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 June 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 August 5, 1999: 226,148
<PAGE>
CARNEGIE FINANCIAL CORP
INDEX
Page
Number
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
(Unaudited) as of June 30,
1999 and December 31, 1998 3
Consolidated Statement of Income
(Unaudited) for the Six Months
ended June 30, 1999 and 1998 4
Consolidated Statement of Income
(Unaudited) for the Three Months
ended June 30, 1999 and 1998 5
Consolidated Statement of
Changes in Stockholders' Equity
(Unaudited) as of June 30, 1999 6
Consolidated Statement of Cash
Flows (Unaudited) for the Six
Months ended June 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)
June 30, December 31,
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 213,848 $ 316,515
Interest - bearing overnight
deposits with other institutions 484,128 648,973
------------ ------------
Cash and cash equivalents 697,976 965,488
Certificates of deposit 100,000 199,000
Investment securities available
for sale 3,616,145 1,259,532
Investment securities held to
maturity (fair value of $503,083) - 489,287
Mortgage - backed securities
available for sale 884,367 1,026,442
Mortgage - backed securities
held to maturity (fair value
of $874,400 and $1,082,927) 871,601 1,066,910
Loans receivable, (net of
allowance for loan losses
of $175,836 and $138,860) 18,832,488 14,512,121
Premises and equipment 239,182 248,228
Federal Home Loan Bank Stock 408,600 102,900
Accrued interest receivable 178,045 114,675
Other assets 169,767 100,061
------------ ------------
TOTAL ASSETS $ 25,998,171 $ 20,084,644
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $ 15,509,414 $ 15,372,170
Borrowed funds 6,950,000 1,200,000
Advances from borrowers for taxes
and insurance 278,204 179,563
Accrued interest payable and
other liabilities 472,002 295,492
------------ ------------
TOTAL LIABILITIES 23,209,620 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 1,146,775 1,118,054
Unearned Employee Stock Ownership
Plan shares (ESOP) (171,396) (180,918)
Unearned Restricted Stock Plan shares (RSP) (72,843) -
Accumulated other comprehensive income (loss) (84,163) 4,434
Treasury stock (11,902 shares, at cost) (118,530) -
------------ ------------
Total stockholders' equity 2,788,551 3,037,419
------------ ------------
Total liabilities and
stockholder's equity $ 25,998,171 $ 20,084,644
============ ============
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Six Months Ended
June 30,
----------- -----------
1999 1998
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 653,464 $ 468,542
Investment securities
Taxable 90,311 44,385
Exempt from federal
income tax 8,752 14,817
Interest - bearing deposits
in other banks 32,360 19,575
Mortgage - backed securities 61,360 84,770
Dividends on Federal Home
Loan Bank Stock 9,246 421
----------- -----------
Total interest and
dividend income 855,493 632,510
----------- -----------
INTEREST EXPENSE
Deposits 327,356 344,548
Borrowings 129,147 -
----------- -----------
Total interest expense 456,503 344,548
----------- -----------
NET INTEREST INCOME 398,990 287,962
Provision for loan losses 38,448 -
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 360,542 287,962
----------- -----------
NONINTEREST INCOME
Service fees 41,680 13,837
Investment securities gains (losses), net (27,739) 2,147
Other income 36,636 10,586
----------- -----------
Total noninterest income 50,577 26,570
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 170,483 155,786
Occupancy and equipment 21,456 19,632
Data processing charges 38,352 35,200
Loss on real estate owned - 61,058
Other expense 139,525 62,088
----------- -----------
Total noninterest expense 369,816 333,764
----------- -----------
Income (loss) before income taxes 41,303 (19,232)
Income taxes 12,582 (6,800)
----------- -----------
NET INCOME (LOSS) $ 28,721 $ (12,432)
=========== ===========
Basic per share earnings $ 0.13 $ N/A
=========== ===========
Dilutive earnings per share $ 0.13 $ N/A
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
June 30,
----------- -----------
1999 1998
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 351,673 $ 252,663
Investment securities
Taxable 54,568 19,292
Exempt from federal
income tax 2,853 7,408
Interest - bearing deposits
in other banks 8,801 12,188
Mortgage - backed securities 28,087 40,544
Dividends on Federal Home
Loan Bank Stock 5,780 421
----------- -----------
Total interest and
dividend income 451,762 332,516
----------- -----------
INTEREST EXPENSE
Deposits 159,486 174,234
Borrowings 80,397 -
----------- -----------
Total interest expense 239,883 174,234
----------- -----------
NET INTEREST INCOME 211,879 158,282
Provision for loan losses 14,427 -
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 197,452 158,282
----------- -----------
NONINTEREST INCOME
Service fees 22,301 7,482
Investment securities gains (losses), net (28,906) -
Other income 22,535 5,526
----------- -----------
