<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO __________________
COMMISSION FILE NUMBER 0-17894
SIGNAL CORP
(Exact name of registrant as specified in its charter)
OHIO 34-1622711
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 11,735,139
(Class) (Shares Outstanding at July 31, 1998)
THIS FORM 10-Q CONTAINS 19 PAGES.
(NO EXHIBIT INDEX)
<PAGE> 2
SIGNAL CORP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II. OTHER INFORMATION
Signatures 18
Exhibit 27 Financial Data Schedule 19
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
SIGNAL CORP
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ($000'S)
(unaudited)
JUNE 30 December 31
1998 1997
--------- ----------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 44,557 $ 34,393
Securities available for sale(a) 368,476 348,468
Securities held to maturity(b) 86,540 70,959
Other short term investments 28,674 32,795
Loans held for sale 53,346 90,379
Loans and leases:
Residential mortgage loans 638,639 676,129
Commercial loans 98,221 64,808
Commercial mortgage loans 94,653 101,582
Commercial lease financing 48,418 41,909
Finance contracts 11,978 4,585
Manufactured housing loans 168,070 110,827
Consumer loans 177,063 175,871
Allowance for credit losses (10,191) (8,773)
----------- -----------
Net loans and leases 1,226,851 1,166,938
Premises and equipment, net 22,701 21,073
Intangible assets 30,065 32,062
Other assets 51,015 35,320
----------- -----------
TOTAL ASSETS $ 1,912,225 $ 1,832,387
=========== ===========
LIABILITIES:
Deposits:
Non-interest bearing demand $ 64,656 $ 52,545
Interest bearing 1,240,430 1,204,351
----------- -----------
Total deposits 1,305,086 1,256,896
Short term borrowings 67,149 124,275
Long term borrowings 299,948 270,693
Company obligated mandatorily redeemable
preferred securities 50,000 --
Other liabilities 34,130 27,926
----------- -----------
TOTAL LIABILITIES 1,756,313 1,679,790
SHAREHOLDERS' EQUITY:
Preferred stock(C) 9,917 9,917
Common stock(d) 11,747 11,396
Additional paid-in capital 58,844 55,844
Retained earnings 76,032 75,947
Treasury stock, at cost (1,565) (1,751)
Accumulated other comprehensive income 937 1,244
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 155,912 152,597
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,912,225 $ 1,832,387
=========== ===========
</TABLE>
(a) Amortized cost of $366,561 as of June 30, 1998 and $346,613 as of December
31, 1997.
(b) Market value of $86,520 as of June 30, 1998 and $71,059 as of
December 31, 1997.
(c)Preferred stock, no par value; authorized 1,500,000
shares; Series B 428,342 and 429,892 issued and outstanding, respectively.
(d)Common stock, $1.00 par value; authorized 40,000,000 shares; 11,747,186 (net
of 141,591 treasury shares), 11,396,056 (net of 396,431 treasury shares),
respectively.
See accompanying notes to Consolidated Financial Statements.
3
<PAGE> 4
SIGNAL CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($000'S EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------
1998 1997 1998 1997
------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases $26,549 $20,373 $52,675 40,096
Securities available for sale 6,373 5,622 12,218 10,539
Securities held to maturity 914 1,482 2,077 2,728
Other 566 305 1,398 549
------------------------------------------
Total interest income 34,402 27,782 68,368 53,912
INTEREST EXPENSE:
Deposits 14,656 10,759 29,208 21,470
Short-term borrowings 960 2,935 2,773 4,837
Long-term debt and mandatorily redeemable
preferred securities 6,177 4,465 11,410 8,400
------------------------------------------
Total interest expense 21,793 18,159 43,391 34,707
------------------------------------------
NET INTEREST INCOME 12,609 9,623 24,977 19,205
Provision for credit losses 2,617 365 3,234 657
------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 9,992 9,258 21,743 18,548
NON-INTEREST INCOME
Manufactured housing income 2,464 4,322 5,558 8,639
Mortgage banking income 1,340 533 3,196 1,088
Customer service fee income 2,056 783 3,814 1,828
Net securities gains 19 82 40 83
Other 894 179 2,632 288
------------------------------------------
Total non-interest income 6,773 5,899 15,240 11,926
NON-INTEREST EXPENSE:
Personnel 6,223 4,108 12,268 8,208
Net occupancy expense 1,307 841 2,691 1,672
Outside services, data processing and
communications 1,278 773 2,539 1,214
Professional fees 675 482 1,486 841
Amortization of intangibles 660 314 1,306 665
Other 2,631 1,391 5,149 3,232
Nonrecurring expenses (a) 7,336 - 7,336 -
------------------------------------------
Total non-interest expense 20,110 7,909 32,775 15,832
------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (3,345) 7,248 4,208 14,642
Provision (benefit)for income taxes (774) 2,346 1,831 5,037
------------------------------------------
NET INCOME (LOSS) $(2,571) $4,902 $2,377 9,605
==========================================
Net income (loss)applicable to common stock $(2,745) $4,500 $2,028 8,796
NET INCOME (LOSS) PER COMMON SHARE:(b)
Basic $(0.24) $0.51 $0.18 $1.01
Diluted $(0.24) $0.42 $0.18 $0.82
- ----------------------------------------------------------------------------------------
<FN>
(a) Non-recurring expenses in 1998 reflect merger related costs incurred in
connection with the Company's June 29, 1998 acquisition of First Shenango
Bancorp, Inc. Total nonrecurring expenses amounted to $9.2 million ($6.3 million
after-tax).
