SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
-----------------
OR
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
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Commission File No. 0-24579
Carnegie Financial Corporation
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(Name of Small Business Issuer in Its Charter)
Pennsylvania 25-1806857
- ------------------------------------------ --------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
17 West Mall Plaza, Carnegie, Pennsylvania 15106
- ------------------------------------------ ----------
(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (412) 276-1266
---------------
Securities registered under to Section 12(b) of the Exchange Act: None
------
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO .
----- ----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,413,000
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the average bid and asked price of the Registrant's
Common Stock on March 22, 1999 was $1.9 million.
As of March 1, 1999, there were issued and outstanding 238,050 shares of
the Registrant's Common Stock.
Transition Small Business Disclosure Format (check one):
YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1998. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 1998. (Part III)
<PAGE>
Item 1. Business
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PART I
Forward Looking Statements
Carnegie Financial Corporation (the "Company") may from time to time make
written or oral "forward-looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this Annual Report on Form 10-KSB and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and savings habits; and the success of the Company at managing the risks
involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
General
The Company is a Pennsylvania corporation organized in February 1998 at the
direction of Carnegie Savings Bank (the "Bank") to acquire all of the capital
stock that the Bank issued in its conversion from the mutual to stock form of
ownership (the "Conversion"). On July 10, 1998, the Bank completed the
Conversion and became a wholly owned subsidiary of the Company. The Company is a
unitary savings and loan holding company which, under existing laws, generally
is not restricted in the types of business activities in which it may engage
provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Bank and investing the Company's portion of the net proceeds obtained in the
Conversion.
2
<PAGE>
The Bank is a federally chartered stock savings bank headquartered in
Carnegie, Pennsylvania. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS") and its deposits are
federally insured by the Bank Insurance Fund ("BIF"). The Bank is a member of
and owns capital stock in the Federal Home Loan Bank of Pittsburgh ("FHLB"),
which is one of the 12 regional banks in the FHLB System.
The Bank operates a traditional savings bank business, attracting deposit
accounts from the general public and using those deposits, together with other
funds, primarily to originate and invest in loans secured by single-family
residential real estate.
Competition
Competition for deposits comes from other insured financial institutions
such as commercial banks, thrift institutions, credit unions, finance companies,
and multi-stage regional banks in the Bank's market areas. Competition for funds
also includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
commercial banks, thrift institutions, credit unions and mortgage bankers.
Lending Activities
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan on the dates
indicated:
December 31,
1998 1997
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Type of Loans:
Real Estate Loans:
One- to four-family........ $10,989 75.00% $7,656 78.93%
Commercial................. 491 3.35 343 3.54
Home equity................ 766 5.23 579 5.97
Construction .............. 1,252 8.55 251 2.59
------- ------- ------ -------
Total real estate...... 13,498 92.13 8,829 91.03
------- ------- ------ -------
Commercial................... 304 2.07 - -
Consumer Loans:
Automobile loans........... 450 3.07 383 3.95
Unsecured.................. 288 1.97 368 3.79
Share loans................ 111 0.76 119 1.23
------- ------- ------ -------
Total consumer.......... 849 5.80 870 8.97
------- ------- ------ -------
Total ....................... $14,651 100.00% $9,699 100.00%
======= ======= ====== =======
3
<PAGE>
Loan Maturity Tables
The following sets forth the maturity of the Bank's loan portfolio at
December 31, 1998. The table does not include prepayments or scheduled principal
repayments. Prepayments and scheduled principal repayments of loans totaled $2.0
million at December 31, 1998. All loans are shown as maturing based on
contractual maturities.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
One- to four-family real estate.. $ 21 $ 489 $10,479 $10,989
Commercial real estate........... - - 491 491
Home equity...................... - 338 428 766
Construction..................... 1,252 - - 1,252
Consumer......................... 55 706 88 849
Commercial....................... - - 304 304
------ ------ ------- -------
Total............................ $1,328 $1,533 $11,790 $14,651
====== ====== ======= =======
The following table sets forth dollar amount of all loans due after
December 31, 1999, which have predetermined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
One-to-four family real estate... $10,629 $ 339 $10,968
Commercial real estate........... - 491 491
Home equity...................... 341 425 766
Consumer......................... 794 - 794
Commercial....................... - 304 304
------- ------ -------
Total................... $11,764 $1,559 $13,323
======= ====== =======
Real Estate Loans. The Bank's primary lending activity consists of the
origination of one- to four-family fixed rate residential mortgage loans secured
by property located in the Bank's primary market area. The Bank generally
originates one- to four-family fixed rate residential mortgage loans in amounts
up to 95% of the lesser of the appraised value or purchase price, with private
mortgage insurance required on loans with a loan-to-value ratio in excess of
90%. Generally, the maximum loan-to-value ratio on mortgage loans secured by
non-owner occupied properties and commercial buildings is limited to 70%. The
Bank retains all of its mortgage loans and originates these loans with
maturities of up to 30 years. Mortgage loans originated and held by the Bank
generally include due-on-sale clauses. This gives the Bank the right to deem the
loan immediately due and payable in the event the borrower transfers ownership
of the property securing the mortgage loan without the Bank's consent.
