1
EXHIBIT 99(b)
SIGNAL CORP
TABLE OF CONTENTS
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997
Consolidated Statements of Income for the Three and Six Months Ended June 30,
1998 and 1997
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and
1997
Notes to Consolidated Financial Statements
2
SIGNAL CORP
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ($000'S)
(UNAUDITED)
JUNE 30 DECEMBER 31
1998 1997
--------- ----------
ASSETS:
Cash and due from banks $ 44,557 $ 34,393
Securities available for sale(a) 368,476 348,468
Securities held to maturity(b) 86,540 70,959
Other short term investments 28,674 32,795
Loans held for sale 53,346 90,379
Loans and leases:
Residential mortgage loans 638,639 676,129
Commercial loans 98,221 64,808
Commercial mortgage loans 94,653 101,582
Commercial lease financing 48,418 41,909
Finance contracts 11,978 4,585
Manufactured housing loans 168,070 110,827
Consumer loans 177,063 175,871
Allowance for credit losses (10,191) (8,773)
---------- ----------
Net loans and leases 1,226,851 1,166,938
Premises and equipment, net 22,701 21,073
Intangible assets 30,065 32,062
Other assets 51,015 35,320
---------- ----------
TOTAL ASSETS $1,912,225 $1,832,387
========== ==========
LIABILITIES:
Deposits:
Non-interest bearing demand $ 64,656 $ 52,545
Interest bearing 1,240,430 1,204,351
---------- ----------
Total deposits 1,305,086 1,256,896
Short term borrowings 67,149 124,275
Long term borrowings 299,948 270,693
Company obligated mandatorily redeemable
preferred securities 50,000 --
Other liabilities 34,130 27,926
---------- ----------
TOTAL LIABILITIES 1,756,313 1,679,790
SHAREHOLDERS' EQUITY:
Preferred stock(C) 9,917 9,917
Common stock(d) 11,747 11,396
Additional paid-in capital 58,844 55,844
Retained earnings 76,032 75,947
Treasury stock, at cost (1,565) (1,751)
Accumulated other comprehensive income 937 1,244
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 155,912 152,597
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,912,225 $1,832,387
========== ==========
(a) Amortized cost of $366,561 as of June 30, 1998 and $346,613 as of December
31, 1997.
(b) Market value of $86,520 as of June 30, 1998 and $71,059 as of
December 31, 1997.
(c)Preferred stock, no par value; authorized 1,500,000 shares; Series B 428,342
and 429,892 issued and outstanding, respectively.
(d)Common stock, $1.00 par value; authorized 40,000,000 shares; 11,747,186 (net
of 141,591 treasury shares), 11,396,056 (net of 396,431 treasury shares),
respectively.
See accompanying notes to Consolidated Financial Statements.
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SIGNAL CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($000'S EXCEPT PER SHARE DATA)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------
1998 1997 1998 1997
------------------------------------------
INTEREST INCOME:
Loans and leases $26,549 $20,373 $52,675 40,096
Securities available for sale 6,373 5,622 12,218 10,539
Securities held to maturity 914 1,482 2,077 2,728
Other 566 305 1,398 549
------------------------------------------
Total interest income 34,402 27,782 68,368 53,912
INTEREST EXPENSE:
Deposits 14,656 10,759 29,208 21,470
Short-term borrowings 960 2,935 2,773 4,837
Long-term debt and mandatorily redeemable
preferred securities 6,177 4,465 11,410 8,400
------------------------------------------
Total interest expense 21,793 18,159 43,391 34,707
------------------------------------------
NET INTEREST INCOME 12,609 9,623 24,977 19,205
Provision for credit losses 2,617 365 3,234 657
------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 9,992 9,258 21,743 18,548
NON-INTEREST INCOME
Manufactured housing income 2,464 4,322 5,558 8,639
Mortgage banking income 1,340 533 3,196 1,088
Customer service fee income 2,056 783 3,814 1,828
Net securities gains 19 82 40 83
Other 894 179 2,632 288
------------------------------------------
Total non-interest income 6,773 5,899 15,240 11,926
NON-INTEREST EXPENSE:
Personnel 6,223 4,108 12,268 8,208
Net occupancy expense 1,307 841 2,691 1,672
Outside services, data processing and
communications 1,278 773 2,539 1,214
Professional fees 675 482 1,486 841
Amortization of intangibles 660 314 1,306 665
Other 2,631 1,391 5,149 3,232
Nonrecurring expenses (a) 7,336 - 7,336 -
------------------------------------------
Total non-interest expense 20,110 7,909 32,775 15,832
------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (3,345) 7,248 4,208 14,642
Provision (benefit)for income taxes (774) 2,346 1,831 5,037
------------------------------------------
NET INCOME (LOSS) $(2,571) $4,902 $2,377 9,605
==========================================
Net income (loss)applicable to common stock $(2,745) $4,500 $2,028 8,796
NET INCOME (LOSS) PER COMMON SHARE:(b)
Basic $(0.24) $0.51 $0.18 $1.01
Diluted $(0.24) $0.42 $0.18 $0.82
- ------------------------------------------------------------------------------------------
Footnotes
- ---------
(a) Non-recurring expenses in 1998 reflect merger related costs incurred in
connection with the Company's June 29, 1998 acquisition of First Shenango
Bancorp, Inc. Total nonrecurring expenses amounted to $9.2 million ($6.3 million
after-tax).