(b) Net income excluding nonrecurring merger costs amounted to $3,748 and $8,696
for the three and six months ended June 30, 1998, respectively. Net income per
share excluding nonrecurring merger costs were as follows:
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic $0.32 $0.51 $0.74 $1.01
Diluted $0.30 $0.42 $0.70 $0.82
</TABLE>
See accompanying notes to Consolidated Financial Statements
4
<PAGE> 5
SIGNAL CORP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30: ($000's) 1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $2,377 $9,605
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 3,234 657
Depreciation, amortization and accretion 3,709 1,556
Employee stock ownership expense 1,307 142
Net securities gains (40) (83)
Net gain on sales of loans (5,375) (4,675)
Proceeds from sales of loans held for sale 308,417 141,149
Origination of loans held for sale (266,009) (117,994)
Increase in other assets (9,342) (9,695)
Increase in other liabilities 5,897 2,665
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44,175 23,327
INVESTING ACTIVITIES:
Proceeds from calls, paydowns and maturities of 146,860 24,295
securities available for sale
Proceeds from sales of securities available for sale 10,727 6,358
Purchases of securities available for sale (183,218) (134,424)
Purchases of securities held to maturity (25,266) (92)
Proceeds from maturities of securities held to maturity 9,685 7,389
Decrease in other short-term investments 4,121 9,046
(Increase) in loans and leases (63,147) (57,862)
Purchases of premises and equipment, net (4,030) (1,815)
------------ -----------
NET CASH USED BY INVESTING ACTIVITIES (104,268) (147,105)
FINANCING ACTIVITIES:
Increase (decrease) in deposits 48,190 (7,334)
Net change in short-term borrowings (57,126) 55,392
Proceeds from issuance of mandatorily redeemable
preferred securities 50,000 --
Net change in long-term borrowings 29,255 70,280
Cash dividends paid (2,348) (2,315)
Purchases of treasury stock -- (637)
Stock issued for options exercised and employee stock
purchase plan 2,286 600
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 70,257 115,986
------------ -----------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 10,164 (7,792)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 34,393 27,830
CASH AND DUE FROM BANKS AT END OF PERIOD $44,557 $20,038
============ ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
5
<PAGE> 6
SIGNAL CORP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. It is assumed that the
readers of these interim financial statements have read or have access to the
1997 Annual Report on Form 10-K of Signal Corp ("Signal Corp" or the "Company").
Therefore, only material changes in financial condition and results of
operations are discussed in Management's Discussion and Analysis. The interim
consolidated financial statements include the accounts of Signal Corp and its
subsidiaries. All significant intercompany transactions have been eliminated.
The interim Consolidated Financial Statements reflect the Company's June
29, 1998 merger with First Shenango Bancorp, Inc. The merger was completed with
the exchange of approximately 3,087,000 common shares of Signal Corp for all
2,161,000 of the outstanding shares of First Shenango. The merger has been
treated as a pooling of interests and accordingly all prior period data has been
restated to reflect the consolidation of First Shenango. Pursuant to the
transaction the Company has recorded $9.2 million ($6.3 million after-tax) in
nonrecurring merger related charges.
In the opinion of management, the Consolidated Financial Statements
contain all adjustments (consisting only of normal recurring adjustments except
as discussed above) necessary to present fairly the financial condition of
Signal Corp as of June 30, 1998 and December 31, 1997, the results of its
operations for the three and six months ended June 30, 1998 and 1997, and its
cash flows for the six months ended June 30, 1998 and 1997. The results of
operations for the interim period reported herein are not necessarily indicative
of results of operations to be expected for the entire year. Certain financial
statement reclassifications have been made for 1997 to conform to
classifications used in 1998.
(2) EARNINGS PER SHARE
Earnings per share is calculated by dividing net income available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period. The conversion of convertible preferred
stock and the exercise of stock options are not included in the calculation of
diluted earnings per share for the three and six months ended June 30, 1998 as
the result would be anti-dilutive.
6
<PAGE> 7
A reconciliation of basic earnings per share to diluted earnings per share
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1998 1997
------------------------------------------------------------ ----------
(000's) Per Share Per Share
<S> <C> <C> <C> <C> <C> <C>
except per share data Income Shares Amount Income Shares Amount
BASIC EPS
Net income
(loss)available to
common shareholders $(2,745) 11,340 $(0.24) $4,500 8,739 $0.51
EFFECT OF DILUTIVE
SECURITIES
Stock options 126 0.08
Convertible Preferred
Stock 402 2,811 $0.10
------------------------------------------------------------ ----------
DILUTED EPS
Net income(loss)
available to
common shareholders
plus assumed
conversions $(2,745) 11,340 $(0.24) $4,902 11,676 $0.42
------------------------------------------------------------ ----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------
1998 1997
---- ----
------------------------------------------------------------ ----------
(000's) Per Share Per Share
except per share data Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
NET INCOME AVAILABLE TO $2,028 11,339 $0.18 $8,796 8,709 $1.01
COMMON SHAREHOLDERS
EFFECT OF DILUTIVE
SECURITIES
STOCK OPTIONS 129 0.01
CONVERTIBLE PREFERRED
STOCK 809 2,833 0.18
-----------------------------------------------------------------------
DILUTED EPS
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS
PLUS ASSUMED
CONVERSIONS $2,028 11,339 $0.18 $9,605 11,671 $0.82
</TABLE>
(3) DIVIDENDS ON COMMON AND PREFERRED STOCK
On April 23, 1998, the Company's Board of Directors declared a
five-for-four stock split, effecting a 25% stock dividend on May 22, 1998 to
shareholders of record as of May 4, 1998. All prior period per share data has
been restated to reflect this dividend.
