 on October 1, 1996 and SFAS 125 on January 1, 1997. The effect of adoption of these statements was not material. Activity related to mortgage servicing rights is summarized as follows: Balance October 1, 1996 ....................... $ 27,771,644 Additions ..................................... 16,860,255 Amortization .................................. (4,638,920) ------------ Balance September 30, 1997 .................... $ 39,992,979 ============ The estimated fair value of mortgage servicing rights as of September 30, 1997 was $64,530,217. The Company had a valuation allowance for mortgage servicing rights of $17,122 as of September 30, 1997. Servicing of Mortgage Loans - The Company originates, purchases and sells to investors, without recourse, loans secured by mortgages, principally on single family residential property. The Company generally retains the servicing of certain loans sold to investors and collects the monthly principal and interest payments and performs certain escrow service generally related to insurance and real estate tax payments. The Company's aggregate net servicing portfolio, including loans serviced for related parties, was $4,156,602,041 at September 30, 1997, representing 74,104 mortgages. Included in the Company's servicing portfolio is 6,142 single-family mortgage loans being serviced under subservicing agreements at September 30, 1997. The outstanding principal balance of these loans is $338,349,925. The Company maintains escrow funds comprised primarily of funds to be transferred to third party investors as well as funds to pay real estate taxes and insurance of borrowers aggregating approximately $65,137,693 at September 30, 1997. These funds are segregated in noninterest-bearing deposit accounts and are not included as assets and liabilities of the Company. 4. ACCOUNTS RECEIVABLE Accounts receivable as of September 30, 1997 consisted of the following: Foreclosure receivables, net of reserves of $55,125 $ 877,498 Advances made on behalf of mortgagors ............. 1,142,542 Accrued interest .................................. 1,054,646 Notes receivable .................................. 30,357 Servicing and production .......................... 1,424,289 ---------- Total ......................................... $4,529,332 ========== 5. PROPERTY AND EQUIPMENT Property and equipment as of September 30, 1997 consisted of the following: Leasehold improvements ......... $ 170,344 Furniture and fixtures ......... 957,296 Computer equipment ............. 1,879,772 Automobiles .................... 81,527 ---------- Total ...................... 3,088,939 Accumulated depreciation ....... 2,263,189 ---------- Property and equipment - net $ 825,750 ========== Depreciation expense for 1997 was $410,615. 6. OTHER ASSETS Other assets at September 30, 1997 consisted of the following: Cash held in escrow ..................... $1,763,966 Deferred finance fees (net of accumulated amortization of $312,627) ............. 147,123 Prepaid expenses ........................ 378,048 Other ................................... 888,289 ---------- Total ............................... $3,177,426 ========== 7. RELATED PARTY TRANSACTIONS The Company leases office space from a partnership whose controlling partners are officers of the Company. The lease agreement provides for annual base rents of $365,400 plus additional rents based on increases in operating expenses and taxes. There were no outstanding amounts due under the lease agreement as of September 30, 1997. The Company advances funds to an affiliated partnership that are used to fund operations of the real estate owned by the partnership. 8. WAREHOUSE LINES OF CREDIT Borrowings under warehouse lines of credit at September 30, 1997 consisted of the following:
Notes due to banks maturing at various dates through May 1998 secured principally by mortgage loans held for sale: Bond program and conventional ...................................... $ 111,092,376 Foreclosure ........................................................ 6,775,917 ------------- Total ............................................................... $ 117,868,293 =============
Short-term notes due to banks secured principally by mortgage loans held for sale have an interest rate range from .8% to 7.375% for the year ended September 30, 1997. The Company has a compensating balance arrangement with lenders to reduce interest on certain borrowings by the amount of the deposit balance maintained at the bank. Certain loan agreements contain financial covenants, including net worth requirements. 9. NOTES PAYABLE - OTHER Notes payable - other at September 30, 1997 consisted of the following:
Credit/Term Loan Agreement borrowings due to various banks under a Co-Agent Agreement ................................. $33,513,537 Note, secured by a multifamily mortgage, due a bank .......... 4,279,000 Note, secured by receivables, due a bank having a maturity date of Ocober 1, 2003 ..................................... 3,340,000 Note, secured by pledged mortgage servicing rights on GNMA pools due a bank ...................................... 1,667,013 Unsecured note due October 31, 1998, to a related party with interest computed at 15% per annum .................... 200,000 ----------- Total notes payable - other ....................... $42,999,550 ===========
