1
Exhibit 99.1
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------
December 31: ($000's) 1997 1996
==============================================================================================================================
ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 34,393 $ 27,830
Securities available for sale 348,468 290,813
Securities held to maturity(a) 70,959 84,984
Other short term investments 32,795 23,917
Loans held for sale 90,379 92,440
Loans and leases:
Residential mortgage loans 676,129 688,675
Commercial loans 64,808 25,794
Commercial mortgage loans 101,582 45,611
Commercial lease financing 41,909 --
Finance contracts 4,585 --
Manufactured housing loans 110,827 38,840
Consumer loans 175,871 128,872
Allowance for credit losses (8,773) (5,783)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 1,166,938 922,009
Premises and equipment, net 21,073 14,687
Intangible assets 32,062 10,572
Other assets 35,320 18,916
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,832,387 $ 1,486,168
==============================================================================================================================
LIABILITIES:
- ------------------------------------------------------------------------------------------------------------------------------
Deposits:
Non-interest bearing demand $ 52,545 $ 25,916
Interest bearing demand 212,120 123,412
Savings 214,289 202,940
Certificates and other time deposits 777,942 587,270
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,256,896 939,538
Short term borrowings 124,275 163,456
Long term borrowings 270,693 235,412
Other liabilities 27,926 19,421
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,679,790 1,357,827
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
- ------------------------------------------------------------------------------------------------------------------------------
Preferred stock(b) 9,917 22,693
Common stock(c) 9,748 6,731
Additional paid-in capital 64,276 49,547
Retained earnings 75,947 60,011
Treasury stock, at cost (7,984) (9,011)
Stock acquired by ESOP (551) (675)
Securities equity valuation account 1,244 (955)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 152,597 128,341
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,832,387 $ 1,486,168
==============================================================================================================================
(a) Market value $71,059 in 1997 and $83,958 in 1996.
(b) Preferred stock, no par value; authorized 1,500,000 shares; Series B 429,892
and 479,327 issued and outstanding, respectively. Series
A 498,287 issued and outstanding in 1996.
(c) Common stock, $1.00 par value; authorized 20,000,000 shares; outstanding
11,754,620 (net of 821,083 treasury shares) and 9,011,310 (net of
1,074,111 treasury shares), respectively.
See accompanying notes to consolidated financial statements.
1
2
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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For the years ended December 31: ($000's except per share data) 1997 1996 1995
================================================================================================================================
INTEREST INCOME:
- --------------------------------------------------------------------------------------------------------------------------------
Loans and leases $ 89,463 $ 76,168 $ 60,875
Securities available for sale 23,256 18,809 18,327
Securities held to maturity 5,686 5,288 9,084
Other 1,248 904 423
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 119,653 101,169 88,709
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
- --------------------------------------------------------------------------------------------------------------------------------
Interest on deposits:
Interest checking and money markets 4,090 2,727 2,226
Savings 5,914 5,724 5,626
Certificates of deposit 38,100 32,507 27,909
- --------------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 48,104 40,958 35,761
Short-term borrowings 10,182 6,753 4,305
Long-term debt 18,226 15,296 13,699
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 76,512 63,007 53,765
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 43,141 38,162 34,944
Provision for credit losses 1,615 1,259 918
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NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 41,526 36,903 34,026
- --------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Manufactured housing income 16,001 11,640 --
Mortgage banking income 5,168 3,515 2,610
Customer service fee income 5,562 2,655 1,350
Net securities gains 1,157 584 449
Other 2,187 563 724
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 30,075 18,957 5,133
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NON-INTEREST EXPENSE:
- --------------------------------------------------------------------------------------------------------------------------------
Personnel 19,593 13,963 8,561
Net occupancy expense 4,031 3,002 2,745
Outside services, data processing and communications 3,487 2,984 2,303
Professional fees 1,771 1,671 1,186
Amortization of intangibles 1,798 1,119 388
Other 9,590 7,701 4,598
Non-recurring expenses (a) 1,209 5,011 --
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 41,479 35,451 19,781
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INCOME BEFORE INCOME TAXES 30,122 20,409 19,378
Provision for income taxes 11,088 7,549 6,853
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NET INCOME $ 19,034 $ 12,860 $ 12,525
================================================================================================================================
Net income applicable to common stock $ 17,450 $ 11,164 $ 10,739
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ 1.93 $ 1.29 $ 1.30
Diluted $ 1.57 $ 1.09 $ 1.08
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,050,918 8,670,249 8,286,052
Diluted 12,151,159 11,828,502 11,559,897
================================================================================================================================
(a) Non-recurring expenses in 1997 of $1.2 million reflect acquisition
transaction costs of Summit Bank, N.A. and 1996 expenses of $5.0 million reflect
a one-time assessment for the recapitalization of the Savings Association
Insurance Fund (SAIF).
See accompanying notes to consolidated financial statements.
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3
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years ended December 31, 1997, 1996, 1995 Preferred Common Paid-In Retained Treasury
($000's except per share data) Stock Stock Capital Earnings Stock
===================================================================================================================================
BALANCE AT JANUARY 1, 1995 $ 25,123 $ 5,774 $ 30,949 $ 57,607 ($ 2,296)
Net income 12,525
Cash dividends:
Common stock $.27 per share (2,250)
Series A preferred stock - $1.75 per share (974)
Series B preferred stock - $1.63 per share (809)
Amortization of unearned compensation on ESOP shares 101
Proceeds from exercise of common stock options -
5,699 shares (11) 48
Contribution of 3,845 shares to the 401(k) plan 41
Conversion and redemption of 20,053 Series A preferred shares
to common shares (501) 213 288
Purchase of Series A preferred stock - 16,000 shares (402) (296)
Purchase of Series B preferred stock - 3,500 shares (88) (6)
Purchase of treasury stock - 112,142 shares (1,373)
10% common stock dividend 309 5,257 (5,566)
Unrealized gain on securities available for sale
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BALANCE AT DECEMBER 31, 1995 24,132 6,083 36,207 60,533 (3,292)
Net income 12,860
Cash dividends:
Common stock $.30 per share (2,694)
Series A preferred stock - $1.75 per share (870)
Series B preferred stock - $1.63 per share (795)
Amortization of unearned compensation on ESOP shares 127
Proceeds from exercise of common stock options -
24,543 shares 74 236
Contribution of 6,614 shares to the 401(k) plan 101
Conversion and redemption of 15,260 Series A
preferred shares to common shares and 3,550
Series B preferred shares to common shares (459) 198 261
Purchase of Series A preferred stock - 25,300 shares (639) (879)
Purchase of Series B preferred stock - 9,900 shares (341) (143)
Purchase of treasury stock - 385,953 shares (6,317)
Issuance of 480,291 common shares in MCi acquisition 279 5,309
10% common stock dividend 369 8,654 (9,023)
Unrealized loss on securities available for sale
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BALANCE AT DECEMBER 31, 1996 22,693 6,731 49,547 60,011 (9,011)
Net income 19,034
Cash dividends:
Common stock - $.34 per share (3,265)
Series A preferred stock - $1.75 per share (861)
Series B preferred stock - $1.63 per share (723)
Amortization of unearned compensation on ESOP shares 199
Issuance of 686,186 common shares in Summit acquisition 549 4,911 1,499
Proceeds from exercise of common stock options - 115,870 (161) 1,088
shares
Tax benefit on stock options exercised 257
Contribution of 3,421 shares to the 401(k) plan 133
Conversion and redemption of 496,249 Series
A preferred shares to common shares (11,539) 1,455 9,991 93
Conversion and redemption of 49,435 Series
B preferred shares to common shares (1,237) 802 435
Purchase of treasury stock - 41,028 shares (722)
25% common stock dividend 1,013 (1,013) (5)
Unrealized gain on securities available for sale
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 9,917 $ 9,748 $ 64,276 $ 75,947 ($ 7,984)
===================================================================================================================================
Stock Securities
Years ended December 31, 1997, 1996, 1995 Acquired Equity
($000's except per share data) By ESOP Valuation Total
Account
======================================================================================================
BALANCE AT JANUARY 1, 1995 ($ 1,051) ($ 2,979) $ 113,127
Net income 12,525
Cash dividends:
Common stock $.27 per share (2,250)
Series A preferred stock - $1.75 per share (974)
Series B preferred stock - $1.63 per share (809)
Amortization of unearned compensation on ESOP shares 200 301
Proceeds from exercise of common stock options -
5,699 shares 37
Contribution of 3,845 shares to the 401(k) plan 41
Conversion and redemption of 20,053 Series A preferred shares
to common shares --
Purchase of Series A preferred stock - 16,000 shares (698)
Purchase of Series B preferred stock - 3,500 shares (94)
Purchase of treasury stock - 112,142 shares (1,373)
10% common stock dividend - 585,263 shares --
Unrealized gain on securities available for sale 4,323 4,323
- ------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 (851) 1,344 124,156
Net income 12,860
Cash dividends:
Common stock $.30 per share (2,694)
Series A preferred stock - $1.75 per share (870)
Series B preferred stock - $1.63 per share (795)
Amortization of unearned compensation on ESOP shares 176 303
Proceeds from exercise of common stock options -
24,543 shares 310
Contribution of 6,614 shares to the 401(k) plan 101
Conversion and redemption of 15,260 Series A
preferred shares to common shares and 3,550
Series B preferred shares to common shares --
Purchase of Series A preferred stock - 25,300 shares (1,518)
Purchase of Series B preferred stock - 9,900 shares (484)
Purchase of treasury stock - 385,953 shares (6,317)
Issuance of 480,291 common shares in MCi acquisition 5,588
10% common stock dividend - 508,920 shares --
Unrealized loss on securities available for sale (2,299) (2,299)
- ------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 (675) (955) 128,341
Net income 19,034
Cash dividends:
Common stock - $.34 per share (3,265)
Series A preferred stock - $1.75 per share (861)
Series B preferred stock - $1.63 per share (723)
Amortization of unearned compensation on ESOP shares 124 323
Issuance of 686,186 common shares in Summit acquisition (44) 6,915
Proceeds from exercise of common stock options - 115,870 927
shares
Tax benefit on stock options exercised 257
Contribution of 3,421 shares to the 401(k) plan 133
Conversion and redemption of 496,249 Series
A preferred shares to common shares --
Conversion and redemption of 49,435 Series
B preferred shares to common shares --
Purchase of treasury stock - 41,028 shares (722)
25% common stock dividend - 1,148,184 shares (5)
Unrealized gain on securities available for sale 2,243 2,243
- ------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 ($ 551) $1,244 $152,597
======================================================================================================
See accompanying notes to consolidated financial statements.