The Bank originates home equity loans and second mortgage loans which are
secured by one to four-family residences. The Bank originates these loans on
one- to four-family residences with fixed rate terms of up to 15 years. The
loans are generally subject to a 80% combined loan-to-value limitation,
including any other outstanding mortgages or liens.
4
<PAGE>
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The repayment
of these loans typically is dependent on the successful operation of the real
estate project securing the loan. These risks can be significantly affected by
supply and demand conditions in the market for office and retail space and may
also be subject to adverse conditions in the economy.
Construction Lending. The Bank makes construction loans primarily for the
construction of one-to four-family primary home dwellings. These loans are
primarily made to persons who are constructing properties for the purpose of
occupying them. Loans made to individual property owners are
"construction-permanent" loans which generally provide for the payment of
principal and interest during a construction period (generally up to six months)
at fixed or adjustable interest rates having terms similar to other one- to
four-family residential loans.
Commercial Business Loans. The Bank maintains a small number of commercial
lines of credit made to local businesses and professionals. These lines of
credit are primarily secured by real property.
Commercial business loans generally are deemed to entail significantly
greater risk than that which is involved with single family real estate lending.
The repayment of commercial loans typically is dependent on the successful
operations and income stream of the business and the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial lending
generally requires substantially greater oversight efforts compared to
residential real estate lending.
Consumer Loans. The Bank offers consumer loans in order to provide a wider
range of financial services to its customers. The Bank's consumer loans consist
of share loans, automobile loans, and unsecured loans. The Bank makes unsecured
loans to certain creditworthy borrowers. Loans secured by vehicles are financed
for terms up to 60 months. Loans secured by deposits of the bank are granted in
amounts up to 95% of the deposited amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. The Bank establishes various
lending limits for its officers and maintains a loan committee consisting of the
board of directors. The president and loan officer have authority to approve
home equity loans up to $35,000 and $20,000, respectively, and the Officer Loan
Committee has the authority to approve unsecured consumer loans up to $5,000.
The loan committee ratifies all residential mortgage loans and all other real
estate and consumer loans.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
other estimate of value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are processed by independent fee
appraisers.
Title insurance is generally required on all real estate mortgage loans.
The Bank does not require title insurance on home equity loans and second
mortgages under $50,000, but obtains a property report, which indicates whether
there are any liens or other encumbrances against the property. Borrowers also
5
<PAGE>
must obtain fire and casualty insurance. Flood insurance is also required on
loans secured by property that is located in a flood zone.
Loan Commitments. Written commitments are given to prospective borrowers on
all approved real estate loans. Generally, the commitment requires acceptance
within 45 days of the date of issuance. At December 31, 1998, commitments to
cover originations of mortgage loans totalled $2,580,000.
Loans to One Borrower. The maximum amount of loans which the Bank may make
to any one borrower may not exceed the greater of $500,000 or 15% of the Bank's
unimpaired capital and unimpaired surplus. The Bank may lend an additional 10%
of its unimpaired capital and unimpaired surplus if the loan is fully secured by
readily marketable collateral. At December 31, 1998, the Bank's maximum
loan-to-one borrower limit was $575,000.
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 30 days past due, a notice
of nonpayment is sent to the borrower. If such payment is not received by month
end, an additional notice of nonpayment is sent to the borrower. After 60 days,
if payment is still delinquent, a notice of right to cure default is sent to the
borrower giving 30 additional days to bring the loan current before foreclosure
is commenced. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, foreclosure proceedings will be initiated.
