<PAGE> 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): June 29, 1998
SIGNAL CORP
(Exact name of registrant as specified in its charter)
Ohio 0-17894 34-1622711
- --------------------------------------------------------------------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification
incorporation) No.)
135 East Liberty Street, Wooster, Ohio 44691
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 264-8001
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE> 2
On July 8, 1998 Signal Corp. ("Signal") filed a Current Report on Form
8-K, reporting the completion of Signal's acquisition of First Shenango
Bancorp, Inc. ("Shenango") and its subsidiary First Federal Savings Bank of New
Castle on June 29, 1998. The purpose of this amendment on Form 8-K/A is to
provide financial statements and pro forma financial information.
ITEM 5. OTHER EVENTS
The following supplemental consolidated financial statements of Signal
Corp. reflecting the acquisition of Shenango as a pooling of interests
transaction are attached hereto as Exhibit 99.1:
Consolidated Statements of Financial Position - December 31,
1997 and 1996
Consolidated Statements of Income - Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
The following financial statements of Shenango and its
subsidiaries are incorporated herein by reference to Shenango's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, as
amended on Form 10-K/A, and attached hereto as Exhibit 99.2:
Report of Independent Auditors
Consolidated Statements of Financial Position - December 31,
1997 and 1996
Consolidated Statements of Income - Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity -
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
The following unaudited financial statements of Shenango and
its subsidiaries are incorporated herein by reference to Shenango's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1998 and attached hereto as Exhibit 99.3:
Consolidated Statement of Financial Position - March 31, 1998
and December 31, 1997
Consolidated Statements of Income - Three Months Ended March
31, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity -
Year Ended December 31, 1997 and the Three Months Ended March
31, 1998
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997
Notes to Unaudited Consolidated Financial Statements
(b) Pro Forma Financial Information
The unaudited combined condensed pro forma interim financial statements
of Signal Corp as required by Regulation S-X Rule 210.11-02(c)(2)(ii) of the
Securities and Exchange Commission is attached as Exhibit 99.4.
(c) Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as part of
this Report and are incorporated herein by reference.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SIGNAL CORP
By: /s/ Jon W. Park
---------------------
Jon W. Park
Chief Financial Officer
Date: August 28, 1998
<PAGE> 4
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------------------------------------------------------------------------
99.1 Audited Supplemental Financial Statements of Signal Corp
99.2 Audited Financial Statements of First Shenango Bancorp, Inc.
99.3 Unaudited Financial Statements of First Shenango Bancorp, Inc.
99.4 Unaudited Pro Forma Financial Information
<PAGE> 1
Exhibit 99.1
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
December 31: ($000's) 1997 1996
==============================================================================================================================
ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 34,393 $ 27,830
Securities available for sale 348,468 290,813
Securities held to maturity(a) 70,959 84,984
Other short term investments 32,795 23,917
Loans held for sale 90,379 92,440
Loans and leases:
Residential mortgage loans 676,129 688,675
Commercial loans 64,808 25,794
Commercial mortgage loans 101,582 45,611
Commercial lease financing 41,909 --
Finance contracts 4,585 --
Manufactured housing loans 110,827 38,840
Consumer loans 175,871 128,872
Allowance for credit losses (8,773) (5,783)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 1,166,938 922,009
Premises and equipment, net 21,073 14,687
Intangible assets 32,062 10,572
Other assets 35,320 18,916
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,832,387 $ 1,486,168
==============================================================================================================================
LIABILITIES:
- ------------------------------------------------------------------------------------------------------------------------------
Deposits:
Non-interest bearing demand $ 52,545 $ 25,916
Interest bearing demand 212,120 123,412
Savings 214,289 202,940
Certificates and other time deposits 777,942 587,270
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,256,896 939,538
Short term borrowings 124,275 163,456
Long term borrowings 270,693 235,412
Other liabilities 27,926 19,421
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,679,790 1,357,827
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
- ------------------------------------------------------------------------------------------------------------------------------
Preferred stock(b) 9,917 22,693
Common stock(c) 9,748 6,731
Additional paid-in capital 64,276 49,547
Retained earnings 75,947 60,011
Treasury stock, at cost (7,984) (9,011)
Stock acquired by ESOP (551) (675)
Securities equity valuation account 1,244 (955)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 152,597 128,341
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,832,387 $ 1,486,168
==============================================================================================================================
</TABLE>
(a) Market value $71,059 in 1997 and $83,958 in 1996.
(b) Preferred stock, no par value; authorized 1,500,000 shares; Series B 429,892
and 479,327 issued and outstanding, respectively. Series
A 498,287 issued and outstanding in 1996.
(c) Common stock, $1.00 par value; authorized 20,000,000 shares; outstanding
11,754,620 (net of 821,083 treasury shares) and 9,011,310 (net of
1,074,111 treasury shares), respectively.
See accompanying notes to consolidated financial statements.
1
<PAGE> 2
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31: ($000's except per share data) 1997 1996 1995
================================================================================================================================
INTEREST INCOME:
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans and leases $ 89,463 $ 76,168 $ 60,875
Securities available for sale 23,256 18,809 18,327
Securities held to maturity 5,686 5,288 9,084
Other 1,248 904 423
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 119,653 101,169 88,709
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
- --------------------------------------------------------------------------------------------------------------------------------
Interest on deposits:
Interest checking and money markets 4,090 2,727 2,226
Savings 5,914 5,724 5,626
Certificates of deposit 38,100 32,507 27,909
- --------------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 48,104 40,958 35,761
Short-term borrowings 10,182 6,753 4,305
Long-term debt 18,226 15,296 13,699
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 76,512 63,007 53,765
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 43,141 38,162 34,944
Provision for credit losses 1,615 1,259 918
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 41,526 36,903 34,026
- --------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Manufactured housing income 16,001 11,640 --
Mortgage banking income 5,168 3,515 2,610
Customer service fee income 5,562 2,655 1,350
Net securities gains 1,157 584 449
Other 2,187 563 724
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 30,075 18,957 5,133
- --------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
- --------------------------------------------------------------------------------------------------------------------------------
Personnel 19,593 13,963 8,561
Net occupancy expense 4,031 3,002 2,745
Outside services, data processing and communications 3,487 2,984 2,303
Professional fees 1,771 1,671 1,186
Amortization of intangibles 1,798 1,119 388
Other 9,590 7,701 4,598
Non-recurring expenses (a) 1,209 5,011 --
- --------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 41,479 35,451 19,781
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 30,122 20,409 19,378
Provision for income taxes 11,088 7,549 6,853
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 19,034 $ 12,860 $ 12,525
================================================================================================================================
Net income applicable to common stock $ 17,450 $ 11,164 $ 10,739
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ 1.93 $ 1.29 $ 1.30
Diluted $ 1.57 $ 1.09 $ 1.08
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 9,050,918 8,670,249 8,286,052
Diluted 12,151,159 11,828,502 11,559,897
================================================================================================================================
</TABLE>
(a) Non-recurring expenses in 1997 of $1.2 million reflect acquisition
transaction costs of Summit Bank, N.A. and 1996 expenses of $5.0 million reflect
a one-time assessment for the recapitalization of the Savings Association
Insurance Fund (SAIF).
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996, 1995 Preferred Common Paid-In Retained Treasury
($000's except per share data) Stock Stock Capital Earnings Stock
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 25,123 $ 5,774 $ 30,949 $ 57,607 ($ 2,296)
Net income 12,525
Cash dividends:
Common stock $.27 per share (2,250)
Series A preferred stock - $1.75 per share (974)
Series B preferred stock - $1.63 per share (809)
Amortization of unearned compensation on ESOP shares 101
Proceeds from exercise of common stock options -
5,699 shares (11) 48
Contribution of 3,845 shares to the 401(k) plan 41
Conversion and redemption of 20,053 Series A preferred shares
to common shares (501) 213 288
Purchase of Series A preferred stock - 16,000 shares (402) (296)
Purchase of Series B preferred stock - 3,500 shares (88) (6)
Purchase of treasury stock - 112,142 shares (1,373)
10% common stock dividend 309 5,257 (5,566)
Unrealized gain on securities available for sale
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 24,132 6,083 36,207 60,533 (3,292)
Net income 12,860
Cash dividends:
Common stock $.30 per share (2,694)
Series A preferred stock - $1.75 per share (870)
Series B preferred stock - $1.63 per share (795)
Amortization of unearned compensation on ESOP shares 127
Proceeds from exercise of common stock options -
24,543 shares 74 236
Contribution of 6,614 shares to the 401(k) plan 101
Conversion and redemption of 15,260 Series A
preferred shares to common shares and 3,550
Series B preferred shares to common shares (459) 198 261
Purchase of Series A preferred stock - 25,300 shares (639) (879)
Purchase of Series B preferred stock - 9,900 shares (341) (143)
Purchase of treasury stock - 385,953 shares (6,317)
Issuance of 480,291 common shares in MCi acquisition 279 5,309
10% common stock dividend 369 8,654 (9,023)
Unrealized loss on securities available for sale
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 22,693 6,731 49,547 60,011 (9,011)
Net income 19,034
Cash dividends:
Common stock - $.34 per share (3,265)
Series A preferred stock - $1.75 per share (861)
Series B preferred stock - $1.63 per share (723)
Amortization of unearned compensation on ESOP shares 199
Issuance of 686,186 common shares in Summit acquisition 549 4,911 1,499
Proceeds from exercise of common stock options - 115,870 (161) 1,088
shares
Tax benefit on stock options exercised 257
Contribution of 3,421 shares to the 401(k) plan 133
Conversion and redemption of 496,249 Series
A preferred shares to common shares (11,539) 1,455 9,991 93
Conversion and redemption of 49,435 Series
B preferred shares to common shares (1,237) 802 435
Purchase of treasury stock - 41,028 shares (722)
25% common stock dividend 1,013 (1,013) (5)
Unrealized gain on securities available for sale
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 9,917 $ 9,748 $ 64,276 $ 75,947 ($ 7,984)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Stock Securities
Years ended December 31, 1997, 1996, 1995 Acquired Equity
($000's except per share data) By ESOP Valuation Total
Account
======================================================================================================
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 ($ 1,051) ($ 2,979) $ 113,127
Net income 12,525
Cash dividends:
Common stock $.27 per share (2,250)
Series A preferred stock - $1.75 per share (974)
Series B preferred stock - $1.63 per share (809)
Amortization of unearned compensation on ESOP shares 200 301
Proceeds from exercise of common stock options -
5,699 shares 37
Contribution of 3,845 shares to the 401(k) plan 41
Conversion and redemption of 20,053 Series A preferred shares
to common shares --
Purchase of Series A preferred stock - 16,000 shares (698)
Purchase of Series B preferred stock - 3,500 shares (94)
Purchase of treasury stock - 112,142 shares (1,373)
10% common stock dividend - 585,263 shares --
Unrealized gain on securities available for sale 4,323 4,323
- ------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 (851) 1,344 124,156
Net income 12,860
Cash dividends:
Common stock $.30 per share (2,694)
Series A preferred stock - $1.75 per share (870)
Series B preferred stock - $1.63 per share (795)
Amortization of unearned compensation on ESOP shares 176 303
Proceeds from exercise of common stock options -
24,543 shares 310
Contribution of 6,614 shares to the 401(k) plan 101
Conversion and redemption of 15,260 Series A
preferred shares to common shares and 3,550
Series B preferred shares to common shares --
Purchase of Series A preferred stock - 25,300 shares (1,518)
Purchase of Series B preferred stock - 9,900 shares (484)
Purchase of treasury stock - 385,953 shares (6,317)
Issuance of 480,291 common shares in MCi acquisition 5,588
10% common stock dividend - 508,920 shares --
Unrealized loss on securities available for sale (2,299) (2,299)
- ------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 (675) (955) 128,341
Net income 19,034
Cash dividends:
Common stock - $.34 per share (3,265)
Series A preferred stock - $1.75 per share (861)
Series B preferred stock - $1.63 per share (723)
Amortization of unearned compensation on ESOP shares 124 323
Issuance of 686,186 common shares in Summit acquisition (44) 6,915
Proceeds from exercise of common stock options - 115,870 927
shares
Tax benefit on stock options exercised 257
Contribution of 3,421 shares to the 401(k) plan 133
Conversion and redemption of 496,249 Series
A preferred shares to common shares --
Conversion and redemption of 49,435 Series
B preferred shares to common shares --
Purchase of treasury stock - 41,028 shares (722)
25% common stock dividend - 1,148,184 shares (5)
Unrealized gain on securities available for sale 2,243 2,243
- ------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 ($ 551) $1,244 $152,597
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
SIGNAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31: ($000's) 1997 1996 1995
=================================================================================================================================
OPERATING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 19,034 $ 12,860 $ 12,525
Adjustments to reconcile net income to net cash used by operating activities:
Provision for credit losses 1,615 1,259 918
Depreciation, amortization and accretion 6,073 3,154 1,721
Amortization of unearned compensation on ESOP shares 322 301 301
Net securities gains (1,157) (584) (449)
Net gain on sales of loans (9,740) (3,917) (1,485)
Proceeds from sales of loans held for sale 261,197 274,705 89,857
Origination of loans held for sale (259,102) (324,505) (121,690)
(Increase) decrease in other assets (45,034) 6,707 (2,002)
(Decrease) increase in other liabilities (959) 6,486 4,508
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (27,751) (23,534) (15,796)
=================================================================================================================================
INVESTING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of securities available for sale 100,277 76,784 73,826
Proceeds from calls, paydowns and maturities of securities available for sale 73,151 97,507 62,647
Purchases of securities available for sale (230,173) (170,519) (133,463)
Purchases of securities held to maturity (1,417) (9,638) (14,209)
Proceeds from maturities of securities held to maturity 15,442 14,596 22,070
Increase in other short-term investments (8,878) (1,618) (11,826)
Increase in loans and leases (146,209) (153,669) (84,595)
Purchases of premises and equipment, net (6,788) (4,025) (683)
Net cash from purchases of subsidiaries and other acquisitions 2,556 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (202,039) (150,582) (86,233)
=================================================================================================================================
FINANCING ACTIVITIES:
- ---------------------------------------------------------------------------------------------------------------------------------
Increase in core deposits 93,779 84,651 75,952
Acquisition of deposits 150,800 24,606 --
Net change in short-term borrowings (38,766) 93,103 (34,947)
Net change in long-term debt 34,863 (9,080) 75,161
Cash dividends paid (4,786) (4,341) (3,967)
Exercise of stock options 1,185 311 37
Purchases of treasury stock (722) (6,317) (1,373)
Purchases of preferred stock -- (2,002) (792)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 236,353 180,931 110,071
=================================================================================================================================
INCREASE IN CASH AND DUE FROM BANKS 6,563 6,815 8,042
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 27,830 21,015 12,973
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 34,393 $ 27,830 $ 21,015
=================================================================================================================================
</TABLE>
The Corporation paid Federal income taxes of $8,834, $7,320 and $5,919 in 1997,
1996 and 1995, respectively.
The Corporation paid interest of $75,202, $62,549, and $52,289 in 1997, 1996 and
1995, respectively.
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
SIGNAL CORP AND SUBSIDIARIES
FOOTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
NATURE OF OPERATIONS
Signal Corp ("The Corporation") conducts its principal activities through
its banking and non-banking subsidiaries with 29 banking offices located
throughout north central Ohio and four banking offices in western Pennsylvania
and non-banking facilities in Ohio, Indiana and Virginia doing business in 42
states. Principal activities include commercial and retail banking, investment
services and brokering and servicing manufactured housing finance contracts.
RESTATEMENT
The Consolidated Financial Statements reflect the Corporation's June 29,
1998 acquisition of First Shenango Bancorp, Inc. The acquisition was completed
with the exchange of approximately 3,087,000 common shares of Signal Corp for
all 2,161,000 of the outstanding common shares of First Shenango. The
transaction has been treated as a pooling of interests, and accordingly, all
prior period data has been restated to reflect the acquisition of First
Shenango.
Also see note 15 - Acquisitions.
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Signal Corp
and its subsidiaries. All material intercompany transactions and balances have
been eliminated. Certain prior period data has been reclassified to conform to
current period presentation.
The preparation of Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Actual results could differ from those
estimates.
SECURITIES
Securities are classified as held to maturity, available for sale or
trading. Only those securities classified as held to maturity, which management
has the intent and ability to hold to maturity, are reported at amortized cost.
Available for sale and trading securities are reported at fair value with
unrealized gains and losses, net of related deferred income taxes, included in
shareholders' equity or income, respectively. The cost of securities sold is
based on the specific identification method.
Other short term investments consist primarily of interest bearing deposits
with the Federal Home Loan Bank of Cincinnati and the Federal Home Loan Bank of
Pittsburgh (collectively "FHLB").
LOANS AND LEASES
Interest income on loans is based on the principal balance outstanding. The
accrual of interest for commercial, construction and mortgage loans is
discontinued when there is a clear indication that the borrower's cash flow may
not be sufficient to meet payments as they become due. Such loans are also
placed on nonaccrual status when principal or interest is past due ninety days
or more, unless the loan is well secured and in the process of collection. When
a loan is placed on nonaccrual status, all previously accrued and unpaid
interest is reversed against income. A loan remains on non-accrual status until
the loan is current as to payment of both principal and interest, and/or the
borrower demonstrates the ability to pay and remain current.
Direct loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized over the estimated
life of the related loans or commitments as a yield adjustment. Net deferred
loan fees or costs related to loans paid off or sold are included in income at
the time of sale.
Income on direct financing leases is recognized on a basis to achieve a
constant periodic rate of return on the outstanding investment.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rates or the fair value
of the underlying collateral. Impaired loans have been defined as all nonaccrual
commercial loans.
Loans held for sale are valued at the lower of aggregate cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements and were $90,379,000 and $92,440,000 at December 31,
1997 and 1996 respectively. The Corporation has commitments to sell residential
mortgage loans held for sale in the secondary market. Gains and losses on
residential mortgage loans sold are recorded at the time of the sale and are
recognized as mortgage banking income. Mortgage servicing rights associated with
mortgage loans originated and sold, where servicing is retained, are capitalized
and amortized over the period of net revenue. The carrying value of such rights
is subject to periodic adjustment based upon changing market conditions.
The Corporation adopted the provisions of SFAS 125, "Accounting and
Reporting for transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," on January 1, 1997, which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 is based on consistent application of a financial-
components approach that focuses on control. Under the financial-components
approach, the Corporation recognizes the financial and servicing asset it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS 125 also provides consistent standards for distinguishing transfers of
financial assets that are secured borrowings.
