<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10 - QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from to
--------------- ---------------
Commission File Number 0-23765
------------------------------
Carnegie Financial Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 23 -1806857
(State or other jurisdiction of incorporation
or organization) (IRS Employer Identification No.)
17 West Mall Plaza, Carnegie, Pennsylvania, 15106
(Address of principal executive offices)
(412) 276 - 1266
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, par value $.10 per share
Outstanding at November 12, 1998: 238,050
<PAGE>
CARNEGIE FINANCIAL CORP
INDEX
Page
Number
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
(Unaudited) as of September 30,
1998 and December 31, 1997 3
Consolidated Statement of Income
(Unaudited) for the Nine Months
ended September 30, 1998 and 1997 4
Consolidated Statement of
Income (Unaudited) for the
Three Months ended September 30,
1998 and 1997 5
Consolidated Statement of
Changes in Stockholders' Equity
(Unaudited) 6
Consolidated Statement of Cash
Flows (Unaudited) for the Nine
Months ended September 30, 1998 and 1997 7
Notes to Unaudited Consolidated
Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 10 - 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Default Upon Senior Securities 15
Item 4. Submissions of Matters to a
Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8 - K 15
SIGNATURES 16
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
1998 1997
------------ ------------
ASSETS
Cash and Cash Equivalents
Cash and amounts due from
banks $ 143,495 $ 197,565
Interest - bearing deposits
with other institutions 280,421 653,326
------------ ------------
Total cash and cash
equivalents 423,916 850,891
Certificates of deposit with
other banks 100,000 100,000
Investment securities available
for sale 1,584,342 1,615,685
Investment securities held to
maturity (fair value of
$1,052,847 and $922,716) 1,038,273 913,903
Mortgage - backed securities
available for sale 1,120,395 906,869
Mortgage - backed securities
held to maturity (fair value
of $1,241,886 and $1,744,014) 1,223,167 1,721,250
Loans receivable, (net of
allowance for loan losses
of $97,564 and $114,832) 12,220,636 9,585,360
Office properties and
equipment, net 209,798 184,878
Federal Home Loan Bank Stock,
at cost 102,900 0
Real estate owned 0 480,326
Accrued interest receivable 117,156 107,361
Other assets 131,746 256,945
------------ ------------
Total assets $ 18,272,329 $ 16,723,468
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $ 14,624,837 $ 15,177,917
Advances from borrowers for taxes
and insurance 80,211 143,129
Accrued interest payable 224,306 21,800
Other liabilities 238,198 210,577
------------ ------------
Total liabilities 15,167,552 15,553,423
STOCKHOLDERS' EQUITY
Preferred Stock, no par value;
2,000,000 shares authorized;
none outstanding
Common Stock, $.10 par value;
4,000,000 shares authorized
and 238,050 outstanding 23,805 0
Additional paid - in capital 2,075,415 0
Retained Earnings - substantially
restricted 1,177,689 1,156,387
Unearned Employee Stock Ownership
Plan shares (ESOP) (185,679) 0
Net unrealized gain on securities 13,547 13,658
------------ ------------
Total stockholders' equity 3,104,777 1,170,045
------------ ------------
Total liabilities and
stockholder's equity $ 18,272,329 $ 16,723,468
============ ============
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Nine Months Ended
September 30,
----------- -----------
1998 1997
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 718,578 $ 654,385
Investment securities
Taxable 94,845 95,956
Exempt from federal
income tax 21,473 23,985
Interest - bearing deposits
with other institutions 24,477 20,471
Mortgage - backed securities 125,412 135,441
Dividends on Federal Home
Loan Bank Stock 2,107 0
----------- -----------
Total interest and
dividend income 986,892 930,238
----------- -----------
INTEREST EXPENSE
Deposits 515,960 497,748
Short-term borrowings 0 567
----------- -----------
Total interest expense 515,960 498,315
----------- -----------
NET INTEREST INCOME 470,932 431,923
Provision for loan losses 0 2,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 470,932 429,923
----------- -----------
NONINTEREST INCOME
Service charges on deposit
accounts 21,770 21,025
Gain (loss) on sale of
investment securities 2,606 (557)
Other income 15,433 12,071
----------- -----------
Total noninterest income 39,809 32,539
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 234,404 199,646
Occupancy and equipment 29,320 26,184
Data processing charges 64,361 42,621
Loss (gain) on real estate
owned operations 60,545 (5,916)
Other expenses 100,167 90,200
----------- -----------
Total noninterest expense 488,797 352,735
----------- -----------
Income before income taxes 21,944 109,727
Income taxes 642 33,150
----------- -----------
NET INCOME $ 21,302 $ 76,577