(b) Net income excluding nonrecurring merger costs amounted to $3,748 and $8,696
for the three and six months ended June 30, 1998, respectively. Net income per
share excluding nonrecurring merger costs were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
Basic $0.32 $0.51 $0.74 $1.01
Diluted $0.30 $0.42 $0.70 $0.82
See accompanying notes to Consolidated Financial Statements
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SIGNAL CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
FOR THE SIX MONTHS ENDED JUNE 30: ($000'S) 1998 1997
------------ -----------
OPERATING ACTIVITIES:
Net income $2,377 $9,605
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 3,234 657
Depreciation, amortization and accretion 3,709 1,556
Employee stock ownership expense 1,307 142
Net securities gains (40) (83)
Net gain on sales of loans (5,375) (4,675)
Proceeds from sales of loans held for sale 308,417 141,149
Origination of loans held for sale (266,009) (117,994)
Increase in other assets (9,342) (9,695)
Increase in other liabilities 5,897 2,665
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44,175 23,327
INVESTING ACTIVITIES:
Proceeds from calls, paydowns and maturities of 146,860 24,295
securities available for sale
Proceeds from sales of securities available for sale 10,727 6,358
Purchases of securities available for sale (183,218) (134,424)
Purchases of securities held to maturity (25,266) (92)
Proceeds from maturities of securities held to maturity 9,685 7,389
Decrease in other short-term investments 4,121 9,046
(Increase) in loans and leases (63,147) (57,862)
Purchases of premises and equipment, net (4,030) (1,815)
------------ -----------
NET CASH USED BY INVESTING ACTIVITIES (104,268) (147,105)
FINANCING ACTIVITIES:
Increase (decrease) in deposits 48,190 (7,334)
Net change in short-term borrowings (57,126) 55,392
Proceeds from issuance of mandatorily redeemable
preferred securities 50,000 --
Net change in long-term borrowings 29,255 70,280
Cash dividends paid (2,348) (2,315)
Purchases of treasury stock -- (637)
Stock issued for options exercised and employee stock
purchase plan 2,286 600
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 70,257 115,986
------------ -----------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 10,164 (7,792)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 34,393 27,830
CASH AND DUE FROM BANKS AT END OF PERIOD $44,557 $20,038
============ ===========
See accompanying notes to Consolidated Financial Statements.
5
SIGNAL CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. It is assumed that the
readers of these interim financial statements have read or have access to the
1997 Annual Report on Form 10-K of Signal Corp ("Signal Corp" or the "Company").
Therefore, only material changes in financial condition and results of
operations are discussed in Management's Discussion and Analysis. The interim
consolidated financial statements include the accounts of Signal Corp and its
subsidiaries. All significant intercompany transactions have been eliminated.
The interim Consolidated Financial Statements reflect the Company's June
29, 1998 merger with First Shenango Bancorp, Inc. The merger was completed with
the exchange of approximately 3,087,000 common shares of Signal Corp for all
2,161,000 of the outstanding shares of First Shenango. The merger has been
treated as a pooling of interests and accordingly all prior period data has been
restated to reflect the consolidation of First Shenango. Pursuant to the
transaction the Company has recorded $9.2 million ($6.3 million after-tax) in
nonrecurring merger related charges.
In the opinion of management, the Consolidated Financial Statements
contain all adjustments (consisting only of normal recurring adjustments except
as discussed above) necessary to present fairly the financial condition of
Signal Corp as of June 30, 1998 and December 31, 1997, the results of its
operations for the three and six months ended June 30, 1998 and 1997, and its
cash flows for the six months ended June 30, 1998 and 1997. The results of
operations for the interim period reported herein are not necessarily indicative
of results of operations to be expected for the entire year. Certain financial
statement reclassifications have been made for 1997 to conform to
classifications used in 1998.
(2) EARNINGS PER SHARE
Earnings per share is calculated by dividing net income available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period. The conversion of convertible preferred
stock and the exercise of stock options are not included in the calculation of
diluted earnings per share for the three and six months ended June 30, 1998 as
the result would be anti-dilutive.