The Corporation records an asset upon sale or securitization of loans with
servicing retained and allocates the total cost of loans to the servicing rights
and the loans based on their relative fair values. The resulting servicing
rights are amortized in proportion to, and over the period of, estimated net
servicing revenues. Servicing rights are assessed for impairment recognized
through a valuation allowance. For purposes of measuring impairment, the rights
are stratified based on interest rate and original maturity.
ALLOWANCE FOR CREDIT LOSSES
The allowance is maintained at a level management considers to be adequate
to absorb potential loan and lease losses. Credit losses are charged and
recoveries are credited to the allowance. Provisions for credit losses are based
on management's review of the historical credit loss experience and such other
factors which, in management's judgement, deserve consideration under existing
economic conditions in estimating potential credit losses.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation and amortization. Depreciation is computed on
the straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed on the straight-line method
over the lives of the related leases or useful lives of the related assets,
whichever is shorter. Maintenance, repairs and minor improvements are charged to
operating expenses as incurred.
5
<PAGE> 6
INTANGIBLE ASSETS
Intangible assets, primarily premiums on purchased deposits, are amortized
on a straight-line basis generally over a period of up to 15 years. Management
reviews intangible assets for possible impairment if there is a significant
event that detrimentally affects operations. Impairment is measured using
estimates of the future earnings potential of the entity or assets acquired.
Amortization of intangible assets was $1.8 million and $1.1 million in 1997 and
1996, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation has entered into interest rate swap agreements to achieve a
lower aggregate borrowing cost on certain fixed-rate long-term borrowings. Net
interest expense resulting from the differential between exchanging fixed-rate
and floating interest payments is recorded on an accrual basis as an adjustment
to the interest expense of the associated liability.
The Corporation periodically hedges the value of manufactured housing loans
held for sale to mitigate the impact on the change in value on sale of loans due
to future fluctuations in interest rates. The contracts are designated as
hedges, with gains and losses recorded as basis adjustments to loans held for
sale.
The Corporation does not hold or issue derivative financial instruments
for trading purposes.
NET INCOME PER SHARE
Earnings per share is calculated by dividing net income for the period by
the weighted average number of shares of common stock outstanding during the
period. The assumed conversion of convertible preferred stock and the exercise
of stock options is included in the calculation of diluted earnings per share.
SFAS No. 128, "Earnings Per Share," was adopted for 1997 with all
prior-period earnings per share data restated. The statement requires dual
presentation of basic earnings per share and diluted earnings per share on the
Consolidated Statements of Income.
STOCK DIVIDEND
The Corporation's board of directors approved 25% stock dividends in April
1998 and April 1997 and 10% stock dividends on both May 22, 1996 and May 22,
1995. The consolidated financial statements, notes and other references to share
and per share data have been retroactively restated for the stock dividends.
STOCK-BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation," was adopted January
1, 1996 and encourages, but does not require, adoption of a fair-value-based
accounting method for employee stock-based compensation arrangements. The
Corporation has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and
is effective for fiscal years beginnings after December 15, 1997. The statement
requires additional reporting of items that affect comprehensive income but not
net income. Examples relevant to the Corporation include unrealized gains and
losses on securities available for sale. This statement will result in
additional financial statement disclosures upon adoption.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. The statement requires financial disclosure
and descriptive information about reportable operating segments. This statement
may result in additional financial statement disclosures upon adoption, however
the Corporation does not expect to make material changes to its current segment
groupings.
NOTE 2 - SECURITIES
Securities available for sale as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1997
----------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
($000'S) COST GAINS LOSSES VALUE
====================================================================
<S> <C> <C> <C> <C>
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
====================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1996
------------------------------------------------
Amortized Unrealized Unrealized Market
($000's) Cost Gains Losses Value
====================================================================
<S> <C> <C> <C> <C>
U.S. Government and
agency obligations .... $ 55,028 $ 51 ($ 143) $ 54,936
Obligations of states
and political
subdivisions .......... 26,910 461 (87) 27,284
Agency mortgage-
backed securities ..... 169,276 776 (2,616) 167,436
Retained interest in
securitized assets . 6,491 -- -- 6,491
Other bonds, notes and
debentures ............ 2,685 21 (4) 2,702
Other securities ...... 31,896 94 (26) 31,964
- --------------------------------------------------------------------
Total securities....... $292,286 $1,403 ($2,876) $290,813
====================================================================
</TABLE>
Securities held to maturity as of December 31:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1997
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
($000'S) COST GAINS LOSSES VALUE
==============================================================
<S> <C> <C> <C> <C>
U.S. Government
and agency
obligations ........ $ 4,500 $ 3 ($ 31) $ 4,472
Obligations of
states and political
subdivisions ....... 2,906 64 -- 2,970
Agency mortgage-
backed securities .. 61,450 424 (385) 61,489
Other securities ... 2,103 25 -- 2,128
- -------------------------------------------------------------
Total securities ... $70,959 $ 516 ($ 416) $71,059
==============================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1996
---------------------------------------------
Amortized Unrealized Unrealized Market
($000's) Cost Gains Losses Value
==============================================================
<S> <C> <C> <C> <C>
U.S. Government
and agency
obligations ........ $ 4,501 $ 12 ($ 45) $ 4,468
Obligations of
states and political
subdivisions ....... 1,634 24 -- 1,658
Agency mortgage-
backed securities .. 78,737 369 (1,386) 77,720
Other securities ... 112 -- -- 112
- --------------------------------------------------------------
Total securities ... $84,984 $ 405 ($1,431) $83,958
==============================================================
</TABLE>
The amortized cost and approximate market value of securities at December
31, 1997, by expected actual maturity, are shown in the following table. Actual
maturities may differ from contractual
6
<PAGE> 7
maturities when there exists a right to call or prepay obligations with or
without call or prepayment penalties. Maturities of mortgage-backed securities
were estimated based on historical and expected future prepayment trends.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
($000'S) COST VALUE COST VALUE
==============================================================
<S> <C> <C> <C> <C>
Debt securities:
Under 1 year $ 50,826 $ 51,023 $ 3,751 $ 3,724
1-5 years ... 169,668 169,902 51,033 50,979
6-10 years .. 75,431 75,615 5,121 5,135
Over 10 years 50,688 51,928 11,054 11,221
- --------------------------------------------------------------
Total securities $346,613 $348,468 $ 70,959 $ 71,059
==============================================================
</TABLE>
At December 31, 1997 and 1996, securities with a book value of $128,571,000
and $51,675,000, respectively, were pledged to secure short-term borrowings,
public deposits, and for other purposes as required or permitted by law.
Realized gains and losses respectively were as follows: 1997 - $1,240,000 and
($83,000); 1996 - $978,000 and ($394,000); and 1995 - $793,000 and ($344,000).
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
Transactions in the allowance for credit losses for the years ended
December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
($000's) 1997 1996 1995
===============================================================
<S> <C> <C> <C>
Balance at January 1 .......... $ 5,783 $ 5,466 $ 5,904
Losses charged off ............ (1,278) (1,002) (1,408)
Recoveries of losses
previously charged off ..... 142 60 52
- ---------------------------------------------------------------
Net charge-offs ............... (1,136) (942) (1,356)
Provision charged to operations 1,615 1,259 918
Reserves of acquired businesses 2,511 -- --
- ---------------------------------------------------------------
Balance at December 31 ........ $ 8,773 $ 5,783 $ 5,466
===============================================================
</TABLE>
Impaired loan information at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
($000's) 1997 1996
===============================================================
<S> <C> <C>
Impaired loans .................... $7,123 $5,350
Valuation reserve on impaired loans 2,177 1,795
Average impaired loans ............ $5,952 $4,288
===============================================================
</TABLE>
Cash basis interest income recognized on impaired loans during both years
was immaterial.
NOTE 4 - COMMERCIAL LEASE FINANCING
A summary of the gross investment in commercial lease financing at December
31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
($000's) 1997 1996
===============================================================
<S> <C>
Direct financing leases ........ $33,695 --
Operating leases ............... 8,214 --
- ---------------------------------------------------------------
Total commercial lease financing $41,909 --
===============================================================
</TABLE>
The components of the investment in direct financing leases at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
($000's) 1997 1996
===============================================================
<S> <C>
Rentals receivables ........................... $37,182 --
Estimated residual value of leased assets ..... 4,628 --
- ---------------------------------------------------------------
Gross investment in direct financing leases ... 41,810 --
Unearned income ............................... 8,115 --
- ---------------------------------------------------------------
Total net investment in direct financing leases $33,695 --
===============================================================
</TABLE>
At December 31, 1997, the minimum future lease payments receivable for each
of the years 1998 through 2002 were $13,600,000, $11,094,000, $8,276,000,
$5,509,000, and $2,977,000, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
($000's) Estimated 1997 1996
Useful Life
===============================================================
<S> <C> <C> <C>
Land and improvements ...... -- $ 2,744 $ 1,785
Buildings .................. 25 16,531 13,913
Furniture and equipment .... 3 to 10 yrs 13,264 7,365
Leasehold improvements ..... 5 to 25 yrs 3,614 2,446
Accumulated depreciation and
amortization ............... (15,080) (10,822)
- ---------------------------------------------------------------
Total premises and equipment $ 21,073 $ 14,687
===============================================================
</TABLE>
Depreciation and amortization expense related to premises and equipment was
$2,968,000 in 1997, $1,482,000 in 1996, and $1,020,000 in 1995.
The Corporation's subsidiaries have entered into a number of noncancelable
lease agreements with respect to premises. A summary of the minimum annual
rental commitments under these leases at December 31, 1997, exclusive of taxes
and other charges payable under the leases:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's)
==============================================================
<S> <C>
1998 ................................................ $ 669
1999 ................................................ 612
2000 ................................................ 535
2001 ................................................ 323
2002 ................................................ 128
2003 and subsequent years............................ 853
- --------------------------------------------------------------
Total ............................................... $3,120
==============================================================
</TABLE>
Rental expense for cancelable and noncancelable leases was $417,000 for
1997, $302,000 for 1996 and $175,000 for 1995.
NOTE 6 - SHORT-TERM BORROWINGS
A summary of short-term borrowings and rates at December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
($000's) 1997 1996 1995
=======================================================================
<S> <C> <C> <C>
FHLB advances:
Balance ........................ $ 64,802 $137,178 $ 43,585
Rate ........................... 5.79% 6.09% 5.39%
- -----------------------------------------------------------------------
Securities sold under agreements to
repurchase:
Balance ........................ $ 55,814 $ 20,402 $ 24,654
Rate ........................... 5.68% 5.44% 5.85%
- -----------------------------------------------------------------------
Other borrowings:
Balance ........................ $ 3,659 $ 5,876 $ 449
Rate ........................... 8.18% 5.61% 3.75%
- -----------------------------------------------------------------------
Total short-term borrowings:
Balance ........................ $124,275 $163,456 $ 68,688
Rate ........................... 5.81% 5.99% 5.54%
=======================================================================
Average outstanding ............... $172,223 $123,130 $ 93,827
Weighted average interest rate .... 5.91% 5.48% 5.74%
=======================================================================
</TABLE>
The market value of securities sold under repurchase agreements, all of
which were under the Corporation's control, totaled $60,401,819 at December 31,
1997.
At December 31, 1997, the Corporation had unused lines of credit of
$87,297,000 available to support corporate requirements.
NOTE 7 - LONG-TERM BORROWINGS
A summary of long-term borrowings at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
($000's) 1997 1996
===============================================================
<S> <C> <C>
Subordinated debt, 9.125% due 2004... $ 40,500 --
Federal Home Loan Bank advances .... 205,434 235,412
Other, ranging from 8.0% to 9.6% ... 24,759 --
- ---------------------------------------------------------------
Total long-term borrowings ......... $270,693 $235,412
===============================================================
</TABLE>
Interest on the subordinated debt is payable semiannually
beginning in September 1997, and the debt is redeemable at the
7
<PAGE> 8
option of the Corporation any time after June 30, 2002 until its maturity date
of June 30, 2004.
At December 31, 1997, Federal Home Loan bank (FHLB) advances have rates
ranging from 5.10% to 7.57%, with interest payable monthly. The advances are
secured by a blanket lien on first mortgage loans with balances totaling 150
percent of such advances. The FHLB stock also serves as collateral for the
advances. Long-term debt is scheduled to mature as follows: $8,946,000 in 1998,
$88,879,000 in 1999, $51,077,000 in 2000, $12,300,000 in 2001, $26,936,000 in
2002, and $82,555,000 in 2003 and thereafter.
NOTE 8 - INCOME TAXES
The Corporation and its subsidiaries file a consolidated Federal income tax
return. A summary of applicable income taxes included in the Consolidated
Statements of Income follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
($000's) 1997 1996 1995
==================================================================
<S> <C> <C> <C>
Current U.S. income taxes .......... $ 4,768 $ 2,404 $ 6,136
State and local income taxes ....... 750 568 304
- ------------------------------------------------------------------
Total .............................. 5,518 2,972 6,440
- ------------------------------------------------------------------
Deferred U.S. income taxes resulting
from temporary differences ......... 5,570 4,577 413
- ------------------------------------------------------------------
Provision for income taxes ......... $11,088 $ 7,549 $ 6,853
==================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
($000's) 1997 1996
==================================================================
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses ................ $ 2,769 $ 1,558
Basis differences - fixed assets ........... -- 367
Other assets ............................... 742 410
- ------------------------------------------------------------------
Total gross deferred tax assets ............... 3,511 2,335
- ------------------------------------------------------------------
Deferred Tax Liabilities:
Basis difference - leased property ......... 3,976 --
Unrealized gain on loans and securities
available for sale ....................... 978 692
FHLB stock dividends ....................... 1,985 1,438
Originated servicing rights ................ 887 526
Deferred loan fees net of costs ............ 3,889 3,281
Tax bad debt reserve over base year reserves 654 654
Deferred gain on sale of loans ............. 2,066 535
Basis difference - fixed assets ............ 201 112
Other net liabilities ...................... 257 193
- ------------------------------------------------------------------
Total gross deferred tax liabilities .......... 14,893 7,431
- ------------------------------------------------------------------
Net deferred tax liability .................... $11,382 $ 5,096
==================================================================
</TABLE>
Management has determined no valuation allowance for deferred tax assets
was required at December 31, 1997 or 1996.
A reconciliation between the statutory U.S. income tax rate and the
Corporation's effective tax rate:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1997 1996 1995
================================================================
<S> <C> <C> <C>
Statutory tax rate ................. 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes net of
federal benefit ................. 1.6 1.8 1.0
Non-deductible merger transaction .. 0.7 -- --
Tax-free income .................... (1.6) (1.3) (1.1)
Amortization of intangibles ........ 0.7 0.8 --
Other - net ........................ 0.4 0.7 0.5
- ----------------------------------------------------------------
Effective tax rate ................. 36.8% 37.0% 35.4%
================================================================
</TABLE>
Retained earnings at December 31, 1997 includes approximately $11.9 million
in allocations of earnings for bad debt deductions of thrift subsidiaries for
which no income tax has been provided. Under current tax law, if the
Corporation's subsidiaries use this bad debt reserve for purposes other than to
absorb bad debt losses or if they merge into a non-bank entity, the bad debt
reserve will be subject to federal income tax at the current corporate rate.
NOTE 9 - MANUFACTURED HOUSING INCOME
The Corporation, through its subsidiary Mobile Consultants, Inc. (MCi), has
sold certain manufactured housing finance contracts (MHF contracts) to various
financial institutions while retaining the collection and recovery aspect of
servicing. The amount of MHF contracts serviced as described above totaled
$430.1 million and $438 million, at December 31, 1997 and 1996, respectively. At
the time MCi sells a MHF contract to an unaffiliated financial institution,
approximately one third of the fee collected is recorded as a "manufactured
housing brokerage fee" and the remaining two thirds of the fee is deposited into
escrow accounts and is available to offset potential prepayment or credit losses
("MCi reserves"). The MCi reserves are recognized as "servicing income on
brokered MHF contracts" ratably over the MHF contract life based on the present
value of the future cash flows of the MCi reserves utilizing assumptions for
prepayment and credit losses and a discount rate. The undiscounted balance of
the MCi reserves was $46.4 million and $46 million as of December 31, 1997 and
1996, respectively.
The Corporation's subsidiary, Signal Bank, N.A., purchases MHF contracts
from MCi, a portion of which are packaged in asset backed securitizations (ABS
pools) and sold to investors. Sales and securitizations of MHF contracts totaled
$137.3 million in 1997 and $48.9 million in 1996. At the time of sale, the
Corporation records an asset, "retained interest in securitized assets,"
representing the discounted future cash flows to be received by the Corporation
for 1) servicing income from the ABS pool, 2) principal and interest payments on
MHF contracts contributed to the ABS pools as a credit enhancement, referred to
as over-collateralization and 3) excess interest spread. Excess interest spread
represents the difference between interest collected from MHF contract borrowers
and interest paid to investors in the ABS pools net of a 60 basis point per
annum provision for credit risk and further reduced by the impact of estimated
prepayments using 130 MHP. MHP is the manufactured housing industry standard
index for prepayment. Prepayment and credit loss assumptions are based on the
Corporation's historical experience. Subordinated future cash flows from the ABS
pools have been discounted at 10%. The carrying value of retained interest in
securitized assets is subject to periodic adjustment based upon potential
impairment and changing market conditions. Management periodically reviews the
retained interest in securitized assets for possible impairment by comparing
actual cash flows received by the Corporation from the ABS pools and actual
prepayments and credit losses to the corresponding projections used at the time
of sale for each ABS pool. Impairment, if any, is charged to operations.
Favorable experience is recognized prospectively as realized. The aggregate
amount of ABS pools serviced by the Corporation totaled $186.2 million and $48
million at December 31, 1997 and 1996, respectively, and such amounts are not
included in the accompanying Consolidated Financial Statements.
Changes in the retained interest in securitized assets for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996
==============================================================
<S> <C> <C>
Balance at January 1 ................ $ 6,491 --
Retained interest from ABS pool sales 21,386 $ 6,500
Amortization ........................ (854) (9)
- --------------------------------------------------------------
Balance at December 31 .............. $ 27,023 $ 6,491
==============================================================
</TABLE>
The portion of retained interest representing future servicing income was
$5.7 million at December 31, 1997.