On July 22, 1998 the Company's Board declared a cash dividend of $0.11 per
common share. The cash dividend will be paid on August 21, 1998 to shareholders
of record at August 3, 1998. The Board of Directors also declared a cash
dividend of $0.40625 per share on the 6 1/2% Cumulative Convertible Preferred
Stock, Series B. The dividend will be paid on September 1, 1998 to shareholders
of record at August 10, 1998.
7
<PAGE> 8
(4) RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income." The
Statement requires additional reporting of items that affect comprehensive
income but not net income. Items relevant to the Company include unrealized
gains and losses on securities. Comprehensive income (loss) was as follows
($000's):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------
1998 1997 1998 1997
----------- --------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $(2,571) $4,902 $2,377 $9,605
Unrealized gain (loss) on securities available
for sale, net of tax 69 1,647 (307) 413
----------- --------------------------------
Comprehensive income (loss) $(2,502) $6,549 $2,070 $10,018
=========== ================================
</TABLE>
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June, 1997 and is effective for fiscal years
beginning after December 15, 1997. The provisions of this statement do not apply
to interim periods in the year of adoption. The statement requires financial
disclosure and descriptive information about reportable operating segments and
will result in additional financial statement disclosures.
In June, 1998 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. The statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. Items
relevant to the Company include interest rate swap agreements, and certain
hedges related to manufactured housing loans, both of which are periodically
utilized by the Company. Management has not as yet fully analyzed the impact of
this statement on the Company's Consolidated Financial Statements. The statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999 with earlier adoption encouraged.
(5) LOANS HELD FOR SALE
Loans held for sale amounted to $53.3 million of residential mortgage
loans as of June 30, 1998 compared to $90.4 million at December 31, 1997
consisting of $40.4 million of residential mortgage loans and $50 million of
manufactured housing loans.
(6) ACQUISITION
On June 29, 1998, the Company completed its acquisition of First Shenango
Bancorp, Inc. ("First Shenango") by exchanging approximately 3,087,000 common
shares of Signal Corp for all 2,161,000 of the outstanding shares of First
Shenango. The merger has been treated as a pooling of interests. All prior
period data has been restated. Pursuant to the transaction the Company has
incurred $9.2 million ($6.3 million after-tax) in nonrecurring merger related
costs. The costs are primarily for 1) transactions costs of $1.8 million ($1.5
million after-tax) for financial advisory services, and legal and accounting
fees, 2) estimated operational costs of $5.6 million ($3.6 million after-tax) to
integrate First Shenango into Signal including systems conversions, product
conversions/introductions and the elimination of certain duplicated operations,
and 3) an additional provision for credit risk of $1.8 million ($1.2 million
after-tax).
(7) DEFINITIVE MERGER AGREEMENT
On August 10, 1998, the Company entered into a merger agreement with
FirstMerit Corporation (Nasdaq:FMER). Under the terms of the agreement the
Company will merge with and into FirstMerit. Shareholders will receive 1.32
shares of FirstMerit's common stock in exchange for each share of Signal Corp's
common stock and one share of FirstMerit 6 1/2% Cumulative Convertible
Preferred Stock, Series B, for each share of Signal 6 1/2% Cumulative
Convertible Preferred Stock, Series B. Based on FirstMerit's August 10, 1998
closing price of $28.19 the transaction is valued at approximately $470
million. FirstMerit is a bank holding company with approximately $6.2 billion
in assets. The transaction, which is expected to be accounted for as a pooling
of interests, is subject to regulatory and shareholder approval and other
customary conditions of closing, and is expected to be completed in the first
quarter of 1999.
8
<PAGE> 9
(8) SIGNAL TRUST
In February 1998, the Company formed Signal Capital Trust One ("Signal
Trust"),a Delaware business trust. Signal Trust was formed for the purpose of
(I) issuing and selling $50 million of its 8.67% Capital Securities, Series A
(the "Capital Securities"), referred to in the Consolidated Balance Sheet as
"company obligated mandatorily redeemable preferred securities", and common
securities (the "Common Securities"), (ii) investing the proceeds thereof in the
8.67% Junior Subordinated Deferrable Interest Debentures, Series A, issued by
the Company (the "Signal Corp Debentures") and (iii) engaging in certain other
limited activities. The Capital Securities were issued and sold to investors in
a private placement exempt from the Securities Act of 1933 on February 10, 1998.