Loans are reviewed and are placed on a non-accrual status when the loan
becomes more than 90 days delinquent or when, in our opinion, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is charged against interest income. Subsequent
interest payments, if any, are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information regarding
nonaccrual loans and real estate owned, as of the dates indicated. As of the
dates indicated, the Bank has no loans categorized as troubled debt
restructurings within the meaning of SFAS 15 and no impaired loans within the
meaning of SFAS 114, as amended by SFAS 118. Interest income that would have
been recorded on loans accounted for on a nonaccrual basis under the original
terms of such loans was not material for the year ended December 31, 1998.
6
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1998 1997
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
One-to-four family...................................... $ 22 $ -
Home equity............................................. - -
Commercial.............................................. - 14
Construction............................................ - -
Consumer.................................................. 30 28
Commercial................................................ - -
------ --------
Total non-accrual loans................................... 52 42
------ --------
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Residential............................................. - -
Commercial.............................................. - -
Construction............................................ - -
Commercial................................................ - -
Consumer.................................................. - -
Total accruing loans which are contractually past due
90 days or more........................................... - -
------ --------
Total non-performing loans................................ 52 42
------ --------
Real estate owned......................................... - 480
------ --------
Other non-performing assets............................... - -
------ --------
Total non-performing assets............................... $ 52 $ 522
======= ========
Total non-performing loans to total loans................. 0.36% 0.44%
======= ========
Total non-performing loans to total assets................ 0.26% 0.25%
======= ========
Total non-performing assets to total assets............... 0.26% 3.12%
======= ========
</TABLE>
Classified Assets. OTS regulations provide for a classification system for
problem assets of savings banks which covers all problem assets. Under this
classification system, problem assets of savings banks such as the Bank are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
savings bank will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
7
<PAGE>
When a savings bank classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings bank classifies problem assets as
loss, it is required either to establish a specific allowance for losses equal
to 100% of that portion of the asset so classified or to charge off such amount.
A savings bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining a
savings bank's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital.
The following table sets forth the Bank's classified assets in accordance
with the Bank's classification system.
At December 31, 1998
--------------------
(Dollars in thousands)
Special Mention.............. $ 23
Substandard.................. 81
Doubtful assets.............. 26
Loss assets.................. ------
$ 130
======
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Bank's loan portfolio. The evaluation, including a review of all loans on
which full collectibility of interest and principal may not be reasonably
assured, considers: (i) the Bank's past loan loss experience, (ii) known and
inherent risks in the Bank's portfolio, (iii) adverse situations that may affect
the borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.
The Bank monitors its allowance for loan losses and makes additions to the
allowance as economic conditions dictate. Although the Bank maintains its
allowance for loan losses at a level that it considers adequate for the inherent
risk of loss in its loan portfolio, future losses could exceed estimated amounts
and additional provisions for loan losses could be required. In addition, the
Bank's determination of the amount of the allowance for loan losses is subject
to review by the OTS, as part of its examination process. After a review of the
information available, the OTS might require the establishment of an additional
allowance. Any increase in the loan loss allowance required by the OTS would
have a negative impact on the Bank's earnings.
8
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:
For the Years Ended
December 31,
-------------------
1998 1997
---- ----
(Dollars in thousands)
Total loans outstanding......................... $ 14,651 $ 9,700
======== =========
Average loans outstanding....................... 11,709 $ 9,730
======== =========
Allowance balance (at beginning of period)...... $ 115 $ 39
Provision:
Real Estate .................................. 44 73
Consumer...................................... -- --
Charge-offs:
Real Estate Loans............................. -- --
Consumer...................................... (20) --
Recoveries:
Real Estate................................... -- 3
Consumer...................................... -- --
-------- ---------
Allowance balances (at end of period)........... $ 139 $ 115
======== =========
Allowance for loan losses as a percent of
total loans outstanding......................... .95 % 1.19 %
Net loans charged off as percent of average
loans outstanding............................... .17 % -- %
Return on average assets........................ (0.21)% (0.33)%
Return on average equity........................ (1.97)% (4.30)%
Equity to assets at period end.................. 15.12 % 7.00 %
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the Bank's use of the allowance to absorb losses in other
loan categories.
