1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): February 12, 1999
FIRSTMERIT CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 0-10161 34-1339938
(State or other jurisdiction of (Commission (IRS employer
incorporation or organization) file number) identification number)
III CASCADE PLAZA, 7TH FLOOR AKRON, OHIO 44308 (330)996-6300
(Address of Principal Executive Offices) (Zip Code) (Telephone Number)
Copy to:
Kevin C.O'Neil
Brouse McDowell
500 First National Tower
Akron, Ohio 44308-1471
(330)434-5207
2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
Item 7 to the Form 8-K filed on March 5, 1999 is hereby amended and supplemented
as follows:
(a)Attached hereto and incorporated by reference herein are the consolidated
balance sheets of Signal Corp and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income and comprehensive income,
changes in shareholders' equity, and cash flows for each of the years in the
three year period ended December 31, 1998.
(b)Not Applicable.
(c)Not Applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRSTMERIT CORPORATION
Dated: April 21, 1999 By:/s Austin J. Mulhern
---------------------------------
Austin J. Mulhern, Senior Vice President and
Chief Financial Officer
3
[logo]KPMG
SIGNAL CORP
Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
4
[logo]KPMG
1500 National City Center
1900 East Ninth Street
Cleveland, OH 44114-3495
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstMerit Corporation
Akron, Ohio:
We have audited the accompanying consolidated balance sheets of Signal Corp and
Subsidiaries (the Corporation) as of December 31, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the financial statements of First Shenango Bancorp, Inc., a wholly
owned subsidiary, as of December 31, 1997, and for the years ended December 31,
1997 and 1996, which statements reflect total assets constituting 20% in 1997
and total revenues constituting 20% and 23% 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.
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, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
March 5, 1999
5
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------
December 31: ($000's) 1998 1997
- ------------------------------------------------------------------------------------------
ASSETS:
- ------------------------------------------------------------------------------------------
Cash and due from banks $ 82,047 $ 34,393
Securities available for sale 311,472 348,468
Securities held to maturity(a) 72,650 70,959
Other short term investments 19,234 32,795
Loans held for sale 40,912 90,379
Loans and leases:
Residential mortgage loans 620,249 676,129
Commercial loans 114,623 64,808
Commercial mortgage loans 104,338 101,582
Commercial lease financing 19,029 41,909
Finance contracts 20,861 4,585
Manufactured housing loans 283,308 110,827
Consumer loans 191,729 175,871
Allowance for credit losses (17,200) (8,773)
- ------------------------------------------------------------------------------------------
Net loans and leases 1,336,937 1,166,938
Premises and equipment, net 22,301 21,073
Intangible assets 28,194 32,062
Other assets 36,495 35,320
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,950,242 $ 1,832,387
- ------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------
Deposits:
Non-interest bearing demand $ 68,345 $ 52,545
Interest bearing demand 274,106 212,120
Savings 256,545 214,289
Certificates and other time deposits 785,419 777,942
- ------------------------------------------------------------------------------------------
Total deposits 1,384,415 1,256,896
Short term borrowings 183,435 124,275
Long term borrowings 172,670
Other liabilities 21,883 27,926
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,762,403 1,679,790
- ------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred securities 50,000 -
SHAREHOLDERS' EQUITY:
- ------------------------------------------------------------------------------------------
Preferred stock(b) 9,299 9,917
Common stock(c) 12,013 9,748
Additional paid-in capital 69,844 64,276
Retained earnings 45,657 75,947
Treasury stock, at cost (583) (8,535)
Accumulated other comprehensive income 1,609 1,244
- ------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 137,839 152,597
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,950,242 $ 1,832,387
- ------------------------------------------------------------------------------------------
(a)Market value $72,929 in 1998 and $71,059 in 1997.
(b)Preferred stock, no par value; authorized 1,500,000 shares; Series B 403,232,
and 429,892 shares issued and outstanding, respectively.
(c)Common stock, $1.00 par value; authorized 40,000,000 shares.
See accompanying notes to consolidated financial statements.
6
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- ----------------------------------------------------------------------------------------------------------
For the years ended December 31: ($000's except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
INTEREST INCOME:
- ----------------------------------------------------------------------------------------------------------
Loans and leases $109,416 $89,463 $76,168
Securities available for sale 22,907 24,573 18,869
Securities held to maturity 4,563 5,686 5,288
Other 2,574 1,248 904
- ----------------------------------------------------------------------------------------------------------
Total interest income 139,460 120,970 101,229
- ----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
- ----------------------------------------------------------------------------------------------------------
Interest on deposits:
Interest checking and money markets 7,534 4,090 2,727
Savings 6,899 5,914 5,724
Certificates of deposit 45,063 38,100 32,507
- ----------------------------------------------------------------------------------------------------------
Total interest on deposits 59,496 48,104 40,958
Short-term borrowings 6,642 10,182 6,753
Long-term debt 22,587 18,226 15,296
- ----------------------------------------------------------------------------------------------------------
Total interest expense 88,725 76,512 63,007
- ----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 50,735 44,458 38,222
Provision for credit losses 12,538 1,615 1,259
- ----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 38,197 42,843 36,963
- ----------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Manufactured housing income (loss) (21,070) 14,684 11,580
Mortgage banking income 9,086 5,168 3,515
Customer service fee income 8,626 5,562 2,655
Net securities gains 21 1,157 584
Other income 4,305 2,187 563
- ----------------------------------------------------------------------------------------------------------
Total non-interest income 968 28,758 18,897
- ----------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
- ----------------------------------------------------------------------------------------------------------
Personnel 33,190 19,593 13,963
Loss on sale of subsidiary 5,410 - -
Net occupancy expense 5,130 4,031 3,002
Outside services, data processing and communications 5,356 3,487 2,984
Professional fees 2,649 1,771 1,671
Amortization of intangibles 2,924 1,798 1,119
Other 14,351 9,590 7,701
Non-recurring expenses (a) 4,596 1,209 5,011
- ----------------------------------------------------------------------------------------------------------
Total non-interest expense 73,606 41,479 35,451
- ----------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (34,441) 30,122 20,409
Provision for income taxes (9,480) 11,088 7,549
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ($24,961) $19,034 $12,860
- ----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on available for sale securities 365 2,199 (2,299)
- ----------------------------------------------------------------------------------------------------------
Comprehensive income (loss) ($24,596) $21,233 $10,561
- ----------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock ($25,652) $17,450 $11,164
- ----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE:
Basic ($2.22) $1.93 $1.29
Diluted ($2.22) $1.57 $1.09
- ----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 11,576,709 9,050,918 8,670,249
Diluted 11,576,709 12,151,159 11,828,502
- ----------------------------------------------------------------------------------------------------------
(a) Nonrecurring expenses in 1998 and 1997 reflect expenses incurred pursuant to
the Corporation's acquisitions of First Shenango Bancorp (total non-recurring
expenses of $6.5 million) and Summit Bank N.A., respectively. Nonrecurring
expenses in 1996 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.