The Company filed a registration statement with the Securities and Exchange
Commission for these securities on May 13, 1998.
(9) MANUFACTURED HOUSING
The Company, through its subsidiary Mobile Consultants, Inc. (MCi) sells
certain manufactured housing finance contracts (MHF contracts) to various
financial institutions while retaining collection and recovery aspects of
servicing.
The Company's subsidiary, Signal Bank, N.A., purchases MHF contracts from
MCi, a portion of which are periodically packaged in asset-backed securitization
(ABS pools) and sold to investors. Sales and securitization totaled $50 million
and $100 million both in the three months and six months ended June 30, 1998 and
June 30, 1997, respectively. It is anticipated that there will be no additional
sales and securitizations in 1998. The aggregate amount of ABS pools serviced by
the Company totaled $272.8 million at June 30, 1998 and $186.2 million at
December 31, 1997.
At the time of sale the Company records an asset, "retained interest in
securitized assets" which represents the discounted cash flows to be received by
the Company for 1) servicing income from ABS pools, 2) principal and interest
payments on MHF contracts contributed to the ABS pools as a credit enhancement,
referred to as overcollateralization, and 3) excess interest spread. These cash
flows are projected and discounted over the expected life of the ABS pools using
assumptions for credit risk, estimated prepayments and interest rates. The cash
flows are subject to volatility that could materially affect operating results.
Prepayments resulting from increased competition, obligor mobility, general and
regional economic conditions and prevailing interest rates, as well as actual
losses incurred, may vary from the performance the Company projects. In
aggregate, actual cash flow from the Company's six ABS pools has not varied
significantly from expected cash flows. At June 30, 1998 management has
determined that there is no permanent impairment that would require adjustment
to the carrying value of the retained interest in securitized assets.
Management continues to review the cash flow and actual performance of the ABS
pools on a quarterly basis.
The Company classifies the retained interest in securitized assets in two
components on the Company's Consolidated Balance Sheet, 1) securities held for
sale and 2) excess servicing included in the balance sheet as other assets.
Total retained interest in securitized assets and excess servicing were $45.2
million and $27.0 million at June 30, 1998 and December 31, 1997, respectively.
The components of manufactured housing income were as follows:
<TABLE>
<CAPTION>
Three months Ended Six Months Ended
June 30 June 30
----------------------------------------
($000's) 1998 1997 1998 1997
----------------------------------------
<S> <C> <C> <C> <C>
Gain on sale of ABS pools $1,112 $1,577 $2,650 $3,902
Manufactured housing brokerage fees 788 1,497 1,202 2,236
Servicing income on brokered MHF contracts 333 1,200 1,333 2,400
Servicing income on ABS pools 231 48 373 101
----------------------------------------
TOTAL MANUFACTURED HOUSING INCOME $2,464 $4,322 $5,558 $8,639
========================================
</TABLE>
9
<PAGE> 10
(10) MORTGAGE BANKING INCOME
The Company has sold certain residential mortgage loans to various
investors while retaining servicing rights. Loans serviced for others totaled
$563 million at June 30, 1998 and $521 million at December 31, 1997 and are not
included in the accompanying Consolidated Financial Statements.
The components of mortgage banking income for the three months ended June
30 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------
($000's) 1998 1997 1998 1997
---------------------------------------
<S> <C> <C> <C> <C>
Gain on sale of mortgage loans $1,134 $373 $2,627 $765
Mortgage servicing fees, net of amortization 206 160 569 323
---------------------------------------
TOTAL MORTGAGE BANKING INCOME $1,340 $533 $3,196 $1,088
=======================================
</TABLE>
10
<PAGE> 11
SIGNAL CORP
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company reported a loss for the quarter ended June 30 1998 of $2.6
million or $0.24 per share on a diluted basis principally as a result of
nonrecurring merger costs associated with the Company's June 29, 1998
acquisition of First Shenango Bancorp, Inc. Merger costs amounted to $9.2
million ($6.3 million net of tax). Excluding the nonrecurring merger costs the
Company's earnings for the quarter ended June 30, 1998 amounted to $3.7 million
or $0.30 per share on a diluted basis. The acquisition was accounted for as a
pooling of interests and all prior period data has been restated. These amounts
compare to net income of $4.9 million or $0.42 per share on a diluted basis for
the three months ended June 30, 1997.
Net income for the six months ended June 30 1998 was $2.4 million or $0.18
per share on a diluted basis. Excluding the nonrecurring merger costs the
Company's earnings amounted to $8.7 million or $.70 per share on a diluted basis
for the six months ended June 30, 1998. Earnings amounted to $9.6 million or
$0.82 per share on a diluted basis for the six months ended June 30, 1997.