Total noninterest income 15,930 13,008
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 84,686 75,456
Occupancy and equipment 10,751 9,581
Data processing charges 20,066 17,459
Loss on real estate owned - 57,867
Other expense 69,533 29,554
----------- -----------
Total noninterest expense 185,036 189,917
----------- -----------
Income (loss) before income taxes 28,346 (18,627)
Income taxes 11,916 (6,800)
----------- -----------
NET INCOME (LOSS) $ 16,430 $ (11,827)
=========== ===========
Basic per share earnings $ 0.08 $ N/A
=========== ===========
Dilutive earnings per share $ 0.08 $ N/A
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Unearned Unearned Accumulated
Additional Shares Shares Other Total
Common Paid-in Retained Held by Held by Comprehensive Treasury Stockholders' Comprehensive
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 28,721 28,721 $ 28,721
Other comprehensive
income: Unrealized
loss on available
for sale
securities,
net of
reclassification
adjustment (88,597) (88,597) (88,597)
--------
Comprehensive
income $ (59,876)
========
Stock purchased RSP (7,141) (80,937) (88,078)
Shares earned RSP 8,094 8,094
Shares earned ESOP 9,522 9,522
Treasury stock
purchased (118,530) (118,530)
------ ---------- ---------- ---------- --------- --------- -------- --------
Balance,
June 30, 1999 $23,805 $2,064,903 $1,146,775 $ (171,396) $ (72,843) $ (84,163) $(118,530) $2,788,551
====== ========== ========== ========== ========= ========= ======== =========
Components of
comprehensive
income:
Change in net
unrealized
loss on
investment
securities
held for sale $(106,905)
Realized loss
included in
net income,
net of tax 18,308
--------
Total $ (88,597)
========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
CARNEGIE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
1999 1998
-------- ---------
OPERATING ACTIVITIES
Net income (loss) 28,721 (12,432)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, amortization and
accretion, net 48,505 11,686
Provision for loan losses 38,448 -
Investment securities (gains) losses, net 27,739 (2,147)
Increase in accrued interest receivable (63,370) (9,168)
Increase in accrued interest payable 189,678 139,648
Other, net (37,233) (17,984)
-------- --------
Net cash provided by operating activities 232,488 109,603
-------- --------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (2,746,119) (1,361,364)
Proceeds from sales 707,194 317,585
Maturities and repayments - 995,819
Mortgage-backed securities available for sale:
Purchases (111,463) (428,186)
Proceeds from sales - 143,836
Maturities and repayments 245,491 211,041
Mortgage-backed securities held to maturity:
Maturities and repayments 195,299 372,882
Net increase in loans (4,358,816) (1,539,860)
Purchases of Federal Home Loan Bank stock (305,700) -
Purchases of office properties and equipment (4,163) (32,007)
---------- ----------
Net cash used for investing activities (6,378,277) (1,320,254)
---------- ----------
FINANCING ACTIVITIES
Net increase in deposits 137,244 3,271,888
Proceeds from short-term borrowings 2,000,000 -
Proceeds from long-term borrowings 3,750,000 -
Purchase of treasury stock (118,530) -
Purchase stock for RSP (88,079) -
Net change in advances for taxes and insurance 98,641 63,029
---------- ---------
Net cash provided by financing activities 5,779,276 3,334,917
---------- ---------
Increase (decrease) in cash and cash equivalents (366,513) 2,124,266
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,164,488 950,891
---------- ---------
CASH AND CASH EQUIVALENTS
AT END OF YEAR 797,975 3,075,157
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 266,824 $ 204,899
Income taxes 4,425 18,526
See accompanying notes to the unaudited consolidated financial statements.
7
<PAGE>
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 fiscal year 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 six and three months ended June 30, 1999. The weighted
number of shares outstanding was 214,497 and 210,027, 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 six and three months ended June 30, 1999, the diluted number
of shares outstanding from employee stock options was 214,963 and 211,300,
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
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND DECEMBER 31,1998
Total assets increased by approximately $5,913,000 or 29.4% to $25,998,000 at
June 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 $5.7
million.
Total investment and mortgage-backed securities held to maturity increased
$1,530,000 or 39.8% from $3,842,000 at December 31, 1998 to $5,372,000 at June
30, 1999. Of the $2,858,000 of investments purchased, $2,746,000 or 96.1% 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 $441,000 and the sale of
$707,000 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 portfolio. As of April
1, 1999, in accordance with FASB Statement 133, management transferred
approximately $500,000 of held to maturity securities to available for sale.