7
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Years ended December 31, 1998, 1997, 1996 Preferred Common Paid-In Retained Treasury Comprehensive Total
($000's except per share data) Stock Stock Capital Earnings Stock Income
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1996 24,132 6,083 36,207 60,533 (4,143) 1,344 124,156
Net income 12,860 12,860
Cash dividends:
Common stock $.30 per share (2,694) (2,694)
Series A preferred stock - $1.75 per share (870) (870)
Series B preferred stock - $1.63 per share (795) (795)
Amortization of unearned compensation on ESOP shares 127 176 303
Proceeds from exercise of common stock options 74 236 310
Contribution of shares to the 401(k) plan 101 101
Conversion and redemption of Series A and Series B
preferred shares to common shares (459) 198 261 -
Purchase of Series A preferred stock (639) (879) (1,518)
Purchase of Series B preferred stock (341) (143) (484)
Purchase of treasury stock (6,317) (6,317)
Issuance of common shares in MCi acquisition 279 5,309 5,588
10% common stock dividend 369 8,654 (9,023) -
Unrealized loss on securities available for sale (2,299) (2,299)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 22,693 6,731 49,547 60,011 (9,686) (955) 128,341
Net income 19,034 19,034
Cash dividends:
Common stock - $.34 per share (3,265) (3,265)
Series A preferred stock - $1.75 per share (861) (861)
Series B preferred stock - $1.63 per share (723) (723)
Amortization of unearned compensation on ESOP shares 199 124 323
Issuance of common shares in Summit acquisition 549 4,911 1,499 (44) 6,915
Proceeds from exercise of common stock options (161) 1,088 927
Tax benefit on stock options exercised 257 257
Contribution of shares to the 401(k) plan 133 133
Conversion and redemption of Series A and Series B
preferred shares to common shares (12,776) 1,455 10,793 528 -
Purchase of treasury stock (722) (722)
25% common stock dividend 1,013 (1,013) (5) (5)
Unrealized gain on securities available for sale 2,243 2,243
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 9,917 9,748 64,276 75,947 (8,535) 1,244 152,597
Net loss (24,961) (24,961)
Cash dividends:
Common stock $0.42 per share (4,638) (4,638)
Series B preferred stock - $1.63 per share (691) (691)
Amortization of unearned compensation on ESOP shares 1,243 (48) 1,195
Proceeds from exercise of common stock options 269 3,744 2,796 6,809
Contribution of shares to the 401(k) plan 413 413
Conversion and redemption of Series B
preferred shares to common shares (618) 332 286 -
Cancellation of treasury stock (18) (4,383) 4,401 -
Termination of ESOP shares (1) (103) 104 -
Restricted stock 184 5,531 5,715
Tax benefit on restricted stock and stock options exercised 1,035 1,035
25% common stock dividend 1,831 (1,831) -
Unrealized gain on securities available for sale 365 365
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $9,299 $12,013 $69,844 $45,657 ($583) $1,609 $137,839
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31: ($000's) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ($24,961) $19,034 $12,860
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Loss on sale of subsidiary 5,410 - -
Provision for credit losses 12,538 1,615 1,259
Depreciation and amortization 7,627 6,073 3,154
Restricted stock 5,715 - -
Amortization of unearned compensation on ESOP shares 1,195 322 301
Net securities gains (21) (1,157) (584)
Net gain on sales of loans (9,937) (9,740) (3,917)
Proceeds from sales of loans held for sale 518,951 261,197 274,705
Origination of loans held for sale (459,547) (259,102) (324,505)
(Increase) decrease in other assets (3,786) (45,034) 6,707
(Decrease) increase in other liabilities 2,136 (959) 6,486
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES 55,320 (27,751) (23,534)
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of securities available for sale 78,177 100,277 76,784
Proceeds from calls, paydowns and maturities of securities available for sale 240,561 73,151 97,507
Purchases of securities available for sale (287,384) (230,173) (170,519)
Purchases of securities held to maturity (25,000) (1,417) (9,638)
Proceeds from maturities of securities held to maturity 23,309 15,442 14,596
(Increase) decrease in other short-term investments 13,561 (8,878) (1,618)
Increase in loans and leases (222,306) (146,209) (153,669)
Purchases of premises and equipment, net (6,553) (6,788) (4,025)
Net cash from purchases and sales of subsidiaries and other acquisitions (21) 2,556 -
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (185,656) (202,039) (150,582)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------------------
Increase in core deposits 127,519 93,779 84,651
Acquisition of deposits - 150,800 24,606
Net change in short-term borrowings 60,485 (38,766) 93,103
Net change in long-term debt (61,907) 34,863 (9,080)
Proceeds from issuance of company obligated
mandatorily redeemable preferred securities 50,000 - -
Cash dividends paid (5,329) (4,786) (4,341)
Proceeds from common stock transactions 7,222 1,185 311
Purchases of treasury stock - (722) (6,317)
Purchases of preferred stock - - (2,002)
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 177,990 236,353 180,931
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND DUE FROM BANKS 47,654 6,563 6,815
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 34,393 27,830 21,015
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $82,047 $34,393 $27,830
- --------------------------------------------------------------------------------------------------------------------------------
The Corporation paid Federal income taxes of $2,872, $8,834, and $7,320 in 1998,
1997 and 1996, respectively.
The Corporation paid interest of $87,051, $75,202, and $62,549, in 1998, 1997,
and 1996, respectively.
