PROSPECTUS
Up to 238,050 Shares of Common Stock
(Anticipated Maximum, as adjusted)
CARNEGIE FINANCIAL CORPORATION
17 West Mall Plaza
Carnegie, Pennsylvania 15106
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Carnegie Savings Bank is converting from the mutual form to the stock
form of organization. As part of the conversion, Carnegie Savings Bank will
become a wholly owned subsidiary of Carnegie Financial Corporation. Carnegie
Financial Corporation was formed in February 1998 and upon consummation of the
conversion will own all of the shares of Carnegie Savings Bank. The common stock
of Carnegie Financial Corporation is being offered to the public in accordance
with a plan of conversion. The Office of Thrift Supervision has approved the
plan of conversion subject to the approval of a majority of the votes eligible
to be cast by members of Carnegie Savings Bank. No common stock will be sold if
Carnegie Savings Bank does not receive these approvals or Carnegie Financial
Corporation does not receive orders for at least the minimum number of shares.
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TERMS OF OFFERING
An independent appraiser has estimated the market value of the
converted Carnegie Savings Bank to be between $1,530,000 and $2,070,000, which
establishes the number of shares to be offered. Subject to Office of Thrift
Supervision approval, an additional 15% above the maximum number of shares, or
up to 238,050 shares may be offered. Based on these estimates, we are making the
following offering of shares of common stock:
<TABLE>
<CAPTION>
<S> <C>
o Price Per Share: $10.00
o Number of Shares
Minimum/Maximum/Maximum, as adjusted: 153,000 to 207,000 to 238,050
o Underwriting Commissions and Other Expenses
Minimum/Maximum/Maximum, as adjusted: $260,000
o Net Proceeds to Carnegie Financial Corporation
Minimum/Maximum/Maximum, as adjusted: $1,270,000 to $1,810,000 to $2,120,500
o Net Proceeds Per Share
Minimum/Maximum/Maximum, as adjusted: $8.30 to $8.74 to $8.91
</TABLE>
Please refer to Risk Factors beginning on page 1 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, Office of Thrift Supervision,
nor any state securities regulator has approved or disapproved these securities
or determined if this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
For information on how to subscribe, call the Stock
Center at (412) 276-0535.
Capital Resources, Inc.
The date of this prospectus is May 14, 1998
<PAGE>
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TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering............................(i)
Summary.................................................................(iii)
Selected Financial and Other Data........................................(vi)
Recent Developments....................................................(viii)
Risk Factors................................................................1
Proposed Purchases by Directors and Officers............................... 4
Use of Proceeds............................................................ 4
Dividends.................................................................. 5
Market for the Common Stock................................................ 5
Capitalization............................................................. 6
Pro Forma Data............................................................. 7
Historical and Pro Forma Capital Compliance.............................. 11
The Conversion........................................................... 12
Statement of Operations of Carnegie Savings Bank......................... 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 26
Business of Carnegie Financial Corporation............................... 32
Business of Carnegie Savings Bank........................................ 33
Regulation............................................................... 47
Taxation................................................................. 53
Management of Carnegie Financial Corporation............................. 54
Management of Carnegie Savings Bank...................................... 54
Restrictions on Acquisitions of Carnegie Financial Corporation........... 59
Description of Capital Stock............................................. 62
Legal and Tax Matters.................................................... 63
Experts.................................................................. 64
Registration Requirements................................................ 64
Where You Can Find Additional Information................................ 64
Index to Financial Statements of Carnegie Savings Bank.................. F-1
This document contains forward-looking statements which involve risks
and uncertainties. Carnegie Financial Corporation's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 1 of this document.
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the offering?
A: The offering gives you the opportunity to become a stockholder of our newly
formed holding company, Carnegie Financial Corporation, which will allow
you to share indirectly in our future as a federal stock savings bank. The
stock offering will increase our capital and funds for lending and
investment activities. As a federal stock savings bank operating through a
holding company structure, we will have greater flexibility for operations,
expansion and diversification.
Q: How do I purchase the stock?
A: You must complete and return the stock order form to us together with your
payment no later than 12:00 p.m. (noon), Eastern Time, June 19, 1998.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares (or $250). The maximum purchase is 5,000
shares (or $50,000), for any person or persons ordering through a single
account. No person, related persons or persons acting together, may
purchase in the conversion more than 7,500 shares (or $75,000). We may
decrease or increase the maximum purchase limitation without notifying you.
In the event that the offering is oversubscribed, we will allocate shares
based upon your purchase priority.
Q: What happens if there are not enough shares to fill all orders?
A: You might not receive any or all of the shares you want to purchase. If
there is an oversubscription in the subscription offering, the stock will
be offered on the following priority basis:
o Persons who had a deposit account of at least $50 with us on November
30, 1996 ("Eligible Account Holders").
o Any remaining shares will be offered to the employee stock ownership
plan of Carnegie Savings Bank ("ESOP").
o Any remaining shares will be offered to persons who had a deposit
account of at least $50 with us on March 31, 1998 ("Supplemental
Eligible Account Holders").
o Any remaining shares will be offered to other persons entitled to vote
on the approval of the conversion ("Other Members").
If the above persons do not subscribe for all of the shares, the remaining
shares may be offered either directly by Carnegie Financial Corporation in a
community offering or in a best efforts public offering. We have the right to
reject any stock order received in the community offering. In the event of a
community offering, preference will be given to natural persons residing in
Allegheny County. You are prohibited from transferring or entering into any
understanding to transfer your subscription rights.
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(i)
<PAGE>
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Q: As a depositor of Carnegie Savings Bank, am I obligated to purchase stock?
A: No. You are not required to purchase stock.
Q: As a depositor of or borrower from Carnegie Savings Bank, what will happen
if I do not purchase any stock?
A: As a depositor, you presently have voting rights while we are in the mutual
form; however, once we convert, voting rights will be held exclusively by
stockholders. Your deposit account, certificate accounts and any loans you
may have with us will not be affected.
Q. Will the stock be traded on a market?
A. It is anticipated that the stock will be traded on the OTC Bulletin Board.
However it is not assured or guaranteed that the stock will be traded on
the OTC Bulletin Board or on any market.
Q: What particular factors should I consider when deciding whether to buy the
stock?
A: Before you decide to purchase shares, you should read the Risk Factors
section on pages 1-3 of this document.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. In addition, you may contact:
Stock Center
Carnegie Financial Corporation
17 West Mall Plaza
Carnegie, Pennsylvania 15106
(412) 276-0535
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(ii)
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire document, including
the financial statements and the notes to the financial statements of Carnegie
Savings Bank. References in this document to "we", "us", and "our" refer to
Carnegie Savings Bank. In certain instances where appropriate, "we", "us" or
"our" refers collectively to Carnegie Financial Corporation and Carnegie Savings
Bank. References in this document to "CFC" refers to Carnegie Financial
Corporation.
The Companies
Carnegie Financial Corporation
17 West Mall Plaza
Carnegie, Pennsylvania 15106
(412) 276-1266
Carnegie Financial Corporation is not an operating company and has not
engaged in any significant business to date. It was formed in February 1998 as a
Pennsylvania-chartered corporation to be the holding company for Carnegie
Savings Bank. The holding company structure will provide greater flexibility in
terms of operations, expansion and diversification. See pages 32 to 33.
Carnegie Savings Bank
17 West Mall Plaza
Carnegie, Pennsylvania 15106
(412) 276-1266
Carnegie Savings Bank began operations in 1915 under the name,
"Carnegie Savings Building and Loan." In 1995, we converted to a state savings
bank charter and obtained Federal Deposit Insurance Corporation ("FDIC")
insurance through the Bank Insurance Fund ("BIF"). On May 11, 1998, we converted
to a federal mutual savings bank charter, became subject to regulation by the
Office of Thrift Supervision ("OTS") and retained our FDIC insurance through
BIF. We are a community and customer oriented federal mutual savings bank. We
provide financial services to individuals, families and small businesses.
Historically, we have emphasized residential mortgage lending, primarily
originating one- to four-family mortgage loans. At December 31, 1997, we had
total assets of $16.7 million, deposits of $15.2 million, and total retained
earnings of $1.2 million.
See pages 33 to 47.
The Stock Offering
Carnegie Financial Corporation is offering between 153,000 and 207,000
shares of common stock at $10 per share ("Purchase Price"). As a result of
changes in market and financial conditions prior to completion of the conversion
or to fill the order of our employee stock ownership plan and subject to the
Office of Thrift Supervision approval, we may increase the offering to 238,050
shares without further notice to you. If an increase in the offering size is
approved, you will not have the opportunity to change or cancel any stock order
previously delivered to us. See pages 21 to 22.
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(iii)
<PAGE>
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Stock Purchase Priorities
The shares of common stock will be offered on the basis of purchase
priorities. Certain depositors will receive subscription rights to purchase the
shares. The shares will be offered first in a subscription offering and any
remaining shares may be offered in a community offering or a public offering. We
have engaged Capital Resources, Inc. to assist in the selling of common stock on
a best-efforts basis. See pages 15 to 16.
Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. See page 15.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the
estimated pro forma market value of the common stock by FinPro, Inc., an
appraisal firm experienced in appraisals of savings institutions. FinPro has
estimated, that in its opinion as of March 12, 1998 the aggregate estimated pro
forma market value of the common stock ranged between $1,530,000 and $2,070,000
with a midpoint of $1,800,000 (the "EVR"). The estimated pro forma market value
of the shares is our estimated market value after giving effect to the sale of
shares in this offering.
The appraisal was based in part upon our financial condition and
operations and the effect of the additional capital raised by the sale of common
stock in this offering. The $10.00 price per share was determined by our board
of directors and is the price most commonly used in stock offerings involving
conversions of mutual savings institutions. The independent appraisal will be
updated prior to the consummation of the conversion. If the updated estimated
pro forma market value of the common stock is either below $1,530,000 or above
$2,380,500, you will be notified and will have the opportunity to modify or
cancel your order. See pages 20 to 21.
Termination of the Offering
The subscription offering will terminate at 12:00 p.m. (noon), Eastern
Time, on June 19, 1998. The community offering or public offering, if any, may
terminate at any time without notice but no later than 45 days after completion
of the subscription offering, without approval by the OTS. See pages 17 to 18.
Benefits to Management from the Offering
Our full-time employees will participate in the offering through
individual purchases and purchases of stock by our employee stock ownership
plan, which is a form of retirement plan. We also intend to implement a
restricted stock plan and a stock option plan, no earlier than six months
following completion of the conversion, which may benefit our President and
other officers and directors. However, the restricted stock plan and stock
option plan may not be adopted until after the conversion and are subject to
stockholder approval and compliance with OTS regulations. If we adopt the
restricted stock plan, our executive officers and directors will be awarded
common stock at no cost to them. See pages 55 to 59.
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(iv)
<PAGE>
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Use of the Proceeds Raised from the Sale of Common Stock
Carnegie Financial Corporation will use a portion of the net proceeds
from the stock offering to purchase all the common stock to be issued by us in
the conversion and to make a loan to our employee stock ownership plan to fund
its purchase of stock in the conversion. After payment for our common stock,
Carnegie Financial Corporation will retain up to 50% of the funds received in
the stock offering as its initial capitalization. We will use the proceeds of
the sale of the common stock to make investments and fund loans. See pages 4 to
5 for the range of offering proceeds.
Dividends
CFC does not expect to pay dividends during the first year following
the conversion. We may establish a dividend policy after the first year. See
page 5.
Market for the Common Stock
Due to the small size of the offering, it is unlikely that an active
and liquid trading market will develop and be maintained. Investors should have
a long-term investment intent. Persons purchasing shares may not be able to sell
their shares when they desire or sell them at a price equal to or above $10.00.
Following the completion of the offering, it is anticipated that the CFC common
stock will be traded on the OTC Bulletin Board. Capital Resources, Inc. is
expected to make a market in the common stock. However, Capital Resources, Inc.
will not be subject to any obligation with respect to such efforts. See page 5.
Important Risks in Owning Common Stock
Before you decide to purchase stock in the offering, you should read
the Risk Factors section on pages 1-3 of this document.
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(v)
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SELECTED FINANCIAL AND OTHER DATA
The following financial information is a summary only. This information
is derived in part, and should be read in conjunction with, our audited
financial statements and notes beginning on page F-1.
<TABLE>
<CAPTION>
Selected Financial Condition and Other Data
At December 31,
------------------------------------------------------
1997 1996 1995
------------------ ----------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Total Amount of:
Assets.................................... $16,723 $15,100 $13,733
Loans receivable, net..................... 9,585 9,812 9,002
Mortgage-backed securities, net 2,628 2,014 980
Investment securities, net................ 2,530 2,150 1,687
Cash and cash equivalents................. 851 557 1,542
Savings deposits.......................... 15,178 13,378 12,407
Other borrowings.......................... - 300 -
Retained earnings
(substantially restricted(1))........... 1,156 1,210 1,111
Number of:
Deposit accounts.......................... 2,309 2,221 2,080
Full service offices...................... 1 1 1
</TABLE>
(1) Composed of appropriated and unappropriated retained income.
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(vi)
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Summary of Operations
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------------------------------
1997 1996 1995
----------------- ---------------- --------------
(In thousands)
<S> <C> <C> <C>
Interest income................................... $1,222 $1,074 $1,019
Interest expense.................................. 671 552 536
----- ----- -----
Net interest income............................... 551 522 483
Provision for loan losses......................... 73 2 31
----- ----- -----
Net interest income after
provision for loan losses....................... 478 520 452
Other income...................................... 63 74 73
Other expense..................................... 649 459 425
---- ---- ----
Income (loss) before income taxes................. (108) 135 100
Income tax expense (benefit)...................... (54) 36 14
----- ----- -----
Net income (loss)................................. $ (54) $ 99 $ 86
===== ===== =====
</TABLE>
Key Operating Ratios
<TABLE>
<CAPTION>
At or For the
Years Ended
December 31,
---------------------------------------------------
1997 1996 1995
----------------- ------------- -------------
<S> <C> <C> <C>
Performance Ratios:
Return on average assets
(net income (loss) divided by average total (0.33)% 0.70% 0.65%
assets).............................................
Return on average equity
(net income (loss) divided by average equity)...... (4.30)% 8.60% 8.21%
Ratio of average equity to average assets
(average equity divided by average
total assets)...................................... 7.73% 8.09% 7.95%
Equity to assets at period end....................... 7.00% 7.92% 8.08%
Interest rate spread................................. 3.11% 3.48% 3.62%
Net interest margin.................................. 3.50% 3.82% 3.88%
Average interest-earning assets to average
interest-bearing liabilities....................... 109.28% 108.47% 106.07%
Net interest income after provision for loan
losses to total noninterest expense.................. 73.65% 113.29% 106.35%
Asset Quality Ratios:
Non-performing loans to total assets................. 0.25% 0.22% 0.53%
Non-performing assets to total assets................ 3.12% 1.32% 1.75%
Non-performing loans to total loans.................. 0.44% 0.34% 0.81%
Allowance for loan losses to total loans
at end of period................................... 1.20% 0.40% 0.42%
Allowance for loan losses to non-performing
loans.............................................. 273.81% 118.18% 52.05%
</TABLE>
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(vii)
<PAGE>
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RECENT DEVELOPMENTS
Selected Financial Condition and Other Data
Set forth below are the summaries of our historical financial and other
data. Financial data as of March 31, 1998 and for the three months ended March
31, 1998 and 1997, are unaudited. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
have been included. The summary of operations and other data for the three
months ended March 31, 1998 are not necessarily indicative of the results of
operations for the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
At At
March 31, December 31,
1998 1997
------------------ ---------------
(Dollars in thousands)
<S> <C> <C>
Total Amount of:
Assets ......................................... $16,615 $16,723
Loans receivable, net .......................... 10,543 9,585
Mortgage-backed securities, net ................ 2,548 2,628
Investment securities, net ..................... 1,822 2,530
Cash and cash equivalents ...................... 741 851
Savings deposits ............................... 15,029 15,178
Retained earnings
(substantially restricted(1)) .................. 1,171 1,170
Number of:
Deposit accounts ............................... 2,346 2,309
Full service offices ........................... 1 1
</TABLE>
(1) Composed of appropriated and unappropriated retained income.
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(viii)
<PAGE>
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Summary of Operations
For the Three Months Ended
March 31,
--------------------------
1998 1997
------------ -----------
(In thousands)
Interest income................................... $ 298 $ 280
Interest expense.................................. 170 158
----- -----
Net interest income............................... 128 122
Provision for loan losses......................... - -
----- -----
Net interest income after
provision for loan losses....................... 128 122
Other income...................................... 13 7
Other expense..................................... 141 129
----- -----
Income (loss) before income taxes................. - -
----- -----
Income tax expense (benefit)...................... - -
Net income (loss)................................. $ - $ -
===== =====
Key Operating Ratios
At or For the
Three Months Ended
March 31,
----------------------
1998 1997
----------- ---------
Performance Ratios:
Return on average assets
(net income (loss) divided by average total - % - %
assets).............................................
Return on average equity
(net income (loss) divided by average equity)...... - % - %
Ratio of average equity to average assets
ratio (average equity divided by average
total assets)...................................... 7.26% 8.02%
Equity to assets at period end....................... 7.05% 7.51%
Interest rate spread................................. 2.96% 2.91%
Net interest margin.................................. 3.29% 3.23%
Average interest-earning assets to average
interest-bearing liabilities....................... 107.69% 107.61%
Net interest income after provision for loan
losses to total noninterest expense.................. 90.78% 94.57%
Asset Quality Ratios:
Non-performing loans to total assets................. .25% .41%
Non-performing assets to total assets................ 3.12% 1.46%
Non-performing loans to total loans.................. .40% .70%
Allowance for loan losses to total loans
at end of period................................... .92% .39%
Allowance for loan losses to non-performing
loans.............................................. 233.33% 56.06%
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(ix)
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Financial Condition
Total assets remained relatively constant at March 31, 1998 as compared
to December 31, 1997. Net loans receivable increased approximately $958,000 to
$10.5 million at March 31, 1998 from $9.6 million at December 31, 1997. Such
increase was offset by a $703,000 decrease in net investment securities. The
funds received from net investment securities were used to fund the increase in
net loans receivable. All other assets and liabilities remained relatively
constant for the March 31, 1998 period.
Real estate owned decreased $3,000 to $519,000 at March 31, 1998 from
$522,000 at December 31, 1997. Total non-accrual and accrual loans were
unchanged at March 31, 1998 as compared to December 31, 1997.
Results of Operations
Net income for the three months ended March 31, 1998 remained unchanged
as compared to the same period in 1997. The $6,000 increase in net interest
income for the three months ended March 31, 1998 was primarily the result of a
$142,000 increase in net earning assets for the period. The average interest
rate spread for the three months ended March 31, 1998 was 2.96% compared to
2.91% for the same period in 1997. The net yield on interest earning assets for
the three months ended March 31, 1998 was 3.29% compared to 3.23% for the same
period in 1997.
Other income increased $6,000 to $13,000 for the three months ended
March 31, 1998 from $7,000 for the comparable period in 1997. In 1997, the
Savings Bank recognized a $7,000 loss on OREO property sold.
Other expenses increased $12,000 to $141,000 for the three months ended
March 31, 1998 from $129,000 for the comparable period in 1997. The increase in
other expenses was primarily the result of a $5,000 increase in compensation and
benefits and a $7,000 increase in general and administrative expenses primarily
due to an increase in the cost of the Savings Bank's data processing.
Capital Resources
Management monitors risk-based capital and leverage capital ratios in
order to assess compliance with regulatory guidelines. At March 31, 1998, the
Savings Bank had tangible, leverage and total risk- based capital of 6.98%,
6.98% and 16.04%, which exceeded the OTS's minimum requirements of 1.5%, 3.0%,
and 8.00%, respectively.
Subsequent Events
In April 1998, our service bureau advised us that we will be assessed
an aggregate fee of approximately $10,000 for Year 2000 compliance. This fee
will be billed to us on a twelve month basis in addition to our monthly data
processing fee.
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(x)
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit, like that of most financial institutions,
is substantially dependent on our net interest income, which is the difference
between the interest income we earn on our interest-earning assets (e.g. such as
mortgage loans and investment securities) and the interest expense we pay on our
interest-bearing liabilities (such as deposits and borrowings). Substantially
all of our mortgage loans have rates of interest which are fixed for the term of
the loan ("fixed rate") and are originated with terms of up to 30 years, while
deposit accounts have significantly shorter terms to maturity. Because our
interest-earning assets generally have fixed rates of interest and have longer
effective maturities than our interest-bearing liabilities, the yield on our
interest-earning assets generally will adjust more slowly to changes in interest
rates than the cost of our interest-bearing liabilities. As a result, our net
interest income will be adversely affected by material and prolonged increases
in interest rates. In addition, rising interest rates may adversely affect our
earnings because there might be a lack of customer demand for loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - - Asset/Liability Management."
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. Historically, lower interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities,
as borrowers refinanced their mortgages in order to reduce their borrowing cost.
Under these circumstances, we are subject to reinvestment risk to the extent
that we are not able to reinvest such prepayments at rates which are comparable
to the rates on the prepaid loans or mortgage-backed securities.
Lack of Active Market for Common Stock
Due to the small size of the offering, it is highly unlikely that an
active trading market will develop and be maintained. If an active market does
not develop, you may not be able to sell your shares promptly or perhaps at all,
or sell your shares at a price equal to or above the price you paid for the
shares. It is anticipated that CFC common stock will be traded on OTC Bulletin
Board. The common stock may not be appropriate as a short-term investment. See
"Market for the Common Stock."
Additional Capital; Return on Equity
As a result of the conversion, we will have, on a consolidated basis,
total equity that is substantially more than our equity prior to the conversion.
Loan demand is not expected to increase correspondingly, and thus we are likely
to be faced with the choice of either investing capital in lower yielding debt
securities or making higher risk investments to increase yield. Furthermore, we
are not expected to be able immediately to leverage the new capital, and
therefore, the increase in equity may adversely affect our return on equity (net
income divided by average equity), absent a corresponding increase in our net
income. Our return on equity was (4.62)%, 8.28% and 7.75% for the years ended
December 31, 1997, 1996 and 1995 respectively. We intend initially to invest the
net proceeds in short and medium term investments which generally have lower
yields than loans. There can be no assurance that we will be able to increase
net income in future periods in amounts commensurate with the increase in equity
resulting from the conversion. See "Pro Forma Data." Furthermore, current OTS
policy on
1
<PAGE>
stock repurchases by recently converted institutions could limit our flexibility
in utilizing the net proceeds. See "Use of Proceeds" and "The Conversion --
Restrictions on Repurchase of Stock."
Intent to Remain Independent
We have operated as an independent community oriented savings
association since 1915. It is our intention to continue to operate as an
independent community oriented savings association following the conversion.
Accordingly, you are urged not to subscribe for shares of our common stock if
you are anticipating a quick sale by us. See "Business of Carnegie Financial
Corporation."
Dependence on Local Economy
We operate as a community-oriented financial institution, with a focus
on servicing customers in our primary market area of Carnegie and surrounding
areas of Allegheny County, Pennsylvania. At December 31, 1997, most of our loan
portfolio consisted of loans made to borrowers and collateralized by properties
located in our primary market area. As a result of this concentration, a
downturn in the economy of our primary market area could increase the risk of
loss associated with our loan portfolio. See "Business of Carnegie Savings Bank
- - Market Area."
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in CFC's articles of incorporation and bylaws, the general
corporation law of the Commonwealth of Pennsylvania, and certain federal
regulations may make it difficult and expensive to pursue a tender offer, change
in control or takeover attempt which is opposed by our management and board of
directors. As a result, stockholders who might desire to participate in such a
transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current board of directors or management of CFC more
difficult. In addition, these provisions may reduce the trading price of our
stock. These provisions include: restrictions on the acquisition of CFC's equity
securities and limitations on voting rights; the classification of the terms of
the members of the board of directors; certain provisions relating to the
meeting of stockholders; denial of cumulative voting by stockholders in the
election of directors; the issuance of preferred stock and additional shares of
common stock without shareholder approval; and super-majority provisions for the
approval of certain business combinations. See "Restrictions on Acquisitions of
Carnegie Financial Corporation".
Possible Voting Control by Directors and Officers
The proposed purchases of the common stock by our directors, officers
and employee stock ownership plan, as well as the potential acquisition of the
common stock through the stock option plan and restricted stock plan, could make
it difficult to obtain majority support for stockholder proposals which are
opposed by our management and board of directors. Based upon the midpoint of the
estimated valuation range, our officers and directors intend to purchase
approximately 17% of the common shares offered in the conversion. In addition,
the voting of those shares could block the approval of transactions (i.e.,
business combinations and amendment to our articles of incorporation and bylaws)
requiring the approval of 80% of the stockholders under the CFC's articles of
incorporation. See "Proposed Purchases by Directors and Officers," "Management
of Carnegie Savings Bank -- Executive Compensation," "Description of Capital
Stock," and "Restrictions on Acquisitions of Carnegie Financial Corporation."
