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, 1999
[ ] 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 11, 1999: 226,148
<PAGE>
CARNEGIE FINANCIAL CORP
INDEX
Page
Number
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
(Unaudited) as of September 30,
1999 and December 31, 1998 3
Consolidated Statement of Income
(Unaudited) for the Nine Months
Ended September 30, 1999 and 1998 4
Consolidated Statement of Income
(Unaudited) for the Three Months
Ended September 30, 1999 and 1998 5
Consolidated Statement of
Changes in Stockholders' Equity
(Unaudited) as of September 30, 1999 6
Consolidated Statement of Cash
Flows (Unaudited) for the Nine
Months Ended September 30, 1999 and 1998 7
Notes to Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 9 - 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,
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 201,284 $ 316,515
Interest - bearing overnight
deposits with other institutions 173,592 648,973
------------ ------------
Cash and cash equivalents 374,876 965,488
Certificates of deposit 100,000 199,000
Investment securities available
for sale 3,494,137 1,259,532
Investment securities held to
maturity (fair value of $0 and $503,083) - 489,287
Mortgage-backed securities
available for sale 823,490 1,026,442
Mortgage-backed securities
held to maturity (fair value
of $786,967 and $1,082,927) 780,790 1,066,910
Loans receivable, (net of
allowance for loan losses
of $175,836 and $138,860) 21,271,630 14,512,121
Premises and equipment 232,634 248,228
Federal Home Loan Bank stock 514,900 102,900
Accrued interest receivable 154,105 114,675
Other assets 235,326 100,061
------------ ------------
TOTAL ASSETS $ 27,981,888 $ 20,084,644
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $ 15,400,829 $ 15,372,170
Borrowed funds 9,025,000 1,200,000
Advances from borrowers for taxes
and insurance 132,571 179,563
Accrued interest payable and
other liabilities 644,052 295,492
------------ ------------
TOTAL LIABILITIES 25,202,452 17,047,225
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
2,000,000 shares authorized;
none issued - -
Common stock, $.10 par value;
4,000,000 shares authorized
and 238,050 outstanding 23,805 23,805
Additional paid-in capital 2,064,903 2,072,044
Retained earnings - substantially
restricted 1,196,752 1,118,054
Unearned Employee Stock Ownership
Plan shares (ESOP) (166,635) (180,918)
Unearned Restricted Stock Plan shares (RSP) (68,796) -
Accumulated other comprehensive income (loss) (152,063) 4,434
Treasury stock (11,902 shares, at cost) (118,530) -
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,779,436 3,037,419
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 27,981,888 $ 20,084,644
============ ============
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Nine Months Ended
September 30,
1999 1998
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,042,671 $ 718,578
Investment securities
Taxable 154,727 94,845
Exempt from federal
income tax 10,415 21,473
Interest-bearing deposits
in other banks 35,606 24,477
Mortgage-backed securities 85,788 125,412
Dividends on Federal Home
Loan Bank stock 17,190 2,107
----------- -----------
Total interest and
dividend income 1,346,397 986,892
----------- -----------
INTEREST EXPENSE
Deposits 480,268 515,960
Borrowings 236,774 -
----------- -----------
Total interest expense 717,042 515,960
----------- -----------
NET INTEREST INCOME 629,355 470,932
Provision for loan losses 38,448 -
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 590,907 470,932
----------- -----------
NONINTEREST INCOME
Service fees 62,513 21,770
Investment securities gains (losses), net (27,739) 2,606
Other income 43,864 15,433
----------- -----------
Total noninterest income 78,638 39,809
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 254,687 234,404
Occupancy and equipment 31,778 29,320
Data processing charges 58,180 64,361
Loss on real estate owned - 60,545
Other expense 205,036 100,167
----------- -----------
Total noninterest expense 549,681 488,797
----------- -----------
Income before income taxes 119,864 21,944
Income taxes 41,166 642
----------- -----------
NET INCOME $ 78,698 $ 21,302
=========== ===========
Basic per share earnings $ 0.37 $ 0.13
=========== ===========
Dilutive earnings per share $ 0.37 $ N/A
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
September 30,
1999 1998
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 389,207 $ 250,036
Investment securities
Taxable 64,416 45,526
Exempt from federal
income tax 1,663 6,656
Interest-bearing deposits
in other banks 3,246 9,837
Mortgage-backed securities 24,429 40,641
Dividends on Federal Home