See accompanying notes to consolidated financial statements.
9
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 and Indiana doing business in 41 states.
Principal activities include commercial and retail banking, investment services
and brokering and servicing manufactured housing finance contracts.
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, and 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 as accumulated other comprehensive income or in
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 non-accrual 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 non-accrual 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 payoff or 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
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 $40.9 million and $90.4 million at December
31, 1998, and 1997, respectively. Included in loans held for sale at December
31, 1997 was $50 million of manufactured housing loans. 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.
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.
5
10
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, assets or liabilities
acquired. Amortization of intangible assets was $2.9 million, $1.8 million, and
$1.1 million in 1998, 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 (LOSS) PER SHARE
Earnings (loss) per share is calculated by dividing net income (loss) 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 for the years ended December 31, 1997 and 1996. For the year ended
December 31, 1998 there has been no assumed conversion as the result would be
anti-dilutive.
STOCK DIVIDEND
The Corporation's board of directors approved 25% stock dividends in April
of 1998 and April of 1997 and a 10% stock dividend in May of 1996. The
Consolidated Financial Statements, notes and other references to 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
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 Corporation include interest rate swap agreements, and certain
hedges related to manufactured housing loans, both of which are periodically
utilized by the Corporation. Management has not yet fully analyzed the impact of
this statement on the Corporation's Consolidated Financial Statements. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999 with earlier adoption encouraged.
In October, 1998 SFAS No. 134 "Accounting for MortgageBacked Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" was issued. The statement provides accounting and reporting
standards for mortgage backed securities retained after the securitization of
mortgage loans held for sale. The statement is effective for the first quarter
of 1999 and is not expected to have a material impact on the Corporation's
financial statements.
NOTE 2 - SUBSEQUENT EVENT
On February 12, 1999 the Corporation was acquired by FirstMerit (NASDAQ:
FMER), a $7.1 billion bank holding company. The transaction was consummated with
each Signal Corp shareholder receiving 1.32 common shares of FirstMerit for each
common share of Signal Corp. Upon closing of the transaction the Corporation
recorded certain merger related expenses, principally transaction costs and
employee severance expenses, of approximately $8.7 million net of tax. Also
pursuant to the sale, owners of the Corporation's Series B, 6 1/2% Cumulative
Preferred Stock received one share of FirstMerit Series B 6 1/2% Cumulative
Preferred Shares.
In December 1998 the sale of the Corporation to FirstMerit was approved by
the Federal Reserve Board and the Office of the Comptroller of the Currency as
well as the shareholders of both the Corporation and FirstMerit.
NOTE 3 - SECURITIES
Securities available for sale as of December 31:
- -----------------------------------------------------------------
1998
------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
($000's) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------
U.S. Government and
agency obligations ...... $33,835 $86 - $33,921
Obligations of states
and political
subdivisions ............ 37,291 1,957 - 39,248
Agency mortgage-
backed securities ....... 167,149 692 (196) 167,645
Retained interest in
securitized assets ... 17,663 - - 17,663
Other bonds, notes
and debentures .......... 4,510 - (62) 4,448
Other securities ........ 48,566 103 (122) 48,547
- -----------------------------------------------------------------
Total securities ........ $309,014 $2,838 ($380) $311,472
- -----------------------------------------------------------------
- -----------------------------------------------------------------
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
- -----------------------------------------------------------------
6
11
Securities held to maturity as of December 31:
- --------------------------------------------------------------
1998
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
($000'S) COST GAINS LOSSES VALUE
- --------------------------------------------------------------
Obligations of
states and political $2,779 92 - $2,871
subdivisions........
Agency mortgage-
backed securities... 43,403 377 (190) 43,590
Other securities.... 26,468 26,468
- --------------------------------------------------------------
Total securities.... $72,650 $469 ($190) $72,929
- --------------------------------------------------------------
- --------------------------------------------------------------
1997
---------------------------------------------
Amortized Unrealized Unrealized Market
($000's) Cost Gains Losses Value
- --------------------------------------------------------------
U.S. Government
and agency $4,500 $3 ($31) $4,472
obligations.........
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
- --------------------------------------------------------------
The amortized cost and approximate market value of securities at December
31, 1998, by expected actual maturity, are shown in the following table. Actual
maturities may differ from contractual 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..... $13,581 $13,586 $2,180 $2,177
1-5 years........ 161,346 159,436 32,420 32,512
6-10 years....... 55,243 55,282 6,200 6,316
Over 10 years.... 78,844 83,168 31,850 31,924
- ------------------------------------------------------------------
Total securities.... $309,014 $311,472 $72,650 $72,929
- ------------------------------------------------------------------
At December 31, 1998 and 1997, securities with a book value of
$114,800,000, and $128,571,000, respectively, were pledged to secure short-term
borrowings, public deposits, and for other purposes as required or permitted by
law. Gross realized gains and losses respectively were as follows: 1998 -
$1,236,000 and ($1,215,000), 1997 - $1,240,000 and ($83,000); and 1996 -
$978,000 and ($394,000).
NOTE 4 - ALLOWANCE FOR CREDIT LOSSES
Transactions in the allowance for credit losses for the years ended
December 31:
- ------------------------------------------------------------------
($000's) 1998 1997 1996
- ------------------------------------------------------------------
Balance at January 1............. $8,773 $5,783 $5,466
Losses charged off............... (4,380) (1,278) (1,002)
Recoveries of losses
previously charged off........ 269 142 60
- ------------------------------------------------------------------
Net charge-offs.................. (4,111) (1,136) (942)
Provision charged to operations.. 12,538 1,615 1,259
Reserves of acquired - 2,511 -
businesses
- ------------------------------------------------------------------
Balance at December 31........... $17,200 $8,773 $5,783
- ------------------------------------------------------------------
Impaired loans amounted to $6,588,000 and $7,123,000 at December 31, 1998
and 1997, respectively. Cash basis interest income recognized on impaired loans
during both years was immaterial.