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4
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Years Ended December 31: ($000's) 1997 1996 1995
=================================================================================================================================
OPERATING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 19,034 $ 12,860 $ 12,525
Adjustments to reconcile net income to net cash used by operating activities:
Provision for credit losses 1,615 1,259 918
Depreciation, amortization and accretion 6,073 3,154 1,721
Amortization of unearned compensation on ESOP shares 322 301 301
Net securities gains (1,157) (584) (449)
Net gain on sales of loans (9,740) (3,917) (1,485)
Proceeds from sales of loans held for sale 261,197 274,705 89,857
Origination of loans held for sale (259,102) (324,505) (121,690)
(Increase) decrease in other assets (45,034) 6,707 (2,002)
(Decrease) increase in other liabilities (959) 6,486 4,508
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (27,751) (23,534) (15,796)
=================================================================================================================================
INVESTING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of securities available for sale 100,277 76,784 73,826
Proceeds from calls, paydowns and maturities of securities available for sale 73,151 97,507 62,647
Purchases of securities available for sale (230,173) (170,519) (133,463)
Purchases of securities held to maturity (1,417) (9,638) (14,209)
Proceeds from maturities of securities held to maturity 15,442 14,596 22,070
Increase in other short-term investments (8,878) (1,618) (11,826)
Increase in loans and leases (146,209) (153,669) (84,595)
Purchases of premises and equipment, net (6,788) (4,025) (683)
Net cash from purchases of subsidiaries and other acquisitions 2,556 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (202,039) (150,582) (86,233)
=================================================================================================================================
FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------------
Increase in core deposits 93,779 84,651 75,952
Acquisition of deposits 150,800 24,606 --
Net change in short-term borrowings (38,766) 93,103 (34,947)
Net change in long-term debt 34,863 (9,080) 75,161
Cash dividends paid (4,786) (4,341) (3,967)
Exercise of stock options 1,185 311 37
Purchases of treasury stock (722) (6,317) (1,373)
Purchases of preferred stock -- (2,002) (792)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 236,353 180,931 110,071
=================================================================================================================================
INCREASE IN CASH AND DUE FROM BANKS 6,563 6,815 8,042
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 27,830 21,015 12,973
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 34,393 $ 27,830 $ 21,015
=================================================================================================================================
The Corporation paid Federal income taxes of $8,834, $7,320 and $5,919 in 1997,
1996 and 1995, respectively.
The Corporation paid interest of $75,202, $62,549, and $52,289 in 1997, 1996 and
1995, respectively.
See accompanying notes to consolidated financial statements.
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5
SIGNAL CORP AND SUBSIDIARIES
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
NATURE OF OPERATIONS
Signal Corp ("The Corporation") conducts its principal activities through
its banking and non-banking subsidiaries with 29 banking offices located
throughout north central Ohio and four banking offices in western Pennsylvania
and non-banking facilities in Ohio, Indiana and Virginia doing business in 42
states. Principal activities include commercial and retail banking, investment
services and brokering and servicing manufactured housing finance contracts.
RESTATEMENT
The Consolidated Financial Statements reflect the Corporation's June 29,
1998 acquisition of First Shenango Bancorp, Inc. The acquisition was completed
with the exchange of approximately 3,087,000 common shares of Signal Corp for
all 2,161,000 of the outstanding common shares of First Shenango. The
transaction has been treated as a pooling of interests, and accordingly, all
prior period data has been restated to reflect the acquisition of First
Shenango.
Also see note 15 - Acquisitions.
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Signal Corp
and its subsidiaries. All material intercompany transactions and balances have
been eliminated. Certain prior period data has been reclassified to conform to
current period presentation.
The preparation of Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Actual results could differ from those
estimates.
SECURITIES
Securities are classified as held to maturity, available for sale or
trading. Only those securities classified as held to maturity, which management
has the intent and ability to hold to maturity, are reported at amortized cost.
Available for sale and trading securities are reported at fair value with
unrealized gains and losses, net of related deferred income taxes, included in
shareholders' equity or income, respectively. The cost of securities sold is
based on the specific identification method.
Other short term investments consist primarily of interest bearing deposits
with the Federal Home Loan Bank of Cincinnati and the Federal Home Loan Bank of
Pittsburgh (collectively "FHLB").
LOANS AND LEASES
Interest income on loans is based on the principal balance outstanding. The
accrual of interest for commercial, construction and mortgage loans is
discontinued when there is a clear indication that the borrower's cash flow may
not be sufficient to meet payments as they become due. Such loans are also
placed on nonaccrual status when principal or interest is past due ninety days
or more, unless the loan is well secured and in the process of collection. When
a loan is placed on nonaccrual status, all previously accrued and unpaid
interest is reversed against income. A loan remains on non-accrual status until
the loan is current as to payment of both principal and interest, and/or the
borrower demonstrates the ability to pay and remain current.
Direct loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized over the estimated
life of the related loans or commitments as a yield adjustment. Net deferred
loan fees or costs related to loans paid off or sold are included in income at
the time of sale.
Income on direct financing leases is recognized on a basis to achieve a
constant periodic rate of return on the outstanding investment.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rates or the fair value
of the underlying collateral. Impaired loans have been defined as all nonaccrual
commercial loans.
Loans held for sale are valued at the lower of aggregate cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements and were $90,379,000 and $92,440,000 at December 31,
1997 and 1996 respectively. The Corporation has commitments to sell residential
mortgage loans held for sale in the secondary market. Gains and losses on
residential mortgage loans sold are recorded at the time of the sale and are
recognized as mortgage banking income. Mortgage servicing rights associated with
mortgage loans originated and sold, where servicing is retained, are capitalized
and amortized over the period of net revenue. The carrying value of such rights
is subject to periodic adjustment based upon changing market conditions.
The Corporation adopted the provisions of SFAS 125, "Accounting and
Reporting for transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," on January 1, 1997, which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 is based on consistent application of a financial-
components approach that focuses on control. Under the financial-components
approach, the Corporation recognizes the financial and servicing asset it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS 125 also provides consistent standards for distinguishing transfers of
financial assets that are secured borrowings.