=========== ===========
Basic per share earnings $ 0.13 $ N/A
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
4
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CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 250,036 $ 210,942
Investment securities
Taxable 45,526 36,326
Exempt from federal income tax 6,656 7,548
Interest - bearing deposits
with other institutions 9,837 8,365
Mortgage - backed securities 40,641 47,397
Dividends on Federal Home
Loan Bank Stock 1,686 0
----------- -----------
Total interest and
dividend income 354,382 310,578
----------- -----------
INTEREST EXPENSE
Deposits 171,412 170,193
Short-term borrowings 0 0
----------- -----------
Total interest expense 171,412 170,193
----------- -----------
NET INTEREST INCOME 182,970 140,385
Provision for loan losses 0 2,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 182,970 138,385
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 7,933 9,400
Gain (loss) on sale of
investment securities 459 (557)
Other income 4,846 6,384
----------- -----------
Total noninterest income 13,238 15,227
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 78,351 58,230
Occupancy and equipment 9,688 10,058
Data processing charges 29,161 10,491
Other expenses 37,832 28,513
----------- -----------
Total noninterest expense 155,032 107,292
----------- -----------
Income before income taxes 41,176 46,320
Income taxes 7,442 14,982
----------- -----------
NET INCOME $ 33,734 $ 31,338
=========== ===========
Basic earnings per share $ 0.08 $ N/A
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
5
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<TABLE>
<CAPTION>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Unallocated Net
Additional Shares Unrealized Total
Common Paid-in Retained Held by Gain (Loss) Stockholders'Comprehensive
Stock Capital Earnings ESOP On Securities Equity Income
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ - $ - $1,156,387 $ - $ 13,658 $1,170,045
Net income 21,302 21,302 $ 21,302
Other comprehensive
income: Unrealized loss
on available for sale
securities, net of (111) (111) (111)
----------
reclassification adjustment
Comprehensive income $ 21,191
==========
Common stock issued 23,805 2,075,415 (190,440) 1,908,780
ESOP shares released 4,761 4,761
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1998 $ 23,805 $2,075,415 $1,177,689 $ (185,679) $ 13,547 $3,104,777
========== ========== ========== ========== ========== ==========
Components of comprehensive
income: Change in net
unrealized gain on investment
securities held for sale $ 1,609
Realized gains included in
net income, net of tax (1,720)
----------
Total $ (111)
==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
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CARNEGIE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
1998 1997
----------- ---------
OPERATING ACTIVITIES
Net income 21,302 76,577
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and
accretion, net (431,851) (95,257)
Provision for loan losses 0 2,000
Amortization of unearned ESOP 4,761 0
Loss (gain) on real estate owned 60,545 7,514
Loss (gain) on sale of securities (2,606) 557
Increase in accrued interest receivable (9,795) (63,564)
Increase in accrued interest payable 202,506 205,439
Other, net 151,898 (17,744)
-------- --------
Net cash provided by operating activities (3,238) 115,522
-------- --------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (2,216,998) (2,703,092)
Proceeds from sales 2,606 1,948,064
Maturities and repayments 2,589,411 0
Investment securities held to maturity:
Purchases (250,000) (234,000)
Maturities and repayments 225,000 536,000
Mortgage-backed securities available for sale:
Purchases (488,595) (956,115)
Maturities and repayments 280,416 15,323
Mortgage-backed securities held to maturity:
Purchases 0 (424,391)
Maturities and repayments 500,893 607,151
Net increase in loans (2,635,276) (90,144)
Purchases of Federal Home Loan Bank stock (102,900) 0
Proceeds from sale of real estate owned 419,781 159,056
Purchases of office properties and equipment (40,857) (6,693)
---------- ----------
Net cash used for investing activities (1,716,519) (1,148,841)
---------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (553,080) 1,260,232
Increase in short-term borrowings 0 (300,000)
Issuance of stock and additional paid in capital 1,908,780 0
Net change in advances for taxes and insurance (62,918) (101,265)
---------- ----------
Net cash provided by financing activities 1,292,782 858,967
---------- ----------
Decrease in cash and cash equivalents (426,975) (174,352)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 950,891 656,658
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR 523,916 482,306
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 313,453 $ 509,822
Income taxes 18,526 31,406
See accompanying notes to the consolidated financial statements.