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31:
- -------------------------------------------------------------------
($000's) Estimated 1998 1997
Useful Life
- -------------------------------------------------------------------
Land and improvements......... -- $2,951 $2,744
Buildings..................... 25 17,609 16,550
Furniture and equipment....... 3 to 10 yrs 16,363 15,585
Leasehold improvements 5 to 25 yrs 1,772 1,274
Accumulated depreciation
and amortization.............. (16,394)(15,080)
- -------------------------------------------------------------------
Total premises and $22,301 $21,073
equipment
- -------------------------------------------------------------------
Depreciation and amortization expense related to premises and equipment was
$4,703,000 in 1998, $2,968,000 in 1997, and $1,482,000 in 1996.
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, 1998, exclusive of taxes
and other charges payable under the leases:
- ----------------------------------------------------
($000's)
- ----------------------------------------------------
1999....................................... $425
2000....................................... 358
2001....................................... 352
2002....................................... 269
2003....................................... 215
2004 and subsequent years.................. 511
- ----------------------------------------------------
Total...................................... $2,130
- ----------------------------------------------------
Rental expense for cancelable and noncancelable leases was $741,000 for
1998, $417,000 for 1997, and $302,000 for 1996.
12
NOTE 6 - SHORT-TERM BORROWINGS
A summary of short-term borrowings and rates at December 31:
- ---------------------------------------------------------------------
($000's) 1998 1997 1996
- ---------------------------------------------------------------------
FHLB advances:
Balance............................ $174,143 $64,802 $137,178
Rate............................... 5.72% 5.79% 6.09%
- ---------------------------------------------------------------------
Securities sold under agreements to
repurchase:
Balance............................ $7,708 $55,814 $20,402
Rate............................... 5,41% 5.68% 5.44%
- ---------------------------------------------------------------------
Other borrowings:
Balance............................ $1,584 $3,659 $5,876
Rate............................... 4.96% 8.18% 5.61%
- ---------------------------------------------------------------------
Total short-term borrowings:
Balance............................ $183,435 $124,275 $163,456
Rate............................... 5.70% 5.81% 5.99%
- ---------------------------------------------------------------------
Average outstanding................ $119,761 $172,223 $123,130
Weighted average interest rate..... 5.54% 5.91% 5.48%
Maximum month-end balance.......... $183,435 $230,803 $188,607
- ---------------------------------------------------------------------
At December 31, 1998, the Corporation had unused lines of credit of $108.9
million available to support corporate requirements. 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.
NOTE 7 - LONG-TERM BORROWINGS
A summary of long-term borrowings at December 31:
- --------------------------------------------------------------
($000's) 1998 1997
- --------------------------------------------------------------
Subordinated debt, 9.125% due $40,500 $40,500
2004.................
Federal Home Loan Bank 120,747 205,434
advances...................
Other, ranging from 6% to 12%.......... 11,423 24,759
- --------------------------------------------------------------
Total long-term
borrowings..................... $172,670 $270,693
- --------------------------------------------------------------
Interest on the subordinated debt is payable semiannually beginning in
September 1997, and the debt is redeemable at the option of the Corporation any
time after June 30, 2002 until its maturity date of June 30, 2004.
At December 31, 1998, Federal Home Loan bank (FHLB) advances have rates
ranging from 4.94% to 6.94%, 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: $37,023,000 in 2000,
$12,182,000 in 2001, $17,597,000 in 2002, $9,360,000 in 2003, $96,508,000 in
2004, and thereafter.
NOTE 8 - SIGNAL TRUST
In February 1998 the Corporation formed Signal Capital Trust One ("
Signal Trust"), a Delaware business trust. Signal Trust was formed for the
purpose of (1) 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"), (2) investing the proceeds in the
8.67% Junior Subordinated Deferrable Interest Debentures, Series A issued by the
Corporation (the "Signal Debentures") and (3) 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 Corporation registered the securities with the Securities and Exchange
Commission in June of 1998.
The Corporation is the sole owner of the Common Securities. Distributions
on the Capital Securities are guaranteed by the Corporation, are cumulative,
began accumulating interest on February 13, 1998 and are payable semi-annually
in arrears on February 15 and August 15 of each year, commencing August 15, 1998
at the annual rate of 8.67% of the liquidation amount of $1,000 per security.
The interest payment schedule of the Signal Debentures is identical to that of
the Capital Securities, except that so long as the Corporation is not in default
under the governing indenture of the Signal Debentures, the Corporation may
defer the payment of interest on the Signal Debentures at any time and from time
to time for a period not exceeding ten consecutive semi-annual periods (an
"Extension Period"). During any Extension Period the Corporation will be
prohibited from taking certain actions, including declaring or paying any
dividends or distributions on or redeeming or purchasing any of its capital
stock.
NOTE 9 - 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) 1998 1997 1996
- --------------------------------------------------------------
Current U.S. income taxes...... $(3,346) $4,768 $2,404
State and local income taxes... 340 750 568
- --------------------------------------------------------------
Total.......................... (3,006) 5,518 2,972
- --------------------------------------------------------------
Deferred U.S. income taxes
resulting from temporary (6,474) 5,570 4,577
differences....................
- --------------------------------------------------------------
Provision for income ($9,480) $11,088 $7,549
taxes..............
- --------------------------------------------------------------
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) 1998 1997
- --------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses.............. $5,495 $2,769
Basis difference - sale of loans 1,791 -
Other assets............................. 1,569 742
- --------------------------------------------------------------
Total gross deferred tax assets............. 8,855 3,511
- --------------------------------------------------------------
Deferred Tax Liabilities:
Basis difference - leased property....... 1,766 3,976
Unrealized gain on loans and securities
available for sale..................... 707 818
FHLB stock dividends..................... 2,499 1,985
Originated servicing rights.............. 1,881 887
Deferred loan fees net of costs.......... 1,901 3,889
Tax bad debt reserve over base year 545 654
reserves.................................
Deferred gain on sale of loans........... - 2,066
Basis difference - fixed assets.......... 51 201
Other net liabilities.................... 127 257
- --------------------------------------------------------------
Total gross deferred tax liabilities........ 9,477 14,733
- --------------------------------------------------------------
Net deferred tax liability.................. $622 $11,222
- --------------------------------------------------------------
8
13
Management has determined no valuation allowance for deferred tax assets was
required at December 31, 1998 or 1997.