Loan Bank stock 7,943 1,686
----------- -----------
Total interest and
dividend income 490,904 354,382
----------- -----------
INTEREST EXPENSE
Deposits 152,912 171,412
Borrowings 107,627 -
----------- -----------
Total interest expense 260,539 171,412
----------- -----------
NET INTEREST INCOME 230,365 182,970
Provision for loan losses - -
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 230,365 182,970
----------- -----------
NONINTEREST INCOME
Service fees 20,833 7,933
Gain on sale of investment securities - 459
Other income 7,228 4,846
----------- -----------
Total noninterest income 28,061 13,238
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 84,204 78,351
Occupancy and equipment 10,322 9,688
Data processing charges 19,828 29,161
Loss on real estate owned - -
Other expense 65,511 37,832
----------- -----------
Total noninterest expense 179,865 155,032
----------- -----------
Income before income taxes 78,561 41,176
Income taxes 28,584 7,442
----------- -----------
NET INCOME $ 49,977 $ 33,734
=========== ===========
Basic per share earnings $ 0.24 $ 0.08
=========== ===========
Dilutive earnings per share $ 0.24 $ N/A
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned Unearned Accumulated
Additional Shares Shares Other Total Compre-
Common Paid-in Retained Held by Held by Comprehensive Treasury Stockholders' hensive
Stock Capital Earnings ESOP RSP Income (Loss) Stock Equity Income
---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $23,805 $2,072,044 $1,118,054 $(180,918) $ - $ 4,434 - $3,037,419
Net income 78,698 78,698 $ 78,698
Other comprehensive
income: Unrealized loss
on available for sale
securities, net of
reclassification adjustment (156,497) (156,497) (156,497)
Comprehensive ---------
income $(77,799)
=========
Stock purchased RSP (7,141) (80,937) (88,078)
Shares earned RSP 12,141 12,141
Shares earned ESOP 14,283 14,283
Treasury stock purchased (118,530) (118,530)
------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1999 $23,805 $2,064,903 $1,196,752 $(166,635) $(68,796) $(152,063) $(118,530) $2,779,436
======= ========== ========== ========== ========== ========== ========== ==========
Components of comprehensive income:
Change in net unrealized loss on
investment securities held for sale $(174,805)
Realized loss included in net income, net of tax 18,308
---------
Total $(156,497)
==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
CARNEGIE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
1999 1998
---------- ----------
OPERATING ACTIVITIES
Net income $ 78,698 $ 21,302
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation, amortization, and
accretion, net 10,461 (427,090)
Provision for loan losses 38,448 -
Loss on sale of real estate owned - 60,545
Investment securities (gains) losses, net 27,739 (2,606)
Increase in accrued interest receivable (39,430) (9,795)
Increase in accrued interest payable 269,559 202,506
Other, net 24,357 151,900
---------- ----------
Net cash provided by (used for)
operating activities 409,832 (3,238)
---------- ----------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (2,746,119) (2,216,998)
Proceeds from sales 792,344 2,606
Maturities and repayments - 2,589,411
Investment securities held to maturity:
Purchases - (250,000)
Maturities and repayments - 225,000
Mortgage-backed securities available for sale:
Purchases (111,463) (488,595)
Maturities and repayments 294,317 280,416
Mortgage-backed securities held to maturity:
Maturities and repayments 285,797 500,893
Net increase in loans (6,797,958) (2,635,276)
Purchases of Federal Home Loan Bank stock (412,000) (102,900)
Proceeds from sale of real estate owned - 419,781
Purchases of office properties and equipment (4,420) (40,857)
---------- ----------
Net cash used for investing activities (8,699,502) (1,716,519)
---------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 28,659 (553,080)
Proceeds from short-term borrowings 3,750,000 -
Proceeds from long-term borrowings 4,075,000 -
Purchase of treasury stock (118,530) -
Purchase stock for RSP (88,079) -
Issuance of stock and additional paid-in capital - 1,908,780
Net change in advances for taxes and insurance (46,992) (62,918)
---------- -----------
Net cash provided by financing activities 7,600,058 1,292,782
---------- -----------
Decrease in cash and cash equivalents (689,612) (426,975)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,064,488 950,891
---------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 374,876 $ 523,916
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 447,483 $ 313,453
Income taxes 5,000 18,526
See accompanying notes to the unaudited consolidated financial statements.