2
<PAGE>
Possible Dilutive Effect of Restricted Stock Plan and Stock Options
If the conversion is completed and shareholders approve the restricted
stock plan ("RSP") and stock option plan, we will issue stock to our officers
and directors through these plans. If the shares for the RSP and stock options
are issued from our authorized but unissued stock, your voting interests could
be cumulatively diluted by up to approximately 12.3% and the trading price of
our stock may be reduced. See "Pro Forma Data," "Management of Carnegie Savings
Bank -- Proposed Future Stock Benefit Plans," and "-- Restricted Stock Plan."
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, CFC may not
repurchase its shares. During each of the second and third years following the
conversion, CFC may repurchase up to 5% of its outstanding shares. During those
periods, if we decide that additional repurchases would be an appropriate use of
funds, we would not be able to do so, without obtaining OTS approval. There is
no assurance that OTS approval would be given. See "The Conversion --
Restrictions on Repurchase of Shares."
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to our operations. Data processing is
also essential to most other financial institutions and many other companies.
Most of our material data processing that could be affected by this
problem is provided by a third party service bureau. Our service bureau has
advised us that it expects to resolve this potential problem before the year
2000. However, if this potential problem is not resolved before the year 2000,
we would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on our financial condition and our results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Noninterest Expense."
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by
the OTS and FDIC. Bills have been introduced in Congress that could consolidate
the OTS with the Office of the Comptroller of the Currency ("OCC") and require
us to adopt a commercial bank charter. If we become a commercial bank, our
investment authority and the ability of CFC to engage in diversified activities
may be limited, which could adversely affect our value and profitability. See
"Regulation."
3
<PAGE>
PROPOSED PURCHASES BY DIRECTORS AND OFFICERS
The following table sets forth the approximate purchases of common
stock by each director and executive officer and their associates in the
conversion. Shares purchased by officers and directors in the conversion may not
be sold for at least one year. The table assumes that 180,000 shares (the
midpoint of the estimated valuation range, "EVR") of the common stock will be
sold at $10.00 per share and that sufficient shares will be available to satisfy
subscriptions in all categories. However, officers and directors and their
associates may not buy more than 35% of the total amount of shares sold in the
conversion.
<TABLE>
<CAPTION>
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Purchased(1)
- ----------------------- ------------------------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Shirley Chiesa Chairman, President 7,500 $75,000 4.17%
and CEO
Morry Miller Director 5,000 50,000 2.78
JoAnn V. Narduzzi Director 5,000 50,000 2.78
Lois A. Wholey Director 5,000 50,000 2.78
Charles Ruprecht Director 4,000 40,000 2.22
Joseph R. Pigoni Executive Vice 4,000 40,000 2.22
President and CFO
------- ------- -------
30,500 $305,000 16.95%
======= ======= =======
</TABLE>
- --------------------
(1) Does not include shares purchased by the employee stock ownership plan (the
"ESOP").
USE OF PROCEEDS
Carnegie Financial Corporation will use up to 50% of the net proceeds
from the offering (or such additional amounts as is necessary to increase
Carnegie Savings Bank's capital ratio to 10%) to purchase all of the capital
stock we will issue in connection with the conversion. See footnote 1 to
"Historical and Pro Forma Capital Compliance." A portion of the net proceeds to
be retained by Carnegie Financial Corporation will be loaned to our employee
stock plan to fund its purchase of 8% of the shares sold in the conversion. On a
short-term basis, the balance of the net proceeds retained by Carnegie Financial
Corporation initially will be invested in short-term investments. Although there
are no current plans, the net proceeds subsequently may be used to fund
acquisitions of other financial services institutions or to diversify into
non-banking activities. The net proceeds may also serve as a source of funds for
the payment of dividends to stockholders or for the repurchase of the shares. A
portion of the net proceeds may also be used to fund the purchase of 4% of the
shares for the RSP which is anticipated to be adopted following the conversion.
See "Pro Forma Data."
The funds we receive from the sale of our capital stock to CFC will be
added to our general funds and be used for general corporate purposes including:
(i) investment in mortgages and other loans, (ii) investment in U.S. Government
and federal agency securities, (iii) investment in mortgage-backed securities or
(iv) funding loan commitments. However, initially we intend to invest the net
proceeds in short-term investments until we can deploy the proceeds into higher
yielding assets. The funds added to our capital will further strengthen our
capital position.
The net proceeds may vary because the total expenses of the conversion
may be significantly more or less than those estimated. We estimate that our
expenses will be approximately $260,000 and
4
<PAGE>
our estimated net proceeds will range from $1,270,000 to $1,810,000 (or up to
$2,121,000 in the event the maximum of the estimated valuation range is
increased to $2,380,500). See "Pro Forma Data." The net proceeds will also vary
if the number of shares to be issued in the conversion is adjusted to reflect a
change in our estimated pro forma market value. Payments for shares made through
withdrawals from existing deposit accounts with us will not result in the
receipt of new funds for investment by us but will result in a reduction of our
liabilities and interest expense as funds are transferred from interest-bearing
certificates or accounts for use in purchasing stock.
DIVIDENDS
Upon conversion, CFC's board of directors will have the authority to
declare dividends on the shares, subject to statutory and regulatory
requirements. CFC does not expect to pay cash dividends during the first year
after the conversion. Any future declarations of dividends by the board of
directors will depend upon a number of factors, including: (i) the amount of the
net proceeds retained by CFC in the conversion, (ii) investment opportunities
available, (iii) capital requirements, (iv) regulatory limitations, (v) results
of operations and financial condition, (vi) tax considerations, and (vii)
general economic conditions. Upon review of such considerations, the board may
authorize future dividends if it deems such payment appropriate and in
compliance with applicable law and regulation. For a period of one year
following the completion of the conversion, we will not pay any dividends that
would be treated for tax purposes as a return of capital nor take any actions to
pursue or propose such dividends. In addition, there can be no assurance that
regular or special dividends will be paid, or, if paid, will continue to be
paid. See "Historical and Pro Forma Capital Compliance," "The Conversion --
Effects of Conversion to Stock Form on Savers and Borrowers of Carnegie Savings
Bank -- Liquidation Account" and "Regulation -- Dividend and Other Capital
Distribution Limitations."
CFC is not subject to OTS regulatory restrictions on the payment of
dividends to its stockholders although the source of such dividends will be
dependent in part upon the receipt of dividends from us. CFC is subject,
however, to the requirements of Pennsylvania law, which generally limit the
payment of dividends to amounts that will not affect the ability of CFC, after
the dividend has been distributed, to pay its debts in the ordinary course of
business.
MARKET FOR THE COMMON STOCK
As a newly organized company, CFC has never issued capital stock, and
consequently there is no established market for the common stock. Following the
completion of the offering, it is anticipated that the common stock will be
traded on the over-the-counter market with quotations available through the OTC
Electronic Bulletin Board. Capital Resources, Inc. is expected to make a market
in the common stock. Making a market may include the solicitation of potential
buyers and sellers in order to match buy and sell orders. However, Capital
Resources, Inc. will not be subject to any obligation with respect to such
efforts. If the common stock cannot be quoted and traded on the OTC Bulletin
Board it is expected that the transactions in the common stock will be reported
in the pink sheets of the National Quotation Bureau, Inc.
The development of an active trading market depends on the existence of
willing buyers and sellers. Due to the small size of the offering, it is highly
unlikely that an active trading market will develop and be maintained. You could
have difficulty disposing of your shares and you should not view the shares as a
short-term investment. You may not be able to sell your shares at a price equal
to or above the price you paid for the shares.
5
<PAGE>
CAPITALIZATION
The following table presents, as of December 31, 1997, our historical
capitalization and the consolidated capitalization of CFC after giving effect to
the conversion and the other assumptions set forth below and under "Pro Forma
Data," based upon the sale of shares at the minimum, midpoint, maximum, and 15%
above the maximum of the EVR at a price of $10.00 per share:
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based on the Sale of (2)(3)
-----------------------------------------------------
Historical 153,000 180,000 207,000 238,050
Capitalization Shares at Shares at Shares at Shares At
at December 31, $10.00 $10.00 $10.00 $10.00
1997 Per Share Per Share Per Share Per Share
------ --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1) .................................. $15,178 $15,178 $15,178 $15,178 $15,178
====== ====== ====== ====== ======
Stockholders' Equity:
Preferred Stock, no par value per share,
2,000,000 shares authorized; none to be
issued..................................... $ - $ - $ - $ - $ -
Common Stock, $.10 par value, 4,000,000
shares authorized; total shares to be
issued as reflected........................ - 15 18 21 24
Additional paid in capital.................... - 1,255 1,522 1,789 2,097
Retained earnings(4)........................ 1,156 1,156 1,156 1,156 1,156
Net unrealized gain on securities available for
sale........................................ 14 14 14 14 14
Less:
Common Stock acquired by ESOP............... - (122) (144) (166) (190)
Common Stock acquired by RSP................ - (61) (72) (83) (95)
------ ------ ------ ------ ------
Total stockholders' equity.................... $ 1,170 $ 2,257 $ 2,494 $ 2,731 $ 3,006
====== ====== ====== ====== ======
</TABLE>
- ---------------------
(1) Excludes accrued interest payable on deposits. Withdrawals from savings
accounts for the purchase of stock have not been reflected in these
adjustments. Any withdrawals will reduce pro forma capitalization by the
amount of such withdrawals.
(2) Does not reflect the increase in the number of shares of common stock after
the conversion in the event of implementation of the Stock Option Plan or
RSP. See "Management of Carnegie Savings Bank -- Proposed Future Stock
Benefit Plans -- Stock Option Plan" and "-- Restricted Stock Plan."
(3) Assumes that 8% and 4% of the shares issued in the conversion will be
purchased by the ESOP and RSP, respectively. No shares will be purchased by
the RSP in the conversion. It is assumed that the RSP will purchase common
stock in the open market within one year of the conversion in order to give
an indication of its effect on capitalization. The pro forma presentation
does not show the impact of: (a) results of operations after the
conversion, (b) changing market prices of shares of common stock after the
conversion, or (c) a smaller than 4% or 8% purchase by the RSP or ESOP,
respectively. Assumes that the funds used to acquire the ESOP shares will
be borrowed from CFC for a ten year term at the prime rate as published in
The Wall Street Journal. For an estimate of the impact of the ESOP on
earnings, see "Pro Forma Data." The Bank intends to make contributions to
the ESOP sufficient to service and ultimately retire its debt. The amount
to be acquired by the ESOP and RSP is reflected as a reduction of
stockholders' equity. The issuance of authorized but unissued shares for
the RSP in an amount equal to 4% of the outstanding shares of common stock
will have the effect of diluting existing stockholders' voting interests by
3.9%. There can be no assurance that stockholder approval of the RSP will
be obtained. See "Management of Carnegie Savings Bank -- Proposed Future
Stock Benefit Plans -- Restricted Stock Plan."
(4) Our equity will be substantially restricted after the conversion. See
"Dividends," "Regulation -- Dividends and Other Capital Distribution
Limitations," "The Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Carnegie Savings Bank -- Liquidation Account"
and Note 13 to the Financial Statements.
6
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds are
currently estimated to be between $1,270,000 and $1,810,000 at the minimum and
maximum, as adjusted, of the EVR, based upon the following assumptions: (i) 8%
of the shares will be sold to the ESOP; (ii) Capital Resources, Inc. will have
received advisory and marketing fees (including legal fees and other
reimbursable expenses) of $80,000; (iii) no shares will be sold in a public
offering; (iv) other conversion expenses, excluding the fees and other expenses
paid to Capital Resources, Inc., will be $180,000; and (v) 4% of the shares will
be sold to the RSP. Because management of Carnegie Savings Bank presently
intends to adopt the RSP within the first year following the conversion, a
purchase by the RSP in the conversion has been included with the pro forma data
to give an indication of the effect of a 4% purchase by the RSP, at a $10.00 per
share purchase price in the market, even though the RSP does not currently exist
and is prohibited by OTS regulation from purchasing shares in the conversion.
The pro forma presentation does not show the effect of: (a) results of
operations after the conversion, (b) changing market prices of the shares after
the conversion, (c) less than a 4% purchase by the RSP, or (d) dilutive effects
of newly issued shares under the restricted stock plan and the stock option plan
(see footnotes 2 and 3).
The following table sets forth, our historical net earnings and
stockholders' equity prior to the conversion and the pro forma consolidated net
earnings and stockholders' equity of CFC following the conversion. Unaudited pro
forma consolidated net earnings and stockholders' equity have been calculated
for the year ended December 31, 1997, as if the common stock to be issued in the
conversion had been sold at January 1, 1997, and the estimated net proceeds had
been invested at 5.55%, which was approximately equal to the one-year U.S.
Treasury bill rate at December 31, 1997. The one-year U.S. Treasury bill rate,
rather than an arithmetic average of the average yield on interest-earning
assets and average rate paid on deposits, has been used to estimate income on
net proceeds because it is believed that the one-year U.S. Treasury bill rate is
a more accurate estimate of the rate that would be obtained on an investment of
net proceeds from the offering. In calculating pro forma income, a combined
effective state and federal income tax rate of 37% has been assumed for the
respective periods, resulting in an after tax yield of 3.50% for the year ended
December 31, 1997. Withdrawals from deposit accounts for the purchase of shares
are not reflected in the pro forma adjustments. The computations are based upon
the assumptions that 153,000 shares (minimum of EVR), 180,000 shares (midpoint
of EVR), 207,000 shares (maximum of EVR) or 238,050 shares (maximum, as
adjusted, of the EVR) are sold at a price of $10.00 per share. As discussed
under "Use of Proceeds," a portion of the net proceeds that CFC will receive
will be loaned to the ESOP to fund its anticipated purchase of 8% of shares
issued in the conversion. It is assumed that the yield on the net proceeds of
the conversion retained by CFC will be the same as the yield on the net proceeds
of the conversion transferred to us. Historical and pro forma per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares. Per share amounts have been computed as if the
shares had been outstanding at the beginning of the periods or at the dates
shown, but without any adjustment of per share historical or pro forma
stockholders' equity to reflect the earnings on the estimated net proceeds.
The stockholders' equity information is not intended to represent the
fair market value of the shares, or the current value of our assets or
liabilities, or the amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. For additional information regarding
the liquidation account, see "The Conversion -- Certain Effects of the
Conversion to Stock Form on Savers and Borrowers of Carnegie Savings Bank --
Liquidation Account" and Note 13 to the financial statements. The pro forma
income derived from the assumptions set forth above should not be considered
indicative of the actual results of our operations for any period. Such pro
forma data may be materially affected by a change in the price per share or
number of shares to be issued in the conversion and by other factors. For
information regarding investment of the proceeds see "Use of Proceeds" and "The
Conversion -- Stock Pricing" and "-- Change in Number of Shares to be Issued in
the Conversion."
7
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
------------------------------------------------
153,000 180,000 207,000 238,050
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ........................................... $ 1,530 $ 1,800 $ 2,070 $ 2,381
Less estimated offering expenses ......................... 260 260 260 260
------- ------- ------- -------
Estimated net proceeds ................................... 1,270 1,540 1,810 2,121
Less: ESOP funded by the Company ......................... (122) (144) (166) (190)
RSP funded by the Company ................................ (61) (72) (83) (95)
------- ------- ------- -------
Estimated investable net proceeds ........................ $ 1,087 $ 1,324 $ 1,561 $ 1,836
======= ======= ======= =======
Net income (loss):
Historical net income (loss) ............................. $ (54) $ (54) $ (54) $ (54)
Pro forma earnings on investable net proceeds ............ 38 46 55 64
Pro forma ESOP adjustment(1) ............................. (8) (9) (10) (12)
Pro forma RSP adjustment(2) .............................. (8) (9) (10) (12)
------- ------- ------- -------
Total .................................................... $ (32) $ (26) $ (19) $ (14)
======= ======= ======= =======
Net income (loss) per share:
Historical net income (loss) per share ................... $ (.38) $ (0.32) $ (0.28) $ (0.24)
Pro forma earnings on net proceeds ....................... 0.27 0.28 0.29 0.29
Pro forma ESOP adjustment(1) ............................. (0.06) (0.05) (0.05) (0.05)
Pro forma RSP adjustment(2) .............................. (0.06) (0.05) (0.05) (0.05)
------- ------- ------- -------
Total(5) ................................................. $ (0.23) $ (0.14) $ (0.09) $ (0.05)
======= ======= ======= =======
Stockholders' equity:(3)
Historical ............................................... $ 1,170 $ 1,170 $ 1,170 $ 1,170
Estimated net proceeds ................................... 1,270 1,540 1,810 2,121
Less: Common stock acquired by ESOP(1) ................... (122) (144) (166) (190)
Common stock acquired by RSP(2) .......................... (61) (72) (83) (95)
------- ------- ------- -------
Total .................................................... $ 2,257 $ 2,494 $ 2,731 $ 3,006
======= ======= ======= =======
Stockholders' equity per share:(3)
Historical ............................................... $ 7.65 $ 6.50 $ 5.65 $ 4.91
Estimated net proceeds ................................... 8.30 8.56 8.74 8.91
Less: Common stock acquired by ESOP(1) ................... (.80) (.80) (.80) (.80)
Common stock acquired by RSP(2) .......................... (.40) (.40) (.40) (.40)
------- ------- ------- -------
Total .................................................... $ 14.75 $ 13.86 $ 13.19 $ 12.62
======= ======= ======= =======
Offering price as a percentage of pro forma stockholders'
equity per share(4) ...................................... 67.80% 72.15% 75.82% 79.24%
======= ======= ======= =======
Ratio of offering price to pro forma earnings per share(5) (43.48)x (71.43)x (111.11)x (200.00)x
======= ======= ======= =======
</TABLE>
(footnotes on following page)
8
<PAGE>
- --------------------
(1) Assumes 8% of the shares sold in the conversion are purchased by the ESOP,
and that the funds used to purchase such shares are borrowed from CFC. The
approximate amount expected to be borrowed by the ESOP is not reflected as
a liability but is reflected as a reduction of capital. We intend to make
annual contributions to the ESOP over a ten year period in an amount at
least equal to the principal and interest requirement of the debt. Interest
income earned by us on the ESOP debt offsets the interest paid by Carnegie
Savings Bank on the ESOP loan. Therefore, only the principal payments on
the ESOP debt are recorded as a tax-effected expense. The pro forma net
income assumes: (i) that 1,224, 1,440, 1,656 and 1,904 shares at the
minimum, midpoint, maximum and maximum, as adjusted of the EVR, were
committed to be released during the twelve months December 31, 1997 at an
average fair value of $10.00 per share in accordance with Statement of
Position ("SOP") 93-6 of the American Institute of Certified Public
Accountants ("AICPA"); (ii) the effective tax rate was 37% for such periods
based upon a combined federal and state tax rate; and (iii) only the ESOP
shares committed to be released were considered outstanding for purposes of
the per share net earnings. The pro forma stockholders' equity per share
calculation assumes all ESOP shares were outstanding, regardless of whether
such shares would have been released. Because CFC will be providing the
ESOP loan, only principal payments on the ESOP loan are reflected as
employee compensation and benefits expense. As a result, to the extent the
value of the shares appreciates over time, compensation expense related to
the ESOP will increase. For purposes of the preceding tables, it was
assumed that a ratable portion of the ESOP shares purchased in the
conversion were committed to be released during the period ended December
31, 1997. See Note 5 below. If it is assumed that all of the ESOP shares
were included in the calculation of earnings per share for the year ended
December 31, 1997, earnings per share would have been $(0.21), $(0.14),
$(0.09) and $(0.06), based on the sale of shares at the minimum, midpoint,
maximum and the maximum, as adjusted, of the EVR. See "Management of
Carnegie Savings Bank -- Other Benefits -- Employee Stock Ownership Plan."
(2) Assumes issuance to the RSP of 6,120, 7,200, 8,280, and 9,522 shares at the
minimum, midpoint, maximum, and maximum, as adjusted of the EVR. The
assumption in the pro forma calculation is that (i) shares were purchased
by CFC following the conversion, (ii) the purchase price for the shares
purchased by the RSP was equal to the purchase price of $10 per share (iii)
20% of the amount contributed was an amortized expense during such period,
and (iv) the effective tax rate was 37% for such periods based upon a
combined federal and state tax rate. Such amount does not reflect possible
increases or decreases in the value of such stock relative to the Purchase
Price. As we accrue compensation expense to reflect the five year vesting
period of such shares pursuant to the RSP, the charge against capital will
be reduced accordingly. Implementation of the RSP within one year of
conversion would require regulatory and stockholder approval at a meeting
of our stockholders to be held no earlier than six months after the
conversion. If the shares to be purchased by the RSP are assumed at January
1, 1997, to be newly issued shares purchased from CFC by the RSP at the
Purchase Price, at the minimum, midpoint, maximum and maximum, as adjusted,
of the EVR, pro forma stockholders' equity per share would have been
$14.19, $13.32, $12.68, and $12.14, and pro forma earnings per share would
have been $(0.20), $(0.13), $(0.08), and $(0.05). As a result of the RSP
from newly issued shares, stockholders' voting interests could be diluted
by up to approximately 3.9%. The pro forma data assumes the required
regulatory and stockholder approvals. See "Management of Carnegie Savings
Bank -- Proposed Future Stock Benefit Plans -- Restricted Stock Plan."
(3) Assumes that following the consummation of the conversion, CFC will adopt
the Stock Option Plan, which if implemented within one year of conversion
would be subject to regulatory review and board of director and stockholder
approval, and that such plan would be considered and voted upon at a
meeting of CFC stockholders to be held no earlier than six months after the
conversion. Under the Stock Option Plan, employees and directors could be
granted options to purchase an aggregate amount of shares equal to 10% of
the shares issued in the conversion at an exercise price equal to the
market price of the shares on the date of grant. In the event the shares
issued under the Stock Option Plan were newly issued rather than purchased
in the open market, the voting interests of existing stockholders could be
diluted by up to approximately 9.1%. At the minimum, midpoint, maximum and
the maximum, as adjusted, of the EVR, if all shares under the Stock Option
Plan were newly issued at the beginning of the respective periods and the
exercise price for the stock option shares were equal to the Purchase
Price, the number of outstanding shares would increase to 157,284, 185,040,
212,796 and 244,715, respectively, pro forma stockholders'
9
<PAGE>
equity per share would have been $14.32, $13.51, $12.90, and $12.39, and
pro forma earnings per share for the year ended December 31, 1997 would
have been $(0.20), $(0.14), $(0.09), and $(0.06).
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets over its liabilities. The calculations are based upon
the number of shares issued in the conversion, without giving effect to SOP
93-6. The amounts shown do not reflect the federal income tax consequences
of the potential restoration to income of the tax bad debt reserves for
income tax purposes, which would be required in the event of liquidation.
The amounts shown also do not reflect the amounts required to be
distributed in the event of liquidation to eligible depositors from the
liquidation account which will be established upon the consummation of the
conversion. Pro forma stockholders' equity information is not intended to
represent the fair market value of the shares, the current value of our
assets or liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the conversion and by other factors.
(5) Pro forma net income per share calculations include the number of shares
assumed to be sold in the conversion and, in accordance with SOP 93-6,
exclude ESOP shares which would not have been released during the period.
Accordingly, 11,016, 12,960, 14,904, and 17,140 shares have been subtracted
from the shares assumed to be sold at the minimum, midpoint, maximum, and
maximum, as adjusted, of the EVR, respectively, and 141,984, 167,040,
192,096, and 220,910 shares are assumed to be outstanding at the minimum,
midpoint, maximum, and maximum, as adjusted of the EVR. See Note 1 above.
10
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents our historical and pro forma
capital position relative to our capital requirements as of December 31, 1997.
For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "Use of Proceeds," "Capitalization" and "Pro
Forma Data." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to us, see "Regulation -- Savings Institution Regulation --
Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma(1)
------------------------------------------------------------------------------------
$2,380,500
$1,530,000 $1,800,000 $2,070,000 Maximum,
Historical Minimum Midpoint Maximum as adjusted
--------------- -------------- --------------- --------------- --------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
(2) (2) (2) (2) (2)
------ ------- ------ ------ ------ ------- ------- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital.................................... $1,170 7.00% $1,729 10.00% $1,729 10.00% $1,826 10.51% $1,946 11.12%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Tangible Capital................................ $1,170 7.00% $1,729 10.00% $1,729 10.00% $1,826 10.51% $1,946 11.12%
Tangible Capital Requirement.................... 251 1.50 259 1.50 259 1.50 261 1.50 262 1.50
------ ----- ------ ----- ----- ----- ------ ----- ------ -----
Excess.......................................... $ 919 5.50% $1,469 8.50% $1,469 8.50% $1,565 9.01% $1,663 9.62%
====== ===== ===== ===== ===== ===== ===== ===== ===== =====
Core Capital(3)................................. $1,170 7.00% $1,729 10.00% $1,729 10.00% $1,826 10.51% $1,946 11.12%
Core Capital Requirement(4)..................... 502 3.00 518 3.00 518 3.00 521 3.00 525 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.......................................... $ 668 4.00% $1,211 7.00% $1,211 7.00% $1,305 7.51% $1,421 8.12%
====== ===== ====== ===== ===== ===== ===== ===== ===== =====
Total Risk-Based Capital (4).................... $1,272 14.84 $1,831 20.93% $1,831 20.93% $1,928 21.97% $2,048 23.22%
Risk-Based Capital Requirement.................. 686 8.00 701 8.00 701 8.00 702 8.00 705 8.00
------ ----- ------ ----- ----- ----- ----- ----- ----- -----
Excess.......................................... $ 586 6.84% $1,130 12.90% $1,130 12.93% $1,226 13.97% $1,342 15.22%
====== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- --------------------
1) The pro forma data has been adjusted to reflect reductions in our capital
that would result from an assumed 8% purchase by the ESOP and 4% purchase
by the RSP as of December 31, 1997. It is assumed that CFC will purchase
all of the capital stock of Carnegie Savings Bank in exchange for the
amount necessary to increase Carnegie Savings Bank's tangible regulatory
capital to 10%. At the minimum, midpoint, maximum and maximum, as adjusted,
it is assumed that CFC will use 58.4%, 50.3%, 50%, and 50%, respectively,
of the net conversion proceeds to purchase Carnegie Savings Bank's capital
stock.