A reconciliation between the statutory U.S. income tax rate and the
Corporation's effective tax rate:
- ---------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------
Statutory tax rate................... (35.0%) 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes net of
federal benefit................... 0.8 1.6 1.8
Non-deductible merger transaction. 1.2 0.7 -
Tax-free income................... (2.1) (1.6) (1.3)
Amortization of intangibles....... 1.0 0.7 0.8
Basis difference on sale of
subsidiary..................... 7.5 - -
Other - net....................... (0.9) 0.4 0.7
- ---------------------------------------------------------------
Effective tax rate................... (27.5%) 36.8% 37.0%
- ---------------------------------------------------------------
Retained earnings at December 31, 1998 includes approximately $150 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 10 - 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
$673.2 million and $430.1 million, at December 31, 1998 and 1997, 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 $34.2 million and $46.4 million as of December 31, 1998 and
1997, respectively. Certain contracts with unaffiliated financial institutions
include provisions which obligate MCi to reimburse the unaffiliated financial
institution for prepayment and/or credit losses in excess of MCi reserves. In
1998, MCi recorded a liability of $3.3 million based on its estimated
obligations. In addition, due to increases in the prepayments and credit losses,
$7.4 million of impairment was recorded on the MCi reserves in 1998.
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
$100 million in 1998 and $150 million in 1997.
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 approximately a 3% and 2% constant default rate provision
for credit risk and further reduced by the impact of estimated prepayments using
200 MHP and 130 MHP at December 31, 1998 and 1997, respectively. 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% at
December 31, 1998 and 1997.
Cash flows from the ABS pools are subject to volatility and 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 Corporation expects. Actual cash flows from the Corporation's
six ABS pools have been less than originally expected. The original projections
reflect assumed credit loss experience at a constant rate per year throughout
the term of the pools. Actual credit loss experience typically occurs in ABS
pools in the second through the fourth years at a rate in excess of the assumed
constant annual rate resulting in lower than projected cash flows during these
months. Management reviews the cash flow and actual performance of the ABS
pools. In 1998, the ABS pools were not performing as expected with prepayment
and loss rates occurring at higher rates than originally anticipated.
Accordingly, an impairment loss of $18 million was recorded on the retained
interests. The aggregate amount of ABS pools serviced by the Corporation totaled
$255.8 million and $186.2 million at December 31, 1998 and 1997, respectively,
and such amounts are not included in the accompanying Consolidated Financial
Statements.
The Corporation classifies the retained interest in securitized assets in
two components on the Corporation's Consolidated Balance Sheet, 1) securities
available for sale, and 2) excess servicing in the balance sheet in other
assets. Total retained interest in securitized assets and excess servicing were
$26.3 million and $27.0 million at December 31, 1998 and 1997, respectively.
The components of manufactured housing income were as follows:
- ------------------------------------------------------------------
($000's) 1998 1997 1996
- ------------------------------------------------------------------
Gain on sale of ABS pools........... $2,650 $5,734 $1,574
Manufactured housing brokerage
fees.......................... 2,464 3,151 6,726
Servicing income on brokered MHF
contracts......................... 1,666 4,400 3,200
Servicing income on ABS pools....... 850 1,399 80
Impairment of retained interest in (18,000) -- --
securitized assets................
Impairment of MCi reserves.......... (7,400) -- --
Reserve for recourse obligations... (3,300) -- --
- ------------------------------------------------------------------
TOTAL MANUFACTURED HOUSING
INCOME (LOSS)................ ($21,070) $14,684 $11,580
- ------------------------------------------------------------------
9
14
NOTE 11 - MORTGAGE BANKING INCOME
The Corporation has sold certain loans to various investors while retaining
servicing rights. Loans serviced for others totaled $644 million and $521
million at December 31, 1998 and 1997, 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) 1998 1997
- --------------------------------------------------------------
Balance at January 1.................... $2,541 $1,503
Originated mortgage servicing rights.... 4,015 1,589
Amortization............................ (1,225) (551)
- --------------------------------------------------------------
Balance at December 31 $5,331 $2,541
- --------------------------------------------------------------
THE COMPONENTS OF MORTGAGE BANKING INCOME WERE AS FOLLOWS:
- --------------------------------------------------------------
($000'S) 1998 1997 1996
- --------------------------------------------------------------
Gain on sale of mortgage loans........ $7,166 $3,972 $2,308
Mortgage fees, net of amortization 1,920 1,196 1,207
- --------------------------------------------------------------
TOTAL MORTGAGE BANKING INCOME $9,086 $5,168 $3,515
- --------------------------------------------------------------
NOTE 12 - COMPREHENSIVE INCOME
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income" in
1998. The Statement requires additional reporting of items that affect
comprehensive income but not net income. Items relevant to the Corporation
include unrealized gains and losses on securities available for sale. Other
comprehensive income for the years ended December 31 was as follows:
- -------------------------------------------------------------------
(000's) 1998 1997 1996
- -------------------------------------------------------------------
Unrealized gains (losses) on
securities available for sale:
Gross unrealized holding
gains (losses) arising during
period $574 $4,540 ($2,953)
Less: applicable income
taxes (benefit) 195 1,589 (1,034)
- -------------------------------------------------------------------
Net unrealized holding gains
during period 379 2,951 (1,919)
Less: reclassification
adjustment for gains realized
in net income, net of tax of
$7, $405, and $204, 14 752 380
respectively
- -------------------------------------------------------------------
OTHER COMPREHENSIVE
INCOME (LOSS).............. $365 $2,199 ($2,299)
- -------------------------------------------------------------------
NOTE 13 - 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 1998,
1997, and 1996:
- -----------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------
AVERAGE Average Average
(Shares in OPTION Option Option
000's) SHARES PRICE Shares Price Shares Price
- -----------------------------------------------------------------------
Outstanding
beginning
of year... 844,861 $16.32 675,256 $9.14550,929 8.33
Exercised.... (454,477) 16.36 (112,478) 8.28(42,560) 7.32
Expired...... (15,149) - (16,469) - (13,850) -
Granted...... 314,000 32.66 231,046 30.50180,737 17.54
Acquired
business..... - 67,506 10.40 - -
- -----------------------------------------------------------------------
Outstanding,
end of year 689,235 27.01 844,861 16.32675,256 9.14
- -----------------------------------------------------------------------
Exercisable,
end of year 686,840 27.01 389,900 8.47294,913 7.37
- -----------------------------------------------------------------------
At December 31, 1998, there were 592,346 incentive options and 96,890
nonqualified options outstanding.