Lower earnings in the second quarter and the six months ended June 30 1998
excluding nonrecurring merger related costs, compared to the second quarter and
six months ended June 30, 1997 reflect increases in non-interest expense of $4.9
million for the quarter and $9.6 million for the year-to date, higher recurring
provisions for loan losses of $0.4 million for the quarter and $0.7 million for
the six months, partially offset by higher net interest income of $3.0 million
for the quarter and $5.8 million for the six months, and higher non-interest
income of $0.9 million for the quarter and $3.3 million for the six months. The
$1.2 million decrease in net income form $4.9 million to $3.7 million for the
three month periods ending June 30, 1998 and 1997, respectively, reflects the
costs of facility and staff expansions over the past year to broaden the
Company's product offering and originating capacity which exceeded the
incremental increase in the Company's revenue for the most recent quarter. Since
June of 1997 the Company expanded sales into 11 new states, added 115 staff
members and the infrastructure to handle a projected 35% increase in
manufactured housing finance contracts.
Return on average assets (ROA), excluding merger costs, for the quarter
ended June 30, 1998 was 0.78 % as compared to 1.27 % for the comparable period
of 1997. Return on average shareholders' equity (ROE), excluding merger costs,
for the quarter ended June 30, 1998 was 9.60% as compared to 14.69% for the
comparable period in 1997. For the six months ended June 30, 1998 ROA and ROE,
excluding nonrecurring merger costs, were 0.92% and 11.22%, respectively.
Comparable ROA and ROE amounts for the six months ended June 30, 1997 were 1.26%
and 14.58%, respectively. The Company's ratio of shareholders' equity to total
assets decreased from 8.33% at December 31, 1997 to 8.15% at June 30, 1998,
reflecting asset growth and improved leverage in 1998.
Net interest income increased $3.0 million to $12.6 million in the second
quarter of 1998 from $9.6 million in the second quarter of 1997. This increase
reflects growth in average loan and lease balances of $237 million and a $70
million increase in average securities balances for the three month period ended
June 30, 1998 compared to 1997. Net interest income for the six months ended
June 30, 1998 increased to $25.0 million from $19.2 million for the comparable
period of a year ago. The $5.8 million increase reflects an increase in average
loan and lease balances of $240 million and an increase in average securities
balances of $64 million. The increase in loan and lease balances are primarily
due to higher commercial and manufactured housing loans partially offset by
lower residential mortgages reflecting the strategic diversification of the
Company's balance sheet. Loan and lease balances as of June 30, 1998 include
$83.2 million and $30.9 million reflecting the acquisition of Summit Bank N.A.
(Summit) and Alliance Corporate Resources, Inc. (ACR), respectively in the third
quarter of 1997.
The net interest margin of 2.83% for the quarter ended June 30, 1998
compares favorably to 2.61% for the second quarter of 1997. Net interest margin
for the six months ended June 30, 1998 amounted to 2.84% versus 2.64% for the
six months ended June
11
<PAGE> 12
30, 1997. The Company continues to diversify and reposition its balance sheet
into higher yielding assets, however, the flatness of the yield curve combined
with intense competition in the financial service industry has resulted in asset
yields decreasing disproportionately faster than yields on deposits and funding
sources. Yields on interest earning assets averaged 7.73% for the quarter ended
June 30, 1998 compared to 7.54% for the quarter ended June 30, 1997 reflecting a
favorable change in the mix of loans and leases to higher yielding assets. For
the year-to-date period ending June 30 1998 the yield on interest earning assets
was 7.77% versus 7.41% for the comparable period of a year ago. The average cost
of interest-bearing liabilities decreased to 5.23% for the quarter ended June
30, 1998 as compared to 5.31% for the second quarter of 1997. The average cost
of interest bearing liabilities increased to 5.24% for the six months ended June
30, 1998 which compares to 5.12% for the six months ended June 30, 1997. The
average cost of funds for both the quarter and six months ended June 30 1998
reflect the incremental cost of the issuance of $50 million of mandatorily
redeemable preferred securities in February 1998 with an 8.67% coupon and a
current effective yield of approximately 8%, reflecting an interest swap, and
the $40.5 million of subordinated notes issued in March 1997 with a current
effective yield of 7.1%. Issuance of both the mandatorily redeemable preferred
securities and the subordinated notes provides additional capacity for the
Company to leverage future asset growth, purchase deposits and/or acquire other
financial services businesses. Portions of both debt issues qualify as Tier 1
and Tier 2 regulatory capital.
The recurring provision for credit losses was $754,000 in the second
quarter of 1998 and $365,000 in the second quarter of 1997. The recurring
provision for credit losses amounted to $1,371,000 for the six months ended June
30, 1998 as compared to $657,000 in the six months ended June 30, 1997. The
increased provision reflects the continued growth in commercial and manufactured
housing loan originations which inherently have a higher credit risk level than
residential mortgage loans. Net chargeoffs as a percentage of average loans and
leases for the second quarter of 1998 were 2.0 basis points (8 basis points
annualized) and three basis points (12 basis points annualized) for the
comparable quarter of 1997. Net charge-offs for the six months ended June 30,
1998 amounted to $1.8 million (31 basis points annualized) which compares to
charge-offs of $436,000 (9 basis point annualized) for the six months ended June
30, 1997. Nonperforming assets as a percentage of total assets were .40% at June
30, 1998 and .47% at December 31, 1997.