7
<PAGE>
CARNEGIE FINANCIAL CORPORATION
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 fiscal year ended December 31, 1999 or any other
interim period.
Note 2 - EARNINGS PER SHARE
Earnings per share computations are based upon the weighted number of shares
outstanding for the nine and three-month periods ended September 30, 1999. The
weighted number of shares outstanding was 213,521 and 208,364, respectively. Net
income used in the earnings per share calculation was $28,721 and $16,430,
respectively. Earnings per share computations are not applicable for the period
ending June 30, 1998, as the Company converted from a state-chartered mutual
savings bank to a federally-chartered stock savings bank on July 10, 1998.
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities. For the nine and three-month periods ended September 30, 1999, the
diluted number of shares outstanding from employee stock options was 213,797 and
208,518, respectively.
Note 3 INVESTMENT SECURITIES
In accordance with the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective April 1, 1999, the Company
reclassified investment securities from the held to maturity classification to
available for sale classification with an amortized cost of $489,000 and an
estimated market value of $502,000.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
"believes," "anticipates," "contemplates," "expects," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, the ability to control costs and expenses, and general
economic conditions. The Company undertakes no obligation to publicly release
the results of any revisions to those forward looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31,1998
Total assets increased by approximately $7,897,000 or 39.3 percent, to
$27,982,000 at September 30, 1999 from $20,085,000 at December 31, 1998. This
growth was funded primarily through additional borrowings from the Federal Home
Loan Bank of $7.8 million.
Total investment and mortgage-backed securities available for sale increased
$2,210,000 or 96.9 percent, from $2,286,000 at December 31, 1998 to $4,318,000
at September 30, 1999. Of the $2,858,000 of investments purchased, $2,746,000 or
96.1 percent, were U.S. Government agencies. These investments, which have
slightly lower yields, primarily mature between 15 and 30 years. This overall
increase was partially offset by repayments of mortgage-backed securities of
$580,000 and the sale of $792,000 of U.S. Government Agency securities.
Additionally, the Company obtained financing from the FHLB, and reduced its
balances with deposits in other institutions to fund the growth of the
investment and loan portfolios. As of April 1, 1999, in accordance with FASB
Statement No. 133, management transferred approximately $500,000 of held to
maturity securities to available for sale.
At September 30, 1999, the Company's investment and mortgage-backed securities
available for sale portfolios totaled $4.3 million or 15.4 percent, of the
Company's total consolidated assets. Pursuant to generally accepted accounting
standards, such securities are recorded at current market value and net
unrealized gains or losses on such securities are excluded from earnings and
reported net of income taxes as part of comprehensive income, a separate
component of stockholders' equity, until realized. At September 30, 1999, due to
increases in market rates, unrealized losses for such securities were
approximately $152,000 as compared to net gains at December 31, 1998 of $4,400.
Because of interest rate volatility, the Company's accumulated comprehensive
income and stockholders' equity could materially fluctuate for each interim
period and year-end period. The majority of the unrealized loss at September 30,
1999 resulted from the Company's investment in U.S. Government agency
securities. The decrease in market value of the investment securities available
for sale is considered temporary in nature and will not affect the Company's net
income until the securities are sold.
Net loans receivable increased $6,760,000 or 46.6 percent, from $14,512,000 at
December 31, 1998 to $21,272,000 at September 30, 1999, primarily due to the
growing demand for residential real estate within the Company's market area. The
residential portfolio increased $6,760,000 during 1999 and was primarily driven
by engaging the services of a mortgage broker, which resulted in $5,061,000 in
new residential loans. Although such loans have an average origination of
$230,000, they are subject to the same underwriting guidelines as is typical
within the Company's residential loan portfolio.