9
<PAGE>
At December 31,
------------------------------------------------
1998 1997
---------------------- -----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
Type of Loans:
Real Estate Loans:
Residential............. $110 74.99% $ 75 78.93%
Home equity............. 8 5.23 - 5.97
Commercial.............. 5 3.35 3 3.54
Construction............ 8 8.55 - 2.59
Commercial................ 9 2.08 - -
Consumer Loans............ 9 5.80 37 8.97
---- ------- ---- -------
Total..................... $149 100.00% $115 100.00%
==== ======= ==== =======
Investment Activities
Investment Securities. The Bank is required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. The level of liquid assets
varies depending upon several factors, including: (i) the yields on investment
alternatives, (ii) the Bank's judgment as to the attractiveness of the yields
then available in relation to other opportunities, (iii) expectation of future
yield levels, and (iv) the Bank's projections as to the short-term demand for
funds to be used in loan origination and other activities. The Bank classifies
its investment securities as "available for sale" or "held to maturity" in
accordance with SFAS No. 115. At December 31, 1998, the Bank's investment
portfolio policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) local municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, (vii) federal funds, including FHLB
overnight and term deposits, and (viii) investment grade corporate bonds, equity
securities, commercial paper and mortgage derivative products.
The Bank's securities available for sale and investment securities held to
maturity portfolios at December 31, 1998 did not contain securities of any
issues with an aggregate book value in excess of 10% of the Bank's equity,
excluding those issued by the United States Government or its agencies.
Mortgage-backed Securities. To supplement lending activities, the Bank has
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. The quasi-governmental agencies guarantee the payment of principal and
interest to investors and include the Federal Home Loan Mortgage Corporation
("FHLMC"), Government National Mortgage Association ("GNMA"), and Federal
National Mortgage Association ("FNMA.")
10
<PAGE>
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FHLMC and GNMA make up a majority of the
pass-through certificates market.
Securities Portfolio. The following table sets forth the carrying value of
the Bank's investment securities at the dates indicated.
At December 31,
---------------
1998 1997
-------- ---------
(Dollars in thousands)
Securities held to maturity:
U.S. government agency securities.................... $ -- $ 300
Obligations of state and political subdivisions...... 489 614
Mortgage-backed securities........................... 1,067 1,721
------ --------
Total securities held to maturity............... 1,556 2,635
------ --------
Securities available for sale:
U.S. government agency securities................... 1,250 810
U.S. treasury securities............................ -- 204
Mutual funds........................................ 10 503
Mortgage-backed securities.......................... 1,026 907
------ --------
Total securities available for sale............. 2,286 2,424
------ --------
Total investment and mortgage-backed securities $3,842 $5,059
====== ========
11
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Bank's investment and mortgage-backed securities portfolio at
December 31, 1998 by contractual maturity. The following table does not take
into consideration the effects of scheduled repayments or the effects of
possible prepayments.
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------------------------------------------------------------
Total Investment
More than More than Securities and Mortgage
One Year or Less One to Five Years Five to Ten Years More than Ten Years -Backed Securities
------------------ ------------------ ------------------ ------------------- ------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government agencies.... $ -- -- % $ -- -- % $ 300 6.65% $ 951 5.76% $1,251 6.76% $1,251
Obligations of state and
political subdivisions.... 45 4.25 245 4.44 199 5.38 -- -- 489 4.80 503
Mutual funds................ 10 6.06 -- -- -- -- -- -- 10 6.06 10
Mortgage-backed securities.. -- -- 148 7.93 110 6.80 1,835 6.62 2,093 6.72 2,109
------- ----- ----- ------ ------ ------
Total.................... $ 55 4.58% $ 393 5.75% $ 609 6.26% $2,786 6.33% $3,843 6.49% $3,873
======= ==== ===== ==== ===== ==== ====== ==== ====== ==== ======
</TABLE>
12
<PAGE>
Sources of Funds
Deposits are the Bank's major external source of funds for lending and
other investment purposes. Funds are also derived from the receipt of payments
on loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally from
within the Bank's primary market area through the offering of a selection of
deposit instruments including passbook savings accounts, money market accounts,
and term certificate accounts. IRA accounts and NOW accounts are also offered.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate. At December 31,
1998, the Bank had no brokered deposits and its deposits were represented by the
following types of savings programs.