The Company has entered into a Credit/Term Loan Agreement with several lending institutions to provide for revolving loans and term credit for a maximum amount as amended of $43,013,536. Amendments to this credit agreement were made during 1997 to provide for increases in the revolving loans and term credit facility. Loans outstanding under this agreement totaled $33,513,537 at September 30, 1997. The agreement provides for tranches which have a one year revolver and a five year amortization period. There are currently seven tranches in the facility. Repayment dates for these tranches commenced October 20, 1995 and continue through July 1, 2003. New tranches can be added provided the total outstanding balance does not exceed 70% of the value of the Company's eligible mortgage servicing rights as valued by a third party appraiser acceptable to the several lending institutions. The Company obtains independent valuations of mortgage servicing on a semi-annual basis. The Company pledges current and future mortgage servicing rights as collateral for the facility. In June 1997, the Company borrowed $4,279,000 from a lending institution, collateralized with a multifamily mortgage loan. The loan matures on July 31, 2002, with interest only payable for the first 24 months; thereafter, amortizing on a 20 year schedule. In December 1996, the Company entered into a loan agreement with a lending institution to provide for a maximum loan based on 65% of the market value of the pledged mortgage servicing rights of certain GNMA pools for which the current outstanding balance is $1,667,013. Repayment of the principal amount borrowed to be made in equal quarterly installments in the amount of $92,580 commencing April 1, 1997 and continuing to January 1, 2002 when the balance, if any, shall become due and payable. The Company has provided a guarantee on behalf of Eexcel Cleveland Limited Partnership (an affiliated company)with respect to an Ohio Adjustable Rate Industrial Revenue Bond in the event of default. In the event of default, the Company has guaranteed the difference between the unpaid principal balance of the bonds and the value of the underlying assets securing the bonds. The outstanding balance of the issue was $5,321,975 at September 30, 1997 and the issue matures March 1, 2019. Interest rates on borrowings described in this footnote, unless specifically identified, range from 1.75% to 8.75% for the year ended September 30, 1997. The Company has arrangements with lenders to reduce interest on certain borrowings based on deposits maintained at the banks. Total interest was approximately $10,100,000 for the year ended September 30, 1997. Certain loan agreements contain financial covenants, including net worth requirements, which have been consistently met. Maturities of notes payable other at September 30, 1997 are as follows: Fiscal Year End 1998 $ 7,353,702 1999 9,833,384 2000 9,704,253 2001 7,008,519 2002 3,564,492 Thereafter 5,535,200 ------------ Total $ 42,999,550 ============ 10. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses at September 30, 1997 consisted of the following: Interest ...................... $ 819,091 Salaries and other compensation 601,502 Income taxes .................. 714,006 ---------- Total ..................... $2,134,599 ========== 11. FEDERAL INCOME TAXES The provision for federal income taxes for the year ended September 30, 1997 consists of the following: Current provision .............. $1,535,316 Deferred provision (benefit).... (284,341) ---------- Total ...................... $1,250,975 ========== The deferred tax assets as of September 30, 1997 were $1,383,598 and related to deductible temporary differences primarily market valuation differences on loans, cost associated with mortgage loans held for sale, and accrued bonuses. The deferred tax liability as of September 30, 1997 was $1,635,002 and consisted of taxable temporary differences relating to deferred discounts, mortgage servicing rights and market valuation differences on loans. 12. EMPLOYEE STOCK OWNERSHIP PLAN/SAVINGS AND INVESTMENT PLAN The Company maintains an Employee Stock Ownership Plan in which eligible employees accumulated capital ownership in the Company. The Company has received a determination letter from the Internal Revenue Service that the Plan is frozen as of October 1, 1995, and no future contributions are being made. There were no Company cash contributions to the Plan for the year ended September 30, 1997. The Employee Stock Ownership Plan has, from time to time, acquired shares of Class E common stock of the Company. For the year ended September 30, 1997, no dividends were paid on the Class E common stock. The Company has a Savings and Investment Plan ("401(k) plan") covering all eligible employees as defined by the plan. The 401(k) plan provides, among other items, for matching contributions by the Company up to 50% of eligible employee contributions. For the year ended September 30, 1997, the Company incurred expenses of $130,840 that were contributed to the 401(k) plan. At September 30, 1997, no amounts were due to the 401(k) plan. 13. STOCK OPTIONS The Company granted stock options during the fiscal year ended September 30, 1995 to certain key employees of the Company. The options are for the purchase of 35,000 shares of Class A stock at $1.00 per share. The stock option agreements provide, among other items, for exercise only in the event of a substantial ownership change in the Company as defined in the agreements. No options were granted during 1997. 14. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has various financial instruments that require disclosure as to fair value under generally accepted accounting principles. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount that the Company could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amount of cash, cash held in escrows, marketable securities, accounts and notes receivable, accounts payable, accrued expenses, notes payable, and subordinated debt are reasonable estimates of their fair market value. The carrying amount of loans held for sale is a reasonable approximation of fair market value due to the short time frame (generally 60 days or less) until these loans are sold and, as discussed in Note 1, due to the interest rate risk protection provided by loans originated under the first-time homebuyer bond programs. The fair value estimate presented herein are based on pertinent information available to management as of September 30, 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented above. 