8
<PAGE> 9
The components of manufactured housing income were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
($000'S) 1997 1996 1995
======================================================================
<S> <C> <C>
Gain on sale of ABS pools ............. $ 5,734 $ 1,574 --
Manufactured housing brokerage fees ... 3,151 6,726 --
Servicing income on brokered MHF
contracts .......................... 4,400 3,200 --
Servicing income on ABS pools ......... 1,399 80 --
Interest income on retained interest in
securitized assets ................. 1,317 60 --
- ----------------------------------------------------------------------
TOTAL MANUFACTURED HOUSING
INCOME ........................ $16,001 $11,640 $ 0
======================================================================
</TABLE>
NOTE 10 - MORTGAGE BANKING INCOME
The Corporation has sold certain loans to various investors while retaining
servicing rights. Loans serviced for others totaled $521 million and $419
million at December 31, 1997 and 1996, respectively, and are not included in the
accompanying Consolidated Financial Statements. Changes in mortgage servicing
rights, classified on the balance sheet within other assets, for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
($000's) 1997 1996
=========================================================
<S> <C> <C>
Balance at January 1 ............... $ 1,503 --
Originated mortgage servicing rights 1,589 $ 1,611
Amortization ....................... (551) (108)
- ---------------------------------------------------------
Balance at December 31 $ 2,541 $ 1,503
=========================================================
</TABLE>
The components of mortgage banking income were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
($000'S) 1997 1996 1995
===========================================================================
<S> <C> <C> <C>
Gain on sale of mortgage loans ................. $3,972 $2,308 $1,451
Mortgage loan fee income ....................... 350 500 460
Mortgage servicing fees, net of amortization ... 846 707 699
- ---------------------------------------------------------------------------
TOTAL MORTGAGE BANKING INCOME ............. $5,168 $3,515 $2,610
===========================================================================
</TABLE>
NOTE 11 - STOCK COMPENSATION PLANS
Options can be granted under the Corporation's Stock Option Plans to key
employees and directors of the Corporation and its subsidiaries for up to
1,338,300 shares of the Corporation's common stock. All options granted have up
to ten year terms and vest and become fully exercisable after three to five
years of continued employment. A summary of option transactions during 1997,
1996 and 1995:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------
AVERAGE Average Average
(Shares in OPTION Option Option
000's) SHARES PRICE Shares Price Shares Price
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning
of year ... 675,256 $ 9.14 550,929 $ 8.33 470,255 $ 7.61
Exercised .... (112,478) 8.28 (42,560) 7.32 (5,840) 6.40
Expired ...... (16,469) -- (13,850) -- (10,512) --
Granted ...... 231,047 30.50 180,737 17.54 97,026 11.50
Acquired
business .. 67,506 10.40 -- -- -- --
- -----------------------------------------------------------------------------------------------
Outstanding,
end of year 844,862 $ 16.32 675,256 $ 9.14 550,929 $ 8.33
- -----------------------------------------------------------------------------------------------
Exercisable,
end of year 389,900 $ 8.47 294,913 $ 7.37 214,520 $ 7.19
===============================================================================================
</TABLE>
As of December 31, 1997, options outstanding have exercise prices between
$1.74 and $35.70 and a weighted average remaining contractual life of 7.6 years.
At December 31, 1997, there were 588,978 incentive options and 255,885
nonqualified options outstanding and 649,278 shares were available for granting
additional options.
Under the 1997 Employee Stock Purchase Plan, the Corporation is authorized
to issue up to 171,098 shares of common stock to its full time employees, nearly
all of whom are eligible to participate. Under the terms of the Plan, employees
can choose each year to have up to 10 percent of their annual compensation
withheld to purchase the Corporation's common stock. The purchase price of the
stock is 85 percent of the lower of its beginning-of-purchase period or
end-of-purchase period market price. Approximately 25 percent of eligible
employees currently participate in the Plan. Under the Plan, the Corporation
sold 7,566 shares to employees for 1997.
The Corporation has elected to disclose pro forma net income and net income
per share as if the fair-value-based method had been applied in measuring
compensation costs. The Corporation's pro forma information for the years ended
December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1997 1996 1995
==============================================================================
<S> <C> <C> <C>
Pro forma net income ($000's) ........ $ 18,192 $ 12,421 $ 12,288
Pro forma basic net income per share . $ 1.83 $ 1.24 $ 1.27
Pro forma diluted net income per share $ 1.50 $ 1.05 $ 1.06
==============================================================================
</TABLE>
Compensation expense reflected in the pro forma disclosures is not
indicative of future amounts when the SFAS No. 123 prescribed method will apply
to all outstanding nonvested awards.
The weighted average fair value of options granted was $13.94 in 1997,
$9.23 in 1996 and $5.92 in 1995. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants in 1997, 1996 and 1995: expected
dividend yield of 1.10%, 1.78% and 1.78% and expected option lives of 10 years;
expected volatility of 30%, 39%, and 39%, and risk-free interest rates of 5.70%,
6.25%, and 6.25%, respectively.
The Corporation granted restricted stock to certain officers and directors
in 1996 of which 66,406 shares are outstanding as of December 31, 1997. The
restricted stock vests at a rate of 20% per year on each January 31 through
January 2001, provided the Corporation return on average shareholders' equity of
the preceding year equals or exceeds 15%. Restricted stock compensation expense
was $50,000 in 1997. As of January 31, 1998, 20% of the restricted shares
vested.
NOTE 12 - PREFERRED STOCK
The Corporation issued in 1994 500,000 shares of 6 1/2 percent cumulative
convertible preferred stock, Series B, without par value. The stock is
convertible at the option of the holder at any time or it may be redeemed by the
Corporation on or after June 24, 1999 into 903,418 shares of common stock or
2.1015 common shares for each outstanding share of Series B preferred stock.
Cash dividends are payable quarterly on December 1, March 1, June 1 and
September 1 of each year.
On December 16, 1997, the Corporation redeemed and converted the remaining
482,586 outstanding Series A preferred stock into 1,819,169 shares of common
stock. The 7 percent cumulative convertible Series A preferred stock was
originally issued in 1992.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Corporation has a profit sharing plan covering substantially all
employees. Employer contributions to the plan reflect a 50%-75% match of
employee contributions up to 4% of employee wages and additional discretionary
contributions as approved by the Board of Directors. As of December 31, 1997,
the profit sharing plan held 28,569 shares of the Corporation valued at
$1,005,620. Employer contributions to the profit sharing plan were $299,000,
$124,000 and $81,000 for 1997, 1996 and 1995, respectively.
The Corporation sponsored a final-pay noncontributory defined
benefit plan for Signal Bank, N.A. employees. Effective December 31, 1996, the
employer terminated the plan, settled the
9
<PAGE> 10
accumulated benefit obligation of $2,592,000 (nonvested benefits became vested
upon termination of the plan) by rolling plan assets, primarily certificates of
deposit, into the profit sharing plan and purchasing nonparticipating annuity
contracts. Defined benefits were not provided under any successor plan.
As a result, the Corporation recognized a loss of $200,000 determined as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Before Effect of After
($000's) Termination Termination Termination
=====================================================================
<S> <C> <C> <C>
Assets and obligations:
Accumulated benefit obligation ($2,592) $ 2,592 $ --
Effects of projected future
compensation levels ....... (584) 584 --
--------------------------------
Projected benefit obligation . (3,176) 3,176 --
Plan assets at fair value .... 2,736 (2,736) --
Items not yet recognized in
earnings:
Unrecognized net asset at
transition ................ 582 (582) --
Unrecognized net gain
subsequent to transition .. (342) 342 --
--------------------------------
(Accrued)/prepaid pension cost on
the balance sheet ............ ($ 200) $ 200 $ --
=====================================================================
</TABLE>
The Corporation participates in a multi-employer pension plan covering all
qualified full-time employees of First Federal Savings of New Castle. The plan
provides for monthly payments to each participating employee at normal
retirement age (age 65). The benefits payable are equal to 1.25% of compensation
as defined by the plan multiplied by years of service. The plan invests
primarily in fixed income and equity securities and at December 31, 1997 was
overfunded.
Net periodic pension expense for all plans was $200,000, $143,000 and
$182,000 for 1997, 1996 and 1995, respectively.
The Corporation does not provide postretirement benefits nor does it have
any material liabilities for postemployment benefits.
The Corporation has an Employee Stock Ownership Plan (ESOP) for the benefit
of the employees of First Federal Savings of New Castle who meet eligibility
requirements as defined by the plan. The ESOP trust purchased 160,609 shares in
1993 with proceeds from a loan from the Corporation. The Corporation makes cash
contributions to the ESOP on an annual basis in an amount sufficient to enable
the ESOP to make the required loan payments to the Corporation. The loan bears
interest at prime plus one percent with quarterly interest payments and
principal payable in equal annual installments over ten years. The loan is
secured by the shares of the stock purchased.
As the note is repaid, shares are released from collateral and allocated to
qualified employees. As the shares are released, the Corporation reports
compensation expense equal to the current market price of the shares.
Compensation expense for the ESOP amounted to $310,000, $240,000 and $216,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
ESOP shares at December 31, were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1997 1996 1995
===========================================================================
<S> <C> <C> <C>
Allocated shares .............. 60,149 45,510 33,086
Shares released for allocation 16,061 16,328 16,369
Shares distributed ............ (2,803) (1,689) (3,945)
Unreleased shares ............. 78,765 94,826 111,154
------------------------------------------
Total ESOP shares ............. 152,172 154,975 156,664
==========================================
Fair value of unreleased shares
at December 31 ............. $ 2,040,000 $ 1,493,000 $ 1,595,000
============================================================================
</TABLE>
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation, in the normal course of business, is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers and to minimize exposure to fluctuations in interest rates. These
financial instruments primarily include commitments to extend credit, standby
and commercial letters of credit, and commitments to sell residential mortgage
loans. These instruments involve, to varying degrees, elements of credit risk,
counterparty risk and market risk in excess of the amounts recognized in the
Consolidated Balance Sheets. The contract or notional amounts of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
Creditworthiness for all instruments is evaluated on a case-by-case basis
in accordance with Corporation credit policies. Collateral, if deemed necessary,
is based on management's credit evaluation of the counterparty and may include
business assets of commercial borrowers as well as personal property and real
estate of individual borrowers and guarantors.
A summary of significant commitments and other off-balance- sheet items at
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Contract or
Notional Amount
------------------
($000's) 1997 1996
==============================================================
<S> <C> <C>
Commitments to extend credit ........... $181,256 $ 86,804
Letters of credit (including standby
letters of credit) .................. 3,053 2,354
Commitments to sell residential
mortgage loans ...................... 10,320 56,124
Interest rate swap agreements .......... 65,500 --
Forward contract on loans held for sale 41,000 --
==============================================================
</TABLE>
Commitments to extend credit are agreements to lend. Commitments generally
have fixed expiration dates or other termination clauses that may require
payment of a fee. Since many of the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Corporation's exposure to credit risk in the event of
nonperformance by the other party is the contract amount.
Standby and commercial letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. At December 31,
1997, all standby letters of credit will expire within one year. The amount of
credit risk involved in issuing letters of credit in the event of nonperformance
by the other party is the contract amount.
The Corporation enters into forward contracts for future delivery of
residential mortgage loans of a specified yield to reduce the interest rate risk
associated with fixed-rate residential mortgages held for sale and commitments
to fund residential mortgages. Credit risk arises from the possible inability of
the other parties to comply with the contract terms. The majority of the
Corporation's contracts are with U.S. government-sponsored agencies (FNMA and
FHLMC). Fixed rate commitments to sell residential mortgage loans of $8.3
million at December 31, 1997 are subject to market risk resulting from
fluctuations in interest rates and the Corporation's exposure is limited to the
replacement value of those commitments.
These contracts carry the risk of the counterparty's future ability to
perform under the agreement. A limit of market exposure is approved for all
counterparties.
In 1997, the Corporation entered into interest rate swap agreements with a
notional principal amount of $65.5 million in connection with the issuance of
$40.5 million of long-term, fixed-rate subordinated notes and a $25 million
brokered certificate of deposit. The Corporation receives fixed-rate payments at
9.125% and 7.10%, respectively, and pays a variable interest rate based upon
three-month LIBOR. These transactions involve the exchange of fixed and floating
rate payments without the exchange of the underlying principal amount. At
December 31, 1997, the Corporation has a $41 million forward contract due to
mature January 21, 1998 on manufactured housing loans held for sale. Notional
principal amounts are often used to express the volume of these types of
transactions, however, they do not represent the much smaller amounts that are
potentially subject to credit risk.
10
<PAGE> 11
Entering into interest rate swap agreements and hedges involves the risk of
dealing with counterparties and their ability to meet the terms of the contract.
The Corporation controls the credit risk of these transactions through adherence
to an investment policy, credit approval policies and monitoring procedures.
There are legal claims pending against the Corporation and its
subsidiaries. Based on a review of such litigation with legal counsel,
management believes that any resulting liability would not have a material
effect upon the Corporation's consolidated financial position or results of
operations.
NOTE 15 - ACQUISITIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
CONSIDERATION
-------------------
COMMON
DATE CASH SHARES METHOD OF
COMPLETED ($000'S) ISSUED ACCOUNTING
=================================================================
<S> <C> <C> <C> <C>
First Shenango
Bancorp, Inc. 6-29-98 -- 3,087,000 pooling
Alpha Equipment
Group, Inc.. ... 10-31-97 $ 1,700 -- purchase
Summit Bancorp .... 7-8-97 -- 686,186 pooling
Alliance Corporate
Resources, Inc. 7-1-97 2,000 -- purchase
Mobile Consultants,
Inc ............ 4-3-96 6,900 480,291 purchase
================================================================
</TABLE>
The Consolidated Financial Statements have not been restated to include the
acquisition of Summit Bancorp due to immateriality.
On September 15, 1997, the Corporation purchased deposits of approximately
$151 million, loans of $24 million and seven North Central Ohio branch
facilities from KeyBank, N.A. for approximately $19 million. On March 23, 1996,
the Corporation purchased deposits of approximately $26.6 million and a branch
facility in Mount Vernon, Ohio from Peoples National Bank for $2.4 million.
On June 29, 1998 the Corporation consummated its acquisition of First
Shenango Bancorp, Inc ("Shenango"). The acquisition was completed with the
exchange of approximately 3,087,000 common shares of Signal Corp for all of the
2,161,000 outstanding common shares of Shenango. The acquisition was accounted
for as a pooling of interest and accordingly all prior period data has been
restated. At December 31, 1997 Shenango had assets of $375 million, deposits of
$275 million, and shareholders' equity of $48 million.
The following table sets forth the separate results of operations for
Signal Corp and for Shenango for the years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(000's) 1997 1996 1995
==============================================================
<S> <C> <C> <C>
Revenue:
Signal Corp $119,378 $ 91,488 $69,089
Shenango 30,350 28,638 24,753
-----------------------------------
$149,728 $120,126 $93,842
===================================
Net Income:
Signal Corp $ 14,448 $9,850 $ 9,446
Shenango 4,586 3,010 3,079
-----------------------------------
$ 19,034 $ 12,860 $12,525
===================================
==============================================================
</TABLE>
NOTE 16 - REGULATORY MATTERS
The principal source of income and funds for the Corporation (parent
company) are dividends from its subsidiaries. During the year 1998, the amount
of dividends that the banking subsidiaries can pay to the Corporation without
prior approval of regulatory agencies is limited to their 1997 eligible net
profits, as defined, plus the adjusted retained 1996 and 1995 net income of the
subsidiaries.
Banking subsidiaries must maintain noninterest-bearing cash balances on
reserve with the Federal Reserve Bank. In 1997 and 1996, the subsidiary banks
were required to maintain average reserve balances of $5,821,000 and $3,511,000,
respectively.
The Federal Reserve Board adopted quantitative measures which assign risk
weightings to assets and off-balance-sheet items and also define and set minimum
regulatory capital requirements (risk-based capital ratios). All banks are
required to have core capital (Tier 1) of at least 4% of risk-weighted assets,
total capital of at least 8% of risk-weighted assets and a minimum Tier 1
leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital
consists principally of shareholders' equity excluding unrealized gains and
losses on securities available for sale, less goodwill. Total capital consists
of Tier 1 capital plus certain debt instruments and the allowance for credit
losses, subject to limitation. Failure to meet certain capital requirements can
initiate certain actions by regulators that, if undertaken, could have a direct
material effect on the Consolidated Financial Statements. The regulations also
define well capitalized levels. The subsidiary banks exceeded the minimum
guidelines for well capitalized institutions.
Capital and risk-based capital and leverage ratios for the Corporation and
its significant subsidiaries at December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1997
---------------------
($000's) AMOUNT RATIO
================================================================
<S> <C> <C>
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Signal Corp. ......................... $114,668 12.89%
Signal Bank N.A ...................... 100,948 11.43%
First Federal Savings of New Castle .. 40,963 20.25%
Summit Bank N.A ...................... 7,355 9.88%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Signal Corp. ......................... 72,753 8.18%
Signal Bank N.A ...................... 86,441 9.78%
First Federal Savings of New Castle .. 38,430 19.00%
Summit Bank N.A ...................... 6,423 8.63%
TIER 1 LEVERAGE CAPITAL (TO AVERAGE
ASSETS):
Signal Corp. ......................... 72,753 5.23%
Signal Bank N.A ...................... 86,441 6.68%
First Federal Savings of New Castle .. $ 38,430 10.42%
Summit Bank N.A ...................... $ 6,423 6.40%
================================================================
</TABLE>
In 1996, the Corporation had total capital to risk-weighted assets of
14.52%. Prior to July 1, 1997, the Corporation operated as a thrift holding
company and was not required to compute Tier 1 risk adjusted capital. The thrift
leverage (core) capital ratio, is comparable to the "Tier 1 leverage" ratio
reported currently. The leverage (core) capital ratio was 6.60% on December 31,
1996, compared to the regulatory requirement of 3.00%.