Non-interest income increased $0.9 million for the second quarter of 1998
versus second quarter 1997 primarily reflecting an increase of $1.3 million in
customer service fee income and a $0.8 million increase in mortgage banking
income primarily due to higher mortgage originations and sales. For the six
months ended June 30, 1998 non-interest income increased $3.3 million to $15.2
million from $11.9 million for the six months ended June 30, 1997 principally as
a result of higher customer service income of $2.0 million and higher mortgage
banking income of $2.1 million. Partially offsetting the increases as discussed
was lower income from manufactured housing income which declined to $2.5 million
in the quarter ended June 30, 1998 from $4.3 million for the quarter ended June
30, 1998 and to $5.6 million for the six months ended June 30, 1998 from $8.6
million for the six months ended June 30, 1997. The reductions in income are
principally the result of lower gains upon sale and securitization. The Company
anticipates increasing its portfolio of manufactured housing loans for the
remainder of 1998 and does not plan to sell and securitize any additional
manufactured housing loans in 1998. Also contributing to the decline in
manufactured housing income was lower loan originations primarily as a result
of increased price competition from the two largest originators in the market
as well as severe weather in the Southeast which hampered shipments. Management
expects the price competition to continue, however, the Company is aggressively
marketing additional products to its dealer network including a traditional
mortgage product and dealer floor planning.
Non-interest expense, excluding nonrecurring merger costs, increased $4.9
million to $12.8 million for the quarter ended June 30, 1998 as compared to $7.9
million for the second quarter of 1997. The increase is comprised primarily of
higher compensation expense ($2.1 million), increased occupancy costs ($0.5
million) and higher professional services ($0.2 million). For the six months
ended June 30, 1998 non-interest expense excluding nonrecurring merger costs,
increased $9.6 million to $25.4 million from $15.8 million for the comparable
period of a year ago reflecting higher personnel costs ($4.1 million)and higher
occupancy ($1.0 million). Signal's efficiency ratio of 62.50% for the second
quarter of 1998 compares to 48.93% for the second
12
<PAGE> 13
quarter of 1997. For the six months ended June 30, 1998 the Company's efficiency
ratio was 60.01% as compared to 48.72% for the comparable period a year ago. The
increases in 1998 in both non-interest expense and the efficiency ratio reflect
approximately $3.7 million for the quarter ended June 30, 1998 for businesses
and facilities purchased which were not part of the Company's operations or
non-interest expense for the quarter ended June 30, 1997. These businesses
include Summit Bank, N.A., Signal Finance, Alpha Equipment Group, Inc., Alliance
Corporate Resources (Alliance) and the acquisition or construction of ten new
banking offices. Each of these new businesses is accretive to earnings per share
except for Alliance which has experienced a temporary loss.
Nonrecurring merger related costs of $9.2 million ($6.3 million net of
tax) were incurred by the Company in the second quarter of June 1998 to effect
the Company's acquisition of First Shenango Bancorp on June 29, 1998. The costs
are primarily for 1) transaction costs of $1.8 million ($1.5 million after-tax)
for financial advisory services, legal and accounting fees, 2) estimated
operational costs of $5.6 million ($3.6 million after-tax) to integrate First
Shenango into Signal including systems conversions, product
conversions/introductions and the elimination of certain duplicated operations,
and 3) an additional provision for credit risk of $1.8 million ($1.2 million
after-tax) of which $1.3 million reflects the application of Signal's collection
policies and practices to certain loans on First Shenango's books and an
addition of $0.5 million to general reserves. Included in the operational
charges of $5.6 million is $1.6 million in compensation expense pursuant to the
termination of First Shenango's employee stock ownership plan. As a result of
the merger the Company anticipates cost savings of approximately 20%. First
Shenango's non-interest expense amounted to $5.8 million in 1997.
FINANCIAL CONDITION HIGHLIGHTS
Certain aspects of the Company's financial condition during 1998 are as follows
($000's):
<TABLE>
<CAPTION>
JUNE 30 December 31 Increase
1998 1997 (Decrease)
-------------- --------------- -------------
<S> <C> <C> <C>
Securities available for sale $368,476 $348,468 $20,008
Loans available for sale 53,346 90,379 (37,033)
Net loans and leases 1,226,851 1,166,938 59,913
Deposits 1,305,086 1,256,896 48,190
Borrowings 417,097 394,968 22,129
</TABLE>
The $20.0 million increase in securities available for sale, and the $22.1
million increase in borrowings reflect the February 1998 issuance of and
investment of the proceeds of $50 million in 8.67% mandatorily redeemable
preferred securities. The increase in securities was partially offset by
accelerated prepayments on mortgage related securities.
Net loans and leases increased $59.9 million comparing June 30, 1998 to
December 31, 1997 reflecting a $57.2 million increase in manufactured housing
loans and a $33 million increase in commercial loans and leases partially offset
by lower residential mortgages of $37.5 million reflecting the impact of
mortgage loan refinancings. The Company securitized and sold $50 million of
manufactured housing finance contracts in both the first and second quarter of
1998. For the three months ended June 30, 1998 originations of residential
mortgage loans and manufactured housing contracts totaled $126.4 million and
$83.3 million, respectively compared to $68.6 million and $86.3 million for the
comparable period of a year ago.
The decline in loans available for sale reflects the fact that the Company
has no additional plans for the sale and securitization of manufactured housing
loans in 1998.