(2) GAAP, adjusted, or risk-weighted assets as appropriate.
(3) Proposed regulations of the OTS could increase the core capital requirement
to a ratio between 4% and 5%, based upon an association's regulatory
examination rating. See "Regulation - Regulatory Capital Requirements."
(4) Our Risk-Based Capital includes our Tangible Capital plus $102,000 of our
allowance for loan losses. As of December 31, 1997, our risk-weighted
assets totaled approximately $8.6 million and our total adjusted assets
were $16.7 million. Net proceeds available for investment by us are assumed
to be invested in interest-earning assets that have a 50% risk-weighting.
See Note 9 to our financial statements.
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THE CONVERSION
Our board of directors and the OTS have approved the Plan of Conversion
("Plan" or "Plan of Conversion") subject to the Plan's approval by our members,
and subject to the satisfaction of certain other conditions imposed by the OTS
in its approval. OTS approval, however, does not constitute a recommendation or
endorsement of the Plan by the OTS.
General
On December 15, 1997, our board of directors adopted a Plan of
Conversion which provides for the conversion of Carnegie Savings Bank from a
Pennsylvania mutual savings bank into a Federal mutual savings bank and then
into a Federal capital stock savings bank which will become a wholly owned
subsidiary of CFC. The conversion will include adoption of the proposed Federal
stock charter and bylaws which will authorize the issuance of capital stock by
us. Under the Plan, our capital stock is being sold to CFC and the common stock
of CFC is being offered to our eligible depositors and members and then to the
public. The conversion will be accounted for at historical cost in a manner
similar to a pooling of interests.
The OTS has approved CFC's application to become a savings and loan
holding company and to acquire all of our common stock to be issued in the
conversion. Pursuant to such OTS approval, CFC plans to retain up to 50% of the
net proceeds from the sale of shares of our common stock and to use the
remaining proceeds to purchase all of the common stock we will issue in the
conversion. See "Use of Proceeds."
The shares are first being offered in a subscription offering to
holders of subscription rights. To the extent shares of common stock remain
available after the subscription offering, shares of common stock may be offered
in a community offering and any shares remaining after the community offering
may be offered in a public offering. The community offering or public offering,
if any, may commence anytime subsequent to the commencement of the subscription
offering. We have the right, in our sole discretion, to accept or reject, in
whole or in part, any orders to purchase shares of the common stock received in
the community or public offering. See "-- Community Offering," "-- Public
Offering."
Shares of common stock in an amount equal to our pro forma market value
as a stock savings institution must be sold in order for the conversion to
become effective. The community offering must be completed within 45 days after
the last day of the subscription offering period unless such period is extended
by us with the approval of the OTS. The Plan provides that the conversion must
be completed within 24 months after the date of the approval of the Plan by our
members.
In the event that we are unable to complete the sale of common stock
and effect the conversion within 45 days after the end of the subscription
offering, we may request an extension of the period by the OTS. No assurance can
be given that the extension would be granted if requested. Due to the
potentially volatile nature of market conditions, no assurances can be given
that our estimated market valuation would not substantially change during any
such extension. If the valuation of the shares must be amended, no assurance can
be given that such amended valuation would be approved by the OTS. Therefore, it
is possible that if the conversion cannot be completed within the requisite
period, we may not be permitted to complete the conversion. A substantial delay
caused by an extension of the period may also significantly increase the expense
of the conversion. No sales of the shares may be completed in the offering
unless the Plan is approved by our members and by the OTS.
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<PAGE>
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time following approval of the Plan at the meeting of our members that will be
required to complete the sale of shares being offered in the conversion. If
delays are experienced, significant changes may occur in our estimated pro forma
market value upon conversion together with corresponding changes in the offering
price and the net proceeds to be realized by us from the sale of the shares. In
the event the conversion is terminated, we will charge all conversion expenses
against current income and any funds collected by us in the offering will be
promptly returned, with interest, to each potential investor.
Effects of Conversion to Stock Form on Depositors and Borrowers of Carnegie
Savings Bank
Voting Rights. Currently in our mutual form, our depositors have voting
rights and may vote for the election of directors. Following the conversion, all
voting rights will be held solely by stockholders. A stockholder will be
entitled to one vote for each share of common stock owned.
Savings Accounts and Loans. The balances, terms and FDIC insurance
coverage of savings accounts will not be affected by the conversion.
Furthermore, the amounts and terms of loans and obligations of the borrowers
under their individual contractual arrangements with us will not be affected by
the conversion.
Tax Effects. We have received an opinion from our counsel, Malizia,
Spidi, Sloane & Fisch, P.C. on the federal tax consequences of the conversion.
The opinion has been filed as an exhibit to the registration statement of which
this prospectus is a part and covers those federal tax matters that are material
to the transaction. The opinion provides, in part, that: (i) the conversion will
qualify as a reorganization under Section 368(a)(1)(F) of the Code, and no gain
or loss will be recognized by us by reason of the proposed conversion; (ii) no
gain or loss will be recognized by us upon the receipt of money from CFC for our
stock, and no gain or loss will be recognized by CFC upon the receipt of money
for the shares; (iii) our assets will have the same basis before and after the
conversion; (iv) the holding period of our assets will include the period during
which the assets were held by us in our mutual form; (v) no gain or loss will be
recognized by the Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members upon the issuance to them of withdrawable savings
accounts in us in the stock form in the same dollar amount as their savings
accounts in us in the mutual form plus an interest in the liquidation account of
us in the stock form in exchange for their savings accounts in us in the mutual
form; (vi) provided that the amount to be paid for the shares pursuant to the
subscription rights is equal to the fair market value of such shares, no gain or
loss will be recognized by Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members under the Plan upon the distribution to them
of nontransferable subscription rights; (vii) the basis of each account holder's
savings accounts after the conversion will be the same as the basis of his
savings accounts prior to the conversion, decreased by the fair market value of
the nontransferable subscription rights received and increased by the amount, if
any, of gain recognized on the exchange; (viii) the basis of each account
holder's interest in the liquidation account will be zero; (ix) the holding
period of the common stock acquired through the exercise of subscription rights
shall begin on the date on which the subscription rights are exercised; (x) we
will succeed to and take into account the earnings and profits or deficit in
earnings and profits of us as of the date of conversion; and (xi) the creation
of the liquidation account will have no effect on our taxable income.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part
on the assumption that the exercise price of the subscription rights will be
approximately equal to the fair market value of those shares at the time of the
completion of the proposed conversion. We have received an opinion of FinPro
which, based on certain assumptions, concludes that the subscription rights to
be received by Eligible Account Holders and other eligible subscribers do not
have any economic value at the time of distribution or at
13
<PAGE>
the time the subscription rights are exercised. Such opinion is based on the
fact that such rights are: (i) acquired by the recipients without payment
therefor, (ii) non-transferable, (iii) of short duration, and (iv) afford the
recipients the right only to purchase shares at a price equal to their estimated
fair market value, which will be the same price at which shares for which no
subscription right is received in the subscription offering will be offered in
the community offering, public or syndicated public offering. If the
subscription rights granted to Eligible Account Holders or other eligible
subscribers are deemed to have an ascertainable value, receipt of such rights
would be taxable only to those Eligible Account Holders or other eligible
subscribers who exercise the subscription rights in an amount equal to such
value (either as a capital gain or ordinary income), and we could recognize gain
on such distribution.
We are also subject to Pennsylvania income taxes and have received an
opinion from Malizia, Spidi, Sloane & Fisch, P.C. that the conversion will be
treated for Pennsylvania state tax purposes similar to the conversion's
treatment for federal tax purposes. The opinion has been filed as an exhibit to
the registration statement to which this Prospectus is a part and covers those
state tax matters that are material to the transaction.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane
& Fisch, P.C. and FinPro have no binding effect or official status, and no
assurance can be given that the conclusions reached in any of those opinions
would be sustained by a court if contested by the IRS or the Pennsylvania tax
authorities. Eligible Account Holders, Supplemental Eligible Account Holders,
and Other Members are encouraged to consult with their own tax advisers as to
the tax consequences in the event the subscription rights are deemed to have an
ascertainable value. If the subscription rights are deemed to have an
ascertainable value, eligible account holders, supplemental eligible account
holders, and other members may be deemed to have taxable income based upon the
value of the subscription rights.
Liquidation Account. In the unlikely event of our complete liquidation
in our present mutual form, each depositor is entitled to share in a
distribution of our assets, remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his deposit accounts was to the total value
of all deposit accounts in us at the time of liquidation.
Upon a complete liquidation after the conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of ours. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his deposit
account plus accrued interest. A depositor would not have an interest in the
residual value of our assets above that amount, if any.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he continues to maintain his
deposit account with us, would be entitled on a complete liquidation of us after
conversion, to an interest in the liquidation account prior to any payment to
stockholders. Each Eligible Account Holder would have an initial interest in
such liquidation account for each deposit account held in us on the qualifying
date, November 30, 1996. Each Supplemental Eligible Account Holder would have a
similar interest as of the qualifying date, March 31, 1998. The interest as to
each deposit account would be in the same proportion of the total liquidation
account as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such qualifying dates. However, if the
amount in the deposit account on any annual closing date of ours (December 31)
is less than the amount in such account on the respective qualifying dates, then
the interest in this special liquidation account would be reduced from time to
time
14
<PAGE>
by an amount proportionate to any such reduction, and the interest would cease
to exist if such deposit account were closed. The interest in the special
liquidation account will never be increased despite any increase in the related
deposit account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which we, in our converted form, are not the surviving
institution, shall be considered a complete liquidation. In such transactions,
the liquidation account shall be assumed by the surviving institution.
Subscription Rights and the Subscription Offering
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights.
Subscription rights may be exercised only by the person to whom they are granted
and only for his account. Each person subscribing for shares will be required to
certify that he is purchasing shares solely for his own account and has not
entered into an agreement or understanding regarding the sale or transfer of
those shares. The regulations also prohibit any person from offering or making
an announcement of an offer or intent to make an offer to purchase subscription
rights or shares of common stock prior to the completion of the conversion. We
intend to pursue any and all legal and equitable remedies in the event we become
aware of the transfer of subscription rights and we will not honor orders known
by us to involve the transfer of such rights. In addition, persons who violate
the purchase limitations may be subject to sanctions and penalties imposed by
the OTS.
Subscription Priorities. Non-transferable subscription rights to
purchase shares of the common stock have been granted to persons and entities
entitled to purchase shares in the subscription offering under the Plan. If the
community offering or public offering, if any, as described below, extends
beyond 45 days following the completion of the subscription offering,
subscribers will be resolicited. Subscription priorities have been established
for the allocation of stock to the extent that shares are available after
satisfaction of all subscriptions of all persons having prior rights and subject
to the purchase limitations set forth in the Plan and as described below under
"-- Limitations on Purchases of Shares." The following priorities have been
established:
Category 1: Eligible Account Holders (First Priority). Eligible Account Holders
are persons who had a deposit account of at least $50 with us on November 30,
1996. Each Eligible Account Holder (or persons through a single account) will
receive non-transferable subscription rights on a priority basis to purchase
that number of shares of common stock which is equal to the greater of 5,000
shares ($50,000), or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of subscription rights
in this category results in an oversubscription, shares shall be allocated among
subscribing Eligible Account Holders so as to permit each such account holder,
to the extent possible, to purchase the lesser of 100 shares or the total amount
of his subscription. Any shares not so allocated shall be allocated among the
subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Eligible Account Holders. Only a
person(s) with a qualifying deposit as of the eligibility record date (or a
successor entity or estate) shall receive subscription rights. Any Person(s)
added to a Savings Account after the Eligibility Record Date is not an Eligible
Account Holder. Subscription rights received by officers and directors in this
category based on their increased deposits in us in the one-year
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<PAGE>
period preceding the Eligibility Record Date, are subordinated to the
subscription rights of other Eligible Account Holders. See "-- Limitations on
Purchases and Transfer of Shares."
Category 2: Tax-Qualified Employee Benefit Plans (Second Priority). Our
tax-qualified employee benefit plans ("Employee Plans") have been granted
subscription rights to purchase up to 8% of the total shares issued in the
conversion. The ESOP is an Employee Plan.
The right of Employee Plans to subscribe for shares is subordinate to
the right of the Eligible Account Holders to subscribe for shares. However, in
the event the offering results in the issuance of shares above the maximum of
the EVR (i.e., more than 207,000 shares), the Employee Plans have a priority
right to fill their subscription out of the shares sold in excess of the EVR
(the ESOP, the only Employee Plan, currently intends to purchase up to 8% of the
common stock issued in the conversion). The Employee Plans may, however,
determine to purchase some or all of the shares covered by their subscriptions
after the conversion in the open market or, if approved by the OTS, out of
authorized but unissued shares in the event of an oversubscription.
Category 3: Supplemental Eligible Account Holders (Third Priority). Supplemental
Eligible Account Holders are persons who had a deposit account of at least $50
with us on March 31, 1998. Each Supplemental Eligible Account Holder (or persons
through a single account) who is not an Eligible Account Holder will receive
non-transferable subscription rights to purchase that number of shares which is
equal to the greater of 5,000 shares ($50,000), or 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares to be issued by a fraction of which the numerator is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders. If the exercise of subscription rights in this
category results in an oversubscription, shares shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
account holder, to the extent possible, to purchase the lesser of 100 shares or
the total amount of his subscription. Any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective qualifying deposits
as compared to the total qualifying deposits of all subscribing Supplemental
Eligible Account Holders. The right of Supplemental Eligible Account Holders to
subscribe for shares is subordinate to the rights of the Eligible Account
Holders and Employee Plans to subscribe for shares. See "-- Limitations on
Purchases and Transfer of Shares."
Category 4: Other Members (Fourth Priority). Other Members are persons who have
a deposit account of at least $50 on the voting record date of our special
meeting. Each Other Member who is not an Eligible Account Holder or Supplemental
Eligible Account Holder, will receive non-transferable subscription rights to
purchase up to 5,000 shares ($50,000) to the extent such shares are available
following subscriptions by Eligible Account Holders, Employee Plans, and
Supplemental Eligible Account Holders. In the event there are not enough shares
to fill the orders of the Other Members, the subscriptions of the Other Members
will be allocated so that each subscribing Other Member will be entitled to
purchase the lesser of 100 shares or the number of shares ordered. Any remaining
shares will be allocated among Other Members whose subscriptions remain
unsatisfied on a 100 share (or whatever lesser amount is available) per order
basis until all orders have been filled or the remaining shares have been
allocated. See "-- Limitations on Purchases and Transfer of Shares."
Members in Non-Qualified States. We will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for the shares pursuant to the Plan reside.
However, no person will be offered or allowed to purchase any shares under the
Plan if he resides in a foreign country or in a state with respect to which any
of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in that state or foreign
16
<PAGE>
country; (ii) the granting of subscription rights or offer or sale of shares of
common stock to those persons would require either us, or our employees to
register, under the securities laws of that state or foreign country, as a
broker or dealer or to register or otherwise qualify our securities for sale in
that state or foreign country; or (iii) such registration or qualification would
be impracticable for reasons of cost or otherwise. No payments will be made in
lieu of the granting of subscription rights to any person.
We intend to pursue any and all legal and equitable remedies in the
event we become aware of the transfer of subscription rights and will not honor
orders believed by us to involve the transfer of subscription rights.
Expiration Date. The subscription offering will expire at 12:00 p.m.
(noon), Eastern Time, on June 19, 1998, (Expiration Date). Subscription rights
will become void if not exercised prior to the Expiration Date.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, Employee Plans,
Supplemental Eligible Account Holders and Other Members, we may offer shares to
certain members of the general public with a preference to natural persons
residing in Allegheny County, Pennsylvania, under terms and conditions as
established by the Board of Directors. The community offering, if any, will
commence subsequent to the commencement of the subscription offering. No person
in the community offering, may purchase more than 5,000 shares or $50,000 of
common stock. The right of any person or entity to purchase shares in the
community offering is subject to our right to accept or reject purchases in
whole or in part either at the time of receipt of an order, or as soon as
practicable following the completion of the community offering.
Persons and entities not purchasing the common stock in the
subscription offering may purchase common stock in the community offering by
returning to us a completed and properly executed order form along with full
payment.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the community
offering. In the event an insufficient number of shares are available to fill
orders in the community offering, the available shares will be allocated among
persons submitting orders on an equitable basis determined by the Board of
Directors, provided that a preference will be given to natural persons residing
in Allegheny County, Pennsylvania. If the community offering extends beyond 45
days following the completion of the subscription offering (August 3, 1998) and
such extension is approved by the regulatory authorities, subscribers will have
the right to modify, confirm, decrease or rescind subscriptions for stock
previously submitted. All sales of common stock in the community offering will
be at the same price as in the subscription offering.
Public Offering
Shares of common stock not purchased in the subscription offering and
community offering, if any, may be offered for sale to the general public in a
public offering through selected broker-dealers to be formed and managed by
Capital Resources, Inc.. The public offering, if any, will be conducted to
achieve the widest distribution of common stock subject to our right to reject
orders in whole or in part. Neither Capital Resources, Inc. nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
common stock in the public or syndicated public offering. Stock sold in the
public or syndicated public offering will be sold at the same price as all other
shares.
17
<PAGE>
No person, may purchase more than 5,000 shares or $50,000 in the public
offering. In the event that selected dealer agreements are entered into in
connection with a public offering, we will pay commissions to selected dealers
(which may include Capital Resources, Inc.) at a rate to be agreed upon between
Capital Resources and us for shares sold by the selected dealer.
The public offering will terminate no more than 45 days following the
subscription offering (August 3, 1998), unless extended with the approval of the
OTS.
Ordering and Receiving Shares
Use of Order Forms. Rights to subscribe in the subscription offering or
purchase stock in the community offering, if any, may only be exercised by
completion of an original order form. Persons ordering shares in the
subscription offering must deliver by mail or in person a properly completed and
executed original order form to us prior to the Expiration Date. Order forms
must be accompanied by full payment for all shares ordered. See "-- Payment for
Shares." Subscription rights under the Plan will expire on the Expiration Date,
whether or not we have been able to locate each person entitled to subscription
rights. Once submitted, orders may not be revoked or modified without our
consent.
In the event an order form (i) is not delivered by the United States
Postal Service, (ii) is not received or is received after the Expiration Date,
(iii) is defectively completed or executed, or (iv) is not accompanied by full
payment for the shares subscribed for (including instances where your savings
account or certificate balance from which withdrawal is authorized is
insufficient to fund the amount of such required payment), the subscription
rights for the person to whom such rights have been granted will lapse as though
that person failed to return the completed order form within the time period
specified. We may, but will not be required to, waive any irregularity on any
order form or require the submission of corrected order forms or the remittance
of full payment for subscribed shares by such date as we specify. The waiver of
an irregularity on an order form in no way obligates us to waive any other
irregularity on that, or any irregularity on any other, order form. Waivers will
be considered on a case by case basis. Photocopies of order forms, payments from
private third parties, or electronic transfers of funds may not be accepted. Our
interpretation of the terms and conditions of the Plan and of the acceptability
of the order forms will be final. We have the right to investigate any
irregularity on any order form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
Payment for Shares. Payment for shares of common stock in the
subscription offering may be made (i) in cash, if delivered in person, (ii) by
check or money order payable to us, or (iii) by authorization of withdrawal from
savings accounts (including certificates of deposit) maintained with us. Orders
of $25,000 or more must be paid by Carnegie Savings Bank account withdrawals,
certified funds, cashier's check or money order. Appropriate means by which such
withdrawals may be authorized are provided in the order form. Once such a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by the subscriber for any purpose other than to purchase the shares. Where
payment has been authorized to be made through withdrawal from a savings
account, the sum authorized for withdrawal will continue to earn interest at the
contract rate until the conversion has been completed or terminated. Interest
penalties for early withdrawal applicable to certificate accounts will not apply
to withdrawals authorized for the purchase of shares; however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook savings account rate subsequent to
the withdrawal. Payments
18
<PAGE>
made in cash or by check or money order, will be placed in a segregated savings
account and interest will be paid by us at our passbook savings account rate
from the date payment is received until the conversion is completed or
terminated. An executed order form, once received by us, may not be modified,
amended, or rescinded without our consent, unless the conversion is not
completed within 45 days after the conclusion of the subscription offering, in
which event subscribers may be given an opportunity to modify or cancel their
order. In the event that the conversion is not consummated, all funds submitted
pursuant to the offering will be refunded promptly with interest.
Individual Retirement Accounts ("IRAs") maintained with us do not
permit investment in common stock. If you are interested in using your IRA funds
to purchase our common stock, you must do so through a self-directed IRA. Since
we do not offer such accounts, we will allow you to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase our common stock in the
offering. There will be no early withdrawal or IRS interest penalties for such
transfers. The new trustee would hold your stock in a self-directed account in
the same manner as we now hold your IRA funds. An annual administrative fee may
be payable to the new trustee. If you are interested in using your IRA funds to
purchase our common stock, you should contact our Stock Center as soon as
practicable so that the necessary forms may be forwarded for execution and
returned prior to the Expiration Date.
The ESOP may subscribe for shares by submitting its order form along
with evidence of a loan commitment from another financial institution or CFC for
the purchase of the shares during the subscription offering and by making
payment for shares on the date of completion of the conversion.
We will place cash and checks submitted in the offering in a segregated
account. Interest will be paid on orders made by check or in cash at the
passbook savings account rate from the date the payment is received until the
completion or termination of the conversion. In the event that the conversion is
not completed for any reason, all funds submitted pursuant to the offering will
be promptly refunded with interest.
Federal regulations prohibit us from lending funds or extending credit
to any person to purchase shares in the conversion.
Delivery of Stock Certificates. Certificates representing shares of
common stock issued in the conversion will be mailed to the person(s) at the
address noted on the order form, as soon as practicable following consummation
of the conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
Plan of Distribution
Materials for the subscription offering have been distributed to
persons with subscriptions rights by mail. Additional copies are available at
our Stock Center. Our officers may be available to answer questions about the
conversion. Responses to questions about us will be limited to the information
contained in this document. Officers will not be authorized to render investment
advice. All subscribers for the shares being offered in the subscription
offering and if applicable, the community offering, will be instructed to send
payment directly to us. The funds will be held in a segregated special escrow
account and will not be released until the closing of the conversion or its
termination.
19
<PAGE>
Marketing Arrangements
Capital Resources, Inc. has been engaged as our consultant and
financial advisor in connection with the offering. Capital Resources, Inc. has
agreed to exercise its best efforts to assist us to solicit subscriptions and
purchase orders for shares in the offering. However, Capital Resources, Inc. is
not obligated to take or purchase any shares of common stock in the offering.
Capital Resources, Inc. will receive $60,000 plus reimbursement for
out-of-pocket and legal expenses not to exceed $20,000. In the event that common
stock is offered through a public offering, we will pay an additional fee to
such selected dealers (which may include Capital Resources, Inc.) of up to 4.0%
of the aggregate amount of stock sold in connection with the public offering.
Also, we have agreed to indemnify Capital Resources, Inc. for reasonable costs
and expenses in connection with certain claims or liabilities which might be
asserted against Capital Resources, Inc. This indemnification covers the
investigation, preparation of defense and defense of any action, proceeding or
claim relating to misrepresentation or breach of warranty of the written
agreement between Capital Resources, Inc. and us or the omission or alleged
omission of a material fact required to be stated or necessary in the prospectus
or other documents.
The shares will be offered principally by the distribution of this
document and through activities conducted at a Stock Center located at our
office. The Stock Center is expected to operate during our normal business hours
throughout the offering. A registered representative employed by Capital
Resources, Inc. will be available at the Stock Center. Capital Resources, Inc.
will assist us in responding to questions regarding the conversion and the
offering and processing order forms.
Stock Pricing
Federal Regulations promulgated by OTS require that a converting
savings association issue and sell its capital stock at a total price equal to
the estimated pro forma market value of such stock in the converted savings
association, based on an independent valuation. These regulations require us to
retain an appraiser who is independent of us, experienced and expert in the area
of corporate appraisal and acceptable to OTS. FinPro, an independent economic
consulting and appraisal firm, which is experienced in the evaluation and
appraisal of business entities, including savings institutions involved in the
conversion process has been retained by us to prepare an appraisal of our
estimated pro forma market value. The term "independent appraiser" is defined by
the federal regulations, and FinPro was required to submit information to OTS to
establish its independence in conformity with those regulations. OTS has issued
Guidelines to appraisers in connection with the appraisal of converting savings
institutions which describe the methodology that OTS expects the appraiser to
utilize. OTS reviews the appraisal and any appraisal update submitted to them,
and the methodology employed therein. If OTS indicates that it does not approve
of the appraisal or appraisal update, this will necessitate a converting savings
association such as us to adjust the appraisal or appraisal updates. Although
OTS has not objected to the appraisal of us in connection with the conversion,
the final appraisal might change and we might be required to sell additional
stock to consummate the conversion. There also can be no assurance that the
common stock will exhibit the post-conversion price and trading patterns
experienced by other converting mutual association, or that the common stock
will sell in the aftermarket at $10.00 per share or in the aggregate at or above
the estimated pro forma market value.