The Corporation records an asset upon sale or securitization of loans with
servicing retained and allocates the total cost of loans to the servicing rights
and the loans based on their relative fair values. The resulting servicing
rights are amortized in proportion to, and over the period of, estimated net
servicing revenues. Servicing rights are assessed for impairment recognized
through a valuation allowance. For purposes of measuring impairment, the rights
are stratified based on interest rate and original maturity.
ALLOWANCE FOR CREDIT LOSSES
The allowance is maintained at a level management considers to be adequate
to absorb potential loan and lease losses. Credit losses are charged and
recoveries are credited to the allowance. Provisions for credit losses are based
on management's review of the historical credit loss experience and such other
factors which, in management's judgement, deserve consideration under existing
economic conditions in estimating potential credit losses.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation and amortization. Depreciation is computed on
the straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed on the straight-line method
over the lives of the related leases or useful lives of the related assets,
whichever is shorter. Maintenance, repairs and minor improvements are charged to
operating expenses as incurred.
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6
INTANGIBLE ASSETS
Intangible assets, primarily premiums on purchased deposits, are amortized
on a straight-line basis generally over a period of up to 15 years. Management
reviews intangible assets for possible impairment if there is a significant
event that detrimentally affects operations. Impairment is measured using
estimates of the future earnings potential of the entity or assets acquired.
Amortization of intangible assets was $1.8 million and $1.1 million in 1997 and
1996, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation has entered into interest rate swap agreements to achieve a
lower aggregate borrowing cost on certain fixed-rate long-term borrowings. Net
interest expense resulting from the differential between exchanging fixed-rate
and floating interest payments is recorded on an accrual basis as an adjustment
to the interest expense of the associated liability.
The Corporation periodically hedges the value of manufactured housing loans
held for sale to mitigate the impact on the change in value on sale of loans due
to future fluctuations in interest rates. The contracts are designated as
hedges, with gains and losses recorded as basis adjustments to loans held for
sale.
The Corporation does not hold or issue derivative financial instruments
for trading purposes.
NET INCOME PER SHARE
Earnings per share is calculated by dividing net income for the period by
the weighted average number of shares of common stock outstanding during the
period. The assumed conversion of convertible preferred stock and the exercise
of stock options is included in the calculation of diluted earnings per share.
SFAS No. 128, "Earnings Per Share," was adopted for 1997 with all
prior-period earnings per share data restated. The statement requires dual
presentation of basic earnings per share and diluted earnings per share on the
Consolidated Statements of Income.
STOCK DIVIDEND
The Corporation's board of directors approved 25% stock dividends in April
1998 and April 1997 and 10% stock dividends on both May 22, 1996 and May 22,
1995. The consolidated financial statements, notes and other references to share
and per share data have been retroactively restated for the stock dividends.
STOCK-BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation," was adopted January
1, 1996 and encourages, but does not require, adoption of a fair-value-based
accounting method for employee stock-based compensation arrangements. The
Corporation has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and
is effective for fiscal years beginnings after December 15, 1997. The statement
requires additional reporting of items that affect comprehensive income but not
net income. Examples relevant to the Corporation include unrealized gains and
losses on securities available for sale. This statement will result in
additional financial statement disclosures upon adoption.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. The statement requires financial disclosure
and descriptive information about reportable operating segments. This statement
may result in additional financial statement disclosures upon adoption, however
the Corporation does not expect to make material changes to its current segment
groupings.
NOTE 2 - SECURITIES
Securities available for sale as of December 31:
- --------------------------------------------------------------------
1997
----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
($000'S) COST GAINS LOSSES VALUE
====================================================================
U.S. Government and
agency obligations ... $ 30,240 $ 97 ($ 33) $ 30,304
Obligations of states
and political
subdivisions ......... 31,597 1,567 -- 33,164
Agency mortgage-
backed securities .... 216,091 1,242 (1,183) 216,150
Retained interest in
securitized assets 27,023 -- -- 27,023
Other bonds, notes and
debentures ........... 1,144 28 (3) 1,169
Other securities ..... 40,518 169 (29) 40,658
- --------------------------------------------------------------------
Total securities ..... $346,613 $ 3,103 ($1,248) $348,468
====================================================================
- --------------------------------------------------------------------
1996
------------------------------------------------
Amortized Unrealized Unrealized Market
($000's) Cost Gains Losses Value
====================================================================
U.S. Government and
agency obligations .... $ 55,028 $ 51 ($ 143) $ 54,936
Obligations of states
and political
subdivisions .......... 26,910 461 (87) 27,284
Agency mortgage-
backed securities ..... 169,276 776 (2,616) 167,436
Retained interest in
securitized assets . 6,491 -- -- 6,491
Other bonds, notes and
debentures ............ 2,685 21 (4) 2,702
Other securities ...... 31,896 94 (26) 31,964
- --------------------------------------------------------------------
Total securities....... $292,286 $1,403 ($2,876) $290,813
====================================================================
Securities held to maturity as of December 31:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------
1997
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
($000'S) COST GAINS LOSSES VALUE
==============================================================
U.S. Government
and agency
obligations ........ $ 4,500 $ 3 ($ 31) $ 4,472
Obligations of
states and political
subdivisions ....... 2,906 64 -- 2,970
Agency mortgage-
backed securities .. 61,450 424 (385) 61,489
Other securities ... 2,103 25 -- 2,128
- -------------------------------------------------------------
Total securities ... $70,959 $ 516 ($ 416) $71,059
==============================================================
- --------------------------------------------------------------
1996
---------------------------------------------
Amortized Unrealized Unrealized Market
($000's) Cost Gains Losses Value
==============================================================
U.S. Government
and agency
obligations ........ $ 4,501 $ 12 ($ 45) $ 4,468
Obligations of
states and political
subdivisions ....... 1,634 24 -- 1,658
Agency mortgage-
backed securities .. 78,737 369 (1,386) 77,720
Other securities ... 112 -- -- 112
- --------------------------------------------------------------
Total securities ... $84,984 $ 405 ($1,431) $83,958
==============================================================
The amortized cost and approximate market value of securities at December
31, 1997, by expected actual maturity, are shown in the following table. Actual
maturities may differ from contractual
6
7
maturities when there exists a right to call or prepay obligations with or
without call or prepayment penalties. Maturities of mortgage-backed securities
were estimated based on historical and expected future prepayment trends.
- --------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
($000'S) COST VALUE COST VALUE
==============================================================
Debt securities:
Under 1 year $ 50,826 $ 51,023 $ 3,751 $ 3,724
1-5 years ... 169,668 169,902 51,033 50,979
6-10 years .. 75,431 75,615 5,121 5,135
Over 10 years 50,688 51,928 11,054 11,221
- --------------------------------------------------------------
Total securities $346,613 $348,468 $ 70,959 $ 71,059
==============================================================
At December 31, 1997 and 1996, securities with a book value of $128,571,000
and $51,675,000, respectively, were pledged to secure short-term borrowings,
public deposits, and for other purposes as required or permitted by law.
Realized gains and losses respectively were as follows: 1997 - $1,240,000 and
($83,000); 1996 - $978,000 and ($394,000); and 1995 - $793,000 and ($344,000).
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
Transactions in the allowance for credit losses for the years ended
December 31:
- ---------------------------------------------------------------
($000's) 1997 1996 1995
===============================================================
Balance at January 1 .......... $ 5,783 $ 5,466 $ 5,904
Losses charged off ............ (1,278) (1,002) (1,408)
Recoveries of losses
previously charged off ..... 142 60 52
- ---------------------------------------------------------------
Net charge-offs ............... (1,136) (942) (1,356)
Provision charged to operations 1,615 1,259 918
Reserves of acquired businesses 2,511 -- --
- ---------------------------------------------------------------
Balance at December 31 ........ $ 8,773 $ 5,783 $ 5,466
===============================================================
Impaired loan information at December 31:
- ---------------------------------------------------------------
($000's) 1997 1996
===============================================================
Impaired loans .................... $7,123 $5,350
Valuation reserve on impaired loans 2,177 1,795
Average impaired loans ............ $5,952 $4,288
===============================================================
Cash basis interest income recognized on impaired loans during both years
was immaterial.