NOTE 17 - EARNINGS PER SHARE
Reconciliation of Basic Earnings Per Share to Diluted Earnings Per Share
for the Years Ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1997
------------------------------------
PER-SHARE
(000's except per share data) INCOME SHARES AMOUNT
==============================================================
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders ............. $17,450 9,051 $ 1.93
EFFECT OF DILUTIVE SECURITIES
Convertible Preferred ....... 1,584 2,713 0.31
Stock Options ............... -- 387 0.05
- --------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions............... $19,034 12,151 $1.57
==============================================================
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1996
------------------------------
Per-Share
(000's except per share data) Income Shares Amount
====================================================================
<S> <C> <C> <C>
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
====================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1995
------------------------------------
Per-Share
(000's except per share data) Income Shares Amount
==============================================================
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders ............ $10,739 8,286 $ 1.30
EFFECTIVE OF DILUTIVE
SECURITIES
Convertible Preferred ...... 1,783 2,990 0.19
Stock Options .............. 3 284 0.03
- --------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions ............. $12,525 11,560 $ 1.08
==============================================================
</TABLE>
NOTE 18 - RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, certain directors, executive officers,
principal holders of Corporation common stock and associates of such persons
were indebted to the banking subsidiaries in the aggregate amount, net of
participations, of $2,239,615 and $393,943, respectively. Summit Bank, N.A. had
approximately $1.7 million of related party loans when acquired. During 1997,
new loans aggregating $129,900 were made to such parties and loans aggregating
$249,623 were repaid. Such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the time of
comparable transactions with unrelated parties.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments at
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
-------------------------
($000's) CARRYING FAIR VALUE
AMOUNT
================================================================================
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments ................. $ 67,188 $ 67,188
Securities available for sale ................... 348,468 348,468
Securities held to maturity ..................... 70,959 71,059
Loans and leases including loans held
for sale ..................................... 1,257,317 1,259,684
FINANCIAL LIABILITIES:
Deposits ........................................ 1,256,896 1,254,250
Borrowings ...................................... 394,968 400,148
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: ........... NOTIONAL
AMOUNT
Commitments to extend credit .................... 181,256 181,256
Letters of credit ............................... 3,053 3,053
Forward contracts:
Commitments to sell loans .................... 10,320 10,320
Forward contract on loans held for sale ...... 41,000 (692)
Interest rate swaps ............................. 65,500 252
================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1996
-----------------------
($000's) Carrying Fair Value
Amount
==========================================================================================
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments ............................. $ 51,746 $ 51,746
Securities available for sale ............................... 290,813 290,813
Securities held to maturity ................................. 84,984 83,958
Loans including loans held for sale ......................... 1,014,449 1,012,825
FINANCIAL LIABILITIES:
Deposits .................................................... 939,538 956,602
Borrowings .................................................. 398,868 399,095
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: ....................... NOTIONAL
AMOUNT
Commitments to extend credit ................................ 86,804 86,804
Letters of credit ........................................... 2,354 2,354
Forward contracts:
Commitments to sell loans ................................ 56,124 56,124
==========================================================================================
</TABLE>
Fair values for financial instruments were based on various assumptions and
estimates as of a specific point in time and may vary significantly from amounts
that will be realized in actual transactions. In addition, certain financial
instruments and all non-financial instruments were excluded from the fair value
disclosure requirements. Therefore, the fair values presented above should not
be construed as the underlying value of the Corporation. In addition, the
negative fair value of the interest rate hedge represents the estimated amount
the Corporation would have to pay at each date to cancel the contracts or
transfer them to other parties.
The following methods and assumptions were used in determining the fair
value of selected financial instruments:
SHORT-TERM FINANCIAL ASSETS AND LIABILITIES - for financial instruments
with short or no stated maturity, prevailing market rates and limited credit
risk, carrying amounts approximate fair value. Those financial instruments
include cash and due from banks, other short-term investments, certain deposits
(non-interest bearing demand, interest checking, savings and money market),
repurchase agreements and short-term borrowings.
SECURITIES, AVAILABLE FOR SALE AND HELD TO MATURITY - fair values were
based on quoted market prices, dealer quotes and prices obtained from
independent pricing services.
LOANS AND LEASES - fair values were estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrow with similar credit ratings and for the same remaining maturities.
DEPOSITS - fair values for certificates of deposit - were estimated using a
discounted cash flow calculation that applies interest rates currently being
offered for deposits of similar remaining maturities.
LONG-TERM DEBT AND SUBORDINATED DEBT- fair value of long-term debt was
based on quoted market prices, when available, and a discounted cash flow
calculation using prevailing market rates for borrowings of similar terms.
INTEREST RATE SWAPS AND FORWARD CONTRACTS - fair values of interest rate
swaps and forward contracts were based on quoted market prices.
COMMITMENTS AND LETTERS OF CREDIT - fair value of commitments to extend
credit are based on the estimated cost to terminate them or otherwise settle the
obligation with the counterparties at the reporting date.
NOTE 20 - SEGMENTS
The Corporation's principal activities include Community Banking and
Specialty Finance. Community Banking offers a full range of deposit and loan
products and other services to individuals and businesses. The Specialty
Finance Group 1) originates financing and services the collection and recovery
of
12
<PAGE> 13
loans on manufactured houses through MCi, 2) provides equipment leasing, 3)
provides investment advisory services, financial planning and portfolio
management, 4) provides common financing services and 5) real estate appraisal
services.
The financial information for each business segment reflect those which are
specifically identifiable or which are allocated based on an internal allocation
method. The allocation has been consistently applied for all periods presented.
The measurement of the performance of the business segments is based on the
management structure of the Corporation and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not necessarily indicative of the segments' financial
condition and results of operations if they were independent entities.
Selected financial information by business segment for the three years
ended December 31 is included in the following summary:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
($000's) 1997 1996 1995
=================================================================
<S> <C> <C> <C>
REVENUES:
Community Banking Group $ 128,914 $ 108,378 $ 93,535
Specialty Finance Group 20,814 11,748 307
- -----------------------------------------------------------------
TOTAL .................... 149,728 120,126 93,842
=================================================================
NET INCOME:
Community Banking Group 12,051 9,909 12,447
Specialty Finance Group 6,983 2,951 78
- -----------------------------------------------------------------
TOTAL .................... 19,034 12,860 12,525
=================================================================
IDENTIFIABLE ASSETS:
Community Banking Group 1,768,132 1,463,880 1,278,093
Specialty Finance Group 64,255 22,288 1,298
- -----------------------------------------------------------------
TOTAL ....................$1,832,387 $1,486,168 $1,279,391
=================================================================
</TABLE>
Capital expenditures relating primarily to the Community Banking Group
totaled $6,788,000, $4,025,000, and $683,000 in 1997, 1996, and 1995,
respectively. These expenditures consisted primarily of investments in data
processing equipment, including network computer technology, software,
operations, operations equipment and the retail distribution network.
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the Corporation ($000's):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME (LOSS) (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996 1995
=========================================================================
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries ......... $ 1,000 $ 6,000 $ 11,000
Interest on loans to subsidiaries ... 364 264 303
Securities (gains) losses ........... 576 (2) --
Other ............................... 1,041 761 593
- -------------------------------------------------------------------------
TOTAL INCOME ........................ 2,981 7,023 11,896
- -------------------------------------------------------------------------
EXPENSES:
Interest ............................ 2,922 -- --
Other ............................... 708 688 342
- -------------------------------------------------------------------------
TOTAL EXPENSES ...................... 3,630 688 342
- -------------------------------------------------------------------------
INCOME BEFORE TAXES AND
CHANGE IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES ......... (649) 6,335 11,554
Applicable income taxes (benefit) ... (201) 497 3,723
- -------------------------------------------------------------------------
INCOME (LOSS) BEFORE CHANGE IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES ...................... (448) 5,838 7,831
- -------------------------------------------------------------------------
Undistributed earnings of subsidiaries 19,482 7,022 4,694
- -------------------------------------------------------------------------
NET INCOME ......................... $ 19,034 $ 12,860 $ 12,525
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
CONDENSED BALANCE SHEET (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996
================================================================
<S> <C> <C>
ASSETS:
Cash and equivalents ..................... $ 1,764 $ 3,578
Securities available for sale ............ 4,927 6,280
Loans to subsidiaries .................... 13,551 4,064
Investment in subsidiaries ............... 184,746 118,444
Other assets ............................. 1,840 3,023
- ----------------------------------------------------------------
TOTAL ASSETS ............................. 206,828 135,389
- ----------------------------------------------------------------
LIABILITIES:
Subordinated debt ........................ 40,500 --
Accrued expenses and other liabilities ... 13,731 7,048
- ----------------------------------------------------------------
TOTAL LIABILITIES ........................ 54,231 7,048
- ----------------------------------------------------------------
SHAREHOLDERS' EQUITY ..................... 152,597 128,341
- ----------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $206,828 $135,389
================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996 1995
- -------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income .......................... $ 19,034 $ 12,860 $ 12,525
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Undistributed earnings of
subsidiaries .................. (19,482) (7,022) (4,694)
Securities (gains) losses ........ (576) 2 --
Decrease (increase) in other
assets ........................ 1,631 2,834 113
Increase (decrease) in accrued
expenses and other liabilities. (2,074) 1,431 3,415
- -------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES ............ (1,467) 10,105 11,359
- -------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities ............. (9,698) (11,515) (10,010)
Proceeds from sales or maturities of
securities ....................... 10,982 20,402 7,434
Capital contributions to subsidiaries (37,305) (10,475) (3,285)
Other ............................... (468) 135 58
- -------------------------------------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES ....................... (36,489) (1,453) (5,803)
- -------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of debt .................... 40,500 4,000 --
Purchase of treasury stock .......... (722) (6,317) (1,373)
Purchase of preferred stock ......... -- (2,002) (792)
Proceeds from stock options ......... 1,185 311 37
Cash dividends paid ................. (4,821) (4,376) (3,998)
- -------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............ 36,142 (8,384) (6,126)
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH ......... (1,814) 268 (570)
CASH AT BEGINNING OF YEAR ........... 3,578 3,310 3,880
- -------------------------------------------------------------------------
CASH AT END OF YEAR ................. $ 1,764 $ 3,578 $ 3,310
=========================================================================
</TABLE>
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Signal Corp
Wooster, Ohio:
We have audited the accompanying consolidated balance sheets of Signal Corp and
subsidiaries (the Corporation) as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated statements based on our audits. We did not
audit the financial statements of First Shenango Bancorp, Inc., a wholly owned
subsidiary, which statements reflect total assets constituting 20 percent and
27 percent in 1997 and 1996 and total revenues constituting 20 percent and
23 percent in 1997 and 1996, respectively, of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for First
Shenango Bancorp, Inc., is based solely on the report of the other auditors.
The consolidated financial statements of the Corporation for the year ended
December 31, 1995, prior to their restatement for the 1998 pooling-of-interests
transaction described in Note 15 to the consolidated financial statements, were
audited by other auditors whose report thereon, dated January 26, 1996,
expressed an unqualified opinion on those statements. Separate financial
statements of First Shenango Bancorp, Inc., also included in the 1995 restated
consolidated financial statements, were audited by other auditors whose report
dated February 6, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Signal Corp and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," in 1997.
14
<PAGE> 15
-2-
We also audited the combination of the accompanying consolidated financial
statements for the year ended December 31, 1995, after restatement for the 1998
pooling of interests; in our opinion, such consolidated financial statements
have been properly combined on the basis described in Note 15 of the notes to
the consolidated financial statements.
/s/ KPMG Peat Marwick LLP
February 6, 1998, except as to
note 1 (Stock Dividend), which
is as of April 22, 1998, and note 15,
which is as of June 29, 1998.
<PAGE> 1
Exhibit 99.2
REPORT OF INDEPENDENT AUDITORS
Shareholders & Board of Directors
First Shenango Bancorp, Inc.
We have audited the accompanying consolidated statements of financial position
of First Shenango Bancorp, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the First Shenango's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Shenango
Bancorp, Inc., and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 6, 1998
1
<PAGE> 2
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 2,069,639 $ 1,817,504
Interest-bearing deposits in financial institutions 13,579,118 14,916,979
------------- -------------
15,648,757 16,734,483
Investment securities available for sale, carried at fair value 94,658,748 125,288,762
Loans receivable, net of allowance for loan losses of $3,235,039 and $2,867,270 256,005,938 255,769,702
Accrued interest receivable 2,202,693 2,331,437
REO and other repossessed assets, net 1,111,333 736,852
Premises and equipment, net 5,131,026 4,300,527
Prepaid expenses, sundry assets and deferred taxes 213,231 622,961
------------- -------------
TOTAL ASSETS $ 374,971,726 $ 405,784,724
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest-bearing deposits of $4,971,054 and $4,647,926) $ 275,221,031 $ 267,619,176
Advances from Federal Home Loan Bank and other borrowings 47,724,598 86,455,211
Advance payments by borrowers for taxes and insurance 1,876,095 1,600,202
Accrued expenses, deferred taxes and other liabilities 2,287,692 7,055,808
------------- -------------
TOTAL LIABILITIES 327,109,416 362,730,397
SHAREHOLDERS' EQUITY
Preferred stock, no stated value, 10,000,000 shares authorized, none issued
Common stock $.10 par value, 15,000,000 shares authorized, 2,343,098 shares issued 234,310 234,310
Additional paid-in capital 22,136,466 22,422,843
Treasury stock at cost (1997 - 274,091 shares and 1996 - 283,188 shares) (6,233,171) (6,374,001)
Less stock acquired by MSBPs and ESOP (551,287) (674,997)
Net unrealized gains on securities available for sale, net of tax 1,577,880 190,743
Retained earnings (substantially restricted) 30,698,112 27,255,429
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 47,862,310 43,054,327
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 374,971,726 $ 405,784,724
============= =============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
Interest income: 1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Interest and fees on:
First mortgage residential loans $12,455,760 $10,873,836 $ 9,798,017
Commercial and other real estate loans 4,550,862 4,038,809 2,916,192
Consumer loans 3,974,920 4,980,977 5,319,750
Interest and dividends on investments
Taxable 5,398,544 5,381,830 4,374,893
Tax-exempt 1,701,816 902,260 752,574
Dividends 867,980 970,870 303,798
Other interest 609,897 461,206 321,472
---------------------------------------
TOTAL INTEREST INCOME 29,559,779 27,609,788 23,786,696
---------------------------------------
Interest expense:
Deposits 12,581,867 11,815,409 11,643,299
Borrowed funds 4,379,924 3,144,270 1,075,248
---------------------------------------
TOTAL INTEREST EXPENSE 16,961,791 14,959,679 12,718,547
---------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 12,597,988 12,650,109 11,068,149
Provision for loan losses 772,580 898,479 917,864
---------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,825,408 11,751,630 10,150,285
Non-interest income:
Service charges and other fees 758,075 801,346 855,304
Gain on sale of investments and loans, net 16,339 221,902 98,643
Other 15,941 4,510 12,016
---------------------------------------
TOTAL NON-INTEREST INCOME 790,355 1,027,758 965,963
Non-interest expense:
Salaries and employee benefits 3,123,946 3,024,912 2,797,937
Occupancy and equipment, net 934,246 1,026,642 1,069,192
Deposit insurance premiums 170,700 2,225,037 580,714
Professional services 177,784 240,754 286,764
REO operations 102,617 250,128 70,427
Other 1,327,105 1,336,543 1,325,603
---------------------------------------
TOTAL NON-INTEREST EXPENSE 5,836,398 8,104,016 6,130,637
---------------------------------------
INCOME BEFORE INCOME TAXES 6,779,365 4,675,372 4,985,611
Income tax expense:
Federal 1,754,850 1,380,150 1,602,250
State 438,825 285,225 304,175
---------------------------------------
TOTAL INCOME TAX EXPENSE 2,193,675 1,665,375 1,906,425
---------------------------------------
NET INCOME $ 4,585,690 $ 3,009,997 $ 3,079,186
=======================================
Earnings per share - basic $ 2.31 $ 1.40 $ 1.41
Earnings per share - diluted $ 2.24 $ 1.34 $ 1.35
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unallocated Retained
Additional Unallocated Common Unrealized Earnings, Consolidated
Common Paid-In Treasury Common Stock Stock Held Gain (Loss) Substantially Shareholders'
Stock Capital Stock Held by ESOP by MSBPs on Securities Restricted Equity
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,
1994 $234,310 $22,252,610 $(157,000) $(892,551) $(158,123) $(401,406) $23,002,750 $43,880,590
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 100,800 114,568 85,284 300,652
Stock options
exercised (13,560) 43,560 30,000
Net income 3,079,186 3,079,186
Cash dividends
declared on
common stock
at $.38
per share (846,910) (846,910)
Purchase of
25,790 shares
of treasury
stock (419,024) (419,024)
Change in
unrealized
(loss) on
investment
securities
available
for sale, net 1,598,092 1,598,092
----------------------------------------------------------------------------------------------------------
December 31,
1995 234,310 22,339,850 (532,464) (777,983) (72,839) 1,196,686 25,235,026 47,622,586
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 126,364 114,283 60,695 301,342
Stock options
exercised (42,524) 95,994 53,470
MSBP shares
forfeited (847) 847
Net income 3,009,997 3,009,997
Cash dividends
declared on
common stock
at $.46 per
share (989,594) (989,594)
Purchase of
254,745 shares
of treasury
stock (5,937,531) (5,937,531)
Change in
unrealized
gain on
investment
securities
available
for sale, net (1,005,943) (1,005,943)
----------------------------------------------------------------------------------------------------------
December 31,
1996 $234,310 $22,422,843 $(6,374,001) $(663,700) $(11,297) $190,743 $27,255,429 $ 43,054,327
----------------------------------------------------------------------------------------------------------
Deferred and
unearned
compensation
amortization of
ESOP and MSBPs
shares 198,756 112,413 11,297 322,466
Stock options
exercised (485,133) 863,263 378,130
Net income 4,585,690 4,585,690
Cash dividends
declared on
common stock
at $.57 per
share (1,143,007) (1,143,007)
Purchase of
28,716 shares
of treasury
stock (722,433) (722,433)
Change in
unrealized
gain on
investment
securities
available
for sale, net 1,387,137 1,387,137
----------------------------------------------------------------------------------------------------------
December 31,
1997 $234,310 $22,136,466 $(6,233,171) $(551,287) $0 $1,577,880 $30,698,112 $47,862,310
===========================================================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
OPERATING ACTIVITIES 1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sale of investments and loans (16,339) (221,902) (98,643)
Provisions for estimated losses on loans 772,580 898,479 917,864
Provisions for net losses on REO, repossessed and other assets 11,781 132,726 12,492
Provisions for depreciation and amortization 401,924 429,642 480,740
Amortization of MSBPs and ESOP unearned and deferred compensation 322,466 301,342 300,652
Deferred federal income taxes (232,000) (150,000) (18,000)
Decrease (increase) in accrued interest receivable, prepaid expenses and sundry
assets 297,474 (647,817) (478,182)
Increase in accrued expenses and other liabilities 21,217 199,273 402,422
(Decrease) increase in interest payable (117,008) 222,685 93,612
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,047,785 4,174,425 4,692,143
INVESTING ACTIVITIES
Proceeds from maturities of investments and time deposits 21,948,250 18,860,000 33,429,000
Proceeds from sales of investments 16,510,649 29,679,214 26,759,420
Proceeds from sales of education loans 1,997,714 1,939,776 1,309,422
Purchases of investments and time deposits (15,771,847) (98,775,820) (62,980,856)
Principal repayment on mortgage-backed securities and CMOs 8,312,243 7,045,290 3,958,938
Proceeds from sales of foreclosed real estate, repossessed and other assets 386,889 890,790 911,788
Loan originations, net of loans in process (68,176,626) (95,412,559) (69,691,579)
Principal reduction on loans 64,430,540 64,299,586 52,933,224
Redemption (purchase) of FHLB stock 1,715,600 (2,847,600) (32,600)
Additions to premises and equipment (1,232,423) (501,148) (191,817)
---------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 30,120,989 (74,822,471) (13,595,060)
</TABLE>
5
<PAGE> 6
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
FINANCING ACTIVITIES 1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Net increase (decrease) in money market and NOW deposits 3,899,718 8,827,941 (2,403,749)
Net decrease in savings deposits (3,646,473) (4,000,538) (8,705,485)
Net increase in certificates of deposit 7,368,056 8,372,921 15,547,263
Proceeds from FHLB borrowings 61,930,110 102,998,000 26,216,600
Repayment of FHLB borrowings (100,242,384) (43,420,265) (14,500,000)
Net (decrease) increase in other borrowings (418,339) 211,822 (60,388)
Net increase (decrease) in advance payments by borrowers 275,893 421,800 (216,813)
Net (decrease) increase in other liabilities for unsettled
investment security purchases (4,996,627) 4,996,627
Net proceeds from exercise of stock options 378,130 53,470 30,000
Payment of cash dividend on common stock (1,080,151) (972,278) (780,933)
Purchase of treasury stock (722,433) (5,937,531) (419,024)
---------------------------------------------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (37,254,500) 71,551,969 14,707,471
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,085,726) 903,923 5,804,554
Cash and cash equivalents at beginning of year 16,734,483 15,830,560 10,026,006
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,648,757 $ 16,734,483 $ 15,830,560
===================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 17,078,799 $ 14,764,451 $ 12,597,478
Income taxes $ 2,414,269 $ 1,892,830 $ 1,893,707
Non-cash investing activities:
Transfer from investment securities held to maturity to available
for sale $ 36,490,179
Transfer from loans to REO $ 459,338 $ 317,685 $ 2,084,215
Transfer from loans to other repossessed assets $ 649,396 $ 978,062 $ 611,705
Non-cash financing activities:
Dividends declared but not paid $ 302,082 $ 239,225 $ 223,151
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of First Shenango
Bancorp, Inc., its wholly-owned subsidiary, First Federal Savings Bank of New
Castle (the "Savings Bank"), and the Savings Bank's wholly-owned subsidiary,
Tri- State Service Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Business
The Savings Bank's primary business activities are to attract savings deposits
from the general public and to invest such deposits, together with other sources
of funds in first mortgage residential, commercial and other real estate and
consumer loans, mortgage-backed and investment securities. The Savings Bank is a
federally chartered stock savings bank headquartered in New Castle,
Pennsylvania, with 109 employees and three additional branch offices located
within and throughout the Lawrence County community. The Savings Bank is a
community oriented full service retail savings institution offering traditional
mortgage lending, along with loan origination activities in multi-family,
commercial real estate, consumer and commercial business loan products primarily
in its local market area. The Savings Bank has roots in this community going
back to 1887. There has been slow economic growth within Lawrence County in
recent years, and the Savings Bank has resorted to developing correspondent
relationships in surrounding counties to develop additional markets for loan
growth. The Savings Bank maintains over 80% of its lending activities within 100
miles of its New Castle headquarters. The Savings Bank's deposits are primarily
from within the Lawrence County community.