Substantially all outstanding stock options of the Corporation became 100%
vested in December of 1998 upon shareholder approval of the sale of the
Corporation to FirstMerit (see Note 2).
Under the 1997 Employee Stock Purchase Plan ("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 13,917 shares to employees for 1998.
On December 31, 1998 the Corporation terminated the Plan.
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 assumed conversion of convertible preferred stock and
the exercise of stock options is not included in the calculation of diluted
earnings per share for the year ended December 31, 1998 as the result would be
anti-dilutive. The Corporation's pro forma information for the years ended
December 31:
- -------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------
Pro forma net income (loss) ($000's).... ($29,514) $18,192 $12,421
Pro forma basic net income (loss) per
share.. ($2.55) $1.83 $1.24
Pro forma diluted net income (loss) per
share.. ($2.55) $1.50 $1.05
- -------------------------------------------------------------------
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. As of December 31, 1998, options
outstanding have exercise prices between $4.78 and $35.70.
The weighted average fair value of options granted was $7.08 in 1998,
$13.94 in 1997, and $9.23 in 1996. 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 1998, 1997, and 1996: expected
dividend yield of 1.30%, 1.10%, and 1.78% and expected option lives of 2 years,
10 years and 10 years; expected volatility of 35%, 30%, and 39%, and risk-free
interest rates of 4.62%, 5.70%, and 6.25%, respectively.
The Corporation granted restricted stock to certain officers
10
15
and directors in 1996 and in 1998 of which 53,125 shares are outstanding as of
December 31, 1998. At the time of grant the restricted stock was scheduled to
vest at 20% per year provided the Corporation met certain targets for return on
shareholders' equity. Upon shareholder approval of the sale of the Corporation
to FirstMerit in December of 1998 (see Note 2) all of the restricted stock
granted in 1998 of 185,000 shares became 100% vested. The unvested balance of
the restricted stock granted in 1996 became vested at the merger date with
FirstMerit which was February 12, 1999. Restricted stock compensation expense
amounted to $5.7 million in 1998.
NOTE 14 - 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 847,392 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 15 - 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, 1998,
the profit sharing plan held approximately 45,000 shares of the Corporation
valued at $1.5 million. Employer contributions to the profit sharing plan were
$300,000, $299,000, and $124,000 for 1998, 1997 and 1996, respectively.
The Corporation sponsored a final-pay noncontributory defined benefit plan
for Signal Bank, N.A. employees. Effective December 31, 1996, the Corporation
terminated the plan, settled the 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 ($2,592) $2,592 $ --
obligation
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 $ --
- --------------------------------------------------------------------
Net periodic pension expense for the defined benefit plan was $0, $200,000,
and $143,000 for 1998, 1997, and 1996, respectively.
The Corporation does not provide postretirement benefits nor does it have
any material liabilities for postemployment benefits.
In June of 1998 the Corporation terminated the Employee Stock Ownership Plan
(ESOP) which had been set up in 1993 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 made 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 called for interest at prime
plus one percent with quarterly interest payments and principal payable in equal
annual installments over ten years. The loan was secured by the shares of the
stock purchased. As the note is repaid shares are released from collateral and
allocated to qualified employees. Upon termination of the plan all outstanding
shares were released and the corresponding debt was repaid. Compensation
expense, which is equal to the market price of the shares upon release, amounted
to $1.9 million in 1998 which included $1.6 million pursuant to the termination
of the plan and $310,000, and $240,000 for the years ended December 31, 1997,
and 1996, respectively.
ESOP shares at December 31, were as follows:
- ------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------
Allocated shares.............. 73,407 60,149 45,510
Shares released for allocation 61,586 16,061 16,328
Shares distributed............ (4,893) (2,803) (1,689)
Unreleased shares............. - 78,765 94,826
-----------------------------------
Total ESOP shares............. 130,100 152,172 154,975
===================================
Fair value of unreleased
shares at December 31 - $2,040,000 $1,493,000
- ------------------------------------------------------------------
NOTE 16 - 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.
11
16
A summary of significant commitments and other off-balancesheet items at
December 31:
- --------------------------------------------------------------
Contract or
Notional Amount
-------------------
($000's) 1998 1997
- --------------------------------------------------------------
Commitments to extend credit............. $221,448 $181,256
Letters of credit (including standby
letters of credit).................... 1,682 3,053
Commitments to sell residential
mortgage loans........................ 45,900 10,320
Interest rate swap agreements............ 75,000 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, 1998,
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 enterprises (FNMA and
FHLMC). Fixed rate commitments to sell residential mortgage loans of $45.9
million at December 31, 1998 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 1998, the Corporation entered into interest rate swap agreements with a
notional principal amount of $75 million in connection with the issuance of the
$50 million of fixed rate mandatorily redeemable preferred securities and a $25
million brokered certificate of deposit. The Corporation receives fixed-rate
payments at 8.67% and 6.50%, 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 had a $41 million forward contract
which matured 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. 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.
The Corporation has guaranteed lease financing of Alliance Corporate
Resources of approximately $10.9 million.
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 17 - ACQUISITIONS
- -----------------------------------------------------------------------
CONSIDERATION
--------------------
COMMON
DATE CASH SHARES METHOD OF
COMPLETED ($000'S) ISSUED ACCOUNTING
- -----------------------------------------------------------------------
First Shenango........ 6-29-98 -- 3,087,000 pooling
Alpha Equipment 10-31-97 $1,700 -- purchase
Group, Inc.........
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 completed its 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 of the 2,161,000 outstanding
common shares of First Shenango. The acquisition was accounted for as a pooling
of interests and accordingly all prior period data has been restated.