NOTE 4 - COMMERCIAL LEASE FINANCING
A summary of the gross investment in commercial lease financing at December
31:
- ---------------------------------------------------------------
($000's) 1997 1996
===============================================================
Direct financing leases ........ $33,695 --
Operating leases ............... 8,214 --
- ---------------------------------------------------------------
Total commercial lease financing $41,909 --
===============================================================
The components of the investment in direct financing leases at December 31:
- ---------------------------------------------------------------
($000's) 1997 1996
===============================================================
Rentals receivables ........................... $37,182 --
Estimated residual value of leased assets ..... 4,628 --
- ---------------------------------------------------------------
Gross investment in direct financing leases ... 41,810 --
Unearned income ............................... 8,115 --
- ---------------------------------------------------------------
Total net investment in direct financing leases $33,695 --
===============================================================
At December 31, 1997, the minimum future lease payments receivable for each
of the years 1998 through 2002 were $13,600,000, $11,094,000, $8,276,000,
$5,509,000, and $2,977,000, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31:
- ---------------------------------------------------------------
($000's) Estimated 1997 1996
Useful Life
===============================================================
Land and improvements ...... -- $ 2,744 $ 1,785
Buildings .................. 25 16,531 13,913
Furniture and equipment .... 3 to 10 yrs 13,264 7,365
Leasehold improvements ..... 5 to 25 yrs 3,614 2,446
Accumulated depreciation and
amortization ............... (15,080) (10,822)
- ---------------------------------------------------------------
Total premises and equipment $ 21,073 $ 14,687
===============================================================
Depreciation and amortization expense related to premises and equipment was
$2,968,000 in 1997, $1,482,000 in 1996, and $1,020,000 in 1995.
The Corporation's subsidiaries have entered into a number of noncancelable
lease agreements with respect to premises. A summary of the minimum annual
rental commitments under these leases at December 31, 1997, exclusive of taxes
and other charges payable under the leases:
- --------------------------------------------------------------
($000's)
==============================================================
1998 ................................................ $ 669
1999 ................................................ 612
2000 ................................................ 535
2001 ................................................ 323
2002 ................................................ 128
2003 and subsequent years............................ 853
- --------------------------------------------------------------
Total ............................................... $3,120
==============================================================
Rental expense for cancelable and noncancelable leases was $417,000 for
1997, $302,000 for 1996 and $175,000 for 1995.
NOTE 6 - SHORT-TERM BORROWINGS
A summary of short-term borrowings and rates at December 31:
- -----------------------------------------------------------------------
($000's) 1997 1996 1995
=======================================================================
FHLB advances:
Balance ........................ $ 64,802 $137,178 $ 43,585
Rate ........................... 5.79% 6.09% 5.39%
- -----------------------------------------------------------------------
Securities sold under agreements to
repurchase:
Balance ........................ $ 55,814 $ 20,402 $ 24,654
Rate ........................... 5.68% 5.44% 5.85%
- -----------------------------------------------------------------------
Other borrowings:
Balance ........................ $ 3,659 $ 5,876 $ 449
Rate ........................... 8.18% 5.61% 3.75%
- -----------------------------------------------------------------------
Total short-term borrowings:
Balance ........................ $124,275 $163,456 $ 68,688
Rate ........................... 5.81% 5.99% 5.54%
=======================================================================
Average outstanding ............... $172,223 $123,130 $ 93,827
Weighted average interest rate .... 5.91% 5.48% 5.74%
=======================================================================
The market value of securities sold under repurchase agreements, all of
which were under the Corporation's control, totaled $60,401,819 at December 31,
1997.
At December 31, 1997, the Corporation had unused lines of credit of
$87,297,000 available to support corporate requirements.
NOTE 7 - LONG-TERM BORROWINGS
A summary of long-term borrowings at December 31:
- ---------------------------------------------------------------
($000's) 1997 1996
===============================================================
Subordinated debt, 9.125% due 2004... $ 40,500 --
Federal Home Loan Bank advances .... 205,434 235,412
Other, ranging from 8.0% to 9.6% ... 24,759 --
- ---------------------------------------------------------------
Total long-term borrowings ......... $270,693 $235,412
===============================================================
Interest on the subordinated debt is payable semiannually
beginning in September 1997, and the debt is redeemable at the
7
8
option of the Corporation any time after June 30, 2002 until its maturity date
of June 30, 2004.
At December 31, 1997, Federal Home Loan bank (FHLB) advances have rates
ranging from 5.10% to 7.57%, with interest payable monthly. The advances are
secured by a blanket lien on first mortgage loans with balances totaling 150
percent of such advances. The FHLB stock also serves as collateral for the
advances. Long-term debt is scheduled to mature as follows: $8,946,000 in 1998,
$88,879,000 in 1999, $51,077,000 in 2000, $12,300,000 in 2001, $26,936,000 in
2002, and $82,555,000 in 2003 and thereafter.
NOTE 8 - INCOME TAXES
The Corporation and its subsidiaries file a consolidated Federal income tax
return. A summary of applicable income taxes included in the Consolidated
Statements of Income follows:
- ------------------------------------------------------------------
($000's) 1997 1996 1995
==================================================================
Current U.S. income taxes .......... $ 4,768 $ 2,404 $ 6,136
State and local income taxes ....... 750 568 304
- ------------------------------------------------------------------
Total .............................. 5,518 2,972 6,440
- ------------------------------------------------------------------
Deferred U.S. income taxes resulting
from temporary differences ......... 5,570 4,577 413
- ------------------------------------------------------------------
Provision for income taxes ......... $11,088 $ 7,549 $ 6,853
==================================================================
Deferred income taxes are included in the caption Other Liabilities in the
Consolidated Balance Sheets and are comprised of the following temporary
differences at December 31:
- ------------------------------------------------------------------
($000's) 1997 1996
==================================================================
Deferred tax assets:
Allowance for credit losses ................ $ 2,769 $ 1,558
Basis differences - fixed assets ........... -- 367
Other assets ............................... 742 410
- ------------------------------------------------------------------
Total gross deferred tax assets ............... 3,511 2,335
- ------------------------------------------------------------------
Deferred Tax Liabilities:
Basis difference - leased property ......... 3,976 --
Unrealized gain on loans and securities
available for sale ....................... 978 692
FHLB stock dividends ....................... 1,985 1,438
Originated servicing rights ................ 887 526
Deferred loan fees net of costs ............ 3,889 3,281
Tax bad debt reserve over base year reserves 654 654
Deferred gain on sale of loans ............. 2,066 535
Basis difference - fixed assets ............ 201 112
Other net liabilities ...................... 257 193
- ------------------------------------------------------------------
Total gross deferred tax liabilities .......... 14,893 7,431
- ------------------------------------------------------------------
Net deferred tax liability .................... $11,382 $ 5,096
==================================================================
Management has determined no valuation allowance for deferred tax assets
was required at December 31, 1997 or 1996.
A reconciliation between the statutory U.S. income tax rate and the
Corporation's effective tax rate:
- ----------------------------------------------------------------
1997 1996 1995
================================================================
Statutory tax rate ................. 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes net of
federal benefit ................. 1.6 1.8 1.0
Non-deductible merger transaction .. 0.7 -- --
Tax-free income .................... (1.6) (1.3) (1.1)
Amortization of intangibles ........ 0.7 0.8 --
Other - net ........................ 0.4 0.7 0.5
- ----------------------------------------------------------------
Effective tax rate ................. 36.8% 37.0% 35.4%
================================================================
Retained earnings at December 31, 1997 includes approximately $11.9 million
in allocations of earnings for bad debt deductions of thrift subsidiaries for
which no income tax has been provided. Under current tax law, if the
Corporation's subsidiaries use this bad debt reserve for purposes other than to
absorb bad debt losses or if they merge into a non-bank entity, the bad debt
reserve will be subject to federal income tax at the current corporate rate.
NOTE 9 - MANUFACTURED HOUSING INCOME
The Corporation, through its subsidiary Mobile Consultants, Inc. (MCi), has
sold certain manufactured housing finance contracts (MHF contracts) to various
financial institutions while retaining the collection and recovery aspect of
servicing. The amount of MHF contracts serviced as described above totaled
$430.1 million and $438 million, at December 31, 1997 and 1996, respectively. At
the time MCi sells a MHF contract to an unaffiliated financial institution,
approximately one third of the fee collected is recorded as a "manufactured
housing brokerage fee" and the remaining two thirds of the fee is deposited into
escrow accounts and is available to offset potential prepayment or credit losses
("MCi reserves"). The MCi reserves are recognized as "servicing income on
brokered MHF contracts" ratably over the MHF contract life based on the present
value of the future cash flows of the MCi reserves utilizing assumptions for
prepayment and credit losses and a discount rate. The undiscounted balance of
the MCi reserves was $46.4 million and $46 million as of December 31, 1997 and
1996, respectively.