7
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CARNEGIE FINANCIAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Carnegie Financial Corporation (the
"Company") includes its wholly- owned subsidiary Carnegie Savings Bank (the
"Bank"). All significant intercompany items have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore,
do not necessarily include all information that would be included in audited
financial statements. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of
the results of operations. All such adjustments are of a normal recurring
nature. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year or
any other interim period.
Note 2 - CONVERSION TO A STOCK FORM OF OWNERSHIP AND FORMATION OF HOLDING
COMPANY
On December 11, 1997, the Board of Trustees of the Bank, subject to
regulatory approval and approval by the members of the Bank, adopted a Plan
of Conversion (the "Plan") to convert from a state chartered mutual savings
bank to a federally chartered stock savings bank and the concurrent
formation of a holding company.
As part of the conversion, Carnegie Financial Corporation was organized in
December 1997 at the direction of the Board of Trustees of the Bank for the
purpose of acquiring all of the capital stock to be issued by the Bank in
the conversion. The Company became a holding company with its only
significant assets being all of the outstanding capital stock of the Bank,
which was acquired on July 10, 1998 by exchanging approximately $1.2 million
of the proceeds received in the public offering for all of the common stock
of the Bank, and a percentage of the conversion proceeds permitted to be
retained. From the proceeds of the Conversion, approximately $24,000 was
allocated to common stock and $2.1 million, which is net of $281,000
conversion costs, was allocated to additional paid-in capital.
Note 3 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Bank adopted the Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income." In adopting
Statement No. 130, the Bank is required to present comprehensive income and
its components in a full set of general purpose financial statements. The
Bank has elected to report the effects of Statement No. 130 as part of the
Statement of Changes in Stockholders' Equity.
Note 4 - EARNINGS PER SHARE
Earnings per share computations are based upon the weighted number of shares
outstanding for the period since inception, July 10, 1998, and for the three
months ended September 30, 1998. The weighted number of shares outstanding
for both periods was 238,843. Net income used in the earnings per share
calculation was $32,119 and $19,687 respectively.
8
<PAGE>
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Statement No. 128 replaced the previous reporting requirement of primary and
fully diluted earnings per share with basic and diluted earnings per share.
The Company currently maintains a simple capital structure, therefore, there
are no dilutive effects on earnings per share.
Note 5 - EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company has an ESOP for the benefit of employees who meet the
eligibility requirements which include having completed one year of service
with the Company and having attained age 21. The ESOP Trust purchased
19,044 shares of common stock in the initial public offering with proceeds
from a loan from the Company. The Bank makes cash contributions to the
ESOP on an annual basis sufficient to enable the ESOP to make the required
loan payments to the Company. The loan bears interest at 8.50% with interest
payable quarterly and principal payable in equal annual installments over
ten years. The loan is secured by the shares of the stock purchased.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the
year. The Company accounts for its leveraged ESOP in accordance with
Statement of Position 93 -6. Accordingly, the shares pledged as collateral
are reported as unallocated ESOP shares in the consolidated balance sheet.
As shares are released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares
become outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31,
1997
Total assets increased by approximately $1,549,000 or 9.3% to $18,272,000 at
September 30, 1998 from $16,723,000 at December 31, 1997. The $2.1 million
received in the sale of common stock in July primarily funded this increase
but was offset by a decline in deposits of $744,000.
Total cash and cash equivalents declined $427,000 or 50.1% from $851,000 at
December 31, 1997 to $424,000 at September 30, 1998 primarily to fund growth
in the loan portfolio.
Total investment and mortgage-backed securities decreased $192,000 or 3.7%
from $5,158,000 at December 31, 1997 to $4,966,000 at September 30, 1998.
The overall decrease is the result of management applying principal
repayments on mortgage-backed securities to fund loans and meet operating
expenses. There has been limited activity during the period as management
has directed its investment opportunities to meet a demanding loan
environment.