Use of Estimates
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. Most significantly, the
Company uses estimates in determining the allowance for loan losses.
Cash and Cash Equivalents
The Company considers all highly liquid investments such as cash and amounts due
from depository institutions and interest-bearing deposits in financial
institutions which have an original maturity of three months or less as cash and
cash equivalents.
Investment Securities
Securities to be held for indefinite periods of time and not intended to be held
to maturity are classified as "available for sale." Assets included in this
category are those assets that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk and other related factors.
Securities available for sale are recorded at their estimated fair value with
unrealized gains and losses, net of deferred taxes, reported as a separate
component of shareholders' equity. Gains and losses on the sale of securities
are determined on the specific identification method. If a security has a
decline in fair value that is other than temporary, the security will be written
down to its fair value by recording a loss in the consolidated statements of
income.
Securities that management has the positive intent and the Company has the
ability at the time of purchase or origination to hold until maturity are
classified as "held to maturity." Securities in this category are carried at
amortized cost adjusted for accretion of discounts and amortization of premiums
using the level yield method over the estimated life of the securities. If a
security has a decline in fair value below its amortized cost that is other than
temporary, the security will be written down to its new basis by recording a
loss in the consolidated statements of income.
7
<PAGE> 8
FIRST SHENANGO BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
Discounts on first mortgage loans are amortized to income using the level yield
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Discounts on other loans are recognized over the lives
of the loans using the level yield method.
The allowance for loan losses is increased by charges to income and decreased by
net charge-offs. Management's periodic evaluation of the adequacy of the
allowance is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged off.
An allowance is established based on management's periodic evaluation or when
the loan is ninety days delinquent. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the impairment in the borrower's ability to
make periodic interest and principal payments has been removed, in which case
the loan is returned to accrual status.
The Company is a party to financial instruments with off-balance sheet risk
(commitments to extend credit) in the normal course of business to meet the
financing needs of its customers. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee by the customer. Since some
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case basis,
using the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based upon
management's credit evaluation of the counter-party.
Real Estate Owned and Other Repossessed Assets
Real estate owned, consisting of real estate acquired by foreclosure or deed in
lieu of foreclosure, is recorded at the lower of cost or fair value at date of
acquisition less estimated selling cost. Fair value is defined as the amount
reasonably expected to be received in a current sale between a willing seller
(the Savings Bank) and a willing buyer. Costs incurred in developing or
preparing properties for sale are capitalized. Income and expenses of operating
and holding properties are recorded in operations as incurred. Gains and losses
from sales of such properties are recognized as incurred.
Premises and Equipment
Premises and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the expected useful lives of the assets. The cost of
maintenance and repairs is expensed as it is incurred, and renewals and
betterments are capitalized. When equipment is retired, its cost and the related
accumulated depreciation are generally eliminated from the respective accounts.
Income Taxes
The Company, Savings Bank and its subsidiary file a consolidated federal income
tax return. Each company pays its proportionate share of taxes in accordance
with a tax sharing agreement. Deferred tax assets and liabilities are reflected
at currently enacted income tax rates applicable to the period in which the
deferred tax asset or liability is expected to be realized or settled. Separate
state income tax returns are filed by each entity. Deferred income taxes are
provided by the liability method.
8
<PAGE> 9
FIRST SHENANGO BANCORP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deposit Accounts
Interest on deposit accounts is computed monthly and paid or credited to deposit
accounts each calendar quarter, except for certain certificate and checking
accounts which are accrued monthly and paid either monthly, semi-annually or
annually.
Earnings Per Share
During February 1997, the Financial Accounting Standards Board adopted Statement
No. 128, "Earnings per Share," ("FAS 128") which is effective for periods ending
after December 15, 1997. FAS 128 supersedes Accounting Principles Board Opinion
15 and supersedes or amends various other accounting pronouncements. FAS 128
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international standards. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Early adoption of FAS 128 was not permitted, however,
restatement of all prior period EPS data presented was required upon adoption as
of December 31, 1997. See Note 9.
Treasury Stock
The purchase of the Company's common stock is recorded at cost. In the event of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the average cost basis, with any excess proceeds credited to additional
paid-in capital. Treasury stock is available for general corporate purposes.
Stock Options
In October, 1995, the FASB issued FAS 123 "Accounting for Stock-Based
Compensation" which is effective for fiscal years beginning after December 15,
1995. FAS 123 provides companies with a choice either to expense the fair value
of employee stock options over the vesting period or to continue the previous
practice of measuring compensation cost under Accounting Principles Board
Opinion 25 but disclose the pro forma effects on net income and earnings per
share had the fair value method been used for options granted in fiscal years
beginning after December 15, 1994. The Company has elected to use the disclosure
only option and record no financial statement expense from the granting of stock
options at fair market value. See Note 10.
Recent Accounting Pronouncements
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FAS 125
provides new accounting and reporting standards for sales, securitizations and
servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and for extinguishments of liabilities.
FAS 125 as amended by FASB Statement No. 127, "Deferral of Effective Date of
Certain Provisions of FAS 125" is generally to be applied to transactions
occurring after December 31, 1996, with certain provisions having been delayed
until 1998. FAS 125 did not materially impact the company's financial position
or results of operations as a result of adoption.
In February 1997, the FASB issued FAS 129, "Disclosure of Information about
Capital Structure," which consolidates existing guidance relating to capital
structure. This standard is effective for reporting periods ending after
December 15, 1997. Adoption of this standard did not change the previous
presentation regarding capital structure.
9
<PAGE> 10
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (Continued)
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
standard is effective for years beginning after December 15, 1997, and will be
adopted by the Company as of January 1, 1998. Adoption of this standard is not
expected to significantly impact the presentation of the financial statements.
In June 1997, the FASB also issued FAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which supersedes FAS 14. Under FAS 131's
"management approach," public companies will report financial and descriptive
information about their operating segments. FAS 131 is also effective for years
beginning after December 15, 1997, however, because the Company operates in only
one line of business, adoption of FAS 131 will have no impact on the Company's
financial statement presentation.
Reclassification
Certain items previously reported have been reclassified to conform with the
current year's reporting format. These reclassifications had no impact on net
income.
10
<PAGE> 11
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 999,556 $ 9,352 $ 1,008,908
Collateralized mortgage obligations 41,411,384 546,681 (56,326) 41,901,739
Municipal obligations 29,630,028 1,517,487 31,147,515
Other debt securities 250,000 8,125 258,125
Mortgage-backed securities 7,501,455 278,133 7,779,588
FHLB stock 2,574,200 2,574,200
Other marketable equity securities 9,901,245 93,689 (6,261) 9,988,673
--------------------------------------------------------------------------
$92,267,868 $2,453,467 $(62,587) $94,658,748
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 9,598,446 $ 28,642 $ (14,299) $ 9,612,800
Collateralized mortgage obligations 45,760,876 252,108 (147,103) 45,865,881
Municipal obligations 26,909,987 461,373 (87,457) 27,283,903
Other debt securities 250,000 11,563 261,563
Mortgage-backed securities 28,069,974 280,154 (565,358) 27,784,770
FHLB stock 4,289,800 4,289,800
Other marketable equity securities 10,120,936 95,000 (25,891) 10,190,045
--------------------------------------------------------------------------
$125,000,019 $1,128,840 $(840,097) $125,288,762
==========================================================================
</TABLE>
11
<PAGE> 12
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2. INVESTMENT SECURITIES (Continued)
The investment portfolio includes fixed and floating rate collateralized
mortgage obligations ("CMOs"). The interest rates on the floating rate CMOs
reset monthly in accordance with changes in the London Interbank Offered Rate
("LIBOR"), and were purchased in conjunction with the Company's interest rate
risk management strategy. An increase in market interest rates may have the
effect of reducing principal prepayments, thus extending the lives of these
securities. Conversely, a decline in market interest rates may increase
principal prepayments, shortening the securities' average lives. This would
increase the overall yield on these CMOs, since they were generally purchased at
discounts.
The amortized cost and fair value of investment securities at December 31, 1997,
by contractual maturity, are shown in the following table. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. For purposes
of the maturity table, mortgage-backed securities and CMOs, which are not due at
a single maturity date, have been allocated over maturity groupings based on the
weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities and CMOs may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
<TABLE>
<CAPTION>
Amortized
Debt and mortgage related securities: Cost Fair Value
--------------------------------------
<S> <C> <C>
Due after one year through five years $ 269,834 $ 278,607
Due after five years through ten years 2,568,723 2,634,204
Due after 10 through 20 years 17,669,723 18,562,072
Due after 20 years 59,284,143 60,620,992
--------------------------------------
Total 79,792,423 82,095,875
Marketable equity securities and FHLB stock 12,475,445 12,562,873
--------------------------------------
Total investment securities $92,267,868 $94,658,748
======================================
</TABLE>
The Savings Bank is a member of the FHLB System. As a member, the Savings Bank
maintains an investment in the capital stock of the FHLB of Pittsburgh, at cost,
in an amount not less than 1% of its qualifying assets as defined by the FHLB or
1/20th of its outstanding borrowings, if any, whichever is greater.
During the year ended December 31, 1997, debt securities with fair values of
$16,510,649 were sold resulting in gross gains and losses of $59,946 and
$77,202, respectively. During the year ending December 31, 1996, debt and equity
securities with fair values of $29,679,214 were sold resulting in gross gains
and losses of $246,513 and $59,325, respectively.
Investment securities, with amortized cost and fair values, respectively, of
$9,385,698 and $9,658,749 at December 31, 1997, and of $18,875,096 and
$18,490,771 at December 31, 1996 were pledged as collateral for public unit
deposits and other third party collateral agreements.
12
<PAGE> 13
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. LOANS
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------------
<S> <C> <C>
First mortgage residential:
One-to-four family residential $172,746,874 $158,817,080
Construction 746,288 1,287,007
---------------------------
173,493,162 160,104,087
Commercial and other real estate 22,230,915 24,753,320
Commercial business 19,515,048 20,944,114
Commercial land and land development 7,349,649 3,488,337
Automobile 18,133,970 32,239,765
Home equity 14,947,568 15,327,772
Other consumer 3,622,586 3,796,998
---------------------------
Gross loans held for investment 259,292,898 260,654,393
Less:
Loans in process 2,662,374 5,114,248
Unearned discounts 82,539 100,115
Net deferred fees 731,335 261,344
Allowance for losses 3,235,039 2,867,270
---------------------------
Net loans held for investment 252,581,611 252,311,416
Education loans held for sale 3,424,327 3,458,286
---------------------------
$256,005,938 $255,769,702
===========================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,867,270 $ 2,471,658 $ 2,699,632
Provision charged to income - mortgage 120,000 256
Provision charged to income - commercial 246,284 300,000 585,000
Provision charged to income - consumer 406,296 598,479 332,608
Charge-offs - commercial (36,011) (60,000) (856,634)
Charge-offs - consumer (411,287) (486,642) (326,687)
Recoveries - consumer 42,487 43,775 37,483
-----------------------------------------
Balance at end of year $ 3,235,039 $ 2,867,270 $ 2,471,658
=========================================
The allowance for loan losses at December 31 consisted of:
Mortgage $ 452,000 $ 332,000 $ 332,000
Commercial 1,304,073 1,093,800 853,800
Consumer 1,478,966 1,441,470 1,285,858
-----------------------------------------
$ 3,235,039 $ 2,867,270 $ 2,471,658
=========================================
</TABLE>
13
<PAGE> 14
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3. LOANS (Continued)
The estimated fair value of education loans held for sale approximates book
value. Gains on sales of education loans were $33,595, $34,714, and $33,853 in
1997, 1996 and 1995, respectively.
Loans serviced for others totalled $1,567,619, $1,101,591 and $699,379 at
December 31, 1997, 1996 and 1995, respectively, which generated fee income of
$1,471, $867 and $1,488, respectively. Loans serviced by others totalled
$11,314,458, and $12,518,218 at December 31, 1997, and 1996, respectively. The
Company's loan portfolio is geographically diversified, being in 21 states as of
December 31, 1997.
The Company held two loans with a combined balance of $2.77 million at December
31, 1997, and one loan with a balance of $1.76 million at December 31, 1996,
which were considered impaired. Because the market values of the collateral
securing these loans exceed the loans' recorded balances, no specific loss
reserves are deemed necessary; however, the loans have been included in
management's assessment of the adequacy of general valuation allowances. The
loan which was considered impaired at both year-end dates, has not been placed
on non-accrual status, nor does management expect it to be in the foreseeable
future. The loan which was only considered impaired at December 31, 1997, was
placed on non-accrual status during the fourth quarter of 1997. The average
recorded investment in impaired loans during the years ended December 31, 1997
and 1996, was approximately $1.98 million and $1.78 million, respectively, while
$137,000 and $141,000 was recorded in interest income on impaired loans during
those years.
Loans which the Company considers non-performing due to being placed on
non-accrual status as a result of being in arrears three months or more are as
follows:
<TABLE>
<CAPTION>
Year Number of loans Balance Percent of loans held for investment
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 123 $2,774,357 1.10%
1996 92 $1,013,103 0.40%
</TABLE>
The foregone interest on non-performing loans for the years ended December 31,
1997, 1996, and 1995 was $148,651, $41,709 and $34,933, respectively. Interest
received in cash of $171,935, $69,879, and $45,535 on non-accrual loans is
included in income in 1997, 1996, and 1995, respectively.
At December 31, 1997 and 1996, respectively, the Company was committed under
various agreements to originate first mortgage residential loans of $1,467,390
and $1,455,100, commercial and other real estate loans of $5,335,693 and
$1,974,326, and consumer loans of $42,230 and $1,045,229 and had $3,055,868 and
$4,791,600 in unused commercial lines of credit, $2,145,495 and $2,115,569 in
commercial letters of credit issued, $6,517,403 and $6,163,578 in unused home
equity lines of credit, $2,011,914 and $2,021,514 in unused personal unsecured
lines of credit and $590,047 and $486,369 in unused credit card lines. There
were no commitments to lend additional funds to debtors whose loans with the
Company were non-performing as of December 31, 1997 or 1996.
NOTE 4. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
REO and other repossessed assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------------
<S> <C> <C>
Acquired in foreclosure or deed in lieu of foreclosure $ 1,094,477 $ 705,881
Other repossessed assets 21,856 30,971
Allowance for REO and other repossessed asset losses (5,000)
--------------------------
$ 1,111,333 $ 736,852
==========================
</TABLE>
14
<PAGE> 15
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS (Continued)
The following is an analysis of the allowance for REO and other repossessed
asset losses:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 0 $ 0 $ 0
Provisions charged to income 11,782 133,551 12,492
Charge-offs (44,591) (168,516) (84,044)
Recoveries 37,809 34,965 71,552
-----------------------------------
Balance at end of year $ 5,000 $ 0 $ 0
===================================
</TABLE>
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-----------------------
<S> <C> <C>
Land and land improvements $ 597,553 $ 578,998
Buildings 6,052,638 5,001,669
Leasehold improvements 61,997 21,780
Furniture and equipment 2,402,204 1,934,407
Construction in progress 24,708 388,107
-----------------------
9,139,100 7,924,961
Less accumulated depreciation 4,008,074 3,624,434
-----------------------
$5,131,026 $4,300,527
=======================
</TABLE>
The Company is committed under a number of non-cancelable operating leases for
facilities and equipment with initial or remaining terms in excess of one year.