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1998.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Within three months $ 125
Three through six months 628
Six through twelve months 300
Over twelve months 200
------
$1,253
======
Borrowings. The Bank may obtain advances from the FHLB of Pittsburgh to
supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh
are typically secured by a pledge of the Bank's stock in the FHLB of Pittsburgh,
a portion of the Bank's first mortgage loans and other assets. Each FHLB credit
program has its own interest rate, which may be fixed or adjustable, and range
of maturities. If the need arises, the Bank may also access the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The Bank became a member of the FHLB on June 8,
1998.
13
<PAGE>
Employees
At December 31, 1998 the Bank had 7 full-time and no part-time employees.
The employees of the Bank perform clerical work for the Company from time to
time; otherwise, the Company has no employees other than its officers. None of
the Bank's employees are represented by a collective bargaining group. The Bank
believes that its relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which related to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
controls more than one savings institution, it would lose the ability to
diversify its operations into non-banking related activities, unless such
savings institutions each also qualify as a QTL or were acquired in a supervised
acquisition. See "- Regulation of the Bank - Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, BIF insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the BIF and depositors.
The regulatory structure also gives the regulatory authorities
14
<PAGE>
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the BIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator.
Effective September 30, 1996, federal law was revised to mandate a one-time
special assessment on SAIF members of approximately .657% of deposits held on
March 31, 1995. Beginning January 1, 1997, the deposit insurance assessment for
most Savings Association Insurance Fund ("SAIF") members was reduced to .064% of
deposits on an annual basis through the end of 1999. During this same period,
BIF members will be assessed approximately .013% of deposits. After 1999,
assessments for BIF and SAIF members should be the same. It is expected that
these continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets. In addition, the OTS prompt corrective
action regulation provides that a savings institution that has a leverage
capital ratio of less than 4% (3% for institutions receiving the highest
examination rating) will be deemed to be "undercapitalized" and may be subject
to certain restrictions.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
December 31, 1998, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
15
<PAGE>
Qualified Thrift Lender Test. Savings institutions must meet a QTL test. If
the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus goodwill and other intangible assets, property used by the institution in
conducting its business and liquid assets in an amount not exceeding 20% of
total assets). Certain assets are subject to a percentage limitation of 20% of
portfolio assets. In addition, savings associations may include shares of stock
of the FHLBs, FNMA and FHLMC as qualifying QTIs. An association must be in
compliance with the QTL test on a monthly basis in nine out of every twelve
months. As of December 31, 1998, the Bank was in compliance with its QTL
requirement.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations or 5%
of its outstanding borrowings to the FHLB of Pittsburgh, at the beginning of
each year.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1998, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Description of Property
- -------------------------------
(a) Property. The Bank operates from its one office located at 17 West Mall
Plaza, Carnegie, Pennsylvania. Such property was acquired in 1986.
(b) Investment Policies. See "Item 1. Business" above for a general
description of the Bank's investment policies and any regulatory or
Board of Directors' percentage of assets limitations regarding certain
investments. The Bank's investments are primarily acquired to produce
income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities and - Regulation of the Bank," and "Item 2.
Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending
Activities and - Regulation of the Bank."
16
<PAGE>
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank
are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, no material loss
is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" of the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 1998 (the "Annual Report") is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- --------------------
The information contained in the sectioned captioned "Proposal II -
Ratification of Appointment of Auditors" in the Company's definitive proxy
statement for the Company's 1998 Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
17
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
- --------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical Information" in the Proxy Statement
is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements,
including any pledge by any person of securities of the
Registrant, the operation of which may at a subsequent date
result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report.
1. The consolidated balance sheets of Carnegie Financial
Corporation as of December 31, 1998 and 1997 and the
related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the
two years ended December 31, 1998, together with the
related notes and the independent auditors' report of
S.R. Snodgrass, A.C. independent certified public
accountants for the year ended December 31, 1998. The
independent auditors's report of Goff
18
<PAGE>
Ellenbogen Backa & Alfera, LLC for the year ended December 31,
1997 is included as Exhibit 99 in this Report.