Pursuant to the acquisition of First Shenango the Corporation recorded $9.2
million in nonrecurring expenses ($6.3 million after-tax) in the second quarter
of 1998. These costs were primarily for 1) transaction costs of $1.8 million
($1.5 million after-tax) including financial advisory, legal, and accounting
services, 2) estimated operational conversion costs of $5.6 million ($3.6
million after-tax) to integrate First Shenango into Signal Corp including system
conversions, product conversions/introductions and the elimination of certain
duplicated operations, and 3) $1.8 million ($1.2 million after-tax) in
additional provision for credit losses. In the fourth quarter of 1998, upon
shareholder approval of the Corporation's sale to FirstMerit, the Corporation
reversed approximately $2.7 million ($1.8 million after-tax) of estimated
operational conversion costs that as a result of the pending merger with
FirstMerit were no longer expected to be implemented.
12
17
The following table sets forth the separate results of operations for Signal
Corp and for Shenango for the applicable periods prior to the consummation of
the acquisition:
- --------------------------------------------------------------
THREE
MONTHS Year Year
ENDED Ended Ended
MARCH 31 December 31 December 31
(000's) 1998 1997 1996
- --------------------------------------------------------------
Revenue:
Signal Corp $35,277 $119,378 $91,488
Shenango 7,156 30,350 28,638
-------------------------------------
Total $42,433 $149,728 $120,126
Net Income:
Signal Corp $4,059 $14,448 $9,850
Shenango 889 4,586 3,010
-------------------------------------
Total $4,948 $19,034 $12,860
- --------------------------------------------------------------
NOTE 18 - SALE OF SUBSIDIARY
In the fourth quarter of 1998 the Corporation sold one of its leasing
subsidiaries, Alliance Corporate Resources, Inc. The Corporation recorded a loss
on the sale of $5.4 million ($4.4
million after-tax).
NOTE 19 - 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 1998 eligible net
profits, as defined, plus the adjusted retained 1997 and 1996 net income of the
subsidiaries.
Banking subsidiaries must maintain noninterest-bearing cash balances on
reserve with the Federal Reserve Bank. In 1998 and 1997, the subsidiary banks
were required to maintain average reserve balances of $12,093,000 and
$5,821,000, 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. As of December 31,
1998, the most recent notification from the regulators categorized the Banks as
well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believe have changed the Banks' categories.
Capital and risk-based capital and leverage ratios for the Corporation and
its significant subsidiaries at December 31:
- ---------------------------------------------------------------
1998
-------------------
($000's) AMOUNT RATIO
- ---------------------------------------------------------------
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Signal Bank N.A........................ 144,349 10.29%
Summit Bank N.A........................ 10,401 10.89%
First Federal Savings of New Castle.... 46,147 23.31%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Signal Bank N.A........................ 87,793 6.26%
Summit Bank N.A........................ 9,086 9.51%
First Federal Savings of New Castle.... 43,668 22.06%
TIER 1 LEVERAGE CAPITAL (TO AVERAGE
ASSETS):
Signal Bank N.A........................ 87,793 5.99%
Summit Bank N.A........................ 9,086 7.70%
First Federal Savings of New Castle.... 43,668 10.27%
- ---------------------------------------------------------------
- ---------------------------------------------------------------
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%
Summit Bank N.A.......................... 7,355 9.88%
First Federal Savings of New Castle...... 40,963 20.25%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Signal Corp.............................. 72,753 8.18%
Signal Bank N.A.......................... 86,441 9.78%
Summit Bank.A............................ 6,423 8.63%
First Federal Savings of New Castle...... 38,430 19.00%
TIER 1 LEVERAGE CAPITAL (TO AVERAGE
ASSETS):
Signal Corp.............................. 72,753 5.23%
Signal Bank N.A.......................... 86,441 6.68%
Summit Bank N.A.......................... 6,423 6.40%
First Federal Savings of New Castle...... 38,430 10.42%
- ---------------------------------------------------------------
NOTE 20 - EARNINGS PER SHARE
For the year ended December 31, 1998 there has been no assumed conversion of
the Corporation's convertible preferred securities or assumed exercise of its
common stock options for purposes of calculating diluted earnings per share as
the result would be anti-dilutive.
13
18
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 Income Shares Amount
data)
- --------------------------------------------------------------
BASIC EPS
Income available to
common shareholders........ $17,450 9,051 $1.93
EFFECTIVE 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
- --------------------------------------------------------------
- --------------------------------------------------------------
1996
------------------------------------
Per-Share
(000's except per share Income Shares Amount
data)
- --------------------------------------------------------------
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
- --------------------------------------------------------------
NOTE 21 - RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, 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 $1,701,000 and $2,240,000, respectively. 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 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments at
December 31:
- -------------------------------------------------------------------
1998
---------------------
CARRYING FAIR VALUE
($000's) AMOUNT
- -------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and short-term investments......... $101,281 $101,281
Securities available for sale........... 311,472 311,472
Securities held to maturity............. 72,650 72,929
Loans and leases including loans held
for sale............................. 1,377,849 1,404,001
FINANCIAL LIABILITIES:
1,384,415 1,406,922
Deposits...................................
356,105 361,878
Borrowings.................................
MANDATORILY REDEEMABLE PREFERRED
SECURITIES................................. 50,000 52,530
- -------------------------------------------------------------------
1997
---------------------
Carrying
($000's) Amount Fair Value
- -------------------------------------------------------------------
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 including loans held for sale.....
1,257,317 1,259,684
FINANCIAL LIABILITIES:
Deposits................................... 1,256,896 1,254,250
394,968 400,148
Borrowings.................................
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.
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, accrued interest
receivable, accrued interest payable, 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.
14
19
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.
COMMITMENTS AND LETTERS OF CREDIT - fair value of commitments to extend
credit would be based on fees currently being charged to enter into similar
agreements, taking into account the remaining terms of the agreements. The
Corporation only charges a nominal loan commitment fee and, accordingly, there
is no fair value associated with loan commitments.
NOTE 23 - SEGMENTS
The Corporation has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". The statement requires financial disclosure
and descriptive information about reportable operating segments. The
Corporation's management organizes the segments for management and internal
reporting purposes as "Community Banking", "Manufactured Housing", and "Other".
The Community Banking segment includes the Corporation's three banking
subsidiaries which have been aggregated for disclosure purposes based on the
similar nature of products and services provided by the institutions as well as
the regulatory environment in which they operate. The bank subsidiaries offer a
full range of deposit and loan products and other services to individuals and
businesses. This segment also includes bank subsidiaries involved in various
other financial services including equipment leasing, investment advisory
services, financial planning, and real estate appraisal services. The
Manufactured Housing segment specifically refers to Mobile Consultants, Inc.