The Corporation's subsidiary, Signal Bank, N.A., purchases MHF contracts
from MCi, a portion of which are packaged in asset backed securitizations (ABS
pools) and sold to investors. Sales and securitizations of MHF contracts totaled
$137.3 million in 1997 and $48.9 million in 1996. At the time of sale, the
Corporation records an asset, "retained interest in securitized assets,"
representing the discounted future cash flows to be received by the Corporation
for 1) servicing income from the ABS pool, 2) principal and interest payments on
MHF contracts contributed to the ABS pools as a credit enhancement, referred to
as over-collateralization and 3) excess interest spread. Excess interest spread
represents the difference between interest collected from MHF contract borrowers
and interest paid to investors in the ABS pools net of a 60 basis point per
annum provision for credit risk and further reduced by the impact of estimated
prepayments using 130 MHP. MHP is the manufactured housing industry standard
index for prepayment. Prepayment and credit loss assumptions are based on the
Corporation's historical experience. Subordinated future cash flows from the ABS
pools have been discounted at 10%. The carrying value of retained interest in
securitized assets is subject to periodic adjustment based upon potential
impairment and changing market conditions. Management periodically reviews the
retained interest in securitized assets for possible impairment by comparing
actual cash flows received by the Corporation from the ABS pools and actual
prepayments and credit losses to the corresponding projections used at the time
of sale for each ABS pool. Impairment, if any, is charged to operations.
Favorable experience is recognized prospectively as realized. The aggregate
amount of ABS pools serviced by the Corporation totaled $186.2 million and $48
million at December 31, 1997 and 1996, respectively, and such amounts are not
included in the accompanying Consolidated Financial Statements.
Changes in the retained interest in securitized assets for the years ended
December 31 were as follows:
- --------------------------------------------------------------
($000's) 1997 1996
==============================================================
Balance at January 1 ................ $ 6,491 --
Retained interest from ABS pool sales 21,386 $ 6,500
Amortization ........................ (854) (9)
- --------------------------------------------------------------
Balance at December 31 .............. $ 27,023 $ 6,491
==============================================================
The portion of retained interest representing future servicing income was
$5.7 million at December 31, 1997.
8
9
The components of manufactured housing income were as follows:
- ----------------------------------------------------------------------
($000'S) 1997 1996 1995
======================================================================
Gain on sale of ABS pools ............. $ 5,734 $ 1,574 --
Manufactured housing brokerage fees ... 3,151 6,726 --
Servicing income on brokered MHF
contracts .......................... 4,400 3,200 --
Servicing income on ABS pools ......... 1,399 80 --
Interest income on retained interest in
securitized assets ................. 1,317 60 --
- ----------------------------------------------------------------------
TOTAL MANUFACTURED HOUSING
INCOME ........................ $16,001 $11,640 $ 0
======================================================================
NOTE 10 - MORTGAGE BANKING INCOME
The Corporation has sold certain loans to various investors while retaining
servicing rights. Loans serviced for others totaled $521 million and $419
million at December 31, 1997 and 1996, respectively, and are not included in the
accompanying Consolidated Financial Statements. Changes in mortgage servicing
rights, classified on the balance sheet within other assets, for the years ended
December 31 were as follows:
- ---------------------------------------------------------
($000's) 1997 1996
=========================================================
Balance at January 1 ............... $ 1,503 --
Originated mortgage servicing rights 1,589 $ 1,611
Amortization ....................... (551) (108)
- ---------------------------------------------------------
Balance at December 31 $ 2,541 $ 1,503
=========================================================
The components of mortgage banking income were as follows:
- ---------------------------------------------------------------------------
($000'S) 1997 1996 1995
===========================================================================
Gain on sale of mortgage loans ................. $3,972 $2,308 $1,451
Mortgage loan fee income ....................... 350 500 460
Mortgage servicing fees, net of amortization ... 846 707 699
- ---------------------------------------------------------------------------
TOTAL MORTGAGE BANKING INCOME ............. $5,168 $3,515 $2,610
===========================================================================
NOTE 11 - STOCK COMPENSATION PLANS
Options can be granted under the Corporation's Stock Option Plans to key
employees and directors of the Corporation and its subsidiaries for up to
1,338,300 shares of the Corporation's common stock. All options granted have up
to ten year terms and vest and become fully exercisable after three to five
years of continued employment. A summary of option transactions during 1997,
1996 and 1995:
- -----------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------
AVERAGE Average Average
(Shares in OPTION Option Option
000's) SHARES PRICE Shares Price Shares Price
===============================================================================================
Outstanding
beginning
of year ... 675,256 $ 9.14 550,929 $ 8.33 470,255 $ 7.61
Exercised .... (112,478) 8.28 (42,560) 7.32 (5,840) 6.40
Expired ...... (16,469) -- (13,850) -- (10,512) --
Granted ...... 231,047 30.50 180,737 17.54 97,026 11.50
Acquired
business .. 67,506 10.40 -- -- -- --
- -----------------------------------------------------------------------------------------------
Outstanding,
end of year 844,862 $ 16.32 675,256 $ 9.14 550,929 $ 8.33
- -----------------------------------------------------------------------------------------------
Exercisable,
end of year 389,900 $ 8.47 294,913 $ 7.37 214,520 $ 7.19
===============================================================================================
As of December 31, 1997, options outstanding have exercise prices between
$1.74 and $35.70 and a weighted average remaining contractual life of 7.6 years.
At December 31, 1997, there were 588,978 incentive options and 255,885
nonqualified options outstanding and 649,278 shares were available for granting
additional options.
Under the 1997 Employee Stock Purchase Plan, the Corporation is authorized
to issue up to 171,098 shares of common stock to its full time employees, nearly
all of whom are eligible to participate. Under the terms of the Plan, employees
can choose each year to have up to 10 percent of their annual compensation
withheld to purchase the Corporation's common stock. The purchase price of the
stock is 85 percent of the lower of its beginning-of-purchase period or
end-of-purchase period market price. Approximately 25 percent of eligible
employees currently participate in the Plan. Under the Plan, the Corporation
sold 7,566 shares to employees for 1997.
The Corporation has elected to disclose pro forma net income and net income
per share as if the fair-value-based method had been applied in measuring
compensation costs. The Corporation's pro forma information for the years ended
December 31:
- ------------------------------------------------------------------------------
1997 1996 1995
==============================================================================
Pro forma net income ($000's) ........ $ 18,192 $ 12,421 $ 12,288
Pro forma basic net income per share . $ 1.83 $ 1.24 $ 1.27
Pro forma diluted net income per share $ 1.50 $ 1.05 $ 1.06
==============================================================================
Compensation expense reflected in the pro forma disclosures is not
indicative of future amounts when the SFAS No. 123 prescribed method will apply
to all outstanding nonvested awards.
The weighted average fair value of options granted was $13.94 in 1997,
$9.23 in 1996 and $5.92 in 1995. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants in 1997, 1996 and 1995: expected
dividend yield of 1.10%, 1.78% and 1.78% and expected option lives of 10 years;
expected volatility of 30%, 39%, and 39%, and risk-free interest rates of 5.70%,
6.25%, and 6.25%, respectively.
The Corporation granted restricted stock to certain officers and directors
in 1996 of which 66,406 shares are outstanding as of December 31, 1997. The
restricted stock vests at a rate of 20% per year on each January 31 through
January 2001, provided the Corporation return on average shareholders' equity of
the preceding year equals or exceeds 15%. Restricted stock compensation expense
was $50,000 in 1997. As of January 31, 1998, 20% of the restricted shares
vested.
NOTE 12 - PREFERRED STOCK
The Corporation issued in 1994 500,000 shares of 6 1/2 percent cumulative
convertible preferred stock, Series B, without par value. The stock is
convertible at the option of the holder at any time or it may be redeemed by the
Corporation on or after June 24, 1999 into 903,418 shares of common stock or
2.1015 common shares for each outstanding share of Series B preferred stock.