2. Schedules omitted as they are not applicable.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Articles of Incorporation of Carnegie Financial
Corporation *
3(ii) Bylaws of Carnegie Financial Corporation *
4 Specimen Stock Certificate *
10.1 Employment Agreement between the Bank and Shirley Chiesa *
10.2 Supplemental Executive Retirement Plan *
10.3 Form of Directors Consultation and Retirement Plan between
the Bank and each of the directors *
13 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See "Item 1- Business")
27 Financial Data Schedule (electronic filing only)
99 Auditor's Report of Goff Ellenbogen Backa & Alfera, LLC as
of December 31, 1997.
- ---------------------
* 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.
(b) None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 29, 1999.
CARNEGIE FINANCIAL CORPORATION
By: /s/ Shirley Chiesa
------------------------------------------
Shirley Chiesa
President, C.E.O. and Chairman of the Board
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 29, 1999.
/s/ Shirley Chiesa /s/ JoAnn V. Narduzzi
- ------------------------------------------ --------------------------------
Shirley Chiesa JoAnn V. Narduzzi
President, C.E.O. and Chairman of the Board Director
(Principal Executive)
/s/ Joseph R. Pigoni /s/ Morry Miller
- ------------------------------------------ --------------------------------
Joseph R. Pigoni Morry Miller
Executive Vice President Director
and Chief Financial Officer
(Principal Financial Officer)
/s/ Lois A. Wholey /s/ Charles Rupprecht
- ------------------------------------------ --------------------------------
Lois A. Wholey Charles Rupprecht
Director and Secretary Director
<PAGE>
Carnegie Financial Corporation
Corporate Profile
Carnegie Financial Corporation (the "Company") is a Pennsylvania
corporation organized in February 1998 at the direction of Carnegie Savings Bank
(the "Bank") to acquire all of the capital stock that the Bank issued in its
conversion from the mutual to stock form of ownership (the "Conversion"). On
July 10, 1998, the Bank completed the Conversion and became a wholly owned
subsidiary of the Company. The Company is a unitary savings and loan holding
company which, under existing laws, generally is not restricted in the types of
business activities in which it may engage provided that the Bank retains a
specified amount of its assets in housing-related investments. The Company
conducts no significant business or operations of its own other than holding all
of the outstanding stock of the Bank and investing the Company's portion of the
net proceeds obtained in the Conversion.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), and its deposits are federally insured by
the Federal Deposit Insurance Company. The Bank is a member of and owns capital
stock in the Federal Home Loan Bank ("FHLB") of Pittsburgh, which is one of the
12 regional banks in the FHLB system. The Bank operates a traditional savings
bank business, attracting deposit accounts from the general public and using
those deposits, together with other funds, primarily to originate and invest in
loans secured by single family residential real estate primarily in the borough
of Carnegie and the surrounding municipalities.
Stock Market Information
The Company's common stock has been traded on the OTC Electronic Bulletin
Board under the trading symbol of "CAFN" since it commenced trading on July 10,
1998. The following table reflects high and low bid quotations. The quotations
reflect inter-dealer prices, without retail mark-up, mark- down, or commission,
and may not represent actual transactions. During and for the year ended
December 31, 1998, the Company did not pay nor declare any dividends.
Date High ($) Low ($)
---- -------- -------
July 10, 1998 to August 31, 1998 11.88 9.31
September 1, 1998 to December 31, 1998 10.00 8.13
The number of shareholders of record of common stock as of the record date
of March 15, 1999, was approximately 171. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At March 15, 1999, there were 238,050 shares outstanding. The
Company's ability to pay dividends to stockholders is dependent upon the
dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below the regulatory capital requirements
imposed by the OTS.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform 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 which 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. Carnegie Financial Corporation 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.
General
Carnegie Financial Corporation ("Carnegie" or the "Company") is a
Pennsylvania corporation organized in February 1998 at the direction of Carnegie
Savings Bank (the "Bank") to acquire all of the capital stock that the Bank
issued in its conversion from the mutual to stock form of ownership (the
"Conversion"). On July 10, 1998, the Bank completed the Conversion and became a
wholly owned subsidiary of the Company. In addition, Carnegie sold 238,050
shares of common stock at $10 per share, raising net proceeds of approximately
$1.9 million (the "initial public offering").