Deposits increased $48.2 million comparing June 30, 1998 to December 31,
1997 reflecting the favorable results of sales and marketing efforts as well as
increased balances in existing customer accounts.
CREDIT RISK
The Company provides as an expense an amount for expected credit losses.
The provision is based on the growth of the loan and lease portfolio and on
recent loss experience. Actual losses on loans and leases are charged against
the allowance for loan losses. The Company's recurring provision for loan losses
was $754,000 in the
13
<PAGE> 14
three months ended June 30, 1998 as compared to $365,000 in the three months
ended June 30, 1997. The increased provision reflects the shift in the mix of
loans on the Company's balance sheet from traditional residential mortgages to
commercial loans and manufactured housing loans both of which inherently have
higher credit risk. Charge- offs, net of recoveries were $237,000 and $294,000
for the three months ended June 30, 1998 and 1997, respectively. Net charge-offs
as a percentage of average loans and leases were 8 basis points annualized in
the three months ended June 30, 1998 as compared to 12 basis points annualized
for the comparable period of 1997.
The Company defines underperforming assets as 1) nonaccrual loans and
leases on which the ultimate collectibility of the full amount of interest is
uncertain, 2) loans and leases which have been renegotiated to provide for a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower, 3) loans and leases past due 90 days or more
as to principal or interest and 4) other real estate owned. Underperforming
assets, including nonaccrual loans of $5.8 million and $7.1 million, were $7.6
million and $8.5 million at June 30, 1998 and December 31, 1997, respectively.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or the fair value of
the underlying collateral. Impaired loans have been defined as all nonaccrual
loans.
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of an adequate level of liquidity is necessary to ensure
that sufficient funds are available to meet customers' loan demand and deposit
withdrawals. The banking subsidiaries' liquidity sources consist primarily of
short-term marketable securities, maturing loans and selected sales of loan
assets. Liquidity has also been obtained through liabilities such as
customer-related core deposits, funds borrowed, certificates of deposit and
public funds deposits. The Company has additional borrowing capacity with
both the Federal Home Loan Bank of Cincinnati and the Federal Home Loan Bank of
Pittsburgh and additional collateral eligible for repurchase agreements in the
event internally generated funds are insufficient to meet liquidity needs. In
the absence of the sale and securitization of manufactured housing loans, the
Company expects to augment its liquidity with additional deposit growth, sales
of mortgage loans and wholesale borrowings. The Company anticipates that it has
adequate liquidity and additional sources of funds to meet all of its
foreseeable commitments.
At June 30, 1998, shareholders' equity was $155.9 million, compared to
$152.6 million at December 31, 1997, an increase of $3.3 million primarily
reflecting net income for the six months ended June 30, 1998. Shareholders'
equity as a percentage of total assets as of June 30, 1998 was 8.15% compared to
8.33% as of December 31, 1997. The Federal Reserve Board has adopted risk-based
capital guidelines which assign risk weightings to assets and off-balance sheet
items and also define and set minimum capital requirements (risk-based capital
ratios). The guidelines also define "well capitalized" ratios of Tier 1, total
capital and leverage as 6%, 10% and 5% respectively. The Company's subsidiary
banks, Signal Bank N.A., Summit Bank N.A., and First Federal Savings of New
Castle exceeded the minimum guidelines for well capitalized institutions at both
June 30, 1998 and December 31, 1997. At June 30, 1998, the Company had a Tier 1
risk-based capital ratio of 11.77%, a total risk-based capital ratio of 16.07%
and a leverage ratio of 8.91%. At December 31, 1997, the Company had Tier 1
risk-based capital ratio of 8.18%, a total risk-based capital ratio of 12.89%
and a leverage ratio of 5.23%.
In February 1998, the Company issued $50 million of 8.67% Capital
Securities which was used to pay down short term borrowings, provide funds for
loan originations and as a source of additional capital to support future growth
activities. Interest on the Capital Securities is payable semi-annually
beginning in August 1998. The Capital Securities are redeemable at the option of
the Company after February 2008 until its maturity in February 2028.
DEFINITIVE MERGER AGREEMENT
On August 10, 1998, the Company entered into a merger agreement with
FirstMerit Corporation (Nasdaq:FMER). Under the terms of the agreement the
Company will merge with and into FirstMerit. Shareholders will receive 1.32
shares of FirstMerit's common
14
<PAGE> 15
stock in exchange for each share of Signal Corp's common stock and one share of
FirstMerit 6 1/2% Cumulative Convertible Preferred Stock, Series B, for each
share of Signal 6 1/2% Cumulative Convertible Preferred Stock, Series B. Based
on FirstMerit's August 10, 1998 closing price of $28.19 the transaction is
valued at approximately $470 million. FirstMerit is a bank holding company with
approximately $6.2 billion in assets. The transaction, which will be accounted
for as a pooling of interests, is subject to regulatory and shareholder
approval and other customary conditions of closing, and is expected to be
completed in the first quarter of 1999.
IMPACT OF THE YEAR 2000
The "Year 2000" issue arises from computer programs that were written
using two digits rather than four to define the applicable year. As a result,
computer programs with time-sensitive software may have a difficult time
distinguishing between the year 2000 and the year 1900, causing potential
disruptions of operations, including, among other things, potential
miscalculations or an inability to process transactions.