A reconciliation of basic earnings per share to diluted earnings per share
is as follows:
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THREE MONTHS ENDED JUNE 30
--------------------------
1998 1997
---- ----
------------------------------------------------------------ ----------
(000'S) PER SHARE PER SHARE
except per share data Income Shares Amount Income Shares Amount
BASIC EPS
Net income
(loss)available to
common shareholders $(2,745) 11,340 $(0.24) $4,500 8,739 $0.51
EFFECT OF DILUTIVE
SECURITIES
Stock options 126 0.08
Convertible Preferred
Stock 402 2,811 $0.10
------------------------------------------------------------ ----------
DILUTED EPS
Net income(loss)
available to
common shareholders
plus assumed
conversions $(2,745) 11,340 $(0.24) $4,902 11,676 $0.42
------------------------------------------------------------ ----------
SIX MONTHS ENDED JUNE 30
------------------------
1998 1997
---- ----
------------------------------------------------------------ ----------
(000'S) PER SHARE PER SHARE
EXCEPT PER SHARE DATA INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
BASIC EPS
NET INCOME AVAILABLE TO $2,028 11,339 $0.18 $8,796 8,709 $1.01
COMMON SHAREHOLDERS
EFFECT OF DILUTIVE
SECURITIES
STOCK OPTIONS 129 0.01
CONVERTIBLE PREFERRED
STOCK 809 2,833 0.18
-----------------------------------------------------------------------
DILUTED EPS
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS
PLUS ASSUMED
CONVERSIONS $2,028 11,339 $0.18 $9,605 11,671 $0.82
(3) DIVIDENDS ON COMMON AND PREFERRED STOCK
On April 23, 1998, the Company's Board of Directors declared a
five-for-four stock split, effecting a 25% stock dividend on May 22, 1998 to
shareholders of record as of May 4, 1998. All prior period per share data has
been restated to reflect this dividend.
On July 22, 1998 the Company's Board declared a cash dividend of $0.11 per
common share. The cash dividend will be paid on August 21, 1998 to shareholders
of record at August 3, 1998. The Board of Directors also declared a cash
dividend of $0.40625 per share on the 6 1/2% Cumulative Convertible Preferred
Stock, Series B. The dividend will be paid on September 1, 1998 to shareholders
of record at August 10, 1998.
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(4) RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income." The
Statement requires additional reporting of items that affect comprehensive
income but not net income. Items relevant to the Company include unrealized
gains and losses on securities. Comprehensive income (loss) was as follows
($000's):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------------------
1998 1997 1998 1997
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Net income (loss) $(2,571) $4,902 $2,377 $9,605
Unrealized gain (loss) on securities available
for sale, net of tax 69 1,647 (307) 413
----------- --------------------------------
Comprehensive income (loss) $(2,502) $6,549 $2,070 $10,018
=========== ================================
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 provisions of this statement do not apply
to interim periods in the year of adoption. The statement requires financial
disclosure and descriptive information about reportable operating segments and
will result in additional financial statement disclosures.
In June, 1998 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. The statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. Items
relevant to the Company include interest rate swap agreements, and certain
hedges related to manufactured housing loans, both of which are periodically
utilized by the Company. Management has not as yet fully analyzed the impact of
this statement on the Company's Consolidated Financial Statements. The statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999 with earlier adoption encouraged.
(5) LOANS HELD FOR SALE
Loans held for sale amounted to $53.3 million of residential mortgage
loans as of June 30, 1998 compared to $90.4 million at December 31, 1997
consisting of $40.4 million of residential mortgage loans and $50 million of
manufactured housing loans.
(6) ACQUISITION
On June 29, 1998, the Company completed its acquisition of First Shenango
Bancorp, Inc. ("First Shenango") by exchanging approximately 3,087,000 common
shares of Signal Corp for all 2,161,000 of the outstanding shares of First
Shenango. The merger has been treated as a pooling of interests. All prior
period data has been restated. Pursuant to the transaction the Company has
incurred $9.2 million ($6.3 million after-tax) in nonrecurring merger related
costs. The costs are primarily for 1) transactions costs of $1.8 million ($1.5
million after-tax) for financial advisory services, and legal and accounting
fees, 2) estimated operational costs of $5.6 million ($3.6 million after-tax) to
integrate First Shenango into Signal including systems conversions, product
conversions/introductions and the elimination of certain duplicated operations,
and 3) an additional provision for credit risk of $1.8 million ($1.2 million
after-tax).