15. FREDDIE MAC INDEMNIFICATION AGREEMENT In 1991, due to irregularities identified in multi-family residential real estate mortgages sold by the Company to the Federal Home Loan Mortgage Corporation ("Freddie Mac") during the period 1987 through 1989, the Company and Freddie Mac entered into an agreement referred to as the Freddie Mac Indemnification Agreement (the "Agreement") whereby the Company has indemnified Freddie Mac for certain losses on these mortgages. The Agreement provided, among other things, that the Company place in escrow cash deposits not to exceed $7,500,000. This amount would be reduced to the extent of any payments received from third parties. A total of $3,020,573 was funded to the Freddie Mac escrow account as of September 30, 1997. The Company was notified during this past fiscal year that additional losses related to these loans totaled $52,066. These funds were removed from the account on September 12, 1997. The total escrow balance at Freddie Mac through September 30, 1997 is $1,763,966. Management believes that the Company has satisfied its obligations under the terms of the Agreement and monies held in escrow should be returned to the Company. The agreement provides, among other items, that upon termination, to the extent escrow funds are available therein, Freddie Mac is to return the funded amounts together with interest earned from investment of the funds. Freddie Mac asserts the Agreement is still in effect and the Company is responsible to continue funding the Freddie Mac escrow account and deposit the funds with a Trustee. Total escrow deposits funded with the Trustee amounted to $843,750 at September 30, 1997. The Trustee account balance at September 30, 1997 amounted to $862,050. The Company was notified November 1, 1995 of a civil lawsuit filed by Freddie Mac. Freddie Mac claims the Company is in violation of the Indemnification and Resolution Agreement entered into January 15, 1991 and subsequent Tripartite Agreements. On August 14, 1997, the Judge rendered a written opinion denying Freddie Mac's motion for Summary Judgment and favorable to The Leader Mortgage Company. Further, Freddie Mac informed the Company that on October 9, 1997 fourteen of the seventeen loans in question representing $60 million out of $67 million were refinanced away from Freddie Mac. This leaves three loans in the amount of $7 million in dispute. In February 1998, the Company and Freddie Mac entered into an agreement referenced to as the Settlement Agreement and Release ("Settlement Agreement") whereby the Company and Freddie Mac settle all differences related to the Agreement noted above. Escrow deposits funded to the Trustee were returned to the Company, and funds held in the escrow account with Freddie Mac in excess of $1 million were returned to the Company in February 1998. Freddie Mac will continue to retain $1 million dollars and accrue interest in the same manner set forth in the Agreement. No additional deposits from the Company will be required for the remaining term of the Settlement Agreement. The Company will continue to indemnify Freddie Mac with respect to one loan. No other loans will be subject to the terms of the Agreement. The Agreement will expire on February 11, 2001. In the event of default, the Company's obligation will be limited to the funds on deposit with Freddie Mac at the time Freddie Mac determines its loss and makes its withdrawal. If the balance of the loss is less than the balance held in the escrow, excess funds will be returned to the Company. If there is no event of default, Freddie Mac will return all funds on deposit. 16. SUBSEQUENT EVENTS On July 1, 1998, the Company was acquired by First Defiance Financial Corp. ("First Defiance"), a publicly held corporation with its headquarters in Defiance, Ohio. First Defiance is a holding company of First Federal Savings and Loan which primarily focuses on single family residential mortgage lending, consumer and business loans. Under the terms of the agreement, the purchase price was $39.6 million in cash. In connection with the acquisition by First Defiance, the Employee Stock Ownership Plan received a cash payment of approximately $9,200,000 in exchange for the common stock of the Company in the Plan. Upon the consummation of the merger, the stock options became exercisable at $1 per share. * * * * * * EX-99.3 6 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.
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 --------- ---------- ---------------------- 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 ======== ======== ======== ========
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 --------- ---------- ----------------------------- 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 ========= ========= ========= =========
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.
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 -------- -------- -------- -------- 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
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 -------- -------- ----------- -------- 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
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 ----------------------------------------------------- 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
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 -------------------------------------------------------- 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
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. -----END PRIVACY-ENHANCED MESSAGE-----