("MCi").
MCi originates financing and services the collection and recovery of loans on
manufactured houses. Management evaluates performance of the individual segments
on the basis of net income. Other includes the activities of the Bank holding
company.
Intersegment revenue is generally accounted for as if the revenue was from a
third party. The financial information for each business segment reflect those
which are specifically identifiable.
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) 1998 1997 1996
- --------------------------------------------------------------
REVENUES:
Community Banking $143,825 $137,575 $109,862
Manufactured Housing 13,059 25,955 15,797
Other 4,482 1,428 407
Eliminations (20,938) (15,230) (5,940)
- --------------------------------------------------------------
TOTAL.................... $140,428 $149,728 $120,126
- --------------------------------------------------------------
INTERSEGMENT REVENUES:
Community Banking $4,202 $403 $73
Manufactured Housing 16,736 14,827 5,867
- --------------------------------------------------------------
TOTAL................... $20,938 $15,230 $5,940
- --------------------------------------------------------------
NET INCOME (LOSS):
Community Banking ($7,945) $18,849 $12,547
Manufactured Housing (6,701) 7,289 5,263
Other (6,760) (1,353) (388)
Eliminations (3,555) (5,751) (4,562)
- --------------------------------------------------------------
TOTAL................... ($24,961) $19,034 $12,860
- --------------------------------------------------------------
TOTAL ASSETS:
Community Banking $1,985,326 $1,817,952 $1,467,606
Manufactured Housing 23,295 26,966 20,851
Other 10,849 2,721 3,060
Eliminations (69,228) (15,252) (5,349)
- --------------------------------------------------------------
TOTAL.................. $1,950,242 $1,832,387 $1,486,168
- --------------------------------------------------------------
Capital expenditures relating primarily to the Community Banking Group
totaled $6,553,000, $6,788,000, and $4,025,000, in 1998, 1997, and 1996,
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 24 - PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the Corporation ($000's):
- ------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY)
For the Years Ended December 31: 1998 1997 1996
- ------------------------------------------------------------------
INCOME:
Dividends from subsidiaries......... $ - $1,000 $6,000
Interest on loans to subsidiaries... 4,202 364 264
Securities (gains) losses........... - 576 (2)
Other............................... 280 1,041 761
- ------------------------------------------------------------------
TOTAL INCOME........................ 4,482 2,981 7,023
- ------------------------------------------------------------------
EXPENSES:
Interest............................ 7,406 2,922 -
Other............................... 7,726 708 688
- ------------------------------------------------------------------
TOTAL EXPENSES 15,132 3,630 688
- ------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES AND
UNDISTRIBUTED EARNINGS (LOSS)
OF SUBSIDIARIES (10,650) (649) 6,335
Applicable income taxes (benefit) (3,720) (201) 497
- ------------------------------------------------------------------
INCOME (LOSS) BEFORE
UNDISTRIBUTED EARNINGS
(LOSS) OF SUBSIDIARIES......... (6,930) (448) 5,838
- ------------------------------------------------------------------
Undistributed earnings (loss) of
subsidiaries........................ (18,031) 19,482 7,022
- ------------------------------------------------------------------
NET INCOME (LOSS)...................($24,961) $19,034 $12,860
- ------------------------------------------------------------------
15
20
- -----------------------------------------------------------------
CONDENSED BALANCE SHEET (PARENT COMPANY ONLY)
December 31: 1998 1997
- -----------------------------------------------------------------
ASSETS:
Cash and equivalents......................... $2,914 $1,764
Securities available for sale................ 4,825 4,927
Loans to subsidiaries........................ 57,336 13,551
Investment in subsidiaries................... 168,324 184,746
Other assets................................. 6,024 1,840
- -----------------------------------------------------------------
TOTAL ASSETS 239,423 206,828
- -----------------------------------------------------------------
LIABILITIES:
Subordinated debt............................ 40,500 40,500
Accrued expenses and other liabilities....... 11,084 13,731
- -----------------------------------------------------------------
TOTAL LIABILITIES............................ 51,584 54,231
- -----------------------------------------------------------------
Mandatorily redeemable preferred securities 50,000 -
- -----------------------------------------------------------------
SHAREHOLDERS' EQUITY 137,839 152,597
- -----------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $239,423 $206,828
- -----------------------------------------------------------------
- -----------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
For the Years Ended 1998 1997 1996
December 31:
- -----------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss)..................... ($24,961) $19,034 $12,860
Adjustments to reconcile net
income (loss) to net cash (used)
provided by operating activities:
Undistributed earnings (loss) of
subsidiaries..................... 18,031 (19,482) (7,022)
Securities (gains) losses.......... - (576) 2
Deferred and unearned
amortization of ESOP shares...... 1,195 - -
Restricted stock................... 5,715 - -
Decrease (increase) in other
assets............................ (4,184) 1,631 2,834
Increase (decrease) in accrued
expenses and other liabilities.. (2,647) (2,074) 1,431
- -----------------------------------------------------------------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES.............. (6,851) (1,467) 10,105
- -----------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities............... - (9,698) (11,515)
Proceeds from sales or maturities
of securities........................ 102 10,982 20,402
Capital contributions to
subsidiaries.......................... (44,319) (37,305) (10,475)
Other................................. 325 (468) 135
- -----------------------------------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES......................... (43,892) (36,489) (1,453)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of debt...................... - 40,500 4,000
Issuance of company obligated
mandatorily redeemable
preferred securities.................. 50,000 - -
Purchase of treasury stock............ - (722) (6,317)
Purchase of preferred stock........... - - (2,002)
Proceeds from stock options .......... 7,222 1,185 311
Cash dividends paid................... (5,329) (4,821) (4,376)
- -----------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES.............. 51,893 36,142 (8,384)
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN CASH........... 1,150 (1,814) 268
CASH AT BEGINNING OF YEAR............. 1,764 3,578 3,310
- -----------------------------------------------------------------------
CASH AT END OF YEAR................... $2,914 $1,764 $3,578
- -----------------------------------------------------------------------
16