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(7) DEFINITIVE MERGER AGREEMENT
On August 10, 1998, the Company entered into a merger agreement with
FirstMerit Corporation (Nasdaq:FMER). Under the terms of the agreement the
Company will merge with and into FirstMerit. Shareholders will receive 1.32
shares of FirstMerit's common stock in exchange for each share of Signal Corp's
common stock and one share of FirstMerit 6 1/2% Cumulative Convertible Preferred
Stock, Series B, for each share of Signal 6 1/2% Cumulative Convertible
Preferred Stock, Series B. Based on FirstMerit's August 10, 1998 closing price
of $28.19 the transaction is valued at approximately $470 million. FirstMerit is
a bank holding company with approximately $6.2 billion in assets. The
transaction, which is expected to be accounted for as a pooling of interests, is
subject to regulatory and shareholder approval and other customary conditions of
closing, and is expected to be completed in the first quarter of 1999.
(8) SIGNAL TRUST
In February 1998, the Company formed Signal Capital Trust One ("Signal
Trust"),a Delaware business trust. Signal Trust was formed for the purpose of
(I) issuing and selling $50 million of its 8.67% Capital Securities, Series A
(the "Capital Securities"), referred to in the Consolidated Balance Sheet as
"company obligated mandatorily redeemable preferred securities", and common
securities (the "Common Securities"), (ii) investing the proceeds thereof in the
8.67% Junior Subordinated Deferrable Interest Debentures, Series A, issued by
the Company (the "Signal Corp Debentures") and (iii) engaging in certain other
limited activities. The Capital Securities were issued and sold to investors in
a private placement exempt from the Securities Act of 1933 on February 10, 1998.
The Company filed a registration statement with the Securities and Exchange
Commission for these securities on May 13, 1998.
(9) MANUFACTURED HOUSING
The Company, through its subsidiary Mobile Consultants, Inc. (MCi) sells
certain manufactured housing finance contracts (MHF contracts) to various
financial institutions while retaining collection and recovery aspects of
servicing.
The Company's subsidiary, Signal Bank, N.A., purchases MHF contracts from
MCi, a portion of which are periodically packaged in asset-backed securitization
(ABS pools) and sold to investors. Sales and securitization totaled $50 million
and $100 million both in the three months and six months ended June 30, 1998 and
June 30, 1997, respectively. It is anticipated that there will be no additional
sales and securitizations in 1998. The aggregate amount of ABS pools serviced by
the Company totaled $272.8 million at June 30, 1998 and $186.2 million at
December 31, 1997.
At the time of sale the Company records an asset, "retained interest in
securitized assets" which represents the discounted cash flows to be received by
the Company for 1) servicing income from ABS pools, 2) principal and interest
payments on MHF contracts contributed to the ABS pools as a credit enhancement,
referred to as overcollateralization, and 3) excess interest spread. These cash
flows are projected and discounted over the expected life of the ABS pools using
assumptions for credit risk, estimated prepayments and interest rates. The cash
flows are subject to volatility that could materially affect operating results.
Prepayments resulting from increased competition, obligor mobility, general and
regional economic conditions and prevailing interest rates, as well as actual
losses incurred, may vary from the performance the Company projects. In
aggregate, actual cash flow from the Company's six ABS pools has not varied
significantly from expected cash flows. At June 30, 1998 management has
determined that there is no permanent impairment that would require adjustment
to the carrying value of the retained interest in securitized assets. Management
continues to review the cash flow and actual performance of the ABS pools on a
quarterly basis.
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The Company classifies the retained interest in securitized assets in two
components on the Company's Consolidated Balance Sheet, 1) securities held for
sale and 2) excess servicing included in the balance sheet as other assets.
Total retained interest in securitized assets and excess servicing were $45.2
million and $27.0 million at June 30, 1998 and December 31, 1997, respectively.
The components of manufactured housing income were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------------------
($000'S) 1998 1997 1998 1997
----------------------------------------
Gain on sale of ABS pools $1,112 $1,577 $2,650 $3,902
Manufactured housing brokerage fees 788 1,497 1,202 2,236
Servicing income on brokered MHF contracts 333 1,200 1,333 2,400
Servicing income on ABS pools 231 48 373 101
----------------------------------------
TOTAL MANUFACTURED HOUSING INCOME $2,464 $4,322 $5,558 $8,639
========================================
(10) MORTGAGE BANKING INCOME
The Company has sold certain residential mortgage loans to various
investors while retaining servicing rights. Loans serviced for others totaled
$563 million at June 30, 1998 and $521 million at December 31, 1997 and are not
included in the accompanying Consolidated Financial Statements.
The components of mortgage banking income for the three months ended June
30 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------------------
($000'S) 1998 1997 1998 1997
---------------------------------------
Gain on sale of mortgage loans $1,134 $373 $2,627 $765
Mortgage servicing fees, net of amortization 206 160 569 323
---------------------------------------
TOTAL MORTGAGE BANKING INCOME $1,340 $533 $3,196 $1,088
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