FinPro will receive a fee of $23,500 for preparing the appraisal and
its assistance in connection with the preparation of a business plan and will be
reimbursed for reasonable out-of-pocket expenses up to $4,000. We have agreed to
indemnify FinPro under certain circumstances against liabilities and expenses
arising out of or based on any misstatement or untrue statement of a material
fact contained in the information supplied by us to FinPro.
20
<PAGE>
The appraisal was prepared by FinPro in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors including, but not limited to, our financial
condition and operating trends, the competitive environment within which we
operate, operating trends of certain savings institutions and savings and loan
holding companies, relevant economic conditions, both nationally and in the
Commonwealth of Pennsylvania which affect the operations of savings
institutions, and stock market values of certain savings institutions and stock
market conditions for publicly traded savings institutions and savings and loan
holding companies. In addition, FinPro has advised us that it has considered the
effect of the additional capital raised by the sale of the shares on our
estimated aggregate pro forma market value.
On the basis of the above, FinPro has determined, in its opinion, that
as of March 12, 1998 our estimated aggregate pro forma market value was
$1,800,000. OTS regulations require, however, that the appraiser establish a
range of value for the stock to allow for fluctuations in the aggregate value of
the stock due to changing market conditions and other factors. Accordingly,
FinPro has established a range of value from $1,530,000 to $2,070,000 for the
offering, the EVR. Upon the completion of the Offering, FinPro, after taking
into account factors similar to those involved in its prior appraisal as well as
the results of the Offering, will determine its estimate of the pro forma market
value as of the close of the Offering based on information available to FinPro
at that time. This may result in an increase or decrease in the EVR. An increase
or decrease in the EVR will result in a change in the number of shares to be
issued in the Conversion. See "Changes in Number of Shares to be Issued in the
Conversion."
The board of directors has reviewed the independent appraisal,
including the stated methodology of the independent appraiser and the
assumptions used in the preparation of the independent appraisal. The board of
directors is relying upon the expertise, experience and independence of the
appraiser and is not qualified to determine the appropriateness of the
assumptions.
In order for stock sales to take place FinPro must confirm to the OTS
that, to the best of FinPro's knowledge and judgment, nothing of a material
nature has occurred which would cause FinPro to conclude that the Purchase Price
on an aggregate basis was incompatible with FinPro's estimate of our pro forma
market value of us in converted form at the time of the sale. If, however, facts
do not justify such a statement, an amended EVR may be established.
The appraisal is not a recommendation of any kind as to the
advisability of purchasing these shares. In preparing the appraisal, FinPro has
relied upon and assumed the accuracy and completeness of financial and
statistical information provided by us. FinPro did not independently verify the
financial statements and other information provided by us, nor did FinPro value
independently our assets and liabilities. The appraisal considers us only as a
going concern and should not be considered as our liquidation value. Moreover,
because the appraisal is based upon estimates and projections of a number of
matters which are subject to change, the market price of the common stock could
decline below $10.00. Copies of the appraisal report of FinPro setting forth the
method and assumptions for such appraisal are on file and available for
inspection at the main office of Carnegie Savings Bank and as set forth in
"Where You can Find Additional Information." Any subsequent updated appraisal
report of FinPro also will be available for inspection.
Change in Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the
completion of the offerings, we may significantly increase or decrease the
number of shares to be issued in the conversion. In the event of an increase in
the valuation, we may increase the total number of shares to be issued in the
conversion. An increase in the total number of shares to be issued in the
conversion would decrease a subscriber's percentage ownership interest and the
pro forma net worth (book value) per share and increase the pro
21
<PAGE>
forma net income and net worth (book value) on an aggregate basis. In the event
of a material reduction in the valuation, we may decrease the number of shares
to be issued to reflect the reduced valuation. A decrease in the number of
shares to be issued in the conversion would increase a subscriber's percentage
ownership interest and the pro forma net worth (book value) per share and
decrease pro forma net income and net worth on an aggregate basis. For a
presentation of the possible effects of an increase or decrease in the number of
shares to be issued, see "Pro Forma Data".
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the conversion
results in an offering which is either less than $1,530,000 or more than
$2,380,500. If the offering is either less than $1,530,000 or more than
$2,380,500, only persons who subscribed for shares will have an opportunity to
modify or cancel their orders. We will resolicit such persons by providing them
an updated prospectus or supplement (and filing a post-effective amendment to
this offering). Persons who did not subscribe for shares will not have the
opportunity to do so.
Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional purchase limitations. The
minimum purchase is 25 shares and the maximum purchase for any individual person
or persons ordering through a single account in the subscription offering, and
if applicable, the community offering or public offering, is 5,000 shares. In
addition, no person or persons ordering through a single account, together with
their associates, or group of persons acting together, may purchase in all
categories of the conversion more than 7,500 shares, except for the Employee
Plans which may purchase up to 8% of the shares sold. The OTS regulations
governing the conversion provide that officers and directors and their
associates may not purchase, in the aggregate, more than 35% of the shares
issued pursuant to the conversion. For purposes of the 35% limitation, purchases
by the ESOP will not be included. Pursuant to the Plan, the board of directors
has the authority to determine whether persons are associates or acting in
concert.
Depending on market conditions and the results of the offering, the
board of directors may increase or decrease any of the purchase limitations
without the approval of our members and without resoliciting subscribers. If the
maximum purchase limitation is increased, persons who ordered the maximum amount
will be given the first opportunity to increase their orders. In doing so the
preference categories in the offerings will be followed.
In the event of an increase in the total number of shares offered in
the conversion due to an increase in the EVR of up to 15% (the "Adjusted
Maximum"), the additional shares will be allocated in the following order of
priority: (i) to fill the Employee Plans' subscription of up to 8% of the
Adjusted Maximum number of shares (the ESOP currently intends to subscribe for
8%); (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unfulfilled subscriptions of Eligible Account Holders; (iii) in
the event that there is an oversubscription by Supplemental Eligible Account
Holders, to fill unfulfilled subscriptions to Supplemental Eligible Account
Holders; (iv) in the event that there is an oversubscription by Other Members,
to fill unfulfilled subscriptions of Other Members; and (v) to fill unfulfilled
subscriptions in the community offering or public or syndicated public offering
to the extent possible.
The term "associate" of a person means (i) any corporation or
organization (other than us or a majority-owned subsidiary of ours) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as director or in a similar fiduciary capacity
(excluding tax-qualified employee stock benefit plans), and (iii) any relative
or spouse of such person or any relative of such spouse, who has the same home
as such person or who is a director or officer of us, or any of our
subsidiaries. For example, a corporation of which a person serves as an
22
<PAGE>
officer would be an associate of that person, and therefore all shares purchased
by that corporation would be included with the number of shares which that
person individually could purchase under the above limitations.
The term "officer" may include our chairman of the board, president,
vice presidents in charge of principal business functions, Secretary and
Treasurer and any other person performing similar functions. All references
herein to an officer have the same meaning as used for an officer in the Plan.
Persons must certify on their order form that their purchase does not
conflict with the purchase limitations. In the event that the purchase
limitations are violated by any person (including any associate or group of
persons affiliated or otherwise acting in concert with such persons), we will
have the right to purchase from that person at $10.00 per share all shares
acquired by that person in excess of the purchase limitations. If the excess
shares have been sold by that person, we may recover the profit from the sale of
the shares by that person. We may assign our right either to purchase the excess
shares or to recover the profits from their sale.
Shares of common stock purchased pursuant to the conversion will be
freely transferable, except for shares purchased by our directors and officers.
For certain restrictions on the shares purchased by directors and officers, see
" -- Restrictions on Sales and Purchases of Shares by Directors and Officers."
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with subscription rights and to certain reporting
requirements upon purchase of such securities.
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, CFC may not
repurchase its shares and during each of the second and third years following
the conversion, CFC may repurchase five percent of the outstanding shares
provided they are purchased in open-market transactions. Repurchases must not
cause us to become undercapitalized and at least 10 days prior notice of the
repurchase must be provided to the OTS. The OTS may disapprove a repurchase
program upon a determination that (1) the repurchase program would adversely
affect our financial condition, (2) the information submitted is insufficient
upon which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the OTS may grant special permission to repurchase shares after six
months following the conversion and to repurchase more than five percent during
each of the second and third years. In addition, SEC rules also govern the
method, time, price, and number of shares of common stock that may be
repurchased by CFC and affiliated purchasers. If, in the future, the rules and
regulations regarding the repurchase of stock are liberalized, CFC may utilize
the rules and regulations then in effect.
Restrictions on Sales and Purchases of Shares by Directors and Officers
Shares purchased by directors and officers of CFC may not be sold for
one year following the conversion, except in the event of the death of the
director or officer. Any shares issued to directors and officers as a stock
dividend, stock split, or otherwise with respect to restricted stock shall be
subject to the same restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
23
<PAGE>
Interpretation and Amendment of the Plan
Our board of directors has the authority to interpret and amend the
Plan and its interpretations are final, subject to the authority of the OTS.
Amendments to the Plan after the receipt of member approval will not need
further member approval unless required by the OTS.
Conditions and Termination
Completion of the conversion requires (i) the approval of the Plan by
the affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
Other
All statements made in this document are hereby qualified by the
contents of the Plan, the material terms of which are set forth herein. The Plan
is attached to the proxy statement mailed to certain depositors. Copies of the
Plan are available from us and should be consulted for further information.
24
<PAGE>
CARNEGIE SAVINGS BANK
STATEMENTS OF OPERATIONS
The statements of operations for the years ended December 31, 1997 and
1996, have been audited by Goff Ellenbogen Backa & Alfera, LLC, whose report
appears elsewhere in this Prospectus.
Years Ended
December 31,
---------------------------
1997 1996
------------ ------------
INTEREST INCOME:
Interest on loans................................ $ 859,072 $ 843,488
Interest-bearing deposits with other banks....... 27,478 27,626
Interest on investment:
Taxable........................................ 105,860 66,467
Nontaxable..................................... 31,393 33,527
Mortgage-backed securities....................... 198,454 102,655
--------- ---------
Total interest income..................... 1,222,257 1,073,763
INTEREST EXPENSE
Interest on certificates of deposit............ 570,883 440,380
Interest on other savings accounts............. 99,797 105,828
Interest on borrowings......................... 567 5,505
---------- ----------
Total interest expense..................... 671,247 551,713
--------- ---------
Net interest income................................ 551,010 522,050
Provision for loan losses...................... 73,000 2,203
---------- ----------
Net interest income after provision for loan
losses............................................. 478,010 519,847
NONINTEREST INCOME (LOSS):
Service charges and fee income................. 54,204 41,199
Gain on sale of REO............................ 13,693 -
Gain on sale of securities..................... 1,677 7,733
Dividend income................................ 63 9,379
Net income (loss) - real estate owned.......... (7,515) 13,597
Other income................................... 369 2,067
---------- ----------
Total noninterest income................... 62,491 73,975
NONINTEREST EXPENSES:
Wages, payroll taxes and benefits.............. 442,353 249,065
General and administrative..................... 122,783 140,535
Data processing charges........................ 62,534 48,533
Depreciation and amortization.................. 21,057 20,870
---------- ----------
Total noninterest expenses................. 648,727 459,003
---------- ----------
Net income (loss) before income taxes.............. (108,226) 134,819
Income tax expense (benefit)................... (54,425) 35,400
-------- ---------
Net income (loss).................................. $ (53,801) $ 99,419
======== =========
See accompanying notes beginning on page F-6.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to assist you in understanding our financial condition
and results of operations. The information in this section should also be read
with our Financial Statements and Notes to the Financial Statements elsewhere in
this document.
General
CFC has recently been formed and, accordingly, has no results of
operations. The following discussion relates only to Carnegie Savings Bank's
financial condition and results of operations. Please refer to our Pro Forma
Data discussion beginning on page 7 to see the potential effects of the offering
on our financial statements.
Our results of operations depend primarily on net interest income,
which is determined by (i) the difference between rates of interest we earn on
our interest-earning assets and the rates we pay on interest-bearing liabilities
(our interest rate spread), and (ii) the relative amounts of interest-earning
assets and interest-bearing liabilities, consisting of deposits. Our results of
operations are also affected by non-interest income, including, primarily,
income from customer deposit account service charges, gains and losses from the
sale of investments and mortgage-backed securities and non-interest expense,
including, primarily, compensation and employee benefits, federal deposit
insurance premiums, office occupancy costs, and data processing costs. Our
results of operations also are affected significantly by general, and economic
and competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control.
Recent Business Strategy
To the extent new deposits have exceeded our loan originations, we have
invested these deposits primarily in marketable securities so that they are
available to fund new loans in our market area. As discussed herein, this has
reduced our interest rate risk, but has adversely affected our net interest
income. Since the new deposits and stock proceeds are expected to exceed our
ability to originate loans in our market area, we may purchase loans,
mortgage-backed securities and other investments with higher yields that will
improve our interest income and net income.
Market Risk Analysis
Asset/Liability Management. Our assets and liabilities are interest
rate sensitive. An asset or liability is interest rate sensitive within a
specific time period if it will mature or reprice within that time period. If
our assets mature or reprice more quickly or to a greater extent than our
liabilities, our net portfolio value and net interest income would tend to
increase during periods of rising interest rates but decrease during periods of
falling interest rates. Conversely, if our assets mature or reprice more slowly
or to a lesser extent than our liabilities, our net portfolio value and net
interest income would tend to decrease during periods of rising interest rates
but increase during periods of falling interest rates. Our policy has been to
address the interest rate risk inherent in the historical savings institution
business of originating long-term loans funded by short-term deposits by
maintaining sufficient liquid assets for material and prolonged changes in
interest rates. We do not engage in, or intend to engage in, trading activities
or use derivative instruments to control our interest rate risk.
26
<PAGE>
We emphasize origination of fixed rate real estate loans in the nature
of one- to four-family loans. These loans approximated 85% of our loan portfolio
at December 31, 1997. At December 31, 1997, the average weighted term to
maturity of our mortgage loan portfolio was slightly more than 21 years and the
average weighted term to maturity of our deposits was slightly more than 21
months. See "Risk Factors- Insufficient Loan Demand" and "Business of Carnegie
Savings Bank -- Lending Activities."
Net Portfolio Value. In recent years, we had been a Pennsylvania
chartered mutual savings bank regulated by the Pennsylvania Department of
Banking, and therefore had not been required to measure our interest rate
sensitivity in the manner required by the OTS. We now compute amounts by which
the net present value of expected cash flows from assets, liabilities and off
balance sheet items (our net portfolio value or "NPV") would change in the event
of a range of assumed changes in market interest rates. These computations
estimate the effect on our NPV from instantaneous and permanent 1% to 3% (100 to
300 basis points) increases and decreases in market interest rates.
The following table presents our NPV based upon calculations of FinPro,
Inc. These calculations were based upon assumptions FinPro believes to be
fundamentally sound, although they may vary from assumptions utilized by other
data providers. These assumptions relate to interest rates, loan prepayment
rates, core deposit duration, and the market values of certain assets under the
various interest rate scenarios. During the preparation of the calculations,
FinPro relied on and assumed the accuracy and completeness of the data provided
by us and other sources which FinPro deemed reliable. FinPro did not
independently verify the data provided to it by us.
Percentage Change in Net Portfolio Value
----------------------------------------
Changes
in Market Change in NPV
Interest Rates NPV Ratio(1) Ratio(2)
-------------- ------------ -------------
(basis points)
+ 300 4.66% (680) bp
+ 200 7.31 (414) bp
+ 100 9.55 (190) bp
0 11.45 --
- 100 13.07 161 bp
- 200 14.43 298 bp
- 300 15.59 414 bp
- ------------------
(1) Calculated as the estimated NPV divided by present value of total assets.
(2) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Management believes these calculations indicate that we would be deemed
to have a greater than normal level of interest rate risk under applicable
regulatory capital requirements. However, due to our net size and risk-based
capital level, we are exempt from the interest rate risk component. See
"Regulation - - Savings Institution Regulation -- Regulatory Capital
Requirements."
While we cannot predict future interest rates or their effects on our
NPV or net interest income, we do not expect current interest rates, assuming
rates remain stable, to have a material adverse effect on our NPV or net
interest income. Computations of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including relative levels of
market interest rates, prepayments and
27
<PAGE>
deposit run-offs and should not be relied upon as indicative of actual results.
Certain shortcomings are inherent in such computations. Although certain assets
and liabilities may have similar maturity or periods of repricing they may react
at different times and in different degrees to changes in the market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets and liabilities may lag behind changes in market interest rates.
In the event of a change in interest rates, prepayments and early withdrawal
levels could deviate significantly from those assumed in making calculations set
forth above. Additionally, an increased credit risk may result as the ability of
many borrowers to service their debt may decrease in the event of an interest
rate increase.
The board of directors reviews our asset and liability policies. The
board of directors meets quarterly to review interest rate risk and trends, as
well as liquidity and capital ratios and requirements. Management administers
the policies and determinations of the board of directors with respect to our
asset and liability goals and strategies. We expect that our asset and liability
policies and strategies will continue as described so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
Financial Condition
Our total assets increased $1.6 million, or 10.60%, to $16.7 million at
December 31, 1997 from $15.1 million at December 31, 1996. Our increase in
assets was primarily attributable to increases of $615,000 in mortgage-backed
securities, $380,000 in investment securities, $313,000 in real estate owned and
$294,000 in cash and cash equivalents. These increases were partially offset by
a $227,000 decrease in net loans receivable.
The increases in mortgage-backed securities and other investment
securities were the result of a temporary decrease in loan applications. The
changes in real estate owned resulted from the sale in April, 1997, of a
foreclosed property, and the purchase in December, of a different property, in
order to protect our interests as junior lienholder in a foreclosure.
Our liabilities also increased by $1.6 million. The increase was
primarily due to increases of $1.8 million in deposits and $158,000 in other
liabilities. These increases were partially offset by a decrease of $300,000 in
a line of credit from another financial institution. Deposits increased via a
special certificate of deposit promotion. Part of the proceeds were used to
repay the advance on the line of credit of $300,000.
Results of Operations
Our net income decreased $153,000 to a net loss of $54,000 for 1997
compared to net income of $99,000 for 1996. Our decrease was primarily
attributable to the $29,000 increase in net interest income being offset by a
$71,000 increase in our provision for loan losses. Further, our noninterest
income decreased by $12,000 and our noninterest expenses increased by $190,000.
For 1997, we had a net loss before income taxes of $108,000 compared to net
income before income taxes of $135,000 for 1996. As a result, we had an income
tax benefit of $54,000 for 1997 compared to income tax expense of $35,000 for
1996.
Net Interest Income. Net interest income is the most significant
component of our income from operations. Net interest income is the difference
between interest we receive on our interest-earning assets primarily loans,
investment and mortgage-backed securities and interest we pay on our
interest-bearing liabilities, primarily deposits. Net interest income depends on
the volume of and rates earned on interest-earning assets and the volume of and
rates paid on interest-bearing liabilities.
28
<PAGE>
The following table sets forth certain information relating to our
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and cost are derived by dividing income or expenses by the
average balance of assets of liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily balances has
caused any material differences in the information presented.
<TABLE>
<CAPTION>
At December 31, Year ended December 31,
--------------- --------------------------------------------------------------------------------
1997 1997 1996 1995
---------------- ------------------------- --------------------------- ------------------------
Average Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ------ ------- -------- ------ ------- -------- ------ ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)....... $ 9,585 9.97% $ 9,730 $ 860 8.84% $ 9,391 $ 843 8.98% $ 9,278 $ 847 9.13%
Mortgage-backed securities. 2,628 7.53 2,690 198 7.36 1,478 103 6.97 771 47 6.10
Investment securities...... 2,530 5.41 2,568 137 5.33 2,185 100 4.58 1,659 86 5.18
Other interest-earning
assets(2)................... 951 2.83 744 27 3.63 604 28 4.64 734 39 5.31
------ ------ ------ ------ ------ ------- ------
Total interest-earning assets 15,694 7.79 15,732 1,222 7.77 13,658 1,074 7.86 12,442 1,019 8.19
------ ------ ------
Non-interest-earning assets.. 1,030 516 567 748
------ ------ ------ -------
Total assets............. $16,724 $16,248 $14,225 $ 13,190
====== ====== ====== =======
Interest-bearing liabilities:
NOW accounts............... $ 1,031 1.26 $ 1,150 13 1.13 $ 941 9 0.96 $ 991 12 1.21
Savings account............ 3,375 2.58 3,346 87 2.60 3,473 97 2.79 3,327 142 4.27
Money market accounts...... -- -- -- -- -- -- -- -- -- -- --
Certificates of deposit.... 10,225 5.58 9,888 571 5.77 8,090 440 5.44 7,391 382 5.17
Other liabilities.......... -- -- 12 -- -- 87 6 6.90 21 -- --
------ ------ ------ ------ ------ ------- ------
Total interest-
bearing liabilities.... 14,631 4.59 14,396 671 4.66 12,591 552 4.38 11,730 536 4.57
------ ------ ------
Non-interest-
bearing liabilities:
Non-interest bearing deposits 547 264 191 112
Other liabilities.......... 376 332 292 300
------ ------ ------ -------
Total liabilities........ 15,554 14,992 13,074 12,142
------ ------ ------ -------
Retained earnings............ 1,170 1,256 1,151 1,048
------ ------ ------ -------
Total liabilities and
retained earnings...... $16,724 $16,248 $14,225 $ 13,190
====== ====== ====== =======
Net interest income........ $ 551 $ 522 $ 483
====== ===== ======
Interest rate spread (3)... 3.20% 3.11% 3.48% 3.62%
===== ====== ===== ======
Net yield on interest-
earning assets (4)....... 3.51% 3.50% 3.82% 3.88%
===== ====== ===== =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 109.28% 108.47% 106.07%
====== ====== =======
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield in interest-earning assets represents net interest income as a
percentage of average interest earning assets.
29
<PAGE>
The table below sets forth certain information regarding changes in our
interest income and interest expense for the periods indicated. For each of
interest-earning assets and interest-bearing liabilities, information is
provided on charges attributable to (i) changes in volume (changes in average
volume multiplied by old rate); (ii) changes in rates (changes in rate
multiplied by old average volume), (iii) changes in rate-volume (changes in rate
multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------------------- ---------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------------- ---------------------------------------------
Rate Rate
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ ----- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income: (In Thousands)
Loans receivable.................... $ 31 $ (14) $ (1) $ 16 $ 10 $ (14) $ -- $ (4)
Mortgage-backed securities.......... 85 6 5 96 43 7 6 56
Investment securities............... 17 17 3 37 27 (10) (3) 14
Other interest earning assets....... 6 (5) (1) -- (6) (6) 1 (11)
------ ------ ------ ------ ----- ------ ----- -----
Total interest-earning assets...... $ 139 $ 4 $ 6 $ 149 $ 74 $ (23) $ 4 $ 55
====== ======= ====== ====== ===== ===== ===== =====
Interest expenses:
NOW Accounts ....................... $ 2 $ 2 $ -- $ 4 $ (1) $ (2) $ -- $ (3)
Savings Account..................... (4) (6) -- (10) 6 (49) (2) (45)
Money Market accounts............... -- -- -- -- -- -- -- --
Certificates of deposit............. 98 27 6 131 35 21 2 58
Other liabilities................... (4) (2) 1 (5) 4 -- 1 5
------ ------ ------ ------ ----- ------ ------ -----
Total interest-bearing liabilities. $ 92 $ 21 $ 7 $ 120 $ 44 $ (30) $ 1 $ 15
====== ====== ====== ====== ===== ====== ====== =====
Change in net interest income........ $ 47 $ (17) $ (1) $ 29 $ 30 $ 7 $ 3 $ 40
====== ======= ====== ====== ===== ====== ====== =====
</TABLE>
30
<PAGE>
Our net interest income increased $29,000 in 1997 compared to 1996. The
increase of $2.1 million in the average balances of our interest-earning assets
more than offset the decrease of 19 basis points in their average yield. As a
result, our interest income increased $148,000. This was primarily due to an
increase of $1.2 million in the average balance of mortgage-backed securities
coupled with an increase of 49 basis points in the average yield on
mortgage-backed securities and an increase of $400,000 in the average balance of
investment securities coupled with an increase of 62 basis points in the average
yield on investment securities.
The increase of $1.8 million in the average balance of our
interest-bearing liabilities was coupled with an increase of 28 basis points in
the average rate of interest we paid on those liabilities. This was due
primarily to an increase of $1.8 million in the average balances of our
certificates of deposit and an increase of 33 basis points in the average rate
we paid on our certificates of deposit. Certificates of deposit increased as a
result of a special promotion, at a rate slightly above market.