Carnegie is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided that the Bank retains a specified amount of its
assets in housing-related investments. The Company conducts no significant
business or operations of its own other than holding all of the outstanding
stock of the Bank and investing the Company's portion of the net proceeds
obtained in the Conversion.
Asset/Liability Management
The Bank's net interest income is sensitive to changes in interest rates,
as the rates paid on interest-bearing liabilities generally change faster than
the rates earned on interest-earning assets. As a result, net interest income
will frequently decline in periods of rising interest rates and increase in
periods of decreasing interest rates.
The board of directors manages the interest rate sensitivity of the Bank
through the determination and adjustment of asset/liability composition and
pricing strategies. The board of directors meets quarterly to monitor the impact
of interest rate risk and developed strategies to manage its liquidity, shorten
the effective maturities of certain interest earning assets and increase the
effective maturities of certain liabilities, to reduce the exposure to interest
rate fluctuations. These strategies include focusing its investment activities
on short and medium-term securities , maintaining and increasing the transaction
deposit accounts, as these accounts are considered to be relatively resistent to
changes in interest rates and utilizing Federal Home Loan Bank ("FHLB")
borrowings.
3
<PAGE>
Gap Analysis
As rates on sources of funds have become deregulated and subject to
competitive pressures, savings associations have become increasingly concerned
with the extent to which they are able to match maturities of interest-earning
assets and interest-bearing liabilities. Such matching is facilitated by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity "gap."
An asset or liability is considered to be interest rate sensitive if it will
mature or reprice within a specific time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period over interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative gap
theoretically would tend to adversely affect net interest income. Conversely,
during a period of falling interest rates, a negative gap position would
theoretically tend to result in an increase in net interest income.
These assumptions change over time based upon the current economic outlook.
Management believes that these assumptions approximate actual experience and
considers them appropriate and reasonable. However, the interest rate
sensitivity of the Bank's assets and liabilities illustrated in the following
table would vary substantially if different assumptions were used or if actual
experience differs from that indicated by such assumptions. No consideration has
been provided for the impact of future commitments and loans in process.
Certain shortcomings are inherent in the methods of analysis presented in
the following table setting forth the maturing and repricing of interest-earning
assets and interest-bearing liabilities. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates while interest rates on other types
of assets may lag behind changes in market rates. Additionally, certain assets,
such as adjustable-rate loans, have features which restrict changes in interest
rates both on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to make scheduled payments on their
adjustable-rate loans may decrease in the event of an interest rate increase.
4
<PAGE>
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
expected to reprice or mature in each of the future time periods shown. The
amount of assets or liabilities shown which reprice or mature during a
particular period were determined in accordance with the contractual terms of
the asset or liability.
<TABLE>
<CAPTION>
Less than 1-5 5-10 Over
1 year Years Years 10 Years Total
------ ----- ----- -------- -----
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 1,442 $ 1,549 $ 1,130 $ 10,530 $ 14,651
Mortgage-backed securities 1,667 148 22 256 2,093
Investment Securities 55 245 499 951 1,750
Other interest-earning
assets 752 -- 199 -- 951
-------- ------- ------- ------- -------
Total interest-earning 3,916 1,942 1,850 11,737 19,445
assets ======== ======= ======= ======= =======
Interest-bearing liabilities
NOW accounts $ 1,248 $ -- $ -- $ -- $ 1,248
Savings accounts 3,648 -- -- -- 3,648
Certificates of deposit 6,316 2,976 602 -- 9,894
Other interest-bearing
liabilities 200 1,000 -- -- 1,200
-------- ------- ------- ------- -------
Total interest-bearing
liabilities $ 11,412 $ 3,976 $ 602 -- $ 15,990
======== ======= ======= ======= =======
Excess interest-earning
assets (liabilities) $ (7,496) $ (2,034) $ 1,248 $ 11,737
Cumulative interest-
earning assets $ 3,916 $ 5,858 $ 7,708 19,445
Cumulative interest-
bearing liabilities 11,412 15,388 15,990 15,990
-------- ------- ------- -------
Cumulative gap $ (7,496) $ (9,530) $ (8,282) $ 3,455
======== ======= ======= =======
Cumulative interest rate
sensitivity ratio (1) (0.34) (0.38) (0.48) 1.22
======== ======= ======= =======
</TABLE>
____________________________
(1) Cumulative interest-earning assets divided by cumulative interest-bearing
liabilities.