The Neshannock Township, Shenango Township, and Union Township branches are
constructed on leased land.
<TABLE>
<CAPTION>
Branch Annual Rental Expiration Date Renewal Options
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Neshannock Township $2,500 10/31/22 None
Shenango Township 23,000 07/31/99 Seven, 5-year options
Union Township 19,980 08/31/07 Six, 5-year options
</TABLE>
The future minimum rental payments required under non-cancelable operating
leases with initial or remaining terms in excess of one year as of December 31,
1997 are as follows: 1998 - $45,480, 1999 - $35,897, 2000 - $22,480, 2001 -
$22,480, 2002 - $22,480 and subsequent years - $132,833. Total rental expense
for all operating leases for 1997, 1996 and 1995 was $55,985, $53,928 and
$56,058, respectively.
15
<PAGE> 16
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. DEPOSITS
Deposit account balances are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------------------------------
Stated
Rate Amount % Amount %
-----------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C>
Non-interest-bearing demand deposits: $ 4,971,054 1.81 $ 4,647,926 1.74
Interest-bearing deposits:
NOW deposits 26,916,213 9.78 25,750,252 9.62
Money market deposits 20,745,913 7.54 18,335,286 6.85
Savings deposits 55,919,113 20.32 59,558,081 22.25
Club deposits 232,023 0.08 239,567 0.09
Certificates 0.00-4.00% 687,315 0.25 1,220,331 0.46
4.01-6.00% 79,588,749 28.92 103,833,034 38.80
6.01-8.00% 69,252,911 25.16 35,198,534 13.15
8.01-10.00% 16,808,803 6.11 18,717,823 6.99
----------------------------------------------------------------
275,122,094 99.97 267,500,834 99.95
Accrued interest on certificates 98,937 0.03 118,342 0.05
----------------------------------------------------------------
$275,221,031 100.00 $267,619,176 100.00
================================================================
</TABLE>
A summary of certificates by maturity is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------
<S> <C> <C>
0 - 1 Year $ 80,205,766 $ 76,154,716
1 - 2 Years 58,787,175 38,272,971
2 - 3 Years 6,030,558 23,900,635
3 - 4 Years 7,833,043 4,833,236
4 - 5 Years 3,780,941 7,228,342
Thereafter 9,700,295 8,579,822
----------------------------
166,337,778 158,969,722
Accrued interest 98,937 118,342
----------------------------
$166,436,715 $159,088,064
============================
</TABLE>
The aggregate of all deposits over $100,000 amounted to $28,780,114 and
$31,854,274 at December 31, 1997 and 1996, respectively.
Interest on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Money market and NOW deposits $ 1,346,537 $ 1,051,885 $ 860,111
Savings and club deposits 1,558,815 1,655,368 1,763,451
Certificates of deposit 9,709,911 9,134,262 9,042,574
Interest forfeitures (33,396) (26,106) (22,837)
--------------------------------------------
$ 12,581,867 $ 11,815,409 $ 11,643,299
============================================
</TABLE>
16
<PAGE> 17
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
Advances from the FHLB at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
Interest Interest
Balance Rate Balance Rate
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $26,000,000 5.39%-5.63% $69,530,000 5.34%-6.76%
Due within two years 21,143,000 5.50%-6.13% 5,000,000 5.39%
Due within three years 11,143,000 5.50%-6.13%
Due after five years 339,061 5.97%-6.94% 121,335 6.94%
-------------- --------------
Total $47,482,061 $85,794,335
============== ==============
Weighted average interest rate at
end of period 5.67% 6.06%
=========== ==========
</TABLE>
The Savings Bank has a line of credit and a repurchase agreement with the FHLB.
The total amount of credit available to the Savings Bank through these products
was approximately $18,297,000 and $50,000,000 at December 31, 1997,
respectively, and the outstanding balances were $0 and $21,000,000. The balances
are due on demand and the interest rates may change daily. Borrowings from the
FHLB are secured by the Savings Bank's stock in the FHLB and other qualifying
assets. The Savings Bank's maximum borrowing capacity from the FHLB was
approximately $172,567,000 at December 31, 1997.
Other borrowings at December 31, 1997 and 1996 consist of $242,537 and $660,876
in uninsured investment agreements between the Savings Bank and certain
commercial customers. The interest rate on these agreements resets weekly based
on changes in the federal funds rate less a negotiated margin. Securities with a
market value of approximately $1,365,000 and $987,000 at December 31, 1997 and
1996, respectively, were pledged as collateral for these borrowings.
NOTE 8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 1,986,850 $ 1,530,150 $ 1,620,250
Deferred (232,000) (150,000) (18,000)
-----------------------------------------
1,754,850 1,380,150 1,602,250
State:
Current 438,825 285,225 304,175
-----------------------------------------
$ 2,193,675 $ 1,665,375 $ 1,906,425
=========================================
</TABLE>
Income tax expense (benefit) of the Company differs from the amounts computed by
applying the statutory U.S. federal income tax rate of 34 percent to income
before income taxes because of the following:
<TABLE>
<CAPTION>
Percent of Pretax Income
Year Ended December 31,
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Federal statutory rate 34.00% 34.00% 34.00%
Tax free income (6.99%) (5.47%) (4.36%)
State income tax expense, net of federal income
tax 4.27% 4.03% 4.03%
Qualified dividend received exclusion (0.52%) (0.68%) (0.19%)
Other items, net 1.60% 3.74% 4.76%
-----------------------------
32.36% 35.62% 38.24%
=============================
</TABLE>
17
<PAGE> 18
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE: 8. INCOME TAXES (Continued)
Included in other liabilities at December 31, 1997 and in other assets at
December 31, 1996, are a net deferred tax liability and asset of $242,000 and
$241,000, respectively. The tax effects of the temporary differences that
comprise the net deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans $ 899,000 $ 800,000
Other 128,000 82,000
--------------------------
Total deferred tax assets 1,027,000 882,000
Deferred tax liabilities:
Net unrealized gain on investments available for sale 813,000 98,000
Deferred loan income 181,000 251,000
Depreciation expense 95,000 112,000
Other 180,000 180,000
--------------------------
Total deferred tax liabilities 1,269,000 641,000
--------------------------
Net deferred tax (liability) asset ($ 242,000) $ 241,000
==========================
</TABLE>
Retained earnings at December 31, 1997, include financial statement tax bad debt
reserves of $8,263,000. The Small Business Job Protection Act of 1996 passed on
August 20, 1996 eliminated the special bad debt deduction previously granted
solely to thrifts. This results in the recapture of past taxes for permanent
deductions arising from the "applicable excess reserve," which is the total
amount of the Savings Bank's reserve over its base year reserve as of December
31, 1987. Because the Savings Bank had no "applicable excess reserve," no
recapture tax exists.
The Savings Bank is subject to the Pennsylvania Mutual Thrift Institution Tax
which is currently calculated at 11.50% of earnings based on generally accepted
accounting principles with certain adjustments.
NOTE 9. EARNINGS PER SHARE
Earnings per share for the years ended December 31, 1997, 1996, and 1995, were
calculated as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
=========================================
Weighted average common shares issued 2,343,098 2,343,098 2,343,098
Average unallocated ESOP shares (66,339) (74,863) (87,177)
Average unvested and forfeited MSBP shares (14,742) (31,940) (50,066)
Weighted average treasury shares (276,789) (78,614) (25,223)
-----------------------------------------
Weighted common shares outstanding - basic 1,985,228 2,157,681 2,180,632
=========================================
Basic earnings per share $ 2.31 $ 1.40 $ 1.41
=========================================
Weighted common shares outstanding - basic 1,985,228 2,157,681 2,180,632
Average unvested MSBP shares 4,375 21,469 37,076
Net effect of dilutive stock options 60,110 62,084 55,208
-----------------------------------------
Weighted common shares outstanding - diluted 2,049,713 2,241,234 2,272,916
=========================================
Diluted earnings per share $ 2.24 $ 1.34 $ 1.35
=========================================
</TABLE>
18
<PAGE> 19
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. STOCK BENEFIT PLANS
Stock Option Plan:
Pursuant to the Company's stock option and incentive plan ("Option Plan"),
options for up to 224,825 shares of the Company's stock may be granted to
directors and officers of the Savings Bank. Options granted under the Option
Plan may be either incentive or non-incentive stock options. All options have 10
year terms, and vest and become exercisable 25% per year.
For options granted beginning in 1995, pro forma information regarding net
income and earnings per share is required by FAS 123, and has been determined as
if the Company had accounted for its stock options under the fair value method
of that Statement. The fair value for these options was estimated at the date of
the grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 6.42%, dividend yield of 2.31%, a
volatility factor of the expected market price of the Company's common stock of
.152, and an expected life of the options of 7.20 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Under FAS 123, the
Company's net income for 1997 and 1996 would have been $4,581,610 and
$3,009,056, respectively. Basic and diluted earnings per share for 1997 would
have been $2.31 and $2.24, respectively, and basic and diluted earnings per
share for 1996 would have been $1.39 and $1.34, respectively.
A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 146,887 $ 10.37 150,446 $ 10.00 160,472 $ 10.00
Granted 5,000 20.75
Forfeited 3,212 10.00 7,026 10.00
Exercised 37,813 10.00 5,347 10.00 3,000 10.00
-------------------------------------------------------------------------------------
Outstanding at end of year 109,074 $ 10.49 146,887 $ 10.37 150,446 $ 10.00
=====================================================================================
</TABLE>
Options granted in 1996 have an exercise price of $20.75 and expire in 2006. All
other options have an exercise price of $10.00 and expire in 2003. At December
31, 1997, 104,074 options were exercisable at $10.00 per share and 1,250 options
were exercisable at $20.75 per share.
Employee Stock Ownership Plan:
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Savings
Bank and having attained age 21. The ESOP Trust purchased 112,412 shares of
common stock in the Company's initial public offering with proceeds from a loan
from the Company. The Savings Bank makes cash contributions to the ESOP on an
annual basis sufficient to enable the ESOP to make the required loan payments to
the Company.
The note payable referred to above bears interest at prime rate plus one
percent, adjustable quarterly, with interest payable quarterly and principal
payable in equal annual installments over ten years. The loan is secured by the
shares of the stock purchased.
19
<PAGE> 20
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10. STOCK BENEFIT PLANS (Continued)
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as deferred ESOP
shares in the statement of financial position. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt.
Deferred compensation expense for the ESOP was $310,216, $240,829 and $215,605
for the years ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Allocated shares 42,099 31,853 23,157
Shares released for allocation 11,241 11,428 11,457
Shares distributed (1,962) (1,182) (2,761)
Unreleased shares 55,129 66,370 77,798
-----------------------------------------
Total ESOP shares 106,507 108,469 109,651
=========================================
Fair value of unreleased shares at December 31 $ 2,040,000 $ 1,493,000 $ 1,595,000
=========================================
</TABLE>
Management Stock Bonus Plans ("MSBPs"):
The Company and Savings Bank adopted MSBPs for Directors and Management. A total
of 89,930 shares of restricted stock were awarded on April 5, 1993, the
conversion date, in the form of restricted stock payable over a four year
vesting period, at 25 percent per year, beginning April 5, 1994. The MSBPs
shares purchased in the conversion were initially excluded from shareholders'
equity. The Company recognizes compensation expense in the amount of the fair
market value of the common stock at the grant date, pro rata over the years
during which the shares are payable and recorded as an addition to shareholders'
equity. Compensation expense attributable to the MSBPs amounted to $11,297 in
1997, $60,695 in 1996 and $85,284 in 1995. The shares are entitled to all voting
and other shareholder rights, except that the shares, while restricted, cannot
be sold, pledged or otherwise disposed of, and are required to be held in
escrow.
If a holder of restricted stock under the MSBPs terminates employment for
reasons other than death, disability, retirement or change in control in the
Company, such employee forfeits all rights to any allocated shares which are
still restricted. If termination is caused by death, disability, retirement or
change in control of the Company, all allocated shares become unrestricted.
The following table summarizes the MSBPs activity for the periods indicated:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Restricted shares at beginning of year 16,807 36,324 58,553
Shares vested 16,807 18,162 22,229
Shares forfeited 1,355
----------------------------
Restricted shares at end of year 0 16,807 36,324
============================
</TABLE>
Forfeited shares have been placed in the plan reserve and are eligible for
reallocation at the direction of the Plan Trustees.
20
<PAGE> 21
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11. PENSION PLAN
The Savings Bank has a defined benefit pension plan covering all of its
qualified full-time employees. The Savings Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
The pension plan provides for monthly payments to each participating employee at
normal retirement age (age 65). The annual benefits payable under the pension
plan are equal to 1.25% of Final Average Compensation ("FAC") as defined in the
plan, excluding overtime, commission and bonus pay multiplied by years of
service.
For the periods through December 31, 1994, the Savings Bank was the sponsor of a
single employer plan for the benefit of its employees. Effective January 1,
1995, the Savings Bank changed administrators of this plan and pooled the assets
and liabilities of the plan with a multiemployer plan in which the Savings Bank
participates with a number of other financial institutions. This plan invests
primarily in fixed income and equity securities, both domestic and
international. The qualifications for employees to participate in the
multiemployer plan and the benefits which they will be entitled to receive upon
retirement are substantially the same as under the single employer plan. The
Savings Bank did not receive a reversion of any assets from the plan as a result
of this change. The Savings Bank expects to benefit from this change through
reduced future contributions, and thus, reduced charges to earnings, due to the
overfunded status of the multiemployer plan. Pension expense for 1997, 1996 and
1995 was $0, $0 and $48,637, respectively.
The Company established a qualified plan under Section 401(k) of the Internal
Revenue Code for substantially all of its employees which allows participants to
make contributions by salary reduction equal to or less than 9% of gross annual
salary. The Company matches contributions equal to 50% of the employee's
contributions, up to 4% of compensation. The Company's contributions to the plan
in 1997, 1996 and 1995 were $28,793, $24,090 and $21,436, respectively.
During 1993, the Company adopted a supplemental executive retirement plan
("SERP") for the benefit of the President. The purpose of the SERP is to furnish
the President with supplemental post-retirement benefits in addition to those
which will be provided under the Company's pension plan and other retirement
benefits. Benefits payable under the SERP are anticipated to equal approximately
$1,000 per month upon retirement at age 65 for a minimum of 120 months. Payments
under the SERP are being accrued for financial reporting purposes during the
period of the President's employment. The SERP is unfunded. All benefits payable
under the SERP will be paid from current assets of the Company. There are no tax
consequences to either the President or the Company prior to payment of
benefits. Upon payment of benefits, the Company will be entitled to recognize a
tax deductible compensation expense. The Company's expenses for 1997, 1996 and
1995 were $10,030, $28,997 and $32,389 offset by deferred taxes of approximately
$3,000, $10,000 and $11,000, respectively.
NOTE 12. SHAREHOLDERS' EQUITY
The Savings Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Savings Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors.
The Savings Bank may not declare or pay cash dividends if the effect would be to
reduce shareholder's equity below applicable regulatory capital requirements or
if such declaration and payment would otherwise violate regulatory requirements.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31, 1997,
that the Savings Bank met all capital adequacy requirements to which it was
subject.
To be categorized as well capitalized, the Savings Bank must maintain minimum
ratios as set forth in the table. As of December 31, 1997, the most recent
notification from the Office of Thrift Supervision categorized the Savings Bank
as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category.
21
<PAGE> 22
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12. SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
December 31, 1997 (1) December 31, 1996 (1)
-------------------------------------------------------------------------------
Tier I Tier I Tier II Tier I Tier I Tier II
Core Risk--Based Risk--Based Core Risk--Based Risk--Based
Capital Capital Capital Capital Capital Capital
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity capital (2) $ 40,033 $ 40,033 $ 40,033 $ 33,963 $ 33,963 $ 33,963
Non--includable portion of investment in (26) (26) (26)
subsidiary (24) (24) (24)
Unrealized gain on certain securities available (1,577) (1,577) (1,577)
for sale (200) (200) (200)
General valuation allowances (3) 2,533 2,659
-------------------------------------------------------------------------------
Regulatory capital 38,430 38,430 40,963 33,739 33,739 36,398
Minimum capital requirement 14,752 8,091 16,182 16,015 8,508 17,016
-------------------------------------------------------------------------------
Excess regulatory capital $ 23,678 $ 30,339 $ 24,781 $ 17,724 $ 25,231 $ 19,382
===============================================================================
Adjusted total assets $ 368,801 $ 202,272 $ 202,272 $ 400,371 $ 212,702 $ 212,702
Regulatory capital as a percentage 10.42% 19.00% 20.25% 8.43% 15.86% 17.11%
Minimum capital requirement as a percentage 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
-------------------------------------------------------------------------------
Excess regulatory capital as a percentage 6.42% 15.00% 12.25% 4.43% 11.86% 9.11%
===============================================================================
Well capitalized requirement as a percentage 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
===============================================================================
</TABLE>
(1) Dollar amounts in thousands.
(2) Represents equity capital of the consolidated Savings Bank as reported to
the OTS on Form 1313.
(3) Limited to 1.25% of risk--based assets.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of FAS No. 107, "Disclosures about Fair Value of Financial
Instruments" ("Statement 107"), requires that the Company disclose estimated
fair values for its financial instruments. The market value of investments and
mortgage-backed securities, as presented in Note 2, are based primarily upon
quoted market prices. For substantially all other financial instruments, the
fair values are management's estimates of the values at which the instruments
could be exchanged in a transaction between willing parties. In accordance with
Statement 107, fair values are based on estimates using present value and other
valuation techniques in instances where quoted prices are not available. These
techniques are significantly affected by the assumptions used, including
discount rates and estimates of future cash flows. As such, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, further, may not be realizable in an immediate settlement of the
instruments. Statement 107 also excludes certain items from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent, and should not be construed to represent, the underlying value of the
Company.
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Cash and cash equivalents: The carrying amounts reported on the balance sheet
for cash and cash equivalents approximate those assets' fair value.
Investment securities, including mortgage-backed securities: Fair values are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted prices of comparable instruments.
(See Note 2.)
Loans: For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for all other loans are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Deposit liabilities: The fair values disclosed for NOW, money market, and
savings deposits are, by definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). The carrying amounts for
variable rate certificates of deposit and for those certificates of deposit
maturing in less than one year approximate their fair values at the reporting
date. Fair values for
22
<PAGE> 23
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
fixed-rate certificates of deposit are estimated using a discounted cash flow
analysis, applying interest rates currently being offered on certificates to a
schedule of aggregate expected monthly maturities on those deposits.
Borrowings: Fair values for the Company's variable rate FHLB advances and other
borrowings are deemed to equal carrying value. Fair values for fixed rate
borrowings are estimated using a discounted cash flow analysis similar to that
used in valuing fixed rate deposit liabilities.