Advances from the Federal Home loan Bank of Pittsburgh ("FHLB") increased
$7,825,000 to $9,025,000 at September 30, 1999 from $1,200,000 at December 31,
1998. As noted previously, management entered into these advances to fund loan
and investment growth, as well as to implement part of the Company's leverage
strategy. These borrowings have staggering maturites from overnight lines of
credit to five-year advances. At September 30, 1999, the Bank's maximum
borrowing capacity with the FHLB was $16.1 million.
9
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Continued)
Stockholders' equity decreased $260,000 to $2,779,000 at September 30, 1999,
from $3,037,000 at December 31, 1998. Contributing to the decline in
stockholders' equity was the Company acquiring treasury stock of $119,000, the
implementation of a Restricted Stock Plan for the benefit of key employees and
directors for $84,000, and the decrease in accumulated other comprehensive
income of $156,000 due to a decline in the market values of the Company's
available for sale investment portfolio. These declines were partially offset by
net income of $79,000 for the nine months ended September 30, 1999.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998
Net income increased $57,000 to $79,000 for the nine months ended September 30,
1999, from net income of $21,000 for the same period ended 1998. This increase
was primarily due to an increase in net interest income of $158,000 while being
partially offset by an increases in the provision for loan losses and
noninterest expense of $38,000 and $61,000, respectively.
Total interest and dividend income increased $361,000 or 36.4 percent from
$987,000 for the nine months ended September 30, 1998 to $1,346,000 for the same
period ended 1999. Increases in the average principal balances of loans and
investment securities of $6.9 million and $670,000 primarily fueled the
increases in related interest income of $324,000 and $50,000, respectively. The
effect of the increase in average balance was partially offset by a 50 basis
point reduction in yield on earning assets. As noted previously, the loan
portfolio was heavily influenced by the increase in residential mortgages
originated through a mortgage broker while securities available for sale were
being purchased from the repayment of mortgage-backed securities and from excess
deposits in other financial institutions. The impact of this increase in
interest income is offset by the decline in the average principal balances of
mortgage-backed securities of $677,000.
Interest expense on deposits, which decreased slightly, was $480,000 for the
nine months ended September 30, 1999 compared to $516,000 for the same period
ended in 1998. There were decreases in the average balances of interest-bearing
demand and certificates of deposit of $1.1 million and $252,000, respectively.
While there was a decline in interest expense on deposits, interest expense on
borrowings increased by $237,000, resulting in a net increase in interest
expense of $201,000. The overall increase in interest expense resulted from a
$6.2 million increase in average borrowings with the FHLB.
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 increased by $38,000 for the nine months ended September 30, 1999
compared to the same period ended 1998. This increase is primarily due to the
growth of the loan portfolio as discussed above. See "Risk Elements."
Noninterest income, which is comprised of service charges on deposit accounts,
investment securities gains (losses), net, and other income increased $39,000 or
97.5 percent to $79,000 for 1999 compared to $40,000 for 1998. Service charges
on deposit accounts increased $41,000 due to an increased level of transaction
account activity and the addition of two ATMs. Increases in fees associated with
loan underwriting and processing accounted for the majority of the $28,000
increases to other income. Partially offsetting these increase was a $28,000
loss on the sale of investment securities.
10
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998 (Continued)
Noninterest expense, which increased $61,000 or 12.4 percent to $550,000 for the
nine months ended September 30, 1999 from $489,000 for the same period ended
1998, was substantially effected by increases of $105,000 in other expenses and
$20,000 in compensation and employee benefits. Increases to other expenses
consisted of the following: costs associated with the supplemental director
retirement plan of $31,000; professional fees; and stock expenses of $64,000
resulting from costs associated with conducting business as a public entity for
the nine months ended September 30, 1999, as compared to $3,000 for the same
period in 1998. In addition, ATM costs of $20,000 were incurred in 1999 as the
Company placed two new ATMs in service during the fourth quarter of 1998.