At June 30, 1999, the Company's investment securities and mortgage-backed
available for sale portfolios totaled $4.5 million, or 17.3%, 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 June 30, 1999, due to increases in market rates,
unrealized losses for such securities were approximately $84,000 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 June 30, 1999 resulted from the Company's investment
in U.S. Government Agency securities.
Net loans receivable increased $4,320,000 or 29.8% from $14,512,000 at December
31, 1998 to $18,832,000 at June 30, 1999 primarily due to the growing demand for
residential real estate within the Company's market area.
The residential portfolio increased $4,040,000 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 increased $5,750,000
to $6,950,000 at June 30, 1999 from $1,200,000 at December 31, 1998. As noted
previously, management entered into these advances to fund loan 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 years advances. At
June 30, 1999, the Bank's maximum borrowing capacity with the FHLB was $15.4
million.
Stockholder's equity decreased $249,000 to $2,789,000 at June 30, 1999, from
$3,037,000 at December 31, 1998 as a result of the Company acquiring
treasury stock of $119,000, the implementation of a Restricted Stock Plan for
the benefit of key employees and directors for $81,000, and the decrease in
accumulated other comprehensive income of $89,000 due to a decline in the market
values of the Company's available for sale investment portfolio.
9
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE
30, 1999 AND 1998
Net income increased $41,000 to $29,000 for the six months ended June 30, 1999
from a loss of $12,000 for the same period ended 1998. This increase was
primarily due to an increase in net interest income of $111,000 while
being partially offset by an increase in the provision for loan losses and
noninterest expense of $38,000 and $36,000, respectively.
Total interest and dividend income increased $223,000 or 35.3% from $632,000 for
the six months ended June 30, 1998 to $855,000 for the same period ended 1999.
Increases in the average principal balances of loans and investment securities
of $5.1 and $1.4 million primarily fueled the increases in related interest
income of $185,000 and $46,000, respectively. 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 $530,000, as well as a slight decline in
interest-earning assets from 7.31% as of June 30, 1998 compared to 7.24% as of
June 30, 1999.
Interest expense on deposits, which remained relatively stagnant, was $327,000
for the six months ended June 30, 1999 compared to $345,000 for the same period
ended in 1998. There were slight increases in the average principal balances of
interest-bearing demand and savings deposits of $302,000 and $146,000,
respectively, while being offset by market declines in the cost of funds for
certificates of deposit and savings deposits of 36 and 19 basis points. The
overall increase in interest expense resulted from a $5.7 million increase in
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 six months ended June 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
$24,000 or 90.4% to $51,000 for 1999 compared to $27,000 for 1998. Service
charges on deposit accounts increased $28,000 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 $26,000 increases to other income. Partially offsetting these increase was a
$30,000 loss on the sale of investment securities.
Noninterest expense, which increased $36,000 or 10.8% to $370,000 for the six
months ended June 30, 1999 from $334,000 for the same period ended 1998,
was substantially effected by increases of $77,000 in other expenses and $15,000
in compensation and employee benefits. Increases to other expenses consisted of
the following: costs associated with the supplemental director retirement plan
of $20,000, professional fees and stock expenses of $37,000 resulting from costs
associated with conducting business as a public entity for the six months ended
June 30, 1999 which were not present for the same period ended 1998, and ATM
costs of $14,000 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 of 1998 and January of
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 $19,000 from a benefit of $7,000 for the six months
ended June 30, 1998 to an expense of $12,000 for the same period ended 1999.
This increase in due to an increase in 1999 over 1998 of pre-taxable income of
$61,000.
10
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE
30, 1999 AND 1998
Net income increased $28,000 to $16,000 for the three months ended June 30, 1999
from a loss of $12,000 for the same period ended 1998. This increase was
primarily due to an increase in net interest income of $54,000 while partially
being offset by an increase in the provision for loan losses and income tax
expense of $14,000 and $19,000, respectively.
Total interest and dividend income increased $119,000 or 35.9% from $333,000 for
the three months ended June 30, 1998 to $452,000 for the same period ended 1999.
Interest income on loans and investment securities increased $99,000 and
$35,000, respectively, due to increases in the average principal balances of
$4,863,000 and $2,168,000, respectively, for those same reasons enumerated
above. In addition, there was an increase in the yield of interest-earning
assets from 7.01% for the three months ended June 30, 1998 to 7.27% for the same
period ended 1999. The increase in yield is due to an increase in the yield on
loans of 14 basis points while offset by declining yields of both investment and
mortgage-backed securities during this same time period.