Provision for Loan Losses. Our provision for loan losses increased
$71,000 to $73,000 for the year ended December 31, 1997 from $2,000 in the same
period in 1996. Prior to 1997, in order to evaluate the risks associated with
our loan portfolio and the overall quality of our loan portfolio, management
reviewed all loans on a collective basis. At December 31, 1996, management
believed our allowance for losses was adequate based on the additions to the
provision for loan losses in 1996. During 1997, management reevaluated its loan
review process by measuring the risks and the overall quality of our loan
portfolio on an individual loan basis. As a result of this process, the local
economic trends, and the portfolio mix, management determined it was necessary
to increase the allowance for loan loss to an acceptable level. Because of the
increased coverage of the allowances for loan losses to total loans, management
believes the allowance for loan losses is at a level that is considered to be
adequate to provide for estimated losses; however, there can be no assurance
that further additions will not be made to the allowance and that such losses
will not exceed the estimated amount.
Noninterest Income. Our noninterest income decreased by $12,000 for
1997 compared to 1996. The $13,000 increase in service charges and fee income
was more than offset by a decrease of $21,000 in net income on real estate
owned. We had a net loss on real estate owned of $8,000 in 1997 compared to net
income of $14,000 in 1996 due to high maintenance costs in the first quarter of
1997 and due to the costs incurred in connection with the sale of the property
in April 1997.
Noninterest Expense. Our noninterest expense increased by $190,000 in
1997. The increase was primarily attributable to a $193,000 increase in
compensation expenses. The increased compensation expenses include $36,000 and
$123,000 for accrued expenses related to the implementation of a supplemental
executive retirement plan and a directors consultation and retirement plan,
respectively, which were implemented in 1997.
As a result of the conversion, our noninterest expense might also
increase because of the costs associated with our employee stock ownership plan,
restricted stock ownership plan, if implemented, and the costs of becoming a
public company.
A great deal of information has been disseminated about the global
computer year 2000. Many computer programs that can only distinguish the final
two digits of the year entered (a common programming practice in earlier years)
are expected to read entries for the year 2000 as the year 1900 and compute
payment, interest or delinquency based on the wrong date or are expected to be
unable to compute payment, interest or delinquency. Rapid and accurate data
processing is essential to our operation. Data processing
31
<PAGE>
is also essential to most other financial institutions and many other companies.
Most of our material data processing that could be affected by this problem is
provided by a third party service bureau. Our service bureau has advised us that
it expects to resolve this potential problem before the year 2000. However, if
our service bureau is unable to resolve this potential problem in time, we would
likely experience significant data processing delays, mistakes or failures.
These delays, mistakes or failures could have a significant adverse impact on
our financial condition and results of operation.
Income Tax Expense (Benefit). Our income taxes decreased $90,000 to a
tax benefit of $54,000 in 1997 compared to an income tax expense of $35,000 in
1996, due to a net loss on our operations in 1997.
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of our
deposits and short-term borrowings. The required minimum ratio currently is 4.0%
and our regulatory liquidity ratio was 8.90%, 11.74%, and 16.80% at December 31,
1997, December 31, 1996, and December 31, 1995, respectively.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments, interest-bearing deposits
with other banks and funds provided from operations. While scheduled repayments
of loans and mortgage-backed securities and maturities of investment securities
are predicable sources of funds, deposit flows, and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. We use our liquid resources principally to fund loan commitments,
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, and to meet operating expenses.
Net cash used for our operating activities (the cash effects of
transactions that enter into our determination of net income -- e.g., non-cash
items, amortization and depreciation, provision for loan losses) for 1997 was
$73,000 compared to net cash provided by our operations of $175,000 for 1996.
Net cash used for our investing activities (i.e., cash disbursed,
primarily for investment securities and mortgage-backed securities portfolios
and our loan portfolio) totaled $1.1 million for 1997, a decrease of $1.2
million from 1996.
Net cash provided by our financing activities (i.e., cash receipts from
our net increases in deposits) totaled $1.5 million in 1997 compared to $1.3
million in 1996.
BUSINESS OF CARNEGIE FINANCIAL CORPORATION
CFC is not an operating company and has not engaged in any significant
business to date. It was formed in February 1998 as a Pennsylvania chartered
corporation to be the holding company for Carnegie Savings Bank. The holding
company structure and retention of proceeds will facilitate: (i) diversification
into non-banking activities, (ii) acquisitions of other financial institutions,
such as savings institutions, (iii) expansion within existing and into new
market areas and (iv) stock repurchases without adverse tax consequences. There
are no present plans regarding diversification, acquisitions, expansion, or
repurchases.
Since CFC will own only one savings bank, it generally will not be
restricted in the types of business activities in which it may engage, provided
that we retain a specified amount of our assets in housing-related
32
<PAGE>
investments. CFC initially will not conduct any active business and does not
intend to employ any persons other than officers but will utilize our support
staff from time to time.
The office of the CFC is located at 17 West Mall Plaza, Carnegie,
Pennsylvania. The telephone number is (412) 276-1266.
BUSINESS OF CARNEGIE SAVINGS BANK
The principal sources of funds for our activities are deposits and
payments on loans and investments. Our deposits totalled $15.2 million at
December 31, 1997. Funds are used primarily for the origination of loans secured
by mortgages on one- to four-family residences and home equity loans which are
located in our market area, consumer loans and the purchase of mortgage-backed
and investment securities. Residential real estate loans totalled $8.2 million,
or 84.90%, of our total loans receivable portfolio at December 31, 1997. Our
principal source of revenue is interest received on loans and investments and
our principal expense is interest paid on deposits.
Market Area
Our office is located in Carnegie, a suburb southwest of Pittsburgh,
Pennsylvania. Our primary market area is within Allegheny County and consists of
the Borough of Carnegie and the surrounding municipalities. Most of our deposits
and lending activity is generated from individuals who live in these areas. We
are a community-oriented institution and have served the Carnegie area community
since 1915.
Carnegie is a middle income community having a large proportion of
senior citizens. It is presently enjoying a period of revitalization, which
plans having been approved for a 60-unit townhouse project, and plans proceeding
to open the mall area to vehicular traffic. The Port Authority of Allegheny
County is presently constructing a busway from downtown Pittsburgh to the
Pittsburgh International Airport, with Carnegie slated to be a parking site for
those who will use the busway. A multi-floor municipal parking garage is
planned, with retail establishments slated for the ground floor. Economically,
the town appears to be improving, and Borough officials are quite optimistic
about the town's future.
The Greater Pittsburgh area has been in the process of restructuring
over the past decade. Once centered on heavy manufacturing, primarily steel, its
economic base is now more diverse, including technology, health and business
services. Several "Fortune 500" industrial firms are headquartered in the
Greater Pittsburgh area, including USX Corporation. The largest employers in
Pittsburgh, by the number of local employees, include the United States
Government, the Commonwealth of Pennsylvania, USAirways, University of
Pittsburgh Medical Center, and the University of Pittsburgh. Seven colleges and
universities are located in the greater Pittsburgh area.
Lending Activities
The Bank makes mortgage loans, both residential and commercial,
construction loans, home improvement loans, equity lines of credit, consumer and
savings account loans. The lines of credit are adjustable rate (based on the
Wall Street Journal prime). Some mortgages are adjustable (based on the one-year
T-bill). Savings account loans adjust with the rate paid on the underlying
collateral. Recent market conditions have made borrowers reluctant to agree to
ARMs.
33
<PAGE>
The following table sets forth information concerning the types of
loans held by us.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1997 1996
-------------------- ------------------
$ % $ %
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Real Estate Loans:
Construction................................ $ 251 2.59% $ 70 0.71%
Residential(1).............................. 8,236 84.90 8,360 84.87
Commercial.................................. 343 3.54 418 4.24
-------- ------
Total Residential 8,830 8,848
-------- ------
Consumer Loans:
Share loans................................. 119 1.23 156 1.58
Automobile loans............................ 383 3.95 381 3.87
Unsecured................................... 368 3.79 466 4.73
-------- ------ ------- ------
Total Consumer............................ 870 1,003
Total Loans................................. 9,700 100.00% 9,851 100.00%
-------- ====== ----- ======
Less:
Loans in process............................ -- --
Deferred loan origination fees and costs.... -- --
Allowance for loan losses .................. 115 39
-------- -------
Total loans, net......................... $ 9,585 $ 9,812
======== =======
</TABLE>
(1) Includes $254,000 and $94,000 for fiscal 1997 and 1996, respectively, of
multi-family loans all of which have adjustable rates of interest.
34
<PAGE>
The following sets forth the maturity of our loan portfolio at December
31, 1997. The table does not include prepayments or scheduled principal
repayments. All loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Real Estate Loans
------------------------------------------------------------
Residential Commercial Construction Consumer Total
----------- ---------- ------------ -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within 1 year.............. $ 9 $ -- $ 251 $ 44 $ 304
Over 1 to 3 years.......... 128 -- -- 308 436
Over 3 to 5 years.......... 478 -- -- 397 875
Over 5 to 10 years......... 1,198 -- -- 65 1,263
Over 10 to 20 years........ 1,970 343 -- 56 2,369
Over 20 years.............. 4,453 -- -- -- 4,453
------ ------ ---- ------ ------
Total amount due........... $ 8,236 $ 343 $ 251 $ 870 9,700
====== ====== ==== ====== ------
Less:
Allowance for loan loss 115
Loans in process --
Deferred loan fees --
------
Loans receivable, net $ 9,585
======
</TABLE>
The following table sets forth dollar amount of all loans due after
December 31, 1998, which have predetermined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- ----------
<S> <C> <C> <C>
Residential $ 7,239 $ 988 $ 8,227
Commercial -- 343 343
Construction -- -- --
Consumer 826 -- 826
--------- --------- ---------
Total $ 8,065 $ 1,331 $ 9,396
========= ========= =========
</TABLE>
Real Estate Loans. Our primary lending activity consists of the
origination of one- to four-family fixed rate residential mortgage loans secured
by property located in our primary market area. We generally originate one- to
four-family fixed rate residential mortgage loans in amounts up to 95% of the
lesser of the appraised value or purchase price, with private mortgage insurance
required on loans with a loan-to-value ratio in excess of 80%. Generally, the
maximum loan-to-value ratio on mortgage loans secured by non-owner occupied
properties and commercial buildings is limited to 70%. We retain all of our
mortgage loans and originate these loans with maturities of up to 30 years.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property securing the mortgage
loan without our consent.
We originate home equity loans and second mortgage loans which are
secured by one to four-family residences. We originate these loans on one- to
four-family residences with fixed rate terms of up to 15
35
<PAGE>
years. The loans are generally subject to a 80% combined loan-to-value
limitation, including any other outstanding mortgages or liens.
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The repayment
of these loans typically is dependent on the successful operation of the real
estate project securing the loan. These risks can be significantly affected by
supply and demand conditions in the market for office and retail space and may
also be subject to adverse conditions in the economy.
Consumer Loans. We offer consumer loans in order to provide a wider
range of financial services to our customers. Consumer loans totaled $870,000,
or 8.97% of our total loans at December 31, 1997. Our consumer loans consist of
share loans, automobile loans, and unsecured loans. We make unsecured loans to
certain creditworthy borrowers. Loans secured by vehicles are financed for terms
up to 60 months. Loans secured by deposits of the bank are granted in amounts up
to 95% of the deposited amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. We establish various lending
limits for our officers and maintain a loan committee consisting of the board of
directors. The president and loan officer have authority to approve home equity
loans up to $35,000 and $20,000, respectively, and the Officer Loan Committee
has the authority to approve unsecured consumer loans up to $5,000. The loan
committee ratifies all residential mortgage loans and all other real estate and
consumer loans.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are processed by
independent fee appraisers.
Title insurance is generally required on all real estate mortgage
loans. We do not require title insurance on home equity loans and second
mortgages under $50,000, but we obtain a property report, which indicates
whether there are any liens or other encumbrances against the property.
Borrowers also must obtain fire and casualty insurance. Flood insurance is also
required on loans secured by property that is located in a flood zone.
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 45 days of the date of issuance. At December 31, 1997, there
were no outstanding commitments to cover originations of mortgage loans.
Loans to One Borrower. The maximum amount of loans which we may make to
any one borrower may not exceed the greater of $500,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our maximum loan-to-one borrower limit has been $500,000.
At December 31, 1997, our five largest borrowers had aggregate outstanding
balances of between $294,000 and $495,000. These loans are performing loans.
36
<PAGE>
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 30 days past due, a
notice of nonpayment is sent to the borrower. If such payment is not received by
month end, an additional notice of nonpayment is sent to the borrower. After 60
days, if payment is still delinquent, a notice of right to cure default is sent
to the borrower giving 30 additional days to bring the loan current before
foreclosure is commenced. If the loan continues in a delinquent status for 90
days past due and no repayment plan is in effect, foreclosure proceedings will
be initiated.
Loans are reviewed and are placed on a non-accrual status when the loan
becomes more than 90 days delinquent or when, in our opinion, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is charged against interest income. Subsequent
interest payments, if any, are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned, as of the dates indicated. We
have no loans categorized as troubled debt restructurings within the meaning of
SFAS 15 and no impaired loans within the meaning of SFAS 114, as amended by SFAS
118. Interest income that would have been recorded on loans accounted for on a
nonaccrual basis under the original terms of such loans was approximately $3,000
for the year ended December 31, 1997.
We presently have one piece of real estate owned property, a
residential property in Peters Township, appraised at $540,000. The original
loan, an equity line of credit, was granted on March 29, 1989, in the amount of
$300,000 and was increased to $320,000 on May 9, 1995. Management believes that
the carrying value of this real estate property is adequate, however, there can
be no assurance that we will not recognize additional significant losses to this
property.
37
<PAGE>
The borrowers defaulted on their first mortgage. As second lienholders,
we purchased the property at a Sheriff's Sale on December 5, 1997.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Construction loans...................................... $ - $ - $ -
Permanent loans secured by 1-4 dwelling units........... 14 9 57
All other mortgage loans ............................... - - -
Non-mortgage loans:
Other................................................... - - -
Consumer................................................ 28 24 16
---- ----- ----
Total..................................................... $ 42 $ 33 $ 73
==== ===== ====
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Construction loans...................................... $ - $ - $ -
Permanent loans secured by 1-4 dwelling units........... - - -
All-other mortgage loans................................ - - -
Non-mortgage loans:
Other................................................... - - -
Consumer ............................................... - - -
---- ----- -----
Total................................................... $ - $ - $ -
==== ==== ====
Total non-accrual and accrual loans $ 42 $ 33 $ 73
==== ==== ====
Real estate owned......................................... $ 480 $ 167 $ 167
==== ==== ====
Other non-performing assets............................... $ - $ - $ -
==== ==== ====
Total non-performing assets............................... $ 522 $ 200 $ 240
==== ==== ====
Total non-accrual and accrual loans to net loans.......... 0.44% 0.34% 0.81%
==== ==== ====
Total non-accrual and accrual loans to total assets....... 0.25% 0.22% 0.53%
==== ==== ====
Total non-performing assets to total assets............... 3.12% 1.32% 1.75%
==== ==== ====
</TABLE>
Classified Assets. OTS regulations provide for a classification system
for problem assets of savings banks which covers all problem assets. Under this
classification system, problem assets of savings banks such as ours are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
savings bank will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When a savings bank classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
38
<PAGE>
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings bank classifies problem assets as
loss, it is required either to establish a specific allowance for losses equal
to 100% of that portion of the asset so classified or to charge off such amount.
A savings bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining a
savings bank's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital.
The following table sets forth our classified assets in accordance with
our classification system.
At December 31, 1997
--------------------
(In thousands)
Special Mention.............. $104
Substandard.................. 35
Doubtful assets.............. 42
Loss assets.................. 11
---
$192
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in our loan portfolio. The evaluation, including a review of all loans on which
full collectibility of interest and principal may not be reasonably assured,
considers: (i) our past loan loss experience, (ii) known and inherent risks in
our portfolio, (iii) adverse situations that may affect the borrower's ability
to repay, (iv) the estimated value of any underlying collateral, and (v) current
economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider adequate for the inherent risk of loss
in our loan portfolio, future losses could exceed estimated amounts and
additional provisions for loan losses could be required. In addition, our
determination of the amount of the allowance for loan losses is subject to
review by the OTS, as part of its examination process. After a review of the
information available, the OTS might require the establishment of an additional
allowance. Any increase in the loan loss allowance required by the OTS would
have a negative impact on our earnings.
39
<PAGE>
The following table illustrates the allocation of the allowance for
loan losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996
----------------------------- ------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Real Estate Loans:
Construction $ -- 2.59% $ -- 0.71%
Residential 75 84.90 23 84.87
Commercial 3 3.54 7 4.24
------ ------
Total Real Estate 78 30
------ ------
Consumer Loans:
Share Loans -- 1.23 -- 1.58
Automobile Loans -- 3.95 -- 3.87
Unsecured 37 3.79 9 4.73
------ ------
Total Consumer 37 9
Total $ 115 100.00% $ 39 100.00%
====== ====== ====== ======
</TABLE>
40
<PAGE>
The following table sets forth information with respect to our
allowance for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Total loans outstanding......................... $ 9,700 $ 9,851
======== ========
Average loans outstanding....................... $ 9,730 $ 9,391
======== ========
Allowance balance (at beginning of period)...... $ 39 $ 38
Provision:
Real Estate Loans:
Construction.................................. -- --
Residential................................... 73 2
Commercial.................................... -- --
Consumer Loans:
Share Loans................................... -- --
Automobile Loans.............................. -- --
Unsecured..................................... -- --
Net (Charge-offs) recoveries:
Real Estate Loans:
Construction.................................. -- --
Residential................................... -- --
Commercial.................................... -- --
Consumer Loans:
Share Loans................................... -- --
Automobile Loans.............................. -- --
Unsecured..................................... 3 (1)
-------- --------
Allowance balances (at end of period)........... $ 115 $ 39
======== ========
Allowance for loan losses as a percent of
total loans outstanding......................... 1.19% 0.40%
Net loans charged off as percent of average
loans outstanding............................... --% --%
</TABLE>
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation -- Savings
Institution Regulation -- Federal Home Loan Bank System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." The level of liquid assets varies depending
upon several factors, including: (i) the yields on investment alternatives, (ii)
our judgment as to the attractiveness of the yields then available in relation
to other opportunities, (iii) expectation of future yield levels, and (iv) our
projections as to the short-term demand for funds to be used in loan origination
and other activities. We classify our investment securities as "available for
sale" or "held to maturity" in accordance with SFAS No. 115. At December 31,
1997,
41
<PAGE>
our investment portfolio policy allowed investments in instruments such as: (i)
U.S. Treasury obligations, (ii) U.S. federal agency or federally sponsored
agency obligations, (iii) local municipal obligations, (iv) mortgage-backed
securities, (v) banker's acceptances, (vi) certificates of deposit, (vii)
federal funds, including FHLB overnight and term deposits, and (viii) investment
grade corporate bonds, commercial paper and mortgage derivative products. See
"-- Mortgage-backed Securities." The board of directors may authorize additional
investments.
Mortgage-backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. The
quasi-governmental agencies guarantee the payment of principal and interest to
investors and include the Federal Home Loan Mortgage Corporation ("FHLMC"),
Government National Mortgage Association ("GNMA"), and Federal National Mortgage
Association ("FNMA.")
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties. See "Risk
Factors Potential Impact of Changes in Interest Rates and the Current Interest
Rate Environment." Mortgage-backed securities issued by FHLMC and GNMA make up a
majority of the pass-through certificates market.
42
<PAGE>
Securities Portfolio. The following table sets forth the carrying
(i.e., amortized cost) value of our investment securities held to maturity, at
the dates indicated. Our securities portfolio classified as available for sale
is carried at market value.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1997 1996
------------ -----------
(In thousands)
<S> <C> <C>
Securities held to maturity:
U.S. Government Securities.................................. $ - $ -
U.S. Agency Securities...................................... 300 550
State and Local Government.................................. 614 714
Other Debt securities....................................... -- 199
Mortgage-backed Securities held to maturity................. 1,721 2,014
----- ------
Total Securities Held to Maturity...................... 2,635 3,477
----- ------
Securities Available for Sale:
U.S. Government Securities................................. 204 389
U.S. Agency Securities..................................... 810 199
Federal funds Sold......................................... -- --
Other Debt securities...................................... 602 99
FHLB Stock................................................. -- --
Mortgage-backed Securities Available for sale.............. 907 --
------ -------
Total Securities Available for Sale.................... 2,523 687
------ -------
Total Investment and Mortgage-Backed Securities $ 5,158 $ 4,164
====== =======
</TABLE>
43
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investment and mortgage-backed securities portfolio at December
31, 1997 by contractual maturity. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------
More than More than Total Investment Securities and
One Year or Less One to Five Years Five to Ten Years More than Ten Years Mortgage-Backed Securities
---------------- ----------------- ----------------- ------------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- ------- ------ -------- ------- -------- ------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments securities
U.S. Government Securities $ -- --%$ -- --% $ 100 5.75% $ 104 6.25% $ 204 6.00% $ 204
U.S. Agency Securities -- -- 100 5.67 700 6.91 310 8.15 1,110 7.14 1,108
State and Local Government 25 4.10 90 4.33 499 4.93 -- -- 614 4.81 624
Other Securities........... 503 5.86 -- -- -- -- -- -- 503 5.86 503
Interest-bearing Deposits -- -- -- -- 99 7.30 -- -- 99 7.30 99
Federal Funds Sold........... -- -- -- -- -- -- -- -- -- -- --
FHLB Stock -- -- -- -- --
Mortgage-backed Securities... -- -- -- -- 241 7.10 2,387 6.66 2,628 6.70 2,651
----- ------ ----- ----- ----- -----
Total investment..........$ 528 5.78 $ 190 5.04 $1,639 6.29 $2,801 6.81 $5,158 6.47 $ 5,189
===== ====== ===== ===== ===== =====
</TABLE>
44
<PAGE>
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within our primary market area through the offering of a selection of
deposit instruments including passbook savings accounts, money market accounts,
and term certificate accounts. IRA accounts and NOW accounts are also offered.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate.
The interest rates paid by us on deposits are set weekly at the
direction of our senior management. Interest rates are determined based on our
liquidity requirements, interest rates paid by our competitors, and our growth
goals and applicable regulatory restrictions and requirements.
At December 31, 1997, we had no brokered deposits and our deposits were
represented by the following types of savings programs.
<TABLE>
<CAPTION>
Minimum Balance as of Percentage
Interest Balance December 31, of Total
Category Term Rate(1) Amount 1997 Deposits
- -------- ---- ------- ------ ---- --------
(Dollars in
thousands)
<S> <C> <C> <C> <C> <C>
Accounts:
NOW None 1.50% $ 500 $ 1,031 6.79%
Passbook savings None 2.25 100 1,098 7.23
Premium passbook savings None 2.50 1,000 2,264 14.92
Passbook savings club None 1.75 -- 14 0.09
Noninterest-bearing None -- 100 546 3.60
Certificates of Deposit(2):
Fixed Term, Fixed Rate 1-3 months -- -- -- --
Fixed Term, Fixed Rate 4-6 months 4.50 1,000 1,380 9.09
Fixed Term, Fixed Rate 7-12 months 5.25 500 1,771 11.67
Fixed Term, Fixed Rate 13-24 months 5.25 500 3,557 23.43
Fixed Term, Fixed Rate 25-36 months 5.25 500 698 4.60
Fixed Term, Fixed Rate 37-48 months 5.50 500 80 0.53
Fixed Term, Fixed Rate 49-120 months 6.00 500 2,739 18.05
------ ------
Total $15,178 100.00%
====== ======
</TABLE>
- ---------------
(1) Current interest rate offering as of December 31, 1997.
(2) Includes jumbo certificates of deposit of $1.4 million. See table of
maturities of certificates of deposit of $100,000 or more.
45
<PAGE>
The following table sets forth our time deposits classified by interest
rate as of the dates indicated.
As of December 31,
------------------------------
1997 1996
----------- -----------
(In thousands)
Interest Rate
2.00% or less $ -- $ --
2.01 - 4.00% -- 28
4.01 - 6.00 4,462 5,282
6.01 - 8.00 5,510 3,617
8.01 - 10.00 253 140
10.01 or more -- --
-------- ------
Total $10,225 $9,067
====== =====
The following table sets forth amount and maturities of time deposits
at December 31, 1997.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------------------------------------------
After
December 31, December 31, December 31, December 31,
Interest Rate 1998 1999 2000 2000 Total
- ------------- ----------------- ------------------- ------------------ ------------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00% or less $ - $ - $ - $ - $ -
4.01 - 6.00% 3,194 408 537 323 4,462
6.01 - 8.00% 554 3,051 772 1,133 5,510
8.01 - 10.00% 9 78 -- 166 253
------- ------- ------ ------- -------
Total $ 3,757 $ 3,537 $ 1,309 $ 1,622 $10,225
======= ======= ====== ======= ======
</TABLE>
The following table indicates the amount of our certificates of deposit
of $100,000 or more by time remaining until maturity as of December 31, 1997.