Cash dividends are payable quarterly on December 1, March 1, June 1 and
September 1 of each year.
On December 16, 1997, the Corporation redeemed and converted the remaining
482,586 outstanding Series A preferred stock into 1,819,169 shares of common
stock. The 7 percent cumulative convertible Series A preferred stock was
originally issued in 1992.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Corporation has a profit sharing plan covering substantially all
employees. Employer contributions to the plan reflect a 50%-75% match of
employee contributions up to 4% of employee wages and additional discretionary
contributions as approved by the Board of Directors. As of December 31, 1997,
the profit sharing plan held 28,569 shares of the Corporation valued at
$1,005,620. Employer contributions to the profit sharing plan were $299,000,
$124,000 and $81,000 for 1997, 1996 and 1995, respectively.
The Corporation sponsored a final-pay noncontributory defined
benefit plan for Signal Bank, N.A. employees. Effective December 31, 1996, the
employer terminated the plan, settled the
9
10
accumulated benefit obligation of $2,592,000 (nonvested benefits became vested
upon termination of the plan) by rolling plan assets, primarily certificates of
deposit, into the profit sharing plan and purchasing nonparticipating annuity
contracts. Defined benefits were not provided under any successor plan.
As a result, the Corporation recognized a loss of $200,000 determined as
follows:
- ---------------------------------------------------------------------
Before Effect of After
($000's) Termination Termination Termination
=====================================================================
Assets and obligations:
Accumulated benefit obligation ($2,592) $ 2,592 $ --
Effects of projected future
compensation levels ....... (584) 584 --
--------------------------------
Projected benefit obligation . (3,176) 3,176 --
Plan assets at fair value .... 2,736 (2,736) --
Items not yet recognized in
earnings:
Unrecognized net asset at
transition ................ 582 (582) --
Unrecognized net gain
subsequent to transition .. (342) 342 --
--------------------------------
(Accrued)/prepaid pension cost on
the balance sheet ............ ($ 200) $ 200 $ --
=====================================================================
The Corporation participates in a multi-employer pension plan covering all
qualified full-time employees of First Federal Savings of New Castle. The plan
provides for monthly payments to each participating employee at normal
retirement age (age 65). The benefits payable are equal to 1.25% of compensation
as defined by the plan multiplied by years of service. The plan invests
primarily in fixed income and equity securities and at December 31, 1997 was
overfunded.
Net periodic pension expense for all plans was $200,000, $143,000 and
$182,000 for 1997, 1996 and 1995, respectively.
The Corporation does not provide postretirement benefits nor does it have
any material liabilities for postemployment benefits.
The Corporation has an Employee Stock Ownership Plan (ESOP) for the benefit
of the employees of First Federal Savings of New Castle who meet eligibility
requirements as defined by the plan. The ESOP trust purchased 160,609 shares in
1993 with proceeds from a loan from the Corporation. The Corporation makes cash
contributions to the ESOP on an annual basis in an amount sufficient to enable
the ESOP to make the required loan payments to the Corporation. The loan bears
interest at prime plus one percent with quarterly interest payments and
principal payable in equal annual installments over ten years. The loan is
secured by the shares of the stock purchased.
As the note is repaid, shares are released from collateral and allocated to
qualified employees. As the shares are released, the Corporation reports
compensation expense equal to the current market price of the shares.
Compensation expense for the ESOP amounted to $310,000, $240,000 and $216,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
ESOP shares at December 31, were as follows:
- ---------------------------------------------------------------------------
1997 1996 1995
===========================================================================
Allocated shares .............. 60,149 45,510 33,086
Shares released for allocation 16,061 16,328 16,369
Shares distributed ............ (2,803) (1,689) (3,945)
Unreleased shares ............. 78,765 94,826 111,154
------------------------------------------
Total ESOP shares ............. 152,172 154,975 156,664
==========================================
Fair value of unreleased shares
at December 31 ............. $ 2,040,000 $ 1,493,000 $ 1,595,000
============================================================================
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation, in the normal course of business, is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers and to minimize exposure to fluctuations in interest rates. These
financial instruments primarily include commitments to extend credit, standby
and commercial letters of credit, and commitments to sell residential mortgage
loans. These instruments involve, to varying degrees, elements of credit risk,
counterparty risk and market risk in excess of the amounts recognized in the
Consolidated Balance Sheets. The contract or notional amounts of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
Creditworthiness for all instruments is evaluated on a case-by-case basis
in accordance with Corporation credit policies. Collateral, if deemed necessary,
is based on management's credit evaluation of the counterparty and may include
business assets of commercial borrowers as well as personal property and real
estate of individual borrowers and guarantors.
A summary of significant commitments and other off-balance- sheet items at
December 31:
- --------------------------------------------------------------
Contract or
Notional Amount
------------------
($000's) 1997 1996
==============================================================
Commitments to extend credit ........... $181,256 $ 86,804
Letters of credit (including standby
letters of credit) .................. 3,053 2,354
Commitments to sell residential
mortgage loans ...................... 10,320 56,124
Interest rate swap agreements .......... 65,500 --
Forward contract on loans held for sale 41,000 --
==============================================================
Commitments to extend credit are agreements to lend. Commitments generally
have fixed expiration dates or other termination clauses that may require
payment of a fee. Since many of the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Corporation's exposure to credit risk in the event of
nonperformance by the other party is the contract amount.
Standby and commercial letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. At December 31,
1997, all standby letters of credit will expire within one year. The amount of
credit risk involved in issuing letters of credit in the event of nonperformance
by the other party is the contract amount.
The Corporation enters into forward contracts for future delivery of
residential mortgage loans of a specified yield to reduce the interest rate risk
associated with fixed-rate residential mortgages held for sale and commitments
to fund residential mortgages. Credit risk arises from the possible inability of
the other parties to comply with the contract terms. The majority of the
Corporation's contracts are with U.S. government-sponsored agencies (FNMA and
FHLMC). Fixed rate commitments to sell residential mortgage loans of $8.3
million at December 31, 1997 are subject to market risk resulting from
fluctuations in interest rates and the Corporation's exposure is limited to the
replacement value of those commitments.
These contracts carry the risk of the counterparty's future ability to
perform under the agreement. A limit of market exposure is approved for all
counterparties.
In 1997, the Corporation entered into interest rate swap agreements with a
notional principal amount of $65.5 million in connection with the issuance of
$40.5 million of long-term, fixed-rate subordinated notes and a $25 million
brokered certificate of deposit. The Corporation receives fixed-rate payments at
9.125% and 7.10%, respectively, and pays a variable interest rate based upon
three-month LIBOR. These transactions involve the exchange of fixed and floating
rate payments without the exchange of the underlying principal amount. At
December 31, 1997, the Corporation has a $41 million forward contract due to
mature January 21, 1998 on manufactured housing loans held for sale. Notional
principal amounts are often used to express the volume of these types of
transactions, however, they do not represent the much smaller amounts that are
potentially subject to credit risk.
10
11
Entering into interest rate swap agreements and hedges involves the risk of
dealing with counterparties and their ability to meet the terms of the contract.
The Corporation controls the credit risk of these transactions through adherence
to an investment policy, credit approval policies and monitoring procedures.
There are legal claims pending against the Corporation and its
subsidiaries. Based on a review of such litigation with legal counsel,
management believes that any resulting liability would not have a material
effect upon the Corporation's consolidated financial position or results of
operations.
NOTE 15 - ACQUISITIONS
- ----------------------------------------------------------------
CONSIDERATION
-------------------
COMMON
DATE CASH SHARES METHOD OF
COMPLETED ($000'S) ISSUED ACCOUNTING
=================================================================
First Shenango
Bancorp, Inc. 6-29-98 -- 3,087,000 pooling
Alpha Equipment
Group, Inc.. ... 10-31-97 $ 1,700 -- purchase
Summit Bancorp .... 7-8-97 -- 686,186 pooling
Alliance Corporate
Resources, Inc. 7-1-97 2,000 -- purchase
Mobile Consultants,
Inc ............ 4-3-96 6,900 480,291 purchase
================================================================
The Consolidated Financial Statements have not been restated to include the
acquisition of Summit Bancorp due to immateriality.