Off-balance sheet instruments: Fair values for the Company's commitments to
extend credit would be based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements.
Presently, the Company only charges a nominal loan commitment fee and,
accordingly, there is no fair value associated with loan commitments. The fair
value of the commitment to purchase loans is based on fees currently charged to
enter into similar agreements.
The following table presents the estimates of fair value of financial
instruments:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------- -----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------- ---------------- ------------------ ----------------
ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 15,648,757 $ 15,648,757 $ 16,734,483 $ 16,734,483
Investment securities available for sale 94,658,748 94,658,748 125,288,762 125,288,762
Loans receivable, net 256,005,938 259,097,041 255,769,702 257,895,385
LIABILITIES:
Deposits 275,221,031 272,574,727 267,619,176 264,553,152
FHLB advances and other borrowings 47,724,598 47,748,797 86,455,211 86,483,337
Advance payments by borrowers 1,876,095 1,876,095 1,600,202 1,600,202
</TABLE>
NOTE 14. LOANS TO RELATED PARTIES
The Company has granted loans to the officers and directors of the Company and
to their associates. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$435,693 and $263,242 at December 31, 1997 and 1996, respectively. During 1997
and 1996, $45,000 and $170,000 in new loans were made and $58,339 and $63,757
were advanced under existing lines of credit. The $170,000 approved during 1996
was disbursed in 1997. Repayments totalled $100,888 and $76,368 in 1997 and
1996, respectively.
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS
In October 1994, the FASB issued FAS 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," which is generally
effective for calendar year 1994 financial statements. The Company, Savings Bank
and its subsidiary have not historically invested in instruments which are
typically described as derivative financial instruments, and have no current
plans to do so, for trading, investing, hedging or other purposes. Instruments
of this type include future, forward, swap and option contracts, and interest
rate caps and floors.
FAS 119 expanded the definition of derivative financial instruments for
disclosure purposes to include certain other instruments in addition to the
above items, including commitments to originate loans and unsettled security
purchase or sale agreements. The Company and the Savings Bank enter into these
types of agreements in the normal course of business for investment purposes.
The Company, Savings Bank and its subsidiary are not currently involved in
trading or hedging activities, and have no current plans to do so.
23
<PAGE> 24
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
24
<PAGE> 25
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. CONDENSED FINANCIAL INFORMATION OF FIRST SHENANGO BANCORP, INC. (PARENT
ONLY)
First Shenango Bancorp, Inc. was organized on December 9, 1992, and began
operations on April 5, 1993. The Company's balance sheets as of December 31,
1997 and 1996, and related statements of income and cash flows for the years
ending December 31, 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
BALANCE SHEET 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 624,393 $ 1,793,796
Investments in:
Securities 3,352,149 3,346,286
Savings Bank 40,032,561 33,963,525
Loans receivable from Savings Bank 3,551,288 4,063,699
Commercial loan 665,900 197,796
Other assets 27,117 36,630
----------- -----------
Total Assets $48,253,408 $43,401,732
=========== ===========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 89,016 $ 108,180
Dividends payable 302,082 239,225
----------- -----------
Total Liabilities 391,098 347,405
Total Shareholders' Equity 47,862,310 43,054,327
----------- -----------
Total Liabilities and Shareholders' Equity $48,253,408 $43,401,732
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF INCOME 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 299,886 $ 354,318 $ 353,093
Interest on loans to Savings Bank 253,484 263,818 302,963
Dividend from Savings Bank 5,000,000 1,000,000
Loss on sale of investments 1,563
Expenses 120,636 91,391 147,528
----------- ----------- -----------
Income before equity earnings and income tax 432,734 5,525,182 1,508,528
Income tax expense 176,500 213,250 206,500
----------- ----------- -----------
Net Income before Equity Earnings 256,234 5,311,932 1,302,028
Equity in (excess dividends from) undistributed earnings
of Savings Bank 4,329,456 (2,301,935) 1,777,158
----------- ----------- -----------
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
=========== =========== ===========
</TABLE>
25
<PAGE> 26
FIRST SHENANGO BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. CONDENSED FINANCIAL INFORMATION OF FIRST SHENANGO BANCORP, INC. (PARENT
ONLY) (Continued)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 4,585,690 $ 3,009,997 $ 3,079,186
Loss on sale of investments 1,563
(Equity in undistributed earnings of) excess dividends from Savings Bank (4,329,456) 2,301,935 (1,777,158)
Change in other assets and liabilities (9,644) 45,973 51,875
-------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 246,590 5,359,468 1,353,903
INVESTING ACTIVITIES:
Loans to Savings Bank, net of repayments 512,411 114,285 (3,285,433)
Commercial loan originations, net of repayments (468,104) 134,604 57,600
Purchases of investments (2,100,000)
Proceeds from sales of investments 1,998,437
Proceeds from maturities of investments 3,000,128
-------------------------------------------
NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 44,307 147,326 (227,705)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 378,130 53,470 30,000
Purchase of treasury stock (722,433) (5,937,531) (419,024)
Cash dividends on common stock (1,115,997) (1,007,688) (812,112)
-------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,460,300) (6,891,749) (1,201,136)
-------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,169,403) (1,384,955) (74,938)
Cash and cash equivalents at beginning of year 1,793,796 3,178,751 3,253,689
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 624,393 $ 1,793,796 $ 3,178,751
===========================================
</TABLE>
NOTE 17. SUBSEQUENT EVENT
On February 6, 1998, the Company entered into an Agreement of Affiliation and
Plan of Merger (the "Agreement") with FirstFederal Financial Services Corp.
("FFSW") of Wooster, Ohio. Under the terms of the Agreement, the Company will
merge with and into FFSW, with the Company's shareholders to receive 1.143
shares of FFSW common stock in exchange for each of their shares of the
Company's common stock. FFSW is a bank holding company with total assets of
$1.46 billion at December 31, 1997. The transaction, which will be accounted for
as a pooling of interests, is subject to regulatory and shareholder approvals
and is expected to be completed in the third quarter of 1998.
26
<PAGE> 1
Exhibit 99.3
PART I - FINANCIAL INFORMATION/Item 1. - Financial Statements
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
-------------------- ----------------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash and amounts due from depository institutions $1,225,520 $2,069,639
Interest bearing deposits in financial institutions 23,718,144 13,579,118
-------------------- ----------------------
24,943,664 15,648,757
Investment securities available for sale, carried at fair value 116,073,923 94,658,748
Loans held for sale 3,707,919 3,424,327
Loans receivable, net of allowance for loan losses of $3,248,758 and $3,235,039 249,519,777 252,581,611
Accrued interest receivable 2,395,550 2,202,693
REO and other repossessed assets, net 1,154,136 1,111,333
Premises and equipment, net 5,082,791 5,131,026
Prepaid expenses, sundry assets and deferred taxes 267,972 213,231
-------------------- ----------------------
TOTAL ASSETS $403,145,732 $374,971,726
==================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (including non-interest bearing deposits of $4,716,876 and $4,971,054) $275,393,237 $275,221,031
Advances from Federal Home Loan Bank and other borrowings 72,032,052 47,724,598
Advance payments by borrowers for taxes and insurance 2,565,803 1,876,095
Accrued expenses, deferred taxes and other liabilities 4,862,394 2,287,692
-------------------- ----------------------
TOTAL LIABILITIES 354,853,486 327,109,416
SHAREHOLDERS' EQUITY
Preferred stock, no stated value, 10,000,000 shares authorized, none issued
Common stock, $.10 par value, 15,000,000 shares authorized, 2,343,098 234,310 234,310
shares issued
Additional paid-in capital 22,221,466 22,136,466
Treasury stock at cost (274,091 shares) (6,233,171) (6,233,171)
Less stock acquired by MSBPs and ESOP (523,185) (551,287)
Net unrealized gains on securities available for sale, net of tax 1,307,553 1,577,880
Retained earnings (substantially restricted) 31,285,273 30,698,112
-------------------- ----------------------
TOTAL SHAREHOLDERS' EQUITY 48,292,246 47,862,310
-------------------- ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $403,145,732 $374,971,726
==================== ======================
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 2
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Interest income: 1998 1997
----------------- ---------------
<S> <C> <C>
Interest and fees on:
First mortgage residential loans $3,236,270 $2,966,997
Commercial and other real estate loans 1,101,584 1,120,754
Consumer loans 801,886 1,092,185
Interest and dividends on investments available for sale:
Taxable 873,957 1,470,457
Tax-exempt 438,967 419,360
Dividends 252,739 228,086
Other interest income 260,023 134,923
----------------- ---------------
TOTAL INTEREST INCOME 6,965,426 7,432,762
----------------- ---------------
Interest expense:
Interest on deposits 3,137,625 3,048,900
Interest on borrowed funds 752,954 1,195,737
----------------- ---------------
TOTAL INTEREST EXPENSE 3,890,579 4,244,637
----------------- ---------------
NET INTEREST INCOME 3,074,847 3,188,125
Provision for loan losses 155,070 184,634
----------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,919,777 3,003,491
Non-interest income:
Service charges and other fees 182,513 202,459
Gain on sale of investments and loans, net 772 435
Other 7,932 1,177
----------------- ---------------
TOTAL NON-INTEREST INCOME 191,217 204,071
Non-interest expense:
Salaries and employee benefits 858,758 765,368
Occupancy and equipment, net 249,616 257,948
Deposit insurance premiums 42,733 42,459
Professional services 215,111 50,364
REO operations 16,499 33,901
Other 340,234 312,953
----------------- ---------------
TOTAL NON-INTEREST EXPENSE 1,722,951 1,462,993
----------------- ---------------
INCOME BEFORE INCOME TAXES 1,388,043 1,744,569
Income tax expense:
Federal 409,550 489,425
State 89,250 117,700
----------------- ---------------
TOTAL INCOME TAX EXPENSE 498,800 607,125
----------------- ---------------
NET INCOME $889,243 $1,137,444
================= ===============
Earnings per share - basic $0.44 $0.58
Earnings per share - diluted $0.43 $0.56
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unallocated Unallocated Retained
Additional Common Common Unrealized Earnings, Consolidated
Comprehensive Common Paid-In Treasury Stock Held Stock Held Gain (Loss) Substantially Shareholders'
Income Stock Capital Stock by ESOP by MSBPs on Securities Restricted Equity
-------------- -------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December
31, 1996 $234,310 $22,422,843 $(6,374,001) $(663,700) $(11,297) $190,743 $27,255,429 $43,054,327
-------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
Deferred
and unearned
compensation
amortization
of ESOP and
MSBPs shares 198,756 112,413 11,297 322,466
Stock options
exercised (485,133) 863,263 378,130
Net income $4,585,690 4,585,690 4,585,690
Cash dividends
declared on
common stock
at $.57 per
share (1,143,007) (1,143,007)
Purchase of
28,716
shares of
treasury stock (722,433) (722,433)
Change in
unrealized
gain on
investment
securities
available
for sale, net 1,387,137 1,387,137 1,387,137
-------------- -------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
December 31, 1997 $5,972,827 234,310 22,136,466 (6,233,171) (551,287) 0 1,577,880 30,698,112 47,862,310
============== -------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
Deferred and
unearned
compensation
amortization
of ESOP and
MSBPs shares 85,000 28,102 113,102
Net income $889,243 889,243 889,243
Cash dividend
declared
on common
stock at
$.15 per share (302,082) (302,082)
Change in
unrealized
gain on
investment
securities
available for
sale, net (270,327) (270,327) (270,327)
-------------- -------- ----------- ------------ ----------- ----------- ------------- ------------- -------------
March 31, 1998 $618,916 $234,310 $22,221,466 $(6,233,171) $(523,185) $0 $1,307,553 $ 31,285,273 $48,292,246
============== ======== =========== ============ =========== =========== ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 889,243 $ 1,137,444
Adjustments to reconcile net income to net cash provided by
operating activities:
Net gain on sale of investments and loans (772) (435)
Proceeds from sale of loans held for sale 282,122 260,153
Disbursements for loans held for sale (608,286) (578,243)
Provision for estimated losses on loans 155,070 184,634
(Recovery of) provisions for net losses on REO, repossessed and other assets (6,665) 7,039
Provisions for depreciation and amortization 98,209 106,077
Amortization of MSBPs and ESOP unearned and deferred compensation 113,102 75,400
Deferred federal income taxes (26,000) (15,000)
Increase in accrued interest receivable, prepaid
expenses and sundry assets (247,598) (236,649)
Increase in accrued expenses and other liabilities 372,371 460,902
Increase in interest payable 766,289 824,286
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,787,085 2,225,608
INVESTING ACTIVITIES
Proceeds from maturities of investments 10,500,000 1,505,583
Purchases of investments (34,089,683) (7,901,101)
Principal repayment on mortgage-backed securities and CMOs 2,764,981 2,706,450
Proceeds from sales of foreclosed real estate, repossessed and other assets 85,919 112,429
Loan originations, net of loans in process (9,693,206) (11,293,930)
Principal reduction on loans 12,521,257 13,254,319
(Purchase) redemption of Federal Home Loan Bank stock (999,800) 115,100
Additions to premises and equipment (49,974) (130,792)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (18,960,506) (1,631,942)
</TABLE>
4
<PAGE> 5
FIRST SHENANGO BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
FINANCING ACTIVITIES 1998 1997
------------ ------------
<S> <C> <C>
Net increase in money market and NOW deposits 5,022,811 1,278,512
Net (decrease) increase in savings deposits (19,699) 46,503
Net decrease in certificates of deposit (5,510,173) (454,936)
Proceeds of FHLB borrowings 50,000,000 15,700,000
Repayment of FHLB borrowings (26,003,963) (18,002,250)
Net increase (decrease) in other borrowings 311,417 (208,252)
Net increase in advance payments by borrowers 689,708 734,516
Net increase (decrease) in other liabilities for unsettled investment security purchases 2,280,309 (4,996,627)
Net proceeds from exercise of stock options 153,350
Payment of cash dividend on common stock (302,082) (239,225)
Purchase of treasury stock (297,493)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 26,468,328 (6,285,902)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,294,907 (5,692,236)
Cash and cash equivalents at beginning of period 15,648,757 16,734,483
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,943,664 $ 11,042,247
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 3,124,290 $ 3,420,350
Income taxes $ 86,800 $ 107,500
Non-cash investing activities:
Transfer from loans to real estate owned $ 12,000
Transfer from loans to other repossessed assets $ 194,532 $ 214,444
Non-cash financing activities:
Dividends declared but not paid $ 302,082 $ 239,668
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
FIRST SHENANGO BANCORP, INC.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of First
Shenango Bancorp, Inc. (the "Company"), First Federal Savings Bank of New Castle
(the "Savings Bank") and Tri-State Service Corporation. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and disclosures
required by generally accepted accounting principles for complete financial
statements. However, all normal recurring adjustments have been made which, in
the opinion of management, are necessary to the fair presentation of the
financial statements.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1998.
The Consolidated Statement of Financial Position at December 31, 1997, was
audited by Ernst & Young LLP. Their unqualified opinion thereon is included in
the Company's 1997 Annual Report to Shareholders.
The presentation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates. Most significantly, the Company uses estimates in
determining the allowance for loan losses.
Certain items previously reported have been reclassified to conform with the
current period's reporting format.
NOTE 2. EARNINGS PER SHARE
Earnings per share for the three months ended March 31, 1998, 1997 and 1996 were
calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 889,243 $ 1,137,444 $ 948,583
=========== =========== ===========
Weighted average common shares issued 2,343,098 2,343,098 2,343,098
Average unallocated ESOP shares (55,129) (66,370) (75,031)
Average unvested and forfeited MSBP shares (10,367) (27,175) (45,338)
Weighted average treasury shares (274,091) (282,872) (34,120)
----------- ----------- -----------
Weighted common shares outstanding - basic 2,003,511 1,966,681 2,188,609
=========== =========== ===========
Basic earnings per share $ 0.44 $ 0.58 $ 0.43
=========== =========== ===========
Weighted common shares outstanding - basic 2,003,511 1,966,681 2,188,609
Average unvested MSBP shares 16,808 33,573
Net effect of dilutive stock options 63,031 63,498 63,020
----------- ----------- -----------
Weighted common shares outstanding - diluted 2,066,542 2,046,987 2,285,202
=========== =========== ===========
Diluted earnings per share $ 0.43 $ 0.56 $ 0.42
=========== =========== ===========
</TABLE>
6
<PAGE> 7
NOTE 3. INVESTMENT SECURITIES
A summary of investment securities available for sale is as follows:
March 31, 1998
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $ 3,006,535 $ 7,740 $ (7,857) $ 3,006,418
Collateralized mortgage obligations 31,002,726 476,687 (56,553) 31,422,860
Municipal obligations 32,420,756 1,359,435 (71,141) 33,709,050
Other debt securities 250,000 7,188 257,188
Mortgage-backed securities 23,809,527 257,780 (78,647) 23,988,660
FHLB stock 3,574,000 3,574,000
Other marketable equity securities 20,028,826 117,500 (30,579) 20,115,747
------------- ------------- ------------- -------------
$ 114,092,370 $ 2,226,330 $ (244,777) $ 116,073,923
============= ============= ============= =============
</TABLE>
The amortized cost and estimated fair value of investment securities at March
31, 1998 by contractual maturity are shown in the following table. Actual
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties. For purposes of the maturity table, mortgage-backed securities and
CMOs, which are not due at a single maturity date, have been allocated over
maturity groupings based on the weighted-average contractual maturities of
underlying collateral. The mortgage-backed securities and CMOs may mature
earlier than their weighted-average contractual maturities because of principal
prepayments.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
------------ ------------
<S> <C> <C>
Debt and mortgage-related securities:
Due after one year through five years $ 265,172 $ 272,842
Due after five years through ten years 2,654,178 2,720,434
Due after 10 through 20 years 24,886,391 25,868,107
Due after 20 years 62,683,803 63,522,793
------------ ------------
Total 90,489,544 92,384,176
Marketable equity securities and FHLB stock 23,602,826 23,689,747
------------ ------------
Total investment securities $114,092,370 $116,073,923
============ ============
</TABLE>
7
<PAGE> 8
NOTE 4. LOANS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------ -----------------
<S> <C> <C>
First mortgage residential:
One-to-four family residential $174,096,660 $172,746,874
Construction 735,725 746,288
------------ ------------
174,832,385 173,493,162
Commercial and other real estate 21,436,826 22,230,915
Commercial business 20,434,397 19,515,048
Commercial land and land development 6,866,790 7,349,649
Automobile 15,026,308 18,133,970
Home equity 14,435,932 14,947,568
Other consumer 3,229,021 3,622,586
------------ ------------
Gross loans held for investment 256,261,659 259,292,898
Less:
Loans in process 2,598,790 2,662,374
Unearned discounts 74,498 82,539
Net deferred fees 819,836 731,335
Allowance for losses 3,248,758 3,235,039
------------ ------------
Net loans held for investment 249,519,777 252,581,611
Education loans held for sale 3,707,919 3,424,327
------------ ------------
$253,227,696 $256,005,938
============ ============
</TABLE>
Activity in the allowance for loan losses for the three months ended March 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 3,235,039 $ 2,867,270
Provision charged to income - mortgage 10,000 30,000
Provision charged to income - commercial 70,430 49,997
Provision charged to income - consumer 74,640 104,637
Charge-offs - commercial (31,496)
Charge-offs - consumer (128,147) (132,140)
Recoveries - consumer 18,292 7,744
----------- -----------
Balance at end of period $ 3,248,758 $ 2,927,508
=========== ===========
The allowance for loan losses at March 31 consisted of:
Mortgage $ 462,000 $ 362,000
Commercial 1,343,007 1,143,797
Consumer 1,443,751 1,421,711
----------- -----------
$ 3,248,758 $ 2,927,508
=========== ===========
</TABLE>
8
<PAGE> 9
The estimated fair value of education loans held for sale approximates book
value at March 31, 1998 and December 31, 1997.