Certificates
Maturity Period of Deposits
- --------------- ---------------
(In thousands)
Within three months $ 419
Three through six months 100
Six through twelve months 200
Over twelve months 722
-----
$1,441
=====
Borrowings. Advances (borrowing) may be obtained from the FHLB of
Pittsburgh to supplement our supply of lendable funds. Advances from the FHLB of
Pittsburgh are typically secured by a pledge of our stock in the FHLB of
Pittsburgh, a portion of our first mortgage loans and other assets. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. We expect to become a member of the FHLB of Pittsburgh as
part of the Conversion and will be able to borrow up to the amount set by the
FHLB of Pittsburgh. If the need arises, we may also access the Federal Reserve
Bank discount window to supplement our supply of lendable funds and to meet
deposit withdrawal requirements. At December 31, 1997, we were not a member of
and had no borrowings from the FHLB of Pittsburgh.
46
<PAGE>
At December 31, 1997 and 1996, we had an available line of credit in
the amount of $500,000. The outstanding balance on the line of credit at
December 31, 1997 and 1996 was $0 and $300,000, respectively. The line of credit
is payable upon demand and bears interest at a rate of prime plus 1.25%. In
addition, pursuant to the terms of the line of credit agreement, in order for us
to borrow any funds we are required to maintain a certificate of deposit at the
lending institution; as of December 31, 1997 and 1996, this certificate of
deposit was $100,000.
Competition
Competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
finance companies, and multi-state regional banks in our market areas.
Competition for funds also includes a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from commercial banks, thrift institutions, credit unions
and mortgage bankers, most of whom have far greater resources than we have.
Properties
We operate from one office, which we own, located at 17 West Mall
Plaza, Carnegie, Pennsylvania. The office was acquired in 1986 and has a net
book value at December 31, 1997 of $144,000.
Personnel
At December 31, 1997 we had six full-time employees. None of our
employees are represented by a collective bargaining group. We believe that our
relationship with our employees is good.
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
REGULATION
Set forth below is a brief description of certain laws which relate to
us. The description is not complete and is qualified in its entirety by
references to applicable laws and regulation.
Carnegie Financial Corporation Regulation
General. CFC will be required to register and file reports with the OTS
and will be subject to regulation and examination by the OTS. In addition, the
OTS will have enforcement authority over CFC and any non-savings institution
subsidiaries. This will permit the OTS to restrict or prohibit activities that
it determines to be a serious risk to us. This regulation is intended primarily
for the protection of our depositors and not for the benefit of you, as
stockholders of CFC.
QTL Test. Since CFC will only own one savings institution, it will be
able to diversify its operations into activities not related to banking, but
only as long as we satisfy the QTL test. If CFC controls more than one savings
institution, it would lose the ability to diversify its operations into
non-banking related activities, unless such other savings institutions each also
qualify as a QTL or were acquired in a supervised acquisition. See "-- Savings
Institution Regulation -- Qualified Thrift Lender Test."
47
<PAGE>
Restrictions on Acquisitions. CFC must obtain approval from the OTS
before acquiring control of any other FDIC-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
Savings Institution Regulation
General.
As a federally chartered, BIF-insured savings institution, we are
subject to extensive regulation by the OTS and the FDIC. Our lending activities
and other investments must comply with various federal and state statutory and
regulatory requirements.
The OTS, in conjunction with the FDIC, regularly examines us and
prepares reports for the consideration of our board of directors on any
deficiencies that the OTS finds in our operations. Our relationship with our
depositors and borrowers is also regulated to a great extent by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of our mortgage documents.
We must file reports with the OTS and the FDIC concerning our
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the BIF and depositors.
The regulatory structure also gives regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in regulations, whether by the OTS, the FDIC or any other government
agency, could have a material adverse impact on our operations.
Insurance of Deposit Accounts. The FDIC is authorized to establish
separate annual assessment rates for deposit insurance for members of the BIF
and the SAIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such assessment rates if
such target level has been met. The FDIC has established a risk-based assessment
system for both SAIF and BIF members. Under this system, assessments are set
within a range, based on the risk the institution poses to its deposit insurance
fund. This risk level is determined based on the institution's capital level and
the FDIC's level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below the level required by law. The BIF
had, however, met its required reserve level during the third calendar quarter
of 1995. As a result, deposit insurance premiums for deposits insured by the BIF
such as ours were substantially less than premiums for deposits which are
insured by the SAIF. Legislation to capitalize the SAIF and to eliminate the
significant premium disparity between the BIF and the SAIF became effective
September 30, 1996. The recapitalization plan provided for a special assessment
equal to $.657 per $100 of SAIF deposits held at September 30, 1995, in order to
increase SAIF reserves to the level required by law. Certain BIF institutions
holding SAIF-insured deposits were required to pay a lower special assessment.
48
<PAGE>
The recapitalization plan also provides that the cost of prior failures
which were funded through the issuance of Fico Bonds (bonds issued to fund the
cost of savings institution failures in prior years) will be shared by members
of both the SAIF and the BIF. This will increase BIF assessments for healthy
banks to approximately $.0125 per $100 of deposits in 1998. SAIF assessments for
healthy savings institutions in 1998 will be approximately $.0628 per $100 in
deposits and may be reduced, but not below the level set for healthy BIF
institutions.
The FDIC has lowered the rates on assessments paid to the SAIF and
widened the spread of those rates. The FDIC's action established a base
assessment schedule for the SAIF with rates ranging from 4 to 31 basis points,
and an adjusted assessment schedule that reduces these rates by 4 basis points.
As a result, the effective SAIF rates range from 0 to 27 basis points as of
October 1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member savings
institutions for the last quarter of calendar 1996, to reflect the assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure for making limited adjustments to the base assessment rates by
rulemaking without notice and comment, for both the SAIF and the BIF.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings institutions under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and elimination of the separate
federal regulation of thrifts. As a result, we might have to convert to a
different financial institution charter and be regulated under federal law as a
bank, including being subject to the more restrictive activity limitations
imposed on national banks. We cannot predict the impact of our conversion to, or
regulation as, a bank until the legislation requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. Our capital ratios are set forth under "Historical and Pro Forma Capital
Compliance."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A federal savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The risk-based capital standards of the OTS generally require federal
savings institutions with more than a "normal" level of interest rate risk to
maintain additional total capital. An institution's interest rate
49
<PAGE>
risk will be measured in terms of the sensitivity of its "net portfolio value"
to changes in interest rates. Net portfolio value is defined, generally, as the
present value of expected cash inflows from existing assets and off-balance
sheet contracts less the present value of expected cash outflows from existing
liabilities. A federal savings institution will be considered to have a "normal"
level of interest rate risk exposure if the decline in its net portfolio value
after an immediate 200 basis point increase or decrease in market interest rates
(whichever results in the greater decline) is less than two percent of the
current estimated economic value of its assets. An institution with a greater
than normal interest rate risk will be required to deduct from total capital,
for purposes of calculating its risk-based capital requirement, an amount (the
"interest rate risk component") equal to one-half the difference between the
institution's measured interest rate risk and the normal level of interest rate
risk, multiplied by the economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from an institution's total capital will be based on the
institution's Thrift Financial Report filed two quarters earlier. Federal
savings institutions with less than $300 million in assets and a risk-based
capital ratio above 12% are generally exempt from filing the interest rate risk
schedule with their Thrift Financial Reports. However, the OTS may require any
exempt institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis and may be subject to
an additional capital requirement based upon its level of interest rate risk as
compared to its peers. However, due to our net size and risk-based capital
level, we are exempt from the interest rate risk component.
Dividend and Other Capital Distribution Limitations. OTS regulations
will require us to give the OTS 30 days advance notice of any proposed
declaration of dividends to CFC, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends by us to CFC. In
addition, we may not declare or pay a cash dividend on our capital stock if the
effect would be to reduce our regulatory capital below the amount required for
the liquidation account to be established at the time of the conversion. See
"The Conversion -- Effects of Conversion to Stock Form on Depositors and
Borrowers of Carnegie Savings Bank -- Liquidation Account."
OTS regulations impose limitations upon all capital distributions by
federal savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. We expect
to qualify as a Tier 1 institution.
In the event our capital falls below our fully phased-in requirement or
the OTS notifies us that we are in need of more than normal supervision, we
would become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose
50
<PAGE>
to make any capital distribution, and Tier 2 institutions that propose to make a
capital distribution in excess of the noted safe harbor level, must obtain OTS
approval prior to making such distribution. In addition, the OTS could prohibit
a proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. The OTS has proposed rules relaxing
certain approval and notice requirements for well-capitalized institutions.
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution, and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. Under certain
other circumstances, savings associations will be required to file a notice with
OTS prior to making the capital distribution. The OTS proposed limitations on
capital distributions are similar to the limitations imposed upon national
banks. We are unable to predict whether or when the proposed regulation will
become effective.
A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings institution would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements). Further, a federal savings institution cannot distribute
regulatory capital that is needed for its liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender ("QTL") test. If we maintain an appropriate level of
qualified thrift investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualify as a QTL, we will have full borrowing privileges from the FHLB
of Pittsburgh. The required percentage of QTIs is 65% of portfolio assets
(defined as all assets minus intangible assets, property used by the institution
in conducting its business and liquid assets equal to 10% of total assets).
Certain assets are subject to a percentage limitation of 20% of portfolio
assets. In addition, federal savings institutions may include shares of stock of
the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined
on a monthly basis in nine out of every 12 months. We are not yet subject to the
QTL requirements.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Our
affiliates include CFC and any company which would be under common control with
us. In addition, a savings institution may not extend credit to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institution as affiliates on a case-by-case
basis.
51
<PAGE>
Liquidity Requirements. All federal savings institutions are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings institutions. Monetary penalties may
be imposed upon institutions for violations of liquidity requirements.
Federal Home Loan Bank System. We are a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB
of Pittsburgh in an amount equal to at least 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. We are in compliance with this requirement. The FHLB
imposes various limitations on advances such as limiting the amount of certain
types of real estate related collateral to 30% of a member's capital and
limiting total advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
52
<PAGE>
TAXATION
Federal Taxation
We are subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), in the same general manner as other corporations.
Thrift institutions with $500 million of assets or less are generally allowed to
account for their bad debts by using a reserve method of accounting under Code
ss.585. Alternatively, thrift institutions may choose to account for their bad
debts by using the specific charge off method under Code ss.166. In the past,
due to certain State law restrictions which no longer apply to us, we have
accounted for our bad debts using the specific charge off method. Currently, we
are reviewing the benefits, if any, of changing our method of accounting for our
bad debts to the reserve method of accounting.
We are not currently required by the Code to use the accrual method of
accounting for tax purposes. However, we are reviewing the benefits, if any, of
changing from the cash basis to the accrual method of accounting for tax
purposes to determine the most favorable method for us. Further, for taxable
years ending after 1986, the Code disallows 100% of a savings institution's
interest expense deemed allocated to certain tax-exempt obligations acquired
after August 7, 1986. Interest expense allocable to (i) tax-exempt obligations
acquired after August 7, 1986 which are not subject to this rule, and (ii)
tax-exempt obligations issued after 1982 but before August 8, 1986, are subject
to the rule which applied prior to the Code disallowing the deductibility of 20%
of the interest expense.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by determining
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. Thus, our AMTI
is increased by an amount equal to 75% of the amount by which our adjusted
current earnings exceeds our AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million
is imposed on corporations, including us, whether or not an AMT is paid.
CFC may exclude from its income 100% of dividends received from us as a
member of the same affiliated group of corporations. A 70% dividends received
deduction generally applies with respect to dividends received from corporations
that are not members of such affiliated group, except that an 80% dividends
received deduction applies if CFC owns more than 20% of the stock of a
corporation paying a dividend. The above exclusion amounts, with the exception
of the affiliated group figure, were reduced in years in which we availed
ourself of the percentage of taxable income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS since
our fiscal year ended December 31, 1993. As a result of the audit, there was no
material effect to our financial statements.
State Taxation
We are subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on our financial net income determined in
accordance with generally accepted accounting principles with certain
adjustments. Our tax rate under the Mutual Thrift Institutions Tax is 11.5%.
Interest on state
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and federal obligations is excluded from net income. An allocable portion of net
interest expense incurred to carry the obligations is disallowed as a deduction.
Three year carryforwards of losses are allowed.
Upon consummation of the conversion, we will also be subject to the
Corporate Net Income Tax and the Capital Stock Tax of the Commonwealth of
Pennsylvania.
MANAGEMENT OF CARNEGIE FINANCIAL CORPORATION
CFC board of directors consists of the same individuals who serve as
directors of Carnegie Savings Bank. The articles of incorporation and bylaws of
CFC require that directors be divided into four classes, as nearly equal in
number as possible. Each class of directors serves for a four-year period, with
approximately one-fourth of the directors elected each year. The officers of CFC
will be elected annually by the board and serve at the board's discretion. Such
officers are also officers of Carnegie Savings Bank.
See "Management of Carnegie Savings Bank."
MANAGEMENT OF CARNEGIE SAVINGS BANK
Directors and Executive Officers
Our board of directors is composed of five members each of whom serves
for a term of three years, with approximately one-third of the directors elected
each year. Our proposed stock charter and bylaws require that directors be
divided into four classes, as nearly equal in number as possible. Our officers
are elected annually by our board and serve at the board's discretion.
The following table sets forth information with respect to our
directors and executive officers, all of whom will continue to serve in the same
capacities after the conversion.
<TABLE>
<CAPTION>
Age at Current
December 31, Director Term
Directors 1997 Position Since Expires(1)
- --------- ------------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Shirley Chiesa 60 Chairman of the Board, 1972 1999
President and C.E.O.
Morry Miller 61 Director 1985 2000
JoAnn V. Narduzzi 60 Director 1988 2000
Charles Rupprecht 61 Director 1979 1998
Lois A. Wholey 42 Director and Secretary 1986 1998
Joseph R. Pigoni 34 Executive Vice President N/A N/A
and Chief Financial
Officer
</TABLE>
- -------------------
(1) The terms for directors of CFC are the same as those of Carnegie
Savings Bank except that Lois A. Wholey's term will expire in 2001.
The business experience for the past five years of each of the
directors and executive officers is as follows:
Shirley Chiesa has been a member of the Board since 1972 and the
Chairman since 1980. Ms. Chiesa has been employed by the Carnegie Savings Bank
since 1955 and is currently the President and
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Chief Executive Officer. She is a director of the Western Pennsylvania League of
Financial Institutions. She is Vice-Chairman of the Chartiers Boys and Girls
Club, is the past president and current secretary of the Carnegie Lions Club and
is on the advisory board of the Carnegie Historical Society.
Morry Miller has been a member of the Board since 1985. Mr. Miller is
the President of Izzy Miller Furniture Company. He is a past board member of the
Salvation Army and the Greater Pittsburgh Guild for the Blind.
JoAnn V. Narduzzi has been a member of the Board since 1988. Dr.
Narduzzi is the Hospital Physician Administrator with the Pittsburgh Mercy
Health System. She is on the board of the Pittsburgh Care Partnership and is the
Proclaimer of Word at the St. Thomas More Church.
Charles Rupprecht has been a member of the Board since 1979. Mr.
Rupprecht is the Transportation Supervisor at the Calgon Carbon Corp.
Lois A. Wholey has been a member of the Board since 1986 and is the
Secretary of Carnegie Savings Bank. Ms. Wholey is an attorney and the owner of
Lois Wholey and Associates. She is a member of the board of the Children's
Festival Chorus and the Society for Contemporary Crafts.
Joseph R. Pigoni has been Executive Vice President since December 1997
and Chief Financial Officer since May 1997. Prior to that time he was Assistant
Vice President and Controller of ESB Bank and PennFirst Bancorp, Inc. from
August 1995 to March 1997 and Controller of Mt. Troy Savings Bank from June 1990
to July 1995. He is Vice President of the Pittsburgh chapter of the Financial
Managers Society.
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the
board and through activities of its committees. During the year ended December
31, 1997, the board of directors held 12 regular meetings. No director attended
fewer than 75% of the total meetings of the board of directors and committees on
which such director served during the year ended December 31, 1997.
Director Compensation
During 1997, each director was paid a fee of $300 for each Board
meeting attended. Beginning in January 1998, each director will be paid a fee of
$400 per Board meeting attended. The total fees paid to the directors for the
year ended December 31, 1997 were $19,800. Directors are not paid a fee for
attending committee meetings nor will they be paid a fee for attending CFC Board
meetings.
Directors Consultant and Retirement Plan ("DRP"). The DRP provides
retirement benefits to directors following retirement after age 60 and
completion of at least 10 years of service. If a director agrees to become a
consulting director to our board upon retirement, he or she will receive a
monthly payment equal to 80% of the Board fee in effect at the date of
retirement for a period of 120 months. Benefits under our DRP will begin upon a
director's retirement. In the event there is a change in control, all directors
will be presumed to have not less than 10 years of service and each director
will receive a lump sum payment equal to the present value of future benefits
payable.
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Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
December 31, 1997. No employee earned in excess of $100,000 for the year ended
December 31, 1997.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Other Annual All other
Compensation Compensation
Name and Principal Position Year Salary Bonus (1) ($)(2)
- --------------------------- ---- ------ ----- ----- -------
<S> <C> <C> <C> <C> <C>
Shirley Chiesa, President 1997 $72,500 $15,000 $3,600 $8,750
1996 $72,500 $10,000 $3,000 $8,250
1995 $72,500 $10,000 $2,400 $8,250
</TABLE>
- --------------------
(1) Consists of director fees.
(2) Includes contributions of $8,250 representing 10% of compensation to
Simplified Employees Pension.
Employment Agreement. We have entered into an employment agreement with
our President, Ms. Shirley Chiesa. Ms. Chiesa's base salary under the employment
agreement is $75,000. The employment agreement has a term of three years
beginning January 1, 1998. The agreement is terminable by us for "just cause" as
defined in the agreement. If we terminate Ms. Chiesa without just cause, Ms.
Chiesa will be entitled to a continuation of her salary from the date of
termination through the remaining term of the agreement. The employment
agreement contains a provision stating that in the event of the termination of
employment in connection with any change in control of us, Ms. Chiesa will be
paid a lump sum amount equal to 2.99 times her five year average annual taxable
cash compensation. If such payments had been made under the agreement as of
December 31, 1997, such payments would have equaled approximately $246,435. The
aggregate payments that would have been made to Ms. Chiesa would be an expense
to us, thereby reducing our net income and our capital by that amount. The
agreement may be renewed annually by our board of directors upon a determination
of satisfactory performance within the board's sole discretion. If Ms. Chiesa
shall become disabled during the term of the agreement, she shall continue to
receive payment of 100% of the base salary for a period of 12 months and 65% of
such base salary for the remaining term of such agreement. Such payments shall
be reduced by any other benefit payments made under other disability programs in
effect for our employees.
Retirement Plan. Our Simplified Employee Pension Plan ("SEP") provides
for an annual contribution at the discretion of our directors of up to 15% of
the eligible employee's compensation. In 1997, our SEP expenses were $15,000.
Supplemental Executive Retirement Plan. We have implemented a
supplemental executive retirement plan ("SERP") for the benefit of our
President, Shirley Chiesa. The SERP provides that Ms. Chiesa may receive
additional retirement income in addition to the value of her SERP account,
provided she remains employed until not less than age 65 and has completed not
less than 25 years of service. Benefits payable under the SERP will equal
approximately $3,300 per month for a period of 120 months. Upon a termination of
employment following a change in control, Ms. Chiesa will be presumed to have
attained not less than the minimum retirement age under the SERP. Payments under
the SERP will be accrued for financial reporting purposes during the period of
employment of Ms. Chiesa. At December 31, 1997, approximately $35,580 has been
accrued and recognized as an expense. The SERP shall be unfunded.
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All benefits payable under the SERP will be paid from our current assets. There
are no tax consequences to either Ms. Chiesa or us related to the SERP prior to
payment of benefits. Upon receipt of payment of benefits, Ms. Chiesa will
recognize taxable ordinary income in the amount of such payments received and we
will be entitled to recognize a tax-deductible compensation expense at that
time.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employees
of ours, to be implemented upon the completion of the conversion. Participating
employees are employees who have completed one year of service with us or our
subsidiary and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash. In
accordance with the Plan, the ESOP may borrow funds with which to acquire up to
8% of the common stock to be issued in the conversion. The ESOP intends to
borrow funds from the Company. The loan is expected to be for a term of ten
years at an annual interest rate equal to the prime rate as published in The
Wall Street Journal. Presently it is anticipated that the ESOP will purchase up
to 8% of the common stock to be issued in the offering (i.e., 14,400 shares,
based on the midpoint of the EVR). The loan will be secured by the shares
purchased and earnings of ESOP assets. Shares purchased with such loan proceeds
will be held in a suspense account for allocation among participants as the loan
is repaid. We anticipate contributing approximately $14,400 annually (based on a
$144,000 purchase) to the ESOP to meet principal obligations under the ESOP
loan, as proposed. It is anticipated that all such contributions will be
tax-deductible. This loan is expected to be fully repaid in approximately 10
years.
Shares sold above the maximum of the EVR (i.e., more than 207,000
shares) may be sold to the ESOP before satisfying remaining unfilled orders of
Eligible Account Holders to fill the ESOP's subscription or the ESOP may
purchase some or all of the shares covered by its subscription after the
conversion in the open market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year, or have
terminated employment following death, disability or retirement, in order to
receive an allocation. Participant benefits become vested in plan allocations
following five years of service. Employment prior to the adoption of the ESOP
shall be credited for the purposes of vesting. Vesting will be accelerated upon
retirement, death, disability, change in control of the Company, or termination
of the ESOP. Forfeitures will be reallocated to participants on the same basis
as other contributions in the plan year. Benefits may be payable in the form of
a lump sum upon retirement, death, disability or separation from service. Our
contributions to the ESOP are discretionary and may cause a reduction in other
forms of compensation. Therefore, benefits payable under the ESOP cannot be
estimated.
The board of directors has appointed non-employee the directors to the
ESOP Committee to administer the ESOP and to serve as the initial ESOP Trustees.
The board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the board of directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
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<PAGE>
Proposed Future Stock Benefit Plans
Stock Option Plan. Our board of directors intends to adopt a stock
option plan (the Option Plan) following the conversion, subject to approval by
CFC's stockholders, at a stockholders meeting to be held no sooner than six
months after the conversion. The Option Plan would be in compliance with the OTS
regulations in effect. See "-- Restrictions on Stock Benefit Plans." If the
Option Plan is implemented within one year after the conversion, in accordance
with OTS regulations, a number of shares equal to 10% of the aggregate shares of
common stock to be issued in the offering (i.e., 18,000 shares based upon the
sale of 180,000 shares at the midpoint of the EVR) would be reserved for
issuance by CFC upon exercise of stock options to be granted to our officers,
directors and employees from time to time under the Option Plan. The purpose of
the Option Plan would be to provide additional performance and retention
incentives to certain officers, directors and employees by facilitating their
purchase of a stock interest in CFC. Under the OTS regulations, the Option Plan,
would provide that options awarded would vest over a five year period (i.e., 20%
per year), beginning one year after the date of grant of the option. Options
would be granted based upon several factors, including seniority, job duties and
responsibilities, job performance, our financial performance and a comparison of
awards given by other savings institutions converting from mutual to stock form.
CFC would receive no monetary consideration for the granting of stock
options under the Option Plan. It would receive the option price for each share
issued to optionees upon the exercise of such options. Shares issued as a result
of the exercise of options will be either authorized but unissued shares,
treasury shares, or shares purchased in the open market by CFC. The exercise of
options and payment for the shares received would contribute to the equity of
CFC.
If the Option Plan is implemented more than one year after the
conversion, the Option Plan will comply with OTS regulations and policies that
are applicable at such time.
Restricted Stock Plan. Our board of directors intends to adopt the RSP
following the conversion, the objective of which is to enable us to retain
personnel and directors of experience and ability in key positions of
responsibility. CFC expects to hold a stockholders' meeting no sooner than six
months after the conversion in order for stockholders to vote to approve the
RSP. If the RSP is implemented within one year after the conversion, in
accordance with applicable OTS regulations, the shares granted under the RSP
will be in the form of restricted stock vesting over a five year period (i.e.,
20% per year) beginning one year after the date of grant of the award.
Compensation expense in the amount of the fair market value of the common stock
granted will be recognized pro rata over the years during which the shares are
payable. Until they have vested, such shares may not be sold, pledged or
otherwise disposed of and are required to be held in escrow. Any shares not so
allocated would be voted by the RSP Trustees. The RSP will be implemented in
accordance with applicable OTS regulations. See "-- Restrictions on Stock
Benefit Plans." Awards would be granted based upon a number of factors,
including seniority, job duties and responsibilities, job performance, our
performance and a comparison of awards given by other institutions converting
from mutual to stock form. The RSP would be managed by a committee of
non-employee directors (the "RSP Trustees"). The RSP Trustees would have the
responsibility to invest all funds contributed by us to the trust created for
the RSP (the "RSP Trust").
We expect to contribute sufficient funds to the RSP so that the RSP
Trust can purchase, in the aggregate, up to 4% of the amount of common stock
that is sold in the conversion. The shares purchased by the RSP would be
authorized but unissued shares, treasury shares or would be purchased in the
open market. In the event the market price of the common stock is greater than
$10.00 per share, our contribution of funds will be increased. Likewise, in the
event the market price is lower than $10.00 per share, our contribution will be
decreased. In recognition of their prior and expected services to us and CFC, as
the
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<PAGE>
case may be, the officers, other employees and directors responsible for
implementation of the policies adopted by the board of directors and our
profitable operation will, without cost to them, be awarded stock under the RSP.