Increases to compensation and employee benefits are attributable to implementing
the ESOP and RSP in July 1998 and January 1999, respectively. Offsetting these
increases was a decline in the loss on real estate operations of $61,000 which
was recognized in 1998.
Income tax expense increased $40,000 from $1,000 for the nine months ended
September 30, 1998 to an expense of $41,000 for the same period ended 1999. This
increase in due to an increase in 1999 over 1998 of pre-tax income of $98,000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998
Net income increased $16,000 to $50,000 for the three months ended September 30,
1999 from income of $34,000 for the same period ended 1998. This increase was
primarily due to an increase in net interest income of $47,000 and noninterest
income of $15,000 while partially being offset by an increase in noninterest
expense and income tax expense of $25,000 and $21,000, respectively.
Total interest and dividend income increased $137,000 or 38.5 percent, from
$354,000 for the three months ended September 30, 1998 to $491,000 for the same
period ended 1999. Interest income on loans increased $139,000 due to an
increase in the average principal balance of $8,272,000 from the same period in
1998. This increase in income from volume was offset by a decrease in the yield
of interest-earning assets from 7.90 percent for the three months ended
September 30, 1998 to 7.44 percent for the same period ended 1999. The decrease
in yield is due to the declining yield of loans and mortgage-backed securities
during this same time period.
Total interest expense increased $90,000 to $261,000 for the three months ended
September 30, 1999, from $171,000 for the same period ended 1998. This increase
was derived from an increase in the average principal balances of borrowings
from the FHLB of approximately $8.1 million which corresponded to an increase of
$108,000 in interest expense. Offsetting this increase were market declines in
the cost of funds for certificates of deposit and interest-bearing demand
deposits of 62 and 55 basis points, respectively.
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, no provision for loan
losses was recorded for the three months ended September 30, 1999 and 1998,
respectively. See "Risk Elements."
Noninterest income increased from $15,000 for the three months ended September
30, 1999 to $28,000 from the same period ended September 30, 1998. Service
charges on deposit accounts increased $13,000. As noted previously, such
increases were due primarily to an increased level of transaction account
activity, and the addition of two ATMs.
Noninterest expense increased from $155,000 for the three months ended September
30, 1998 to $180,000 for the same period ended 1999. Other expense increased
$27,000 due to, as noted above, increases to other expenses consisted of
increased costs associated with the supplemental director retirement plan,
professional fees and stock expenses, ATM costs, and the implementation of the
ESOP and RSP.
11
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998 (Continued)
Income tax expense increased from $7,000 for the three months ended September
30, 1999 to $29,000 for the same period 1999. This increase is due to an
increase in 1999 over 1998 of pre-tax income of $37,000.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, advances from the FHLB, 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, 1999, both the Company
and the Bank exceeded the minimum risk-based and leverage capital ratio
requirements. The Company's and Bank's Total Risk-based, Tier I Risk-based, and
Tier I Leverage ratios were 21.2 percent, 20.0 percent, 10.3 percent and 19.0
percent, 17.8 percent, and 9.1 percent, respectively at September 30, 1999.
Due to the year 2000, management has instituted a cash contingency plan in order
to meet the possible larger cash withdrawals of customers in December 1999. Such
plan may decrease the Company's investment in interest-earning assets and may
increase its investment in interest-bearing liabilities, which may cause the
Company's net income to slightly decrease in the 1999 fourth quarter.
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.
12
<PAGE>
RISK ELEMENT (Continued)
September 30, December 31,
1999 1998
------------ -----------
(Dollars in thousands)
Loans on nonaccrual basis $ 21 $ 57
Loans past due 90 days or
more and still accruing - -
--------- ---------
Total non-performing loans 21 57
--------- ---------
Real estate owned - -
--------- ---------
Total non-performing assets 21 57
--------- ---------
Non-performing loans as a
percent of total loans 0.10% 0.39%
========= =========
Non-performing assets as a
percent of total assets 0.08% 0.28%
========= =========
Allowance for loan losses to
Non-performing loans 837.31% 243.61%
========= =========
Management monitors impaired loans on a continual basis. As of September 30,
1999, impaired loans had no material effect on the Company's financial position
or results of operations.