Net loans receivable increased $2,635,000 or 27.5% from $9,585,000 at
December 31, 1997 to $12,221,000 at September 30, 1998 primarily due to the
growing demand within the Company's market area. Benefiting mostly from
this environment is the residential real estate portfolio which increased
$1,654,000 or 20.1%. In addition, the Company has relatively significant
commitments to fund loans as a direct result of the economic health of the
Company's market area and the competitive pricing of its loan products. The
funding of the loan growth was mainly provided by the usage of funds from
the stock offering, overnight deposits and principal repayments from
mortgage-backed securities.
Deposits decreased $744,000 or 4.9% to $14,434,000 at September 30, 1998
from $15,178,000 at December 31, 1997 due to the competitiveness of deposits
within the Company's market area, as well as the usage of deposits for
subscriptions in the stock offering.
Stockholder's equity increased $1,935,000 to $3,104,777 at September 30,
1998 from $1,170,000 at December 31, 1997 as a result of the $2,099,000 net
proceeds received in the initial public offering offset by $190,000 as a
result of establishing an Employee Stock Ownership Plan.
10
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND 1997
Net income decreased $55,000 to $21,000 for the nine months ended September
30, 1998 from $76,000 for the same period ended 1997. This decrease was due
to an increase in noninterest expenses of $123,000 offset by an increase in
net interest income of $39,000 and a decrease in income tax expense of
$33,000.
Interest income increased $57,000 or 6.1% from $930,000 for the nine months
ended September 30, 1997 to $987,000 for the same period 1998 due primarily
to an increase in earnings on loans of $64,000 or 9.8% and offset by a
decrease in earnings on mortgage-backed securities of $10,000 or 7.4%. The
increase in interest income on loans was due to an increase in the average
principal balance for loans in general, and one-to-four family residential
loans specifically. As stated previously, this increase is the result the
economic viability of the Bank's market area and is being funded with the
proceeds from the stock offering. The decrease in interest income on
mortgage-backed securities was also the result of fluctuations in average
balances as repayments were used to fund the growth in loans.
Interest expense on deposits increased $18,000 or 3.7% from $498,000 for the
nine months ended September 30, 1997 to $516,000 for the same period ended
1998 primarily due to an increase in the average balances of deposits.
Based upon management's continuing evaluation of the adequacy of the
allowance for loan losses which encompasses the overall risk characteristics
of the various portfolio segments, past experience with losses, the impact
of economic conditions on borrowers, and other relevant factors, the
provision for loan losses decreased by $2,000 for the nine months ended
September 30, 1998 compared to the same period ended 1997. See "Risk
Elements".
Noninterest income, which is comprised of service charges on deposit
accounts, gains and losses on sales of securities, and other income
increased $7,000 or 22.3% to $40,000 for 1998 compared to $33,000 for 1997
as a result of an increase in gains or sale of investment securities of
$3,000 and smaller dollar increases in various other income accounts.
Noninterest expense increased $136,000 or 38.6% to $489,000 for the nine
months ended September 30, 1998 from $353,000 for the same period ended
1997. Compensation and benefits increased $35,000 or 17.4% compared to the
prior period due to increased benefit costs associated with an increase in
salaries to employees coupled with the implementation of an Employee Stock
Ownership Plan as a result of the Stock Offering. Data processing expenses
increased $22,000 or 51.0% due to both volume of transactions and an
increase in third party costs relating both to the stock conversion and year
2000 readiness. There also was an increase of $66,000 in real estate owned
expenses due to the settlement of approximately $480,000 in all previously
foreclosed properties.
There was a decrease in income tax expense of $33,000 for the nine months
ended September 30, 1998 as compared to the same period 1997. This
fluctuation is the result of a decrease in pretax income of $80,000.
11
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
Net income for the three months ended September 30, 1998 increased $2,000 or
7.6% to $33,000 from $31,000 for the same period ended 1997.
Net interest income increased $43,000 for the three months ended September
30, 1998 to $183,000 from $140,000 for 1997. This increase results from an
increase of $39,000 or 18.5% and $8,900 or 20.3% in interest on loans and
investment securities due to fluctuations in average balances. Interest
income on mortgage-backed securities decreased $7,000 during this same
period due to the same reasons as previously discussed. Overall, interest
expense remained relatively unchanged during this time period increasing
slightly from $170,000 for the three month period ended September 30, 1997
to $171,000 for the same period ended 1998.