The Company has conducted a comprehensive review of its computer systems
to identify applications that could be affected by the Year 2000 issue, has
assigned a project manager and has developed an implementation plan to address
the issue. The Company's data processing is performed primarily utilizing
outside vendors, consequently the Company is very dependent on those vendors to
conduct its business. The Company has already completed its assessment phase and
is in the renovation and testing phase. To date, the Company has been informed
that its primary service providers anticipate that all reprogramming efforts
will be completed by December 31, 1998. Management does not expect Year 2000
costs to have a significant impact on its financial position or results of
operations however, there can be no assurance that the vendors systems will be
Year 2000 compliant, consequently the Company could incur incremental costs to
convert to another vendor. The Company has identified certain of its hardware
and software equipment that will not be Year 2000 compliant and is replacing
such equipment and software prior to December 31, 1998. These capital
expenditures are expected to total approximately $2.0 million.
FORWARD LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which would cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management considers interest rate risk to be the Company's most
significant market risk. Interest rate risk is the exposure to adverse changes
in the net interest income of the Company as a result of changes in interest
rates. Consistency in the Company's earnings is largely dependent on the
effective management of interest rate risk.
There have been no significant changes to the Company's interest rate risk
position or to the practices used by the Company to manage interest rate risk
since December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company's shareholders held on June 16,
1998, the following matters were considered:
1. The adoption of the Agreement of Affiliation and Plan of Merger with
First Shenango Bancorp, Inc. ("Proposal One");
2. The adoption of an amendment to the Company's Articles of
Incorporation to increase the number of shares of Common Stock
authorized for issuance thereunder from 20,000,000 to 40,000,000
("Proposal Two");
3. The adoption of an amendment to the Company's Articles of
Incorporation to change the Company's name from "FirstFederal
Financial Services Corp" to "Signal Corp" ("Proposal Three"); and
4. The election of six directors of the Company.
The votes cast on Proposal One, Two and Three were as follows:
<TABLE>
<CAPTION>
BROKER
NON-
FOR AGAINST ABSTAIN VOTES
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Proposal One 4,197,525 10,186 37,718 1,441,852
--------- -------- -------- ---------
Proposal Two 5,574,712 71,219 41,948 -0-
--------- -------- -------- ---------
Proposal Three 5,610,881 37,422 39,576 -0-
--------- -------- -------- ---------
</TABLE>
The votes cast for the election of directors were as follows:
<TABLE>
VOTE
FOR WITHHELD
--------- ---------
<S> <C> <C>
R. Victor Dix 5,639,219 48,660
Daniel H. Plumly 5,642,198 45,681
L. Dwight Douce 5,650,068 37,811
David J. Olderman 5,650,058 37,821
David C. Vernon 5,649,361 38,518
James J. Little 5,641,540 46,339
</TABLE>
Messrs. Dix, Plumly, Douce and Olderman were elected for terms to expire in
2001, and Messrs. Vernon and Little were elected for terms to expire in 2000.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2 - Form S-4 for the registration of Signal Capital
Trust One's 8.67% Capital Securities was previously filed
with the Securities and Exchange Commission on May 13, 1998
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
- One report on Form 8-K was filed on May 1, 1998 with respect
to the Company's earnings release for the quarter ended March
31, 1998.
All other items have been omitted as not required and not applicable under the
instructions.
16
<PAGE> 17
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 thereunto duly authorized.
SIGNAL CORP
(Registrant)
Date August 14, 1998 /s/ GARY G. CLARK
Gary G. Clark
Chairman and Chief Executive Officer
(Duly Authorized Representative)
Date August 14, 1998 /s/ JON W. PARK
Jon W. Park
Chief Financial Officer (Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED CONDENSED
BALANCE SHEET AND STATEMENT OF INCOME FOR THE THREE
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 44,557
<INT-BEARING-DEPOSITS> 28,674
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 368,476
<INVESTMENTS-CARRYING> 86,540
<INVESTMENTS-MARKET> 53,346
<LOANS> 1,226,851
<ALLOWANCE> 10,191
<TOTAL-ASSETS> 1,912,225
<DEPOSITS> 1,305,086
<SHORT-TERM> 67,149
<LIABILITIES-OTHER> 34,130
<LONG-TERM> 299,948
50,000
9,917
<COMMON> 11,747
<OTHER-SE> 134,248
<TOTAL-LIABILITIES-AND-EQUITY> 1,912,225
<INTEREST-LOAN> 26,549
<INTEREST-INVEST> 7,287
<INTEREST-OTHER> 566
<INTEREST-TOTAL> 34,402
<INTEREST-DEPOSIT> 14,656
<INTEREST-EXPENSE> 21,793
<INTEREST-INCOME-NET> 12,609
<LOAN-LOSSES> 2,617
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 20,110
<INCOME-PRETAX> (3,345)
<INCOME-PRE-EXTRAORDINARY> (2,571)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,571)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
<YIELD-ACTUAL> 2.83
<LOANS-NON> 5,814
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,811
<CHARGE-OFFS> 296
<RECOVERIES> 59
<ALLOWANCE-CLOSE> 10,191
<ALLOWANCE-DOMESTIC> 10,191
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