Based upon the sale of 180,000 shares of common stock in the offering at the
midpoint of the EVR, the RSP Trust is expected to purchase up to 7,200 shares of
common stock. If the RSP is implemented more than one year after the conversion,
the RSP will comply with such OTS regulations and policies that are applicable
at such time.
Restrictions on Stock Benefit Plans. OTS regulations provide that in
the event stock option or management and/or employee stock benefit plans are
implemented within one year from the date of conversion, such plans must comply
with the following restrictions: (1) the plans must be fully disclosed in the
prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
conversion, (3) for restricted stock plans, the shares may not exceed 3% of the
shares issued in the conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25% of the available awards under the option plan or the restricted
stock plans, (6) directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan, (7) all plans
must be approved by a majority of the total votes eligible to be cast at any
duly called meeting of CFC's stockholders held no earlier than six months
following the conversion, (8) for stock option plans, the exercise price must be
at least equal to the market price of the stock at the time of grant, (9) for
restricted stock plans, no stock issued in a conversion may be used to fund the
plan, (10) neither stock option awards nor restricted stock awards may vest
earlier than 20% as of one year after the date of stockholder approval and 20%
per year thereafter, and vesting may be accelerated only in the case of
disability or death (or if not inconsistent with applicable OTS regulations in
effect at such time, in the event of a change in control), (11) the proxy
material must clearly state that the OTS in no way endorses or approves of the
plans, and (12) prior to implementing the plans, all plans must be submitted to
the Regional Director of the OTS within five days after stockholder approval
with a certification that the plans approved by the stockholders are the same
plans that were filed with and disclosed in the proxy materials relating to the
meeting at which stockholder approval was received.
RESTRICTIONS ON ACQUISITIONS OF CARNEGIE FINANCIAL CORPORATION
While the board of directors is not aware of any effort that might be
made to obtain control of CFC after conversion, the board of directors believes
that it is appropriate to include certain provisions as part of CFC's articles
of incorporation to protect the interests of CFC and its stockholders from
hostile takeovers ("anti-takeover"provisions) which the board of directors might
conclude are not in the best interests of us or our stockholders. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the board of directors but which individual stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over the current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current board of directors or management of CFC more difficult.
The following discussion is a general summary of the material
provisions of the articles of incorporation, bylaws, and certain other
regulatory provisions of CFC, which may be deemed to have such an anti-takeover
effect. The description of these provisions is necessarily general and reference
should be made in each case to the articles of incorporation and bylaws of CFC
which are filed as exhibits to the registration statement of which this
prospectus is a part. See "Where You Can Find Additional Information" as to how
to obtain a copy of these documents.
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Provisions of CFC Articles of Incorporation and Bylaws
Limitations on Voting Rights. The articles of incorporation of CFC
provide that for a period of five years from completion of the conversion, in no
event shall any record owner of any outstanding equity security which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of any class of equity security outstanding (the "Limit") be
entitled or permitted to any vote in respect of the shares held in excess of the
Limit. The number of votes which may be cast by any record owner who
beneficially owned shares in excess of the Limit shall be a number equal to the
total number of votes which a single record owner of all common stock owned by
such person would be entitled to cast, multiplied by a fraction, the numerator
of which is the number of shares of such class or series which are both
beneficially owned by such person and owned of record by such record owner and
the denominator of which is the total number of shares of common stock
beneficially owned by such person owning shares in excess of the Limit. In
addition, for a period of five years from the completion of our conversion, no
person may directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of an equity security of CFC.
The impact of these provisions on the submission of a proxy on behalf
of a beneficial holder of more than 10% of the common stock is (1) to disregard
for voting purposes and require divestiture of the amount of stock held in
excess of 10% (if within five years of the conversion more than 10% of the
common stock is beneficially owned by a person) and (2) limit the vote on common
stock held by the beneficial owner to 10% or possibly reduce the amount that may
be voted below the 10% level (if more than 10% of the common stock is
beneficially owned by a person more than five years after the conversion).
Unless the grantor of a revocable proxy is an affiliate or an associate of such
a 10% holder or there is an arrangement, agreement or understanding with such a
10% holder, these provisions would not restrict the ability of such a 10% holder
of revocable proxies to exercise revocable proxies for which the 10% holder is
neither a beneficial nor record owner. A person is a beneficial owner of a
security if he has the power to vote or direct the voting of all or part of the
voting rights of the security, or has the power to dispose of or direct the
disposition of the security. The articles of incorporation of CFC further
provide that this provision limiting voting rights may only be amended upon the
vote of a majority of the outstanding shares of voting stock.
Election of Directors. Certain provisions of CFC's articles of
incorporation and bylaws will impede changes in majority control of the board of
directors. CFC's articles of incorporation provide that the board of directors
of CFC will be divided into four staggered classes, with directors in each class
elected for four-year terms. Thus, it would take three annual elections to
replace a majority of CFC's board. CFC's articles of incorporation provide that
the size of the board of directors may be increased or decreased only if
two-thirds of the directors then in office concur in such action. The articles
of incorporation also provide that any vacancy occurring in the board of
directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the articles of incorporation and
the bylaws impose certain notice and information requirements in connection with
the nomination by stockholders of candidates for election to the board of
directors or the proposal by stockholders of business to be acted upon at an
annual meeting of stockholders.
The articles of incorporation provide that a director may only be
removed for cause by the affirmative vote of at least a majority of the shares
of CFC entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
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Restrictions on Call of Special Meetings. The articles of incorporation
of CFC provide that a special meeting of stockholders may be called only
pursuant to a resolution adopted by a majority of the board of directors.
Absence of Cumulative Voting. CFC's articles of incorporation provide
that stockholders may not cumulate their votes in the election of directors.
Authorized Shares. The articles of incorporation authorizes the
issuance of 4,000,000 shares of common stock and 2,000,000 shares of preferred
stock. The shares of common stock and preferred stock were authorized in an
amount greater than that to be issued in the conversion to provide CFC's board
of directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and the
exercise of stock options. However, these additional authorized shares may also
be used by the board of directors consistent with its fiduciary duty to deter
future attempts to gain control of CFC. The board of directors also has sole
authority to determine the terms of any one or more series of Preferred Stock,
including voting rights, conversion rates, and liquidation preferences. As a
result of the ability to fix voting rights for a series of Preferred Stock, the
board has the power, to the extent consistent with its fiduciary duty, to issue
a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
Procedures for Certain Business Combinations. The articles of
incorporation require the affirmative vote of at least 80% of the outstanding
shares of CFC entitled to vote in the election of directors in order for CFC to
engage in or enter into certain "Business Combinations," as defined therein,
with any Principal Shareholder (as defined below) or any affiliates of the
Principal Shareholder, unless the proposed transaction has been approved in
advance by CFC's board of directors, excluding those who were not directors
prior to the time the Principal Shareholder became the Principal Shareholder.
The term "Principal Shareholder" is defined to include any person and the
affiliates and associates of the person (other than CFC or its subsidiary) who
beneficially owns, directly or indirectly, 20% or more of the outstanding shares
of voting stock of CFC. Any amendment to this provision requires the affirmative
vote of at least 80% of the shares of CFC entitled to vote generally in an
election of directors.
Amendment to Articles of Incorporation and Bylaws. Amendments to CFC's
articles of incorporation must be approved by CFC's board of directors and also
by a majority of the outstanding shares of CFC's voting stock, provided,
however, that approval by at least 80% of the outstanding voting stock is
generally required for certain provisions (i.e., provisions relating to
restrictions on the acquisition and voting of greater than 10% of the common
stock; number, classification, election and removal of directors; amendment of
bylaws; call of special stockholder meetings; director liability; certain
business combinations; power of indemnification; and amendments to provisions
relating to the foregoing in the articles of incorporation).
The bylaws may be amended by a majority vote of the board of directors
or the affirmative vote of the holders of at least 80% of the outstanding shares
of CFC entitled to vote in the election of directors cast at a meeting called
for that purpose.
Benefit Plans. In addition to the provisions of CFC's articles of
incorporation and bylaws described above, certain benefit plans of ours adopted
in connection with the conversion contain provisions which also may discourage
hostile takeover attempts which the boards of directors might conclude are not
in the best interests for us or our stockholders. For a description of the
benefit plans and the provisions of such plans relating to changes in control,
see "Management of Carnegie Savings Bank -- Proposed Future Stock Benefit
Plans."
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Regulatory Restrictions. A federal regulation prohibits any person
prior to the completion of a conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days notice to
the OTS and have received no OTS objection to such acquisition of control, and a
company must apply for and receive OTS approval of the acquisition. Control,
involves a 25% voting stock test, control in any manner of the election of a
majority of the institution's directors, or a determination by the OTS that the
acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of an institution's voting stock, if the acquiror
also is subject to any one of either "control factors," constitutes a rebuttable
determination of control under the regulations. The determination of control may
be rebutted by submission to the OTS, prior to the acquisition of stock or the
occurrence of any other circumstances giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
CFC is authorized to issue 4,000,000 shares of the common stock, $0.10
par value per share, and 2,000,000 shares of serial preferred stock, no par
value per share. CFC currently expects to issue up to 207,000 shares of common
stock in the conversion. CFC does not intend to issue any shares of serial
preferred stock in the conversion, nor are there any present plans to issue such
preferred stock following the conversion. The aggregate par value of the issued
shares will constitute the capital account of CFC. The balance of the purchase
price will be recorded for accounting purposes as additional paid-in capital.
See "Capitalization." The capital stock of CFC will represent nonwithdrawable
capital and will not be insured by us, the FDIC, or any other government agency.
Common Stock
Voting Rights. Each share of the common stock will have the same
relative rights and will be identical in all respects with every other share of
the common stock. The holders of the common stock will possess exclusive voting
rights in CFC, except to the extent that shares of serial preferred stock issued
in the future may have voting rights, if any. Each holder of the common stock
will be entitled to only one vote for each share held of record on all matters
submitted to a vote of holders of the common stock and will not be permitted to
cumulate their votes in the election of CFC's directors.
62
<PAGE>
Liquidation. In the unlikely event of the complete liquidation or
dissolution of CFC, the holders of the common stock will be entitled to receive
all assets of CFC available for distribution in cash or in kind, after payment
or provision for payment of (i) all debts and liabilities of CFC; (ii) any
accrued dividend claims; and (iii) liquidation preferences of any serial
preferred stock which may be issued in the future.
Restrictions on Acquisition of the Common Stock. See "Certain
Restrictions on Acquisition of CFC" for a discussion of the limitations on
acquisition of shares of the common stock.
Other Characteristics. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Therefore, the board of directors may sell shares of
capital stock of CFC without first offering such shares to existing stockholders
of CFC. The common stock is not subject to call for redemption, and the
outstanding shares of common stock when issued and upon receipt by CFC of the
full purchase price therefor will be fully paid and non-assessable.
Issuance of Additional Shares. Except in the subscription offering, or,
if any, the community offering or public or syndicated public offering and
possibly pursuant to the RSP or Stock Option Plan, the CFC has no present plans,
proposals, arrangements or understandings to issue additional authorized shares
of the common stock. In the future, the authorized but unissued and unreserved
shares of the common stock will be available for general corporate purposes,
including, but not limited to, possible issuance: (i) as stock dividends; (ii)
in connection with mergers or acquisitions; (iii) under a cash dividend
reinvestment or stock purchase plan; (iv) in a public or private offering; or
(v) under employee benefit plans. See "Risk Factors -- Possible Dilutive Effect
of RSP and Stock Options" and "Pro Forma Data." Normally no stockholder approval
would be required for the issuance of these shares, except as described herein
or as otherwise required to approve a transaction in which additional authorized
shares of the common stock are to be issued.
For additional information, see "Dividends," "Regulation" and
"Taxation" with respect to restrictions on the payment of cash dividends; "The
Conversion -- Restrictions on Sales and Purchases of Shares by Directors and
Officers" relating to certain restrictions on the transferability of shares
purchased by directors and officers; and "Restrictions on Acquisitions of
Carnegie Financial Corporation" for information regarding restrictions on
acquiring common stock of CFC.
Serial Preferred Stock
None of the 2,000,000 authorized shares of serial preferred stock of
CFC will be issued in the conversion. After the conversion is completed, the
board of directors of CFC will be authorized to issue serial preferred stock and
to fix and state voting powers, designations, preferences or other special
rights of such shares and the qualifications, limitations and restrictions
thereof, subject to regulatory approval but without stockholder approval. If and
when issued, the serial preferred stock is likely to rank prior to the common
stock as to dividend rights, liquidation preferences, or both, and may have full
or limited voting rights. The board of directors, without stockholder approval,
can issue serial preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of the common stock. The board
of directors has no present intention to issue any of the serial preferred
stock.
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for
Capital Resources, Inc. may be passed upon by Steele, Silcox & Browning, P.C.,
Washington, D.C. The federal and state income tax consequences of the
63
<PAGE>
conversion have been passed upon for us by Malizia, Spidi, Sloane & Fisch, P.C.,
Washington, D.C.
EXPERTS
The financial statements of Carnegie Savings Bank as of and for the
years ended December 31, 1997 and 1996 appearing in this document have been
audited by Goff Ellenbogen Backa & Alfera, LLC, independent certified public
accountants, as set forth in their report which appears elsewhere in this
document, and is included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
FinPro, Inc. has consented to the publication herein of a summary of
its letters to Carnegie Savings Bank setting forth its opinion as to the
estimated pro forma market value of us in the converted form and its opinion
setting forth the value of subscription rights and to the use of its name and
statements with respect to it appearing in this document.
REGISTRATION REQUIREMENTS
The common stock of CFC will be registered pursuant to Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") prior to
completion of the conversion. CFC will be subject to the information, proxy
solicitation, insider trading restrictions, tender offer rules, periodic
reporting and other requirements of the SEC under the Exchange Act. CFC may not
deregister the common stock under the Exchange Act for a period of at least
three years following the conversion.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
CFC and Carnegie Savings Bank are not currently subject to the
informational requirements of the Exchange Act.
CFC has filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The SEC also maintains an internet address ("Web site") that
contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is "http://www.sec.gov." The statements
contained in this document as to the contents of any contract or other document
filed as an exhibit to the Form SB-2 are, of necessity, brief descriptions and
are not necessarily complete; each such statement is qualified by reference to
such contract or document.
Carnegie Savings Bank has filed an Application for conversion with the
OTS with respect to the conversion. Pursuant to the rules and regulations of the
OTS, this document omits certain information contained in that Application. The
Application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Northeast Regional Office of the OTS, 10
Exchange Place, Jersey City, New Jersey 07302, without charge.
A copy of the Articles of Incorporation and the Bylaws of CFC are
available without charge from Carnegie Savings Bank.
64
<PAGE>
<TABLE>
<CAPTION>
Carnegie Savings Bank
Index to Financial Statements
Page
----
<S> <C>
Independent Auditors' Report....................................................................................F-2
Statements of Condition.........................................................................................F-3
Statements of Operations....................................................................................... 25
Statements of Changes in Retained Earnings......................................................................F-4
Statements of Cash Flows........................................................................................F-5
Notes to Financial Statements...................................................................................F-6
</TABLE>
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
Separate financial statements for CFC have not been included since it will not
engage in material transactions until after the conversion. CFC, which has been
inactive to date, has no significant assets, liabilities, revenues, expenses or
contingent liabilities.
F-1
<PAGE>
Goff
Ellenbogen
Backa & Alfera, LLC
- ---------------------------
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Trustees
Carnegie Savings Bank
Carnegie, Pennsylvania
We have audited the accompanying statements of condition of Carnegie Savings
Bank as of December 31, 1997 and 1996, and the related statements of operations,
changes in retained earnings, and cash flows for the years then ended. These
financial statements are the representation of the Bank'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 financial position of Carnegie Savings Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/Goff Ellenbogen Backa & Alfera, LLC.
- ---------------------------------------
GOFF ELLENBOGEN BACKA & ALFERA, LLC.
Pittsburgh, Pennsylvania
February 17, 1998
[LOGO]
-------------------------
South Hills Office:
3325 Saw Mill Run Blvd.
Pittsburgh, PA 15227-2736
412/885-5045
412/885-4870 Fax
Edgewood Office:
640 Allenby Avenue
Pittsburgh, PA 15218-1363
412/731-1500
412/731-9620 Fax
- ----------------------------
Member: American and Pennslyvania Institutes of Certified Public Accountants,
AICPA Private Companies and SEC Practice Sections.
An affiliate of INPACT International.
F-2
<PAGE>
Carnegie Savings Bank
Statements of Condition
December 31,
<TABLE>
<CAPTION>
Note 1997 1996
-----------------------------------------------
ASSETS
------
<S> <C> <C> <C>
Cash and cash equivalents 1 $ 850,891 $ 556,658
Certificates of deposits with other banks 1;6 100,000 100,000
Investment securities available for sale, net 1;2 1,615,685 687,312
Investment securities held to maturity, net (market
value of $922,716 and $1,453,244) 1;2 913,903 1,462,353
Mortgage-backed securities available for sale, net 1;2 906,869 -
Mortgage-backed securities held to maturity, net
(market value of $1,744,014 and $2,030,225) 1;2 1,721,250 2,013,551
Loans receivable (net of allowance for loan
losses of $114,832 and $39,144) 1;3 9,585,360 9,811,840
Accrued interest receivable 1 107,361 101,244
Property and equipment, net 1;4 184,878 188,910
Real estate owned 1 480,326 166,570
Deferred tax asset 1;7 92,700 -
Other assets 1 164,245 11,831
----------------- ------------------
Total assets $ 16,723,468 $ 15,100,269
================= ==================
LIABILITIES AND RETAINED EARNINGS
---------------------------------
Deposits 1;5 $ 15,177,917 $ 13,377,825
Line of credit 6 - 300,000
Advance payments by borrowers for taxes
and insurance 143,129 158,770
Deferred income taxes 1;7 33,698 13,400
Accrued income taxes payable 1;7 6,316 20,600
Other liabilities 8 192,363 34,000
----------------- ------------------
Total liabilities 15,553,423 13,904,595
Commitments and contingencies 12 - -
Unrealized gains (losses) on securities
available-for-sale, net of tax of
($7,036) and $2,087 1;2 13,658 ( 14,514)
Retained earnings (Substantially restricted) 1,156,387 1,210,188
----------------- ------------------
Total retained earnings 1,170,045 1,195,674
----------------- ------------------
Total liabilities and retained earnings $ 16,723,468 $ 15,100,269
================= ==================
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-3
<PAGE>
CARNEGIE SAVINGS BANK
STATEMENTS OF OPERATIONS
December 31
<TABLE>
<CAPTION>
Note 1997 1996
-----------------------------------------------
INTEREST INCOME:
<S> <C> <C>
Interest on loans................................ 1 $ 859,072 $ 843,488
Interest-bearing deposits with other banks....... 27,478 27,626
Interest on investment:
Taxable........................................ 1;2 105,860 66,467
Nontaxable..................................... 31,393 33,527
Mortgage-backed securities....................... 198,454 102,655
--------- ---------
Total interest income..................... 1,222,257 1,073,763
INTEREST EXPENSE
Interest on certificates of deposit............ 570,883 440,380
Interest on other savings accounts............. 99,797 105,828
Interest on borrowings......................... 567 5,505
---------- ----------
Total interest expense..................... 671,247 551,713
--------- ---------
Net interest income................................ 551,010 522,050
Provision for loan losses...................... 1;3 73,000 2,203
---------- ----------
Net interest income after provision for loan
losses............................................. 478,010 519,847
NONINTEREST INCOME (LOSS):
Service charges and fee income................. 1 54,204 41,199
Gain on sale of REO............................ 13,693 -
Gain on sale of securities..................... 1;2 1,677 7,733
Dividend income................................ 2 63 9,379
Net income (loss) - real estate owned.......... 1 (7,515) 13,597
Other income................................... 369 2,067
---------- ----------
Total noninterest income................... 62,491 73,975
NONINTEREST EXPENSES:
Wages, payroll taxes and benefits.............. 442,353 249,065
General and administrative..................... 122,783 140,535
Data processing charges........................ 62,534 48,533
Depreciation and amortization.................. 1;4 21,057 20,870
---------- ----------
Total noninterest expenses................. 648,727 459,003
---------- ----------
Net income (loss) before income taxes.............. (108,226) 134,819
Income tax expense (benefit)................... 1;7 (54,425) 35,400
-------- ---------
Net income (loss).................................. $ (53,801) $ 99,419
======== =========
</TABLE>
See accompanying notes beginning on page F-6.
F-4
<PAGE>
Carnegie Savings Bank
Statement of Changes in Retained Earnings
December 31,
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Available
Retained for Sale,
Earnings Net of Taxes Total
-------- ------------ -----
<S> <C> <C> <C>
Balance, December 31, 1995 $1,110,769 $ ( 1,805) $1,108,964
Net income 99,419 - 99,419
Change in net unrealized gains/(losses)
AFS investment securities - ( 12,709) ( 12,709)
---------- ------------ ----------
Balance, December 31, 1996 1,210,188 ( 14,514) 1,195,674
Net loss (53,801) - ( 53,801)
Change in net unrealized gains/(losses)
on AFS investment securities - 28,172 28,172
---------- ------------ ----------
Balance, December 31, 1997 $1,156,387 $ 13,658 $1,170,045
========== ============ ==========
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-5
<PAGE>
Carnegie Savings Bank
Statements of Cash Flows
December 31,
<TABLE>
<CAPTION>
1997 1996
------------------ -- ------------------
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ ( 53,801) $ 99,419
Adjustments to reconcile net income (loss) to
net cash provided (used) by operations:
Depreciation and amortization 21,057 20,870
Provision for loan losses 73,000 2,203
Deferred income taxes ( 72,402) ( 900)
Net amortization of premiums/discounts ( 10,811) 1,470
Gain on sale of real estate owned ( 13,693) -
(Gain) loss on sale of securities ( 1,677) ( 7,733)
Increase (decrease) in cash due to changes in assets
and liabilities:
Accrued interest receivable ( 6,117) ( 13,402)
Other assets (152,414) 52,413
Income tax liabilities ( 14,284) 20,600
Other liabilities 158,363 ( 219)
------------------ ------------------
Net cash provided (used) by operations ( 72,779) 174,721
------------------ ------------------
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from sales and maturities 646,313 500,363
Purchases (1,574,686) (691,436)
Investment securities held to maturity:
Proceeds from maturities and repayments 548,450 20,000
Purchases - (298,639)
Mortgage-backed securities available for sale:
Purchases (1,053,921) -
Maturities and repayments 167,304 -
Mortgage-backed securities held to maturity:
Purchases - (1,247,113)
Maturities and repayments 291,936 213,570
Net (increase) decrease in loans receivable 344,516 ( 810,198)
Proceeds from sale of real estate owned 10,000 -
Investment in real estate owned ( 480,326) -
Purchase of equipment ( 17,025) ( 6,781)
------------------ ------------------
Net cash used by investing activities (1,117,439) (2,320,234)
------------------ ------------------
Cash flows from financing activities:
Advances from borrowers for taxes and insurance ( 15,641) ( 10,939)
Net increase in deposits 1,800,092 970,638
Net increase (decrease) in line of credit ( 300,000) 300,000
------------------ ------------------
Net cash provided by financing activities 1,484,451 1,259,699
------------------ ------------------
Net increase (decrease) in cash 294,233 ( 885,814)
Cash, beginning of year 656,658 1,542,472
------------------ ------------------
Cash and cash equivalents, end of year $ 950,891 $ 656,658
================== ==================
( See Note 11 for Supplemental Disclosures)
</TABLE>
See Independent Auditor's Report and Notes to Financial Statements.
F-6
<PAGE>
Carnegie Savings Bank
Notes to Financial Statements
December 31, 1997 and 1996
Note 1 - Summary of Significant Accounting Policies:
- ----------------------------------------------------
Nature of operations
Carnegie Savings Bank (the "Bank") provides a variety of financial services to
individual and business customers through its one location in Carnegie,
Pennsylvania, which is a southwestern suburb of the city of Pittsburgh. The
Bank's primary deposit products are interest-bearing checking accounts, passbook
savings accounts, and certificates of deposit. It's primary lending products are
single-family residential first mortgages and consumer type loans.
Effective April 3, 1995, the Bank was successful in converting from a privately
insured Pennsylvania-chartered savings association to a FDIC insured non-member
state mutual savings bank.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Bank to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in foreclosure or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and
foreclosed real estate, the Bank obtains independent appraisals for significant
properties.
A majority of the Bank's loan portfolio consists of single-family residential
mortgage loans in the southwestern Pennsylvania area. The regional economy
depends primarily on manufacturing and service related industries. The ultimate
collectibility of the Bank's loan portfolio and the recovery of the carrying
amount of foreclosed real estate are susceptible to changes in the local market
conditions.
While the Bank uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowance for loan losses may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses and foreclosed real estate. Such agencies
may require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
Cash equivalents
For the purpose of reporting cash flows, the Bank considers all cash and amounts
due from depository institutions, FHLB interest bearing deposits, and
certificates of deposits maturing in less than 90 days to be cash equivalents
for purposes of the statements of cash flows. As of December 31, 1997 and 1996,
the Bank had interest bearing deposits that totaled $842,138 and $540,882,
respectively.