On September 15, 1997, the Corporation purchased deposits of approximately
$151 million, loans of $24 million and seven North Central Ohio branch
facilities from KeyBank, N.A. for approximately $19 million. On March 23, 1996,
the Corporation purchased deposits of approximately $26.6 million and a branch
facility in Mount Vernon, Ohio from Peoples National Bank for $2.4 million.
On June 29, 1998 the Corporation consummated its acquisition of First
Shenango Bancorp, Inc ("Shenango"). The acquisition was completed with the
exchange of approximately 3,087,000 common shares of Signal Corp for all of the
2,161,000 outstanding common shares of Shenango. The acquisition was accounted
for as a pooling of interest and accordingly all prior period data has been
restated. At December 31, 1997 Shenango had assets of $375 million, deposits of
$275 million, and shareholders' equity of $48 million.
The following table sets forth the separate results of operations for
Signal Corp and for Shenango for the years ended December 31:
- --------------------------------------------------------------
(000's) 1997 1996 1995
==============================================================
Revenue:
Signal Corp $119,378 $ 91,488 $69,089
Shenango 30,350 28,638 24,753
-----------------------------------
$149,728 $120,126 $93,842
===================================
Net Income:
Signal Corp $ 14,448 $9,850 $ 9,446
Shenango 4,586 3,010 3,079
-----------------------------------
$ 19,034 $ 12,860 $12,525
===================================
==============================================================
NOTE 16 - REGULATORY MATTERS
The principal source of income and funds for the Corporation (parent
company) are dividends from its subsidiaries. During the year 1998, the amount
of dividends that the banking subsidiaries can pay to the Corporation without
prior approval of regulatory agencies is limited to their 1997 eligible net
profits, as defined, plus the adjusted retained 1996 and 1995 net income of the
subsidiaries.
Banking subsidiaries must maintain noninterest-bearing cash balances on
reserve with the Federal Reserve Bank. In 1997 and 1996, the subsidiary banks
were required to maintain average reserve balances of $5,821,000 and $3,511,000,
respectively.
The Federal Reserve Board adopted quantitative measures which assign risk
weightings to assets and off-balance-sheet items and also define and set minimum
regulatory capital requirements (risk-based capital ratios). All banks are
required to have core capital (Tier 1) of at least 4% of risk-weighted assets,
total capital of at least 8% of risk-weighted assets and a minimum Tier 1
leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital
consists principally of shareholders' equity excluding unrealized gains and
losses on securities available for sale, less goodwill. Total capital consists
of Tier 1 capital plus certain debt instruments and the allowance for credit
losses, subject to limitation. Failure to meet certain capital requirements can
initiate certain actions by regulators that, if undertaken, could have a direct
material effect on the Consolidated Financial Statements. The regulations also
define well capitalized levels. The subsidiary banks exceeded the minimum
guidelines for well capitalized institutions.
Capital and risk-based capital and leverage ratios for the Corporation and
its significant subsidiaries at December 31:
- ----------------------------------------------------------------
1997
---------------------
($000's) AMOUNT RATIO
================================================================
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Signal Corp. ......................... $114,668 12.89%
Signal Bank N.A ...................... 100,948 11.43%
First Federal Savings of New Castle .. 40,963 20.25%
Summit Bank N.A ...................... 7,355 9.88%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Signal Corp. ......................... 72,753 8.18%
Signal Bank N.A ...................... 86,441 9.78%
First Federal Savings of New Castle .. 38,430 19.00%
Summit Bank N.A ...................... 6,423 8.63%
TIER 1 LEVERAGE CAPITAL (TO AVERAGE
ASSETS):
Signal Corp. ......................... 72,753 5.23%
Signal Bank N.A ...................... 86,441 6.68%
First Federal Savings of New Castle .. $ 38,430 10.42%
Summit Bank N.A ...................... $ 6,423 6.40%
================================================================
In 1996, the Corporation had total capital to risk-weighted assets of
14.52%. Prior to July 1, 1997, the Corporation operated as a thrift holding
company and was not required to compute Tier 1 risk adjusted capital. The thrift
leverage (core) capital ratio, is comparable to the "Tier 1 leverage" ratio
reported currently. The leverage (core) capital ratio was 6.60% on December 31,
1996, compared to the regulatory requirement of 3.00%.
NOTE 17 - EARNINGS PER SHARE
Reconciliation of Basic Earnings Per Share to Diluted Earnings Per Share
for the Years Ended December 31:
- --------------------------------------------------------------
1997
------------------------------------
PER-SHARE
(000's except per share data) INCOME SHARES AMOUNT
==============================================================
BASIC EPS
Income available to common
shareholders ............. $17,450 9,051 $ 1.93
EFFECT OF DILUTIVE SECURITIES
Convertible Preferred ....... 1,584 2,713 0.31
Stock Options ............... -- 387 0.05
- --------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions............... $19,034 12,151 $1.57
==============================================================
11
12
- --------------------------------------------------------------------
1996
------------------------------
Per-Share
(000's except per share data) Income Shares Amount
====================================================================
BASIC EPS
Income available to common
shareholders ...................... $11,164 8,670 $ 1.29
EFFECTIVE OF DILUTIVE
SECURITIES
Convertible Preferred ................ 1,665 2,925 0.19
Stock Options ........................ 31 234 0.01
- --------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions........................ $12,860 11,829 $ 1.09
====================================================================
- --------------------------------------------------------------
1995
------------------------------------
Per-Share
(000's except per share data) Income Shares Amount
==============================================================
BASIC EPS
Income available to common
shareholders ............ $10,739 8,286 $ 1.30
EFFECTIVE OF DILUTIVE
SECURITIES
Convertible Preferred ...... 1,783 2,990 0.19
Stock Options .............. 3 284 0.03
- --------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions ............. $12,525 11,560 $ 1.08
==============================================================
NOTE 18 - RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, certain directors, executive officers,
principal holders of Corporation common stock and associates of such persons
were indebted to the banking subsidiaries in the aggregate amount, net of
participations, of $2,239,615 and $393,943, respectively. Summit Bank, N.A. had
approximately $1.7 million of related party loans when acquired. During 1997,
new loans aggregating $129,900 were made to such parties and loans aggregating
$249,623 were repaid. Such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the time of
comparable transactions with unrelated parties.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments at
December 31:
- --------------------------------------------------------------------------------
1997
-------------------------
($000's) CARRYING FAIR VALUE
AMOUNT
================================================================================
FINANCIAL ASSETS:
Cash and short-term investments ................. $ 67,188 $ 67,188
Securities available for sale ................... 348,468 348,468
Securities held to maturity ..................... 70,959 71,059
Loans and leases including loans held
for sale ..................................... 1,257,317 1,259,684
FINANCIAL LIABILITIES:
Deposits ........................................ 1,256,896 1,254,250
Borrowings ...................................... 394,968 400,148
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: ........... NOTIONAL
AMOUNT
Commitments to extend credit .................... 181,256 181,256
Letters of credit ............................... 3,053 3,053
Forward contracts:
Commitments to sell loans .................... 10,320 10,320
Forward contract on loans held for sale ...... 41,000 (692)
Interest rate swaps ............................. 65,500 252
================================================================================
- ------------------------------------------------------------------------------------------
1996
-----------------------
($000's) Carrying Fair Value
Amount
==========================================================================================
FINANCIAL ASSETS:
Cash and short-term investments ............................. $ 51,746 $ 51,746
Securities available for sale ............................... 290,813 290,813
Securities held to maturity ................................. 84,984 83,958
Loans including loans held for sale ......................... 1,014,449 1,012,825
FINANCIAL LIABILITIES:
Deposits .................................................... 939,538 956,602
Borrowings .................................................. 398,868 399,095
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: ....................... NOTIONAL
AMOUNT
Commitments to extend credit ................................ 86,804 86,804
Letters of credit ........................................... 2,354 2,354
Forward contracts:
Commitments to sell loans ................................ 56,124 56,124
==========================================================================================
Fair values for financial instruments were based on various assumptions and
estimates as of a specific point in time and may vary significantly from amounts
that will be realized in actual transactions. In addition, certain financial
instruments and all non-financial instruments were excluded from the fair value
disclosure requirements. Therefore, the fair values presented above should not
be construed as the underlying value of the Corporation. In addition, the
negative fair value of the interest rate hedge represents the estimated amount
the Corporation would have to pay at each date to cancel the contracts or
transfer them to other parties.