The Company held two loans with a combined balance of $2.75 million at March 31,
1998 and $2.77 million at December 31, 1997 which were considered impaired.
Because the market value of the collateral securing these loans exceeds the
loans' recorded balance, no specific loss reserve is deemed necessary; however,
the loans have been included in management's assessment of the adequacy of
general valuation allowances. One of these loans with a balance of $1.11 million
was placed on non-accrual status during the fourth quarter of 1997. No interest
income has been recorded on this loan during 1998. The other loan with a balance
of $1.64 million at March 31, 1998 has not been placed on non-accrual status,
nor does management expect it to be in the foreseeable future. Interest income
of $33,078 has been recorded on this loan during 1998. There were no other loans
considered impaired during the three months ended March 31, 1998.
Loans which the Company considers non-performing due to being placed on
non-accrual status as a result of being in arrears three months or more are as
follows:
<TABLE>
Period Number of Loans Balance Percent of loans held for investment
- ------------------ ----------------- ----------- ------------------------------------
<S> <C> <C> <C>
March 31, 1998 134 $2,741,421 1.10%
December 31, 1997 123 $2,774,357 1.10%
</TABLE>
The foregone interest on non-performing loans for the periods ended March 31,
1998 and December 31, 1997 was $61,062 and $148,651, respectively.
At March 31, 1998 the Company was committed under various agreements to purchase
first mortgage loans of $1,370,728; originate first mortgage loans of
$3,440,755; originate or disburse commercial loans of $4,899,554; originate
consumer loans of $213,000; and had $2,478,247 in unused commercial lines of
credit; $1,180,478 in commercial letters of credit issued; $6,314,341 in unused
home equity lines of credit; $2,038,605 in unused personal unsecured lines of
credit; and $622,673 in unused credit card lines. There were no commitments to
lend additional funds to debtors whose loans with the Company were
non-performing as of March 31, 1998.
NOTE 5. DEFINITIVE MERGER AGREEMENT
On February 6, 1998, the Company entered into an Agreement of Affiliation and
Plan of Merger (the "Agreement") with FirstFederal Financial Services Corp
("FFSW") of Wooster, Ohio. Under the terms of the Agreement, the Company will
merge with and into FFSW, with the Company's shareholders to receive 1.143
shares of FFSW common stock in exchange for each of their shares of the
Company's common stock. FFSW is a bank holding company with total assets of
$1.46 billion at December 31, 1997. The transaction, which will be accounted for
as a pooling of interests, is subject to regulatory and shareholder approvals
and is expected to be completed in the third quarter of 1998.
9
<PAGE> 1
EXHIBIT 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Financial Statements and
related footnotes account for the merger using the pooling of interest method of
accounting. Under this method of accounting, the recorded assets, liabilities,
shareholders' equity, income and expenses of Signal Corp and First Shenango are
combined and recorded at their historical cost-based amounts, except as noted
below and in the footnotes. The following Unaudited Pro Forma Condensed Combined
Statements of Financial Condition as of March 31, 1998 combines the historical
consolidated statement of financial condition of Signal Corp and subsidiaries
and First Shenango and subsidiaries as if the Merger had been effective on March
31, 1998, after giving effect to certain pro forma adjustments described in the
accompanying notes. The following Unaudited Pro Forma Condensed Combined
Statements of Income present the combined historical results of operations of
Signal Corp and subsidiaries and First Shenango and subsidiaries as if the
Merger had been effective January 1, 1995. Both Signal Corp's and First
Shenango's fiscal years end December 31. Pro forma per share amounts are based
on the Exchange Ratio of 1.42875 shares of Signal Corp common stock for each
share of First Shenango Common Stock.
The Unaudited Pro Forma Condensed Combined Financial Statements are
intended for informational purposes and are not necessarily indicative of the
future consolidated financial position or future results of operations if the
combined entity or the consolidated financial position or results of operations
of the combined entity that would have been achieved had the Merger been
consummated as of the date of the beginning of the periods presented. The
Unaudited Pro Forma Condensed Combined Statements of Financial Condition
reflects adjustments to conform accounting policies and estimated costs to
effect the Merger and combine operations. Estimated amounts and ranges of
amounts of these costs are shown in the Notes to Unaudited Pro Forma Condensed
Combined Financial Statements. The Unaudited Pro Forma Condensed Combined
Statements of Income do not reflect the costs to effect the Merger and combine
operations, or any expected cost savings as a result of the Merger. These
Unaudited Pro Forma Condensed Combined Financial Statements should be read in
conjunction with, and are qualified in their entirety by, the separate
historical consolidated financial statements and notes thereto of Signal Corp
and First Shenango.
1
<PAGE> 2
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
Signal Corp First Shenango Bancorp Pro Forma Pro Forma
as Reported as Reported Adjustments Combined
----------- ---------------------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $28,046 $1,226 $1,047 (4) $30,319
Securities available for sale 295,147 116,074 -- 411,221
Securities held to maturity 65,711 -- -- 65,711
Other short term investments 38,798 23,718 -- 62,516
Loans held for sale 97,628 3,708 -- 101,336
Loans and leases receivables 910,167 252,769 -- 1,162,936
Allowance for credit losses (4,562) (3,249) (1,800)(1) (9,611)
---------- -------- ------ ----------
Net loans and leases 905,605 249,520 (1,800) 1,153,325
Other assets 88,784 8,900 2,330 (3) 100,014
---------- -------- ------ ----------
Total assets $1,519,719 $403,146 $1,577 $1,924,442
========== ======== ====== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Deposits $998,646 $275,393 -- $1,274,039
Short term borrowings 93,862 20,554 -- 114,416
Long term debt 243,569 51,478 -- 295,047
Mandatorily redeemable preferred securities 50,000 -- -- 50,000
Other liabilities 25,580 7,429 4,878 (1) 37,887
---------- -------- ------ ----------
Total liabilities 1,411,657 354,854 4,878 1,771,389
Shareholders' Equity
Preferred stock 9,917 -- -- 9,917
Common stock 8,440 234 2,233 (7) 10,907
Additional paid-in capital 43,313 22,221 776 66,310
Retained earnings 48,387 31,285 (6,310)(2) 73,362
Treasury stock, at cost (1,555) (6,233) -- (7) (7,788)
Stock acquired by MSBP's and ESOP -- (523) -- (7) (523)
Securities equity valuation account (440) 1,308 -- 868
---------- -------- ------ ----------
Total Shareholders' Equity 108,062 48,292 (3,301) 153,053
---------- -------- ------ ----------
Total Liabilities and Shareholders' Equity $1,519,719 $403,146 $1,577 $1,924,442
========== ======== ====== ==========
</TABLE>
See notes to Unaudited Pro Forma Condensed Combined Financial Statements.
2
<PAGE> 3
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Signal Corp First Shenango Bancorp Pro Forma Pro Forma
as Reported(6) as Reported Adjustments Combined(5)
-------------- ---------------------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income $27,001 $ 6,965 -- $33,966
Interest expense 17,708 3,890 -- 21,598
------- ------- ------- -------
NET INTEREST INCOME 9,293 3,075 -- 12,368
Provision for credit losses 462 155 -- 617
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISIONS FOR CREDIT LOSSES 8,831 2,920 -- 11,751
Non-interest income 8,276 191 -- 8,467
Non-interest expense 10,942 1,723 -- 12,665
------- ------- ------- -------
Income before taxes 6,165 1,388 -- 7,553
Provision for income taxes 2,106 499 -- 2,605
------- ------- ------- -------
NET INCOME $ 4,059 $ 889 -- $ 4,948
======= ======= ======= =======
Preferred Stock Dividends 174 -- -- 174
------- ------- ------- -------
NET INCOME APPLICABLE TO COMMON STOCK $ 3,885 $ 889 -- $ 4,774
======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic $ 0.46 $ 0.44 -- $ 0.42
======= ======= ======= =======
Diluted $ 0.42 $ 0.43 -- $ 0.40
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 8,428 2,004 -- 11,291
======= ======= ======= =======
Diluted 9,562 2,067 -- 12,514
======= ======= ======= =======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
3
<PAGE> 4
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Signal Corp First Shenango Bancorp Pro Forma Pro Forma
as Reported(6) as Reported Adjustments Combined(5)
-------------- ---------------------- ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest income $18,698 $7,433 -- $26,131
Interest expense 12,304 4,245 -- 16,549
------- ------ ------- -------
NET INTEREST INCOME 6,394 3,188 -- 9,582
Provision for credit losses 107 185 -- 292
------- ------ ------- -------
NET INTEREST INCOME AFTER PROVISIONS FOR CREDIT LOSSES 6,287 3,003 -- 9,290
Non-interest income 5,823 204 -- 6,027
Non-interest expense 6,460 1,463 -- 7,923
------- ------ ------- -------
Income before taxes 5,650 1,744 -- 7,394
Provision for income taxes 2,085 607 -- 2,692
------- ------ ------- -------
NET INCOME $3,565 $1,137 -- $4,702
======= ====== ======= =======
Preferred Stock Dividends 407 -- -- 407
------- ------ ------- -------
NET INCOME APPLICABLE TO COMMON STOCK $3,158 $1,137 -- $4,295
======= ====== ======= =======
NET INCOME PER COMMON SHARE
Basic $0.55 $0.58 -- $0.50
======= ====== ======= =======
Diluted $0.41 $0.56 -- $0.41
======= ====== ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 5,713 1,967 -- 8,523
======= ====== ======= =======
Diluted 8,667 2,047 -- 11,592
======= ====== ======= =======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
4
<PAGE> 5
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Signal Corp First Shenango Pro Forma Pro Forma
as Reported(6) as Reported Adjustments Combined(5)
-------------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income $ 90,093 $ 29,560 -- $119,653
Interest expense 59,550 16,962 -- 76,512
-------- -------- -------- --------
NET INTEREST INCOME 30,543 12,598 -- 43,141
Provision for credit losses 842 773 -- 1,615
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISIONS FOR CREDIT LOSSES 29,701 11,825 -- 41,526
Non-interest income 29,285 790 -- 30,075
Non-interest expense 35,643 5,836 -- 41,479
-------- -------- -------- --------
Income before taxes 23,343 6,779 -- 30,122
Provision for income taxes 8,895 2,193 -- 11,088
-------- -------- -------- --------
NET INCOME $ 14,448 $ 4,586 -- $ 19,034
======== ======== ======== ========
Preferred Stock Dividends 1,584 -- -- 1,584
-------- -------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 12,864 $ 4,586 -- $ 17,450
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 2.07 $ 2.31 -- $ 1.93
======== ======== ======== ========
Diluted $ 1.57 $ 2.24 -- $ 1.57
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 6,215 1,985 -- 9,051
======== ======== ======== ========
Diluted 9,223 2,050 -- 12,151
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
5
<PAGE> 6
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Signal Corp First Shenango Pro Forma Pro Forma
as Reported(6) as Reported Adjustments Combined(5)
-------------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income $ 73,559 $ 27,610 -- $101,169
Interest expense 48,048 14,959 -- 63,007
-------- -------- -------- --------
NET INTEREST INCOME 25,511 12,651 -- 38,162
Provision for credit losses 360 899 -- 1,259
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISIONS FOR CREDIT LOSSES 25,151 11,752 -- 36,903
Non-interest income 17,929 1,028 -- 18,957
Non-interest expense 27,346 8,105 -- 35,451
-------- -------- -------- --------
Income before taxes 15,734 4,675 -- 20,409
Provision for income taxes 5,884 1,665 -- 7,549
-------- -------- -------- --------
NET INCOME $ 9,850 $ 3,010 -- $ 12,860
======== ======== ======== ========
Preferred Stock Dividends 1,696 -- -- 1,696
-------- -------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 8,154 $ 3,010 -- $ 11,164
======== ======== ======== ========
NET INOCME PER COMMON SHARE
Basic $ 1.46 $ 1.40 -- $ 1.29
======== ======== ======== ========
Diluted $ 1.14 $ 1.34 -- $ 1.09
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 5,587 2,158 -- 8,670
======== ======== ======== ========
Diluted 8,626 2,241 -- 11,829
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
6
<PAGE> 7
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Signal Corp First Shenango Pro Forma Pro Forma
as Reported(6) as Reported Adjustments Combined(5)
-------------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income $ 64,922 $ 23,787 -- $ 88,709
Interest expense 41,046 12,719 -- 53,765
-------- -------- -------- --------
NET INTEREST INCOME 23,876 11,068 -- 34,944
Provision for credit losses -- 918 -- 918
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISIONS FOR CREDIT LOSSES 23,876 10,150 -- 34,026
Non-interest income 4,167 966 -- 5,133
Non-interest expense 13,651 6,130 -- 19,781
-------- -------- -------- --------
Income before taxes 14,392 4,986 -- 19,378
Provision for income taxes 4,946 1,907 -- 6,853
-------- -------- -------- --------
NET INCOME $ 9,446 $ 3,079 -- $ 12,525
======== ======== ======== ========
Preferred Stock Dividends 1,786 -- -- 1,786
-------- -------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 7,660 $ 3,079 -- $ 10,739
======== ======== ======== ========
NET INOCME PER COMMON SHARE
Basic $ 1.48 $ 1.41 -- $ 1.30
======== ======== ======== ========
Diluted $ 1.14 $ 1.35 -- $ 1.08
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 5,170 2,181 -- 8,286
======== ======== ======== ========
Diluted 8,312 2,273 -- 11,560
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
7
<PAGE> 8
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Pursuant to the Merger Agreement and consistent with generally accepted
accounting principles, Signal Corp and First Shenango expect that costs incurred
to effect the Merger, which would include transaction costs of the Merger and
costs to combine operations, will be deducted in determining net income in the
period in which they are incurred. Adjustments to conform the accounting
policies of the entities are reflected in these Unaudited Pro Forma Condensed
Combined Financial Statements and are discussed in the following notes. The pro
forma financial statements do not give effect to any cost savings which may be
realized in connection with the consolidation of the respective operations of
Signal Corp and First Shenango.
(1) Transaction costs of the Merger (primarily investment banker and other
professional fees) and costs to combine operations are expected to be
in the $8.6 million to $9.5 million range (the "Expected Range"_). The
Unaudited Pro Forma Condensed Combined Statements of Income do not
reflect these charges. The Unaudited Pro Forma Condensed Combined
Statement of Financial Condition reflects these charges at the
mid-point of the Expected Range ($9.1 million). It is anticipated that
these charges will be incurred and recognized by Signal Corp and First
Shenango and substantially paid by the end of 1998. The following table
provides details of the estimated charges by type of cost:
<TABLE>
<CAPTION>
Type of Cost Expected Range of Pre-Tax Cost
- -------------------------------------------------------------------------------------------------------
<S> <C>
Transaction costs 1.8 million
Adjustments to conform accounting policies .50 to .75 million
Additional loan loss allowance 1.8 million
Costs to combine operations:
Employee Stock Ownership Plan termination costs 1.6 million
Duplicative systems and operating costs 2.4 to 2.8 million
Other costs incidental to the Merger .50 to .75 million
Total Merger-related adjustments 8.6 to 9.5 million
</TABLE>
(2) Represents the expected after-tax effect of the pro forma adjustments,
as described in note (1) above, assuming a federal income tax rate of
35%. Transaction costs are not fully deductible for federal income tax
purposes.
(3) Represents the expected income tax benefit associated with the pro
forma adjustments.
(4) Represents the exercise of options covering 5,000 shares of First
Shenango Common Stock at $20.75 per share and the exercise of options
covering 94,339 shares of First Shenango Common Stock at $10.00 per
share which are expected to occur prior to the closing of the Merger
pursuant to written commitments to exercise executed by the optionees.
(5) The pro forma combined per share data has been computed based on the
combined historical income and on the combined weighted average common
and common equivalent shares outstanding assuming the issuance of
1.42875 shares of Signal Corp Common Stock for each share of First
Shenango Common Stock based on the Exchange Ratio. Shares assumed to be
issued in computing the weighted number of common and common equivalent
shares outstanding used to compute basic per share earnings for the
three months ended March 31, 1998 and 1997 and for the years ended
December 31, 1997, 1996 and 1995 were 2,863,000, 2,810,000, 2,836,000,
3,083,000, and 3,116,000, respectively.
(6) Share and per share data for Signal Corp. has been retroactively
restated for a 25% stock dividend approved in April 1998.
8
<PAGE> 9
(7) The following table reflects the assumed conversion of First Shenango
Common Stock into Signal Corp Common Stock pursuant to the Merger if
the Merger were to be effective as of March 31, 1998:
<TABLE>
<CAPTION>
Pre-Merger Shares Post-Merger Shares
Outstanding Outstanding
<S> <C> <C>
First Shenango common shares issued 2,343,098 2,343,098
Less Treasury stock 274,091 174,752
Cancellation of shares held in First Shenango
Management Bonus Plan reserves -- (10,367)
---------------- ------------------
First Shenango common shares issued and outstanding 2,069,007 2,157,979
================
Exchange Ratio x 1.42875
------------------
First Shenango post-Merger shares outstanding 3,088,212
==================
</TABLE>
Treasury shares will be issued upon the exercise of options covering
99,339 shares of First Shenango Common Stock. All shares of First
Shenango Common Stock in First Shenango's ESOP will vest as a result of
the change in control of First Shenango.
9