F-7
<PAGE>
Investment securities, net including Mortgage Backed Securities
Investment securities consist primarily of various debt securities and
mortgage-backed securities which represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts.
In May 1993, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As required by FAS 115, the Bank adopted the standard
for the year beginning January 1, 1994, without an effect on the reported
operations for 1994. Pursuant to the requirements of FAS 115, the Bank
classifies all of its investments in debt and equity securities into three
categories. Securities which the Bank has a positive intent and ability to hold
to maturity are classified as held to maturity ("HTM"). Securities that are
purchased and held principally for the purpose of selling them in the near
future are classified as trading securities. All other securities that are not
within the above classifications are classified as available for sale securities
("AFS"). Unrealized gains and losses for trading securities are included in
current earnings. Unrealized gains and losses for AFS are excluded from current
earnings and reported as a separate component of retained earnings, net of tax,
until realized. Investments classified as HTM are carried at cost and adjusted
for amortization of premiums and the accretion of discounts over the term of the
investment utilizing methods that approximate the interest method. Gains and
losses on the sales of securities are recognized upon realization. Costs of
securities is recognized using the specific identification method.
Loans receivable, net
Loans are stated at unpaid principal balances, less allowance for loan losses.
The amount of origination and loan fees is not material to the financial
statements and, accordingly, the Bank recognizes these fees as revenue when they
are received.
Loans are placed on nonaccrual status when a loan is specifically determined to
be impaired or when principal or interest payments are delinquent for 90 days or
more. Any unpaid interest previously accrued on nonaccrual loans is reversed
from current interest income. Prospectively, interest income generally is not
recognized on specific impaired loans unless the likelihood of further loss is
remote. Interest payments received on such loans are applied as a reduction of
the outstanding loan principal balance. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received. As of
December 31, 1997 and 1996, the Bank did not have any impaired loans.
The allowance for loan losses is maintained at a level which, in the Bank's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based upon the Bank's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to current operations, and reduced by charge-offs, net of recoveries.
Accrued interest receivable
At December 31, 1997 and 1996, respectively, accrued interest receivable
consisted of interest on mortgage loans of $52,603 and $60,869, other loans of
$9,215 and $7,528, investment securities (held to maturity and available for
sale) of $22,741 and $22,562, and mortgage-backed securities (held to maturity
and available for sale) of $22,802 and $10,285.
F-8
<PAGE>
Property and equipment, net
Property and equipment are recorded at cost. Depreciation expense is generally
provided on the straight-line basis for book purposes over the estimated useful
lives of the related assets which range from 5 to 31 years.
Real estate owned
Real estate property acquired through loan foreclosure, or deed in lieu thereof,
is recorded at the lower of the Bank's cost or the asset's fair value less costs
to sell (estimated net realizable value), which becomes the property's new
basis. Any write-downs based on the assets fair value at date of acquisition are
charged to the allowance for loan losses. After foreclosure, these assets are
carried at the lower of their new cost basis or fair value less cost to sell.
Costs incurred in maintaining real estate and subsequent write-downs to reflect
declines in the fair value of the property are included in net income (loss) on
real-estate owned on the statement of operations.
During the year ended December 31, 1997, the Bank sold a piece of property
previously reported as real estate owned resulting in a gain of approximately
$13,693. Additionally, during 1997 the Bank purchased a piece of property which
increased real estate owned by approximately $480,326.
Income taxes
The FASB issued FAS No. 109, "Accounting for Income Taxes," in February 1993.
The Bank adopted the provisions of FAS 109 in 1993 without effect on the
reported results of operations. Under FAS 109, an asset and liability approach
is required for financial accounting and reporting for income taxes.
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences caused by the recognition of certain income and
expense items on the accrual basis for financial reporting purposes and cash
basis for income tax purposes. The deferred taxes also are related to
differences between the tax and financial reporting basis for AFS securities,
loans receivable, net, accrued liabilities related to supplemental retirement
programs (see Note 8), and property and equipment, net.
Other assets
Other assets at December 31, consisted primarily of the following items:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
<S> <C> <C>
Prepaid expenses and deferred costs $ 15,022 $ 11,831
Income taxes receivable 8,559 -
In-transit escrow from purchase of REO 140,664 -
----------------------- ------------------------
Balance, end of year $ 164,245 $ 11,831
======================= ========================
</TABLE>
Reclassification of Comparative Amounts
Certain comparative account balances for prior periods have been reclassified to
conform to the current period classifications. Such classifications did not
effect net income.
F-9
<PAGE>
Note 2 - Investment securities, net including Mortgage Backed Securities:
- -------------------------------------------------------------------------
Investment securities held-to-maturity as of December 31, are as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Gross
Amortized Unrealized
Cost Fair Value Gain (loss)
------------------- ------------------- -------------------
<S> <C> <C> <C>
State and local government $ 613,903 $ 623,714 $ 9,811
Government sponsored agencies 300,000 299,002 ( 998)
------------------- ------------------- -------------------
$ 913,903 $ 922,716 $ 8,813
=================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Gross
Amortized Unrealized
Cost Fair Value Gain (loss)
------------------- ------------------- -------------------
<S> <C> <C> <C>
State and local government $ 713,840 $ 712,327 $ ( 1,513)
Government sponsored agencies 549,708 543,842 ( 5,866)
Privately issued debt securities 198,805 197,075 ( 1,730)
------------------- ------------------- -------------------
$ 1,462,353 $ 1,453,244 $ ( 9,109)
=================== =================== ===================
</TABLE>
Securities available-for-sale consist of the following as of December 31,:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Gross
Amortized Unrealized
Cost Fair Value Gain (loss)
------------------- ------------------- -------------------
<S> <C> <C> <C>
U.S. Securities $ 204,645 $ 204,328 $ ( 317)
Government sponsored agencies 808,704 809,366 662
Privately issued debt securities 601,991 601,991 -
------------------- ------------------- -------------------
$ 1,615,340 $ 1,615,685 $ 345
=================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Gross
Amortized Unrealized
Cost Fair Value Gain (loss)
------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Securities $ 405,179 $ 389,125 $ ( 16,054)
Government sponsored agencies 199,734 199,187 ( 547)
Privately issued debt securities 99,000 99,000 -
------------------- ------------------- -------------------
$ 703,913 $ 687,312 $ ( 16,601)
=================== =================== ===================
</TABLE>
F-10
<PAGE>
The following is a summary of maturities of investment securities
held-to-maturity and available-for-sale as of December 31, 1997:
<TABLE>
<CAPTION>
HTM AFS
-------------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
One year or less $ 45,090 $ 45,281 $ 502,991 $ 502,991
After one year through five years 170,011 169,798 - -
After five years through ten years 698,802 707,637 699,342 699,899
After ten years - - 413,007 412,795
--------------- ---------------- --------------- ---------------
$ 913,903 $ 922,716 $ 1,615,340 $ 1,615,685
=============== ================ =============== ===============
</TABLE>
Mortgage-backed securities consisted of the following at December 31, :
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Gross
Amortized Unrealized
Cost Fair Value Gain (loss)
------------------- ------------------- -------------------
<S> <C> <C> <C>
Held-to-maturity:
- -----------------
GNMA $ 1,630,734 $ 1,656,280 $ 25,546
FNMA 42,286 41,508 ( 778)
FHLMC 48,230 46,226 ( 2,004)
------------------- ------------------- -------------------
$ 1,721,250 $ 1,744,014 $ 22,764
=================== =================== ===================
Available-for-sale:
- -------------------
GNMA $ 210,083 $ 211,437 $ 1,354
FNMA 337,352 344,610 7,258
FHLMC 208,816 216,347 7,531
Privately issued 130,269 134,475 4,206
------------------- ------------------- -------------------
$ 886,520 $ 906,869 $ 20,349
=================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Gross
Amortized Unrealized
Cost Fair Value Gain (loss)
------------------- ------------------- -------------------
Held-to-maturity
- ----------------
<S> <C> <C> <C>
GNMA $ 1,846,629 $ 1,862,717 $ 16,088
FNMA 78,420 78,959 539
FHLMC 88,502 88,549 47
------------------- ------------------- -------------------
$ 2,013,551 $ 2,030,225 $ 16,674
=================== =================== ===================
</TABLE>
The amortized cost and fair value of mortgage-backed securities as of December
31, 1997 and 1996, by contractual maturity, are 10 years or more, except for one
at December 31, 1997 which matures on August 20, 2005. The amortized cost and
fair value of this security at December 31, 1997 is $191,762 and $192,734,
respectively. However, expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
without call or prepayment penalties.
F-11
<PAGE>
Pursuant to FAS 115, the unrealized gains/(losses) on AFS securities are
required to be presented as a separate component of retained earnings, net of
tax. As of December 31, 1997 and 1996, the net unrealized gains/(losses) on AFS
securities is determined as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
<S> <C> <C>
Unrealized gains/(losses) $ 20,694 $ ( 16,601)
Deferred income taxes ( 7,036) 2,087
----------------------- -----------------------
$ 13,658 $ ( 14,514)
======================= =======================
</TABLE>
Note 3 - Loans Receivable, Net:
- -------------------------------
Loans receivable consisted of the following at December 31, :
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
<S> <C> <C>
Construction $ 252,322 $ 70,000
Residential 8,235,374 8,359,364
Commercial 343,195 418,929
Share loans 119,764 156,434
Automobile 382,974 380,508
Unsecured 367,563 465,749
----------------------- -----------------------
Total loans 9,700,192 9,850,984
Less: Allowance for loan losses ( 114,832) ( 39,144)
----------------------- -----------------------
$ 9,585,360 $ 9,811,840
======================= =======================
</TABLE>
Residential loans consist primarily of 1-4 family dwelling units; the above
balance also includes multi-family loans with approximate aggregate balances at
December 31, 1997 and 1996 of $254,000 and $94,000, respectively.
An analysis of the allowance for loan losses is as follows as of December 31, :
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
<S> <C> <C>
Balance, beginning of year $ 39,144 $ 38,133
Provisions for loan losses 73,000 2,203
Loans charged off - (3,276)
Recoveries 2,688 (2,084)
----------------------- -----------------------
Balance, end of year $ 114,832 $ 39,144
======================= =======================
</TABLE>
In the ordinary course of business, the Bank has and expects to continue to have
transactions, including borrowings, with its executive officers and directors.
In the opinion of the Bank's management, such transactions were and will
continue to be on substantially the same terms, including interest rate and
collateral, as those prevailing at the time for comparable transactions with
other persons and do not involve more than normal risk of collectibility or
present any other unfavorable features to the Bank. The approximate aggregate
dollar amount of these loans at December 31, 1997 and 1996 was $303,190 and
$639,730, respectively.
F-12
<PAGE>
An analysis of the activity in the loans to executive
officers and directors during 1997 is as follows:
1997
-----------
Aggregate balance, 1/1/97 $ 639,730
Loan originations 0
Increases in line of credits 28,865
Loan payoffs ( 316,970)
Principal repayments ( 48,435)
-----------
Aggregate balance, end of year $ 303,190
===========
Note 4 - Property and Equipment, Net:
- -------------------------------------
Property and equipment consisted of the following at December 31,:
<TABLE>
<CAPTION>
1997 1996
------------------------- -----------------------
<S> <C> <C>
Land and building $ 262,284 $ 262,284
Furniture and equipment 88,477 71,453
------------------------- -----------------------
350,761 333,737
Less: accumulated depreciation ( 165,883) ( 144,827)
------------------------- -----------------------
Balance, end of year $ 184,878 $ 188,910
========================= =======================
</TABLE>
Note 5 - Deposits:
- ------------------
Deposits with the Bank consisted of the following at December 31, :
<TABLE>
<CAPTION>
1997 1996
-------------------------- -----------------------
<S> <C> <C>
Certificates of deposits $ 10,224,984 $ 9,067,447
Money market demand accounts 3,374,959 3,168,155
NOW accounts 1,031,088 927,073
Non-interest bearing accounts 546,886 215,150
-------------------------- -----------------------
$ 15,177,917 $ 13,377,825
========================== =======================
</TABLE>
The aggregate amount of deposit accounts exceeding $100,000 was approximately
$1,441,000 and $937,000 at December 31, 1997 and 1996, respectively. Deposits in
excess of $100,000 are not federally insured.
Note 6 - Line of Credit:
- ------------------------
At December 31, 1997 and 1996, the Bank had an available line of credit in the
amount of $500,000. The outstanding balance on the line of credit at December
31, 1997 and 1996 was $0 and $300,000, respectively. The line of credit is
payable upon demand and bears interest at a rate of prime plus 1.25%. In
addition, pursuant to the terms of the line of credit agreement, in order for
the Bank to borrow any funds it is required to maintain a certificate of deposit
at the lending institution; as of December 31, 1997 and 1996, this certificate
of deposit was $100,000.
F-13
<PAGE>
Note 7 - Income Taxes:
- ----------------------
The income tax provision at December 31, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------------------------- -----------------------
Current provision:
<S> <C> <C>
Federal $ 27,100 $ 21,700
State - 12,800
--------------------------- -----------------------
Total current expense 27,100 34,500
Deferred tax expense (benefit):
Federal ( 68,625) 900
Deferred state credit, net ( 12,900) -
--------------------------- -----------------------
Total income tax expense (benefit) $ ( 54,425) $ 35,400
=========================== =======================
</TABLE>
The provision for income taxes differs from that computed by applying statutory
rates to income before income tax expense, as indicated in the following
analysis for the years ended December 31,:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Expected federal tax at statutory rates $ ( 36,797) (34.0%) $ 33,802 34.0%
State tax provision, net ( 8,514) ( 7.9%) 2,773 2.8%
Effect of tax exempt income ( 10,674) ( 9.9%) (11,341) (11.4%)
Effect of dividend exclusion - - (3,189) ( 3.2%)
Other and surtax benefit 1,560 1.5% 13,355 13.4%
-------------------- ----------- ------------------ -----------
Federal tax provision $ ( 54,425) (50.3)% $ 35,400 35.6%
==================== =========== ================== ===========
</TABLE>
Note 8 - Retirement Plan:
- -------------------------
Simplified Employee Pension Plan (SEP)
The Bank has adopted a SEP plan which provides for an annual contribution at the
discretion of the Board of Directors up to 15% of the eligible employee's
compensation. Pension expense charged to operations for the years ended December
31, 1997 and 1996, was $14,799 and $19,256, respectively.
Supplemental Executive Retirement Plan
On December 15, 1997, the Board of Directors adopted a non-qualified
Supplemental Executive Retirement Plan (the "Plan") with an officer of the Bank
to provide post-retirement benefits for a period of ten (10) years, assuming not
less than twenty-five (25) years of service following retirement after age 65.
Pursuant to the Plan, benefits also become payable upon disability, death, or
change of control of the Bank (as defined in the Plan document). As of December
31, 1997, approximately $35,580 has been accrued and recognized as an expense.
Directors Consultation and Retirement Plan
On December 15, 1997, the Board of Directors adopted a non-qualified Directors
Consultation and Retirement Plan ( the "Directors Plan") to provide
post-retirement benefits over a period of ten-years (10) to members of the Board
of Directors who have completed not less than ten-years (10) of service or after
attainment of not less than age 60. Pursuant to the Directors Plan, benefits
also become payable upon disability, death, or change of control of the Bank (as
defined
F-14
<PAGE>
in the Plan document). As of December 31, 1997, approximately $122,920 has been
accrued and recognized as an expense.
Note 9 - Regulatory Capital Requirements:
- -----------------------------------------
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, The Federal Insurance Deposit Corporation (FDIC).
Failure to meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have a direct material affect on the
Bank and the financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications under the prompt corrective action guidelines are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets ( as defined in the
regulations), and Tier I capital to adjusted total assets ( as defined).
Management believes, as of December 31, 1997 and 1996, the Bank meets all the
capital adequacy requirements to which it is subject.
The following tables set forth certain information concerning the Bank's
regulatory capital as of December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Tier I Core Capital Tier I - Risk-Based Tier II -
Capital Risk-Based Capital
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Equity Capital (1) $ 1,170 $ 1,170 $ 1,170
Unrealized (gains) losses on AFS
securities ( 14) ( 14) ( 14)
Plus general valuation allowance (2) - - 102
--------------------- --------------------- --------------------
Total regulatory capital 1,156 1,156 1,258
Minimum required capital 658 326 651
--------------------- --------------------- --------------------
Excess regulatory capital $ 498 $ 830 $ 607
===================== ===================== ====================
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $ 822 $ 489 $ 814
===================== ===================== ====================
Regulatory capital as a % (3) 7.03% 14.20% 15.45%
Minimum required capital % 4.00% 4.00% 8.00%
--------------------- --------------------- --------------------
Excess regulatory capital % 3.03% 10.20% 7.45%
===================== ===================== ====================
Minimum required capital % to be well
capitalized under the Prompt
Corrective Action Provisions 5.00% 6.00% 10.00%
===================== ===================== ====================
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------
Tier I Core Capital Tier I - Risk-Based Tier II -
Capital Risk-Based Capital
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Equity Capital (1) $ 1,196 $ 1,196 $ 1,196
Unrealized (gains) losses on AFS
securities 14 14 14
Plus general valuation allowance (2) - - 37
--------------------- --------------------- --------------------
Total regulatory capital 1,210 1,210 1,247
Minimum required capital 589 309 619
--------------------- --------------------- --------------------
Excess regulatory capital $ 621 $ 901 $ 628
===================== ===================== ====================
Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions $ 736 $ 464 $ 774
===================== ===================== ====================
Regulatory capital as a % (3) 8.22% 15.64% 16.12%
Minimum required capital % 4.00% 4.00% 8.00%
--------------------- --------------------- --------------------
Excess regulatory capital % 4.22% 11.64% 8.12%
===================== ===================== ====================
Minimum required capital % to be well
capitalized under the Prompt
Corrective Action Provisions 5.00% 6.00% 10.00%
===================== ===================== ====================
</TABLE>
(See footnotes to table of regulatory capital requirements below.)
Footnotes to regulatory capital tables:
Note #: Footnote Description:
- --------------------------------------------------------------------------------
1 Represents equity capital of the Bank as reported to the FDIC and the
Department of Banking on Form 033 for the quarters ended December 31,
1997 and 1996
2 Limited to 1.25% of risk adjusted assets.
3 Tier I capital is calculated as a percentage of adjusted total average
assets of $16,445 and $14,716 as of December 31, 1997 and 1996,
respectively. Tier I and Tier II risk-based capital are calculated as a
percentage of adjusted risk weighted assets of $8,143 and $7,736 as of
December 31, 1997 and 1996, respectively.
F-16
<PAGE>
Note 10 - Reconciliation of Net Income and Retained Earnings from Financial
- --------------------------------------------------------------------------------
Statements to Annual Regulatory Reports:
- ----------------------------------------
The following is a reconciliation of net income and retained earnings as
reported in the audited financial statements to the net income and retained
earnings as reported by the Bank in its annual call reports as of December 31, :
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Net Loss Retained Earnings
----------------------- ------------------------
<S> <C> <C>
Per audited financial statements: $ ( 53,801) $ 1,156,387
Audit adjustments:
Income taxes ( 53,068) ( 53,068)
Accrued pension expense 118,500 118,500
Other accrued expenses 9,000 9,000
Computer conversion costs 6,456 6,456
Other Audit adjustments, net 2,813 2,813
----------------------- ------------------------
Net adjustments 83,701 83,701
----------------------- ------------------------
Change in net unrealized gains/losses on AFS
securities - 13,000
----------------------- ------------------------
Per call report $ 29,900 $ 1,253,088
======================= ========================
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Net Income Retained Earnings
----------------------- ------------------------
<S> <C> <C>
Per audited financial statements: $ 99,419 $1,210,188
Audit adjustments:
Income taxes 6,623 6,623
Accrued interest payable on deposits 7,847 7,847
Other Audit adjustments, net 2,436 2,436
-----------------------
------------------------
Net adjustments 16,906 16,906
----------------------- ------------------------
Change in unrealized holding gains
and losses on AFS securities - (12,000)
----------------------- ------------------------
Per call report $116,325 $1,215,094
======================= ========================
</TABLE>
Note 11 - Supplemental Statement of Cash Flows Disclosures:
- -----------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
<S> <C> <C>
Loans to facilitate the sale of real
estate owned $ 170,263 $ -
======================== ========================
Cash paid during year for interest $ 660,954 $ 543,100
======================== ========================
Cash paid during year for income taxes $ 28,932 $ 13,900
======================== ========================
</TABLE>
F-17
<PAGE>
Note 12 - Commitments and Contingencies:
- ----------------------------------------
Commitments
In the normal course of business, the Bank makes various commitments which are
not reflected in the accompanying financial statements. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the statement of condition. The Bank's exposure to
credit loss in the event of nonperformance by the other parties to the financial
instruments is represented by the contractual amounts disclosed. The Bank
minimizes its exposure to credit loss under these commitments by subjecting them
to credit approval and review procedures, and collateral requirements, as deemed
necessary.
The off-balance sheet commitments as of December 31, 1997 and 1996, consisted
approximately of the following:
<TABLE>
<CAPTION>
1997 1996
--------------------------- -----------------------
<S> <C> <C>
Commitments to extend credit:
One to four family $ 516,000 $ -
Lines of credit 297,000 333,000
--------------------------- -----------------------
$ 813,000 $ 333,000
=========================== =======================
</TABLE>
The Bank has no commitment to loan additional funds to borrowers of impaired or
nonaccrual loans. The majority of the Bank's commitments to fund the equity
lines of credit are at variable market rates of interest; the Bank's commitment
to fund future loans for one to four family mortgage loans are generally fixed
rates ranging from 7.25% to 8.25%. Generally, the Bank's commitments to fund
future loans expire in 30 to 60 days.
Contingencies
In the normal course of business, the Bank is involved in various legal
proceedings primarily involving the collection of outstanding loans. None of
these proceedings are expected to have a material effect on the financial
position of the Bank.
The Bank is aware of the issues associated with the programming code in existing
computer systems as the millennium ( Year 2000 ) approaches. The "Year 2000"
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Bank utilizes a service bureau to process the majority of its accounting
transactions. The Bank is utilizing the expertise of the service bureau to
identify, correct or reprogram, and test the systems for the year 2000
compliance. As of December 31, 1997, the Bank's service bureau has reported that
it is 82% complete with the project to bring its computer system into compliance
with the year 2000. It is expected that the project will be fully completed by
June 30, 1998, and for testing to begin in the third quarter of 1998. However,
the Bank will be responsible for verifying that all of its vendors software
upgrades are year 2000 compliant and are fully tested, including any interface
to its service bureau. As a result, the year 2000 compliance creates risk for
the Bank from unforeseen problems in its own computer systems and from third
parties with whom the Bank deals on financial transactions worldwide. Although
the Bank has not yet assessed the year 2000 compliance expense and related
potential affect on the Bank's earnings, it does not expect the costs to be
material.
F-18
<PAGE>
Note 13 - Plan of Conversion:
- -----------------------------
On December 15, 1997, the Board of Trustees of the Bank, subject to regulatory
approval, ratified a Plan of Conversion ( the "Plan" ) to convert from a state
mutual savings bank to a federally insured stock savings bank and the concurrent
formation of a holding company for the Bank. The Plan provides that the holding
company will offer nontransferable subscription rights to purchase common stock
of the holding company. The rights will be offered first to eligible account
holders, the Bank's tax-qualified employee stock benefits plans, supplemental
eligible account holders, and directors, officers, and employees. Any shares
remaining may then be offered to the general public.
At the date of conversion, the Bank will establish a liquidation account in an
amount equal to its retained earnings reflected in the statement of condition
appearing in the final prospects. The liquidation account will be maintained for
the benefit of eligible account holders and supplemental eligible account
holders who continue to maintain their accounts at the Bank after the
conversion. The liquidation will be reduced annually to the extent these
account holders have reduced their qualifying deposits. In the event of a
complete liquidation, each eligible savings account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held.
The Bank may not declare or pay a cash dividend on, or repurchase any of its
common shares if the effect thereof would cause the Bank's shareholders' equity
to be reduced below either the amount required for the liquidation account or
the regulatory capital requirements for insured institutions.
Costs associated with the conversion will be deferred and deducted from the
proceeds of the stock offering. If, for any reason, the offering is not
successful, the deferred costs will be charged to operations. As of December 31,
1997, there was $11,200 of costs associated with the conversion that have been
deferred and presented as other assets.
F-19
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this document in connection with
the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by Carnegie
Savings Bank, Carnegie Financial Corporation or Capital Resources, Inc. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which such offer or solicitation would be unlawful. Neither the delivery of
this document by Carnegie Savings Bank, Carnegie Financial Corporation or
Capital Resources, Inc. nor any sale made hereunder shall in any circumstances
create an implication that there has been no change in the affairs of Carnegie
Savings Bank or Carnegie Financial Corporation since any of the dates as of
which information is furnished herein or since the date hereof.
CARNEGIE FINANCIAL CORPORATION
Up to 238,050 Shares
(Anticipated Maximum, As Adjusted)
Common Stock
----------
PROSPECTUS
----------
Capital Resources, Inc.
Dated May 14, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until the later of August 20, 1998, or 90 days after commencement of the
offering of common stock, all dealers that buy, sell or trade these securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