The following methods and assumptions were used in determining the fair
value of selected financial instruments:
SHORT-TERM FINANCIAL ASSETS AND LIABILITIES - for financial instruments
with short or no stated maturity, prevailing market rates and limited credit
risk, carrying amounts approximate fair value. Those financial instruments
include cash and due from banks, other short-term investments, certain deposits
(non-interest bearing demand, interest checking, savings and money market),
repurchase agreements and short-term borrowings.
SECURITIES, AVAILABLE FOR SALE AND HELD TO MATURITY - fair values were
based on quoted market prices, dealer quotes and prices obtained from
independent pricing services.
LOANS AND LEASES - fair values were estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrow with similar credit ratings and for the same remaining maturities.
DEPOSITS - fair values for certificates of deposit - were estimated using a
discounted cash flow calculation that applies interest rates currently being
offered for deposits of similar remaining maturities.
LONG-TERM DEBT AND SUBORDINATED DEBT- fair value of long-term debt was
based on quoted market prices, when available, and a discounted cash flow
calculation using prevailing market rates for borrowings of similar terms.
INTEREST RATE SWAPS AND FORWARD CONTRACTS - fair values of interest rate
swaps and forward contracts were based on quoted market prices.
COMMITMENTS AND LETTERS OF CREDIT - fair value of commitments to extend
credit are based on the estimated cost to terminate them or otherwise settle the
obligation with the counterparties at the reporting date.
NOTE 20 - SEGMENTS
The Corporation's principal activities include Community Banking and
Specialty Finance. Community Banking offers a full range of deposit and loan
products and other services to individuals and businesses. The Specialty
Finance Group 1) originates financing and services the collection and recovery
of
12
13
loans on manufactured houses through MCi, 2) provides equipment leasing, 3)
provides investment advisory services, financial planning and portfolio
management, 4) provides common financing services and 5) real estate appraisal
services.
The financial information for each business segment reflect those which are
specifically identifiable or which are allocated based on an internal allocation
method. The allocation has been consistently applied for all periods presented.
The measurement of the performance of the business segments is based on the
management structure of the Corporation and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not necessarily indicative of the segments' financial
condition and results of operations if they were independent entities.
Selected financial information by business segment for the three years
ended December 31 is included in the following summary:
- -----------------------------------------------------------------
($000's) 1997 1996 1995
=================================================================
REVENUES:
Community Banking Group $ 128,914 $ 108,378 $ 93,535
Specialty Finance Group 20,814 11,748 307
- -----------------------------------------------------------------
TOTAL .................... 149,728 120,126 93,842
=================================================================
NET INCOME:
Community Banking Group 12,051 9,909 12,447
Specialty Finance Group 6,983 2,951 78
- -----------------------------------------------------------------
TOTAL .................... 19,034 12,860 12,525
=================================================================
IDENTIFIABLE ASSETS:
Community Banking Group 1,768,132 1,463,880 1,278,093
Specialty Finance Group 64,255 22,288 1,298
- -----------------------------------------------------------------
TOTAL ....................$1,832,387 $1,486,168 $1,279,391
=================================================================
Capital expenditures relating primarily to the Community Banking Group
totaled $6,788,000, $4,025,000, and $683,000 in 1997, 1996, and 1995,
respectively. These expenditures consisted primarily of investments in data
processing equipment, including network computer technology, software,
operations, operations equipment and the retail distribution network.
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the Corporation ($000's):
- -------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME (LOSS) (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996 1995
=========================================================================
INCOME:
Dividends from subsidiaries ......... $ 1,000 $ 6,000 $ 11,000
Interest on loans to subsidiaries ... 364 264 303
Securities (gains) losses ........... 576 (2) --
Other ............................... 1,041 761 593
- -------------------------------------------------------------------------
TOTAL INCOME ........................ 2,981 7,023 11,896
- -------------------------------------------------------------------------
EXPENSES:
Interest ............................ 2,922 -- --
Other ............................... 708 688 342
- -------------------------------------------------------------------------
TOTAL EXPENSES ...................... 3,630 688 342
- -------------------------------------------------------------------------
INCOME BEFORE TAXES AND
CHANGE IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES ......... (649) 6,335 11,554
Applicable income taxes (benefit) ... (201) 497 3,723
- -------------------------------------------------------------------------
INCOME (LOSS) BEFORE CHANGE IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES ...................... (448) 5,838 7,831
- -------------------------------------------------------------------------
Undistributed earnings of subsidiaries 19,482 7,022 4,694
- -------------------------------------------------------------------------
NET INCOME ......................... $ 19,034 $ 12,860 $ 12,525
=========================================================================
- ----------------------------------------------------------------
CONDENSED BALANCE SHEET (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996
================================================================
ASSETS:
Cash and equivalents ..................... $ 1,764 $ 3,578
Securities available for sale ............ 4,927 6,280
Loans to subsidiaries .................... 13,551 4,064
Investment in subsidiaries ............... 184,746 118,444
Other assets ............................. 1,840 3,023
- ----------------------------------------------------------------
TOTAL ASSETS ............................. 206,828 135,389
- ----------------------------------------------------------------
LIABILITIES:
Subordinated debt ........................ 40,500 --
Accrued expenses and other liabilities ... 13,731 7,048
- ----------------------------------------------------------------
TOTAL LIABILITIES ........................ 54,231 7,048
- ----------------------------------------------------------------
SHAREHOLDERS' EQUITY ..................... 152,597 128,341
- ----------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $206,828 $135,389
================================================================
- -------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996 1995
- -------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income .......................... $ 19,034 $ 12,860 $ 12,525
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Undistributed earnings of
subsidiaries .................. (19,482) (7,022) (4,694)
Securities (gains) losses ........ (576) 2 --
Decrease (increase) in other
assets ........................ 1,631 2,834 113
Increase (decrease) in accrued
expenses and other liabilities. (2,074) 1,431 3,415
- -------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES ............ (1,467) 10,105 11,359
- -------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities ............. (9,698) (11,515) (10,010)
Proceeds from sales or maturities of
securities ....................... 10,982 20,402 7,434
Capital contributions to subsidiaries (37,305) (10,475) (3,285)
Other ............................... (468) 135 58
- -------------------------------------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES ....................... (36,489) (1,453) (5,803)
- -------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of debt .................... 40,500 4,000 --
Purchase of treasury stock .......... (722) (6,317) (1,373)
Purchase of preferred stock ......... -- (2,002) (792)
Proceeds from stock options ......... 1,185 311 37
Cash dividends paid ................. (4,821) (4,376) (3,998)
- -------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............ 36,142 (8,384) (6,126)
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH ......... (1,814) 268 (570)
CASH AT BEGINNING OF YEAR ........... 3,578 3,310 3,880
- -------------------------------------------------------------------------
CASH AT END OF YEAR ................. $ 1,764 $ 3,578 $ 3,310
=========================================================================
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Signal Corp
Wooster, Ohio:
We have audited the accompanying consolidated balance sheets of Signal Corp and
subsidiaries (the Corporation) as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated statements based on our audits. We did not
audit the financial statements of First Shenango Bancorp, Inc., a wholly owned
subsidiary, which statements reflect total assets constituting 20 percent and
27 percent in 1997 and 1996 and total revenues constituting 20 percent and
23 percent in 1997 and 1996, respectively, of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for First
Shenango Bancorp, Inc., is based solely on the report of the other auditors.
The consolidated financial statements of the Corporation for the year ended
December 31, 1995, prior to their restatement for the 1998 pooling-of-interests
transaction described in Note 15 to the consolidated financial statements, were
audited by other auditors whose report thereon, dated January 26, 1996,
expressed an unqualified opinion on those statements. Separate financial
statements of First Shenango Bancorp, Inc., also included in the 1995 restated
consolidated financial statements, were audited by other auditors whose report
dated February 6, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Signal Corp and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," in 1997.
14
15
-2-
We also audited the combination of the accompanying consolidated financial
statements for the year ended December 31, 1995, after restatement for the 1998
pooling of interests; in our opinion, such consolidated financial statements
have been properly combined on the basis described in Note 15 of the notes to
the consolidated financial statements.
/s/ KPMG Peat Marwick LLP
February 6, 1998, except as to
note 1 (Stock Dividend), which
is as of April 22, 1998, and note 15,
which is as of June 29, 1998.