Provision for loan losses decreased $2,000 for the three months ended
September 30, 1998 compared to the same period ended September 30, 1997.
This decrease is derived from management's continual monitoring of the
quality of its loan portfolio and its determination of the adequacy of the
allowance for loan losses.
Noninterest income decreased slightly by $2,000 or 13.1% for the three
months ended September 30, 1997 compared to the same period ended 1998 as a
result of a slight decline in service charges on deposits and other income
accounts offset by an increase in gain on sale of investments.
Noninterest expense increased $48,000 or 44.5% from $107,000 for the three
months ended September 30, 1997 to $155,000 for the same period ended 1998.
As previously noted, the increases result from an increase in employee
salaries, the implementation of an Employee Stock Ownership Plan, the volume
of transactions and increase in third party costs, and an increase in
offices supplies and training materials for employees.
Income taxes decreased $8,000 for the three months ended September 30, 1998
to $7,000 from $15,000 for the same period ended September 30, 1997 due to a
decline in pretax income.
LIQUIDITY AND CAPITAL RESOURCES
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 predictable 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.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to
the savings and loan industry and similar matters. Management monitors
projected liquidity needs and determines the level desirable based in part
on the Bank's commitments to make loans and management's assessment of the
Bank's ability to generate funds.
Management monitors both the Company's and the Savings Bank's total risk-based,
Tier I risk-based and Tier I leverage capital ratios in order to
assess compliance with regulatory guidelines. At September 30, 1998, both
the Company and the Savings Bank exceeded the minimum risk-based and
leverage capital ratios requirements. The Company's and Savings Bank's
total risk-based, Tier I risk-based and Tier I leverage ratios are 34.5%,
33.5%, 17.0% and 25.9%, 24.8%, 12.4%, respectively at September 30, 1998.
12
<PAGE>
RISK ELEMENT
The table below presents information concerning nonperforming assets
including nonaccrual loans, renegotiated loans, loans 90 days or more past
due, other real estate loans, and repossessed assets. A loan is classified
as nonaccrual when, in the opinion of management, there are serious doubts
about collectibility of interest and principal. At the time the accrual of
interest is discontinued, future income is recognized only when cash is
received. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as
a result of the deterioration of the borrower.
September 30, December 31,
1998 1997
------------ -----------
(Dollars in thousands)
Loans on nonaccrual basis $ 32 $ 42
Loans past due 90 days or
more and still accruing - -
--------- ---------
Total nonperforming loans 32 42
--------- ---------
Real estate owned - 480
--------- ---------
Total nonperforming assets - 522
--------- ---------
Nonperforming loans as a
percent of total loans 0.26% 0.43%
========= =========
Nonperforming assets as a
percent of total assets 0.23% 3.12%
========= =========
Allowance for loan losses to
nonperforming loans 306.25% 273.81%
========= =========
Management monitors impaired loans on a continual basis. As of September
30, 1998, impaired loans had no material effect on the Company's financial
position or results of operations.
During the nine month period ended September 30, 1998, loans increased
$2,355,000 and nonperforming loans decreased $10,000 while the allowance for
loan losses decreased $17,000 for the same period. The percentage of
allowance for loan losses to loans outstanding declined to .77% at September
30, 1998 from 1.19% at December 31, 1997 as classified assets decreased from
$192,000 to $35,000 during this same period. Nonperforming loans are
primarily made up of one to four family residential mortgages and consumer
loans. The collateral requirements on such loans reduce the risk of
potential losses to an acceptable level in management's opinion.
Management believes the level of the allowance for loan losses at
September 30, 1998 is sufficient; however, there can be no assurance that
the current allowance for loan losses will be adequate to absorb all future
loan losses. The relationship between the allowance for loan losses and
outstanding loans is a function of the credit quality and known risk
attributed to the loan portfolio. The on-going loan review program and
credit approval process is used to determine the adequacy of the allowance
for loan losses.
13
<PAGE>
YEAR 2000
Rapid and accurate data processing is essential to the Bank's operations.