Total interest expense increased $66,000 to $240,000 for the three months ended
June 30, 1999 from $174,000 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 $6.2 million which corresponded to an increase of
$80,000 in interest expense. Offsetting this increase was market declines in the
cost of funds for certificates of deposit and savings deposits of 54 and 38
basis points.
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 $14,000 for the three months ended June 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 increased from $13,000 for the three months ended June 30,
1998 to $16,000 for the same period ended June 30, 1999. Service charges on
deposit accounts and other income increased $15,000 and $17,000, respectively.
As noted previously, such increases were due primarily to an increased level of
transaction account activity, the addition of two ATMs, and an increase in fees
associated with loan underwriting and processing. Partially offsetting these
increases was a $29,000 loss on the sale of investment securities.
Noninterest expense decreased from $190,000 for the three months ended June 30,
1998 to $185,000 for the same period ended 1999. A decrease in the loss on real
estate operations of $58,000 was substantially offset by increases of $40,000
and $9,000 for other expenses and compensation and employee benefits,
respectively. As noted above, these 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.
Income tax expense increased from a benefit of $7,000 for the three months ended
June 30, 1998 to an expense of $12,000 for the same period ended 1999. This
increase in due to an increase in 1999 over 1998 of pre-taxable income of
$47,000.
11
<PAGE>
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 June 30, 1999, both the Company and
the Bank exceeded the minimum risk-based and leverage capital ratios
requirements. The Company's and Bank's total risk-based, Tier I risk-based and
Tier I leverage ratios are 22.9%, 21.6%, 10.8% and 17.9%, 16.6%, and 8.3%,
respectively at June 30, 1999.
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.
June 30, December 31,
1999 1998
------------ -----------
(Dollars in thousands)
Loans on nonaccrual basis $ 40 $ 57
Loans past due 90 days or
more and still accruing - -
--------- ---------
Total nonperforming loans 40 57
--------- ---------
Real estate owned - -
--------- ---------
Total nonperforming assets 40 57
--------- ---------
Nonperforming loans as a
percent of total loans 0.21% 0.39%
========= =========
Nonperforming assets as a
percent of total assets 0.21% 0.39%
========= =========
Allowance for loan losses to
nonperforming loans 440.00% 243.61%
========= =========
Management monitors impaired loans on a continual basis. As of June 30, 1999,
impaired loans had no material effect on the Company's financial position or
results of operations.
During the six month period ended June 30, 1999, loans increased $4,357,000,
nonperforming loans decreased $17,000, and the allowance for loan losses
increased $37,000 for the same period. The percentage of allowance for loan
losses to loans outstanding declined slightly to .93% at June 30, 1999 from .95%
at December 31, 1998. 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 June 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.
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 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. 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.
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
The following represents the results of matters submitted to a vote
of the sharesholders at the annual meeting held on April 20, 1999:
Election of Directors:
The following directors were elected with terms of four years:
For Votes Withheld
------- ----------------
Charles Rupprecht 235,256 16,000
Lois A. Wholey 235,256 17,000
S.R. Snodgrass A.C.was selected as the Company's independent
auditors for the fiscal year 1999 by the following vote:
For: 235,125
Against: 1,731
Abstain: 0
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: August 11, 1999 By: /s/Shirley Chiesa
--------------------------------------
Shirley Chiesa
President and Chief Executive Officer
Date: August 11, 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> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 214
<INT-BEARING-DEPOSITS> 584
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,501
<INVESTMENTS-CARRYING> 872
<INVESTMENTS-MARKET> 874
<LOANS> 19,008
<ALLOWANCE> 176
<TOTAL-ASSETS> 25,998
<DEPOSITS> 15,509
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 750
<LONG-TERM> 4,950
0
0
<COMMON> 24
<OTHER-SE> 2,765
<TOTAL-LIABILITIES-AND-EQUITY> 25,998
<INTEREST-LOAN> 653
<INTEREST-INVEST> 160
<INTEREST-OTHER> 42
<INTEREST-TOTAL> 855
<INTEREST-DEPOSIT> 327
<INTEREST-EXPENSE> 457
<INTEREST-INCOME-NET> 399
<LOAN-LOSSES> 38
<SECURITIES-GAINS> (28)
<EXPENSE-OTHER> 370
<INCOME-PRETAX> 41
<INCOME-PRE-EXTRAORDINARY> 41
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29
<EPS-BASIC> .13
<EPS-DILUTED> .13
<YIELD-ACTUAL> 3.38
<LOANS-NON> 40
<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>