During the nine-month period ended September 30, 1999, loans increased
$6,796,000, non-performing loans decreased $36,000, and the allowance for loan
losses increased $38,000 for the same period. The percentage of allowance for
loan losses to loans outstanding declined slightly to 0.82 percent at September
30, 1999 from 0.95 percent at December 31, 1998. Non-performing 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,
1999 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.
YEAR 2000
Rapid and accurate data processing is essential to the Bank's operations. Many
computer programs that can only distinguish the final two digits of the year
entered 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.
13
<PAGE>
YEAR 2000 (Continued)
Bank's own computers and software. The Bank has completed its year 2000 testing
and has found no material problems. The Bank has corrected all problems that
were found during testing. The Bank believes that as a result of modifications
to existing software and hardware and conversions to new software, the year 2000
problem has been mitigated. The majority of the costs associated with the Bank's
own computers and software were incurred during 1998. The Bank does not expect
to have any material costs for such areas in 1999.
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. Because
we primarily contract with outside vendors for our computer application
programs, we believe our principal risk relating to year 2000 issues lies in the
potential inability of those vendors to process date sensitive information
involving the year 2000. 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. The above items are
documented in the Bank's written contingency plan which has been approved by the
Board of Directors.
Despite management's best efforts to address the year 2000 issue, the vast
number of external entities that have direct and indirect business relationships
with the Bank, such as customers, vendors, payment system providers, utility
companies, and other financial institutions, make it impossible to assure that a
failure to achieve compliance by one or more of these entities would not have a
material adverse impact on the Bank's business or on the Company's consolidated
financial statements.
14
<PAGE>
CARNEGIE FINANCIAL CORPORATION
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities
None
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) The following exhibits are incorporated as part of this report
3.1 Articles of Incorporation of Carnegie Financial Corporation
3.2 Bylaws of Carnegie Financial Corporation *
4.0 Specimen Stock Certificate *
10.1 Employment agreement between Carnegie Savings Bank and
Shirley Chiesa
10.2 Restricted Stock Plan **
10.3 1999 Stock Option Plan **
27.0 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
There were no reports filed under Form 8-K for the period under report.
- --------------------------------------------------------------------------------
* Incorporated by reference to the identically numbered exhibit to the
registration statement on Form SB-2 (File no. 333-24579) declared effective
by the SEC on May 14, 1998.
** Incorporated by reference to the proxy statement for the special meeting of
stockholders on January 11, 1999 and filed with the SEC on December 10,
1998.
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 12, 1999 By: \s\Shirley Chiesa
--------------------------------------
Shirley Chiesa
President and Chief Executive Officer
Date: NOVEMBER 12, 1999 By: \s\Joseph Pigoni
--------------------------------------
Joseph Pigoni
Vice President and CFO
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 201
<INT-BEARING-DEPOSITS> 274
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,318
<INVESTMENTS-CARRYING> 781
<INVESTMENTS-MARKET> 787
<LOANS> 21,447
<ALLOWANCE> 176
<TOTAL-ASSETS> 27,982
<DEPOSITS> 15,401
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 777
<LONG-TERM> 4,950
0
0
<COMMON> 24
<OTHER-SE> 2,756
<TOTAL-LIABILITIES-AND-EQUITY> 27,982
<INTEREST-LOAN> 1,043
<INTEREST-INVEST> 251
<INTEREST-OTHER> 53
<INTEREST-TOTAL> 1,346
<INTEREST-DEPOSIT> 480
<INTEREST-EXPENSE> 717
<INTEREST-INCOME-NET> 629
<LOAN-LOSSES> 38
<SECURITIES-GAINS> (28)
<EXPENSE-OTHER> 550
<INCOME-PRETAX> 120
<INCOME-PRE-EXTRAORDINARY> 120
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79
<EPS-BASIC> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 3.42
<LOANS-NON> 21
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 139
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 176
<ALLOWANCE-DOMESTIC> 176
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