Many computer programs can only distinguish the final two digits of the year
entered (a common programming practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly
attempt to compute payment, interest, delinquency and other data. The Bank
has been evaluating both information technology (computer systems) and non-
information technology systems (e.q. vault timers, electronic door lock and
elevator controls). Based upon such evaluations, management has determined
that the Bank has year 2000 risk in three areas: (1) Bank's own computer
and software, (2) computers of others used by the Bank's borrowers, and (3)
computers of others who provide the Bank with processing of certain
services.
Bank's own computers and software. The Bank expects to spend approximately
$4,000 through December 31, 1998 to upgrade its computer system and
software. This upgrade is expected to eliminate the year 2000 risk. The
Bank does not expect to have material costs to address this risk after
December 31, 1998. At September 30, 1998 approximately $2,000 has been
expensed. The Bank expects, though there is no assurance, to be year 2000
compliant in this risk area by December 31, 1998.
Computers of others used by our borrowers. The Bank has evaluated most of
their borrowers and does not believe the year 2000 problem should, on an
aggregate basis, impact their ability to make payments to the Bank. The
Bank believes that most of their residential borrowers are not dependent on
their home computers for income and that none of their commercial borrowers
are so large that a year 2000 problem would render them unable to collect
revenue or rent and, in turn, continue to make loan payments to the Bank.
The Bank does not expect any material costs to address this risk area and
believes they are year 2000 compliant in this risk area.
Computers of others who provide us with processing of certain services.
This risk is primarily focused on one third party service bureau that
provides virtually all of the Bank's data processing. The service bureau
has communicated that it is substantially year 2000 compliant and subsequent
results of testing by the Bank have been positive.
Contingency Plan. The Bank will continue monitoring their service bureau to
evaluate whether its data processing system will fail and is being provided
with periodic updates on the status of testing and upgrades being made by
the service bureau. If the Bank service bureau fails, the Bank will attempt
to locate an alternative service bureau that is year 2000 compliant. If the
Bank is unsuccessful, the Bank will enter deposit balances and interest with
its existing computer system. If this labor intensive approach is
necessary, management and employees will become much less efficient.
However, the Bank believes that they would be able to operate in this manner
in the short-term, until their existing service bureau, or their
replacement, is able to again provide data processing services. If very few
financial institution services bureaus were operating in the year 2000, the
Bank's replacement costs, assuming the Bank could negotiate an agreement,
could be material.
14
<PAGE>
CARNEGIE FINANCIAL CORPORATION
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
Use of Proceeds
(4) (I) The offering has terminated but did not terminate before
the sale of all securities registered;
(ii) The name of the managing underwriter was: Capital
Resources, Inc.
(iii) Common stock par value $.10 per share was registered;
(iv) Amount registered 238,050 shares;
Aggregate price of offering amount registered -
$2,380,500; Amount sold 238,050;
Aggregate offering price of stock sold to date -
$2,380,500;
(V) Expenses of the offering which were direct
or indirect payments to others;
Expense paid to and for underwriters $94,500;
Other expenses - $186,800 (estimate);
Total expenses - $281,300 (estimate);
(vi) Net offering proceeds - $2,099,220;
(vii) Direct or indirect payments to affiliates:
Loan to ESOP of subsidiary bank - $190,440;
Purchase outstanding stock of subsidiary bank - $1,049,610
Noninterest checking account with subsidiary bank -
$813,374
(viii) Not applicable
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) (3)(i) Articles of Incorporation of Carnegie Financial
Corporation*
(3)(ii) Bylaws of Carnegie Financial Corporation*
(4) Specimen Stock Certificate of Carnegie Financial
Corporation*
(10) Form of Employment Agreement between the Bank and Shirley
Chiesa*
(27) Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
None
* Incorporated by reference to the registration statement on Form SB-2
(333-48655).
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused the report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Carnegie Financial Corporation
Date: November 16, 1998 By: /s/ Shirley Chiesa
--------------------------------------
Shirley Chiesa
President and Chief Executive Officer
Date: November 16, 1998 By: /s/ Joseph Pigoni
--------------------------------------
Joseph Pigoni
Vice President and CFO
16
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
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<DEPOSITS> 14,434
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<EXPENSE-OTHER> 489
<INCOME-PRETAX> 22
<INCOME-PRE-EXTRAORDINARY> 22
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
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<LOANS-NON> 32
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