The deal Union Planters Corp. struck this month to acquire a Memphis thrift would bring it more than a bigger market share in Tennessee's second-largest city. There's also a highly profitable but potentially risky niche business.

Leader Financial Corp., a thrift company the commercial bank agreed on March 8 to purchase for $523 million in stock, specializes in purchasing, processing, and servicing delinquent FHA and VA loans.

The business is the major driver of earnings at Leader, providing 41% of its loan portfolio and one third of its net income last year.

"The traditional thrift business isn't very viable, so that was the way Leader differentiated itself," said analyst Kay C. Lister, with Keefe, Bruyette & Woods Inc.

Spurred by the success of its delinquent-loan business, Leader, with $3 billion of assets, became one of the most profitable thrifts in the country. Its return on assets last year, 1.38%, and return on equity, 16.82%, actually topped Union Planters' - 1.24% and 15.92%, respectively.

Leader, parent company of Leader Federal Bank, got into the delinquent or "slow-pay" loan business five years ago under president and chief operating officer Ronald W. Stimpson. The S&L began by purchasing higher- coupon, government-insured mortgage loans more than 180 days past due out of its own servicing pool.

When the higher yields made this program profitable, Leader Federal refined its models and began testing portfolios of loans that were 90 days past due. Finally, it expanded beyond its own servicing portfolio and began aggressively buying past due portfolios from third parties.

Union Planters' chief financial officer, Jack W. Parker, said the scale of Leader's operation, rather than the business itself, made the program innovative, since most other mortgage lenders purchase discounted delinquent loans on a limited basis.

"It's not as complicated as people without mortgage backgrounds have tried to make it," Mr. Parker said. "But I'm not aware of anybody that did it as a business like Leader has. And they did it well."

The delinquent-loan operation at Union Planters will continue to be supervised by Mr. Stimpson, who is to become a senior executive vice president and chief administrator at the combined company with responsibility for all nontraditional banking functions, including mortgages.

But Mr. Parker also said the program would play a much smaller role at Union Planters, which would have $14.4 billion of assets when the acquisition closes, which is expected to be in the fourth quarter. The $13.6 million of profits the FHA/VA program contributed to Leader last year constitutes only 8% of the combined company's $172.8 million of pro forma earnings for 1995.

"I would not anticipate growing it at the same speed that it grew with them stand-alone. And as interest rates rise, that's not nearly as attractive a business," Mr. Parker said.

When interest rates perk up, Leader must seek ever higher yields on the past-due loans to maintain the proper spread with its own cost of funds.

Higher rates also tend to encourage more defaults, which puts additional pressure on Leader's collections effort. "The key risk here is increasing interest rates," Mr. Moore said.

Analysts say Leader is selling out at an optimal time, not only because it faced the prospect of higher interest rates, but because it had outrun its funding capacity. Leader Federal operated at a 125% loan-to-deposit ratio, compared with Union Planters' rather anemic 75%, forcing Leader to rely heavily on wholesale funding, particularly Federal Home Loan Bank borrowings.

The addition of Union Planters' $9.5 billion deposit base cures that problem, boosting the combined company's loan-to-deposit ratio to 85%.

"This deal works for both sides," Ms. Lister said. "Union Planters needed somebody like Leader. It needed a big asset generator."

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