5
<PAGE>
FINANCIAL CONDITION
Total assets increased by approximately $3,365,000 or 20.1% to $20,085,000
at December 31, 1998 from $16,719,000 at December 31, 1997. The increase in
assets was funded primarily as a result of receipt of $1.9 million in net
proceeds from the sale of 238,050 shares of common stock in the initial public
offering, and a $1,000,000 FHLB advance.
Total investment and mortgage-backed securities decreased $1,217,000 or
24.0% from $5,059,000 at December 31, 1997 to $3,842,000 at December 31, 1998.
The overall declining interest rate environment has resulted in an increase in
the receipt of principal prepayments on mortgage-backed securities during the
year, and has stimulated an increase in debt securities being called. There has
been limited activity by management during the period as focus on investment
opportunities has been directed toward meeting a demanding loan environment.
Net loans receivable increased $4,927,000 or 51.4% from $9,585,000 at
December 31, 1997 to $14,512,000 at December 31, 1998. The loan growth generated
during 1998 was largely from increases in loans secured by residential real
estate and the offering of a commercial line of credit product. These segments
of the portfolio increased $4,521,000 and $304,000, respectively. Of the
residential mortgage loan increase, $1,001,000 consisted of new construction
loans. In addition, the Company has approximately $2.1 million in 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. As previously stated, the
funding of this loan growth was mainly provided by the usage of funds from the
stock offering, principal repayments from mortgage-backed securities and an
advance from the FHLB.
Deposits remained relatively stagnant, increasing slightly by $194,000 to
$15,372,000 at December 31, 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. Money market deposit
accounts increased 273,000 or 8.1%, transaction accounts increased $253,000 or
16.0%, while total certificates of deposit decreased $331,000 or 3.2%. These
events seem to indicate the customers willingness to maintain accessible
deposits at slightly lower interest rates until more advantageous interest rate
products become available.
In order to support its business development and interest rate risk, the
Company obtained funding through a variety of borrowings from the FHLB for
$1,200,000. These borrowing arrangements have staggering maturities which range
from one to five years.
Stockholder's equity increased $1,867,000 to $3,037,000 at December 31,
1998 from $1,170,000 at December 31, 1997 as a result of the $1,905,000 net
proceeds received in the initial public offering. This increase was offset by
$190,000 from the implementation of an Employee Stock Ownership Plan ("ESOP")
for the benefit of participating employees.
RESULTS OF OPERATIONS
Net loss decreased $16,000 or 29.6%, to $38,000 for the year ended December
31, 1998 from a net loss of $54,000 for the same period ended 1997. This
decrease was the result of increases in net interest and noninterest income of
$83,000 and $27,000, respectively, and an offsetting increase to noninterest
expense of $83,000 coupled with a decrease in income tax benefit of $41,000.
6
<PAGE>
The Company's net interest income increased $83,000 or 14.7% from $565,000
for the year ended December 31, 1997 compared to $648,000 for the same period
ended 1998, due to an increase of $107,000 or 8.7% in interest income, which
totaled $1,344,000 for 1998 as compared to $1,237,000 for 1997. The increase in
interest income more than offset the $25,000 or 3.6% increase in interest
expense. Overall, the interest rate spread decreased from 3.20% for the year
ended December 31, 1997 to 3.01% for the same period ended 1998. Contributing
significantly to the interest rate spread decline was a decline in the loan
interest rate environment coupled with the Bank's competitive pricing of its
certificate of deposit products.
7
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------
1998 1997
------------------------------------ ----------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1)............................ $ 11,709 $ 998 8.52% $ 9,730 $ 873 8.97%
Mortgage-backed securities..................... 2,467 162 6.57% 2,690 173 6.43%
Investment securities.......................... 2,291 140 6.11% 2,369 137 5.78%
Other interest-earning assets(2)............... 829 44 5.31% 943 53 5.62%
-------- ----- ----- ------- ----- ----
Total interest-earning assets................. 17,296 1,344 7.77% 15,732 1,236 7.86%
----- -----
Non-interest-earning assets..................... 1,075 516
------- ------
Total assets.................................. $ 18,371 $16,248
------- ------
Interest-bearing liabilities:
NOW accounts................................... $ 1,111 23 2.07% $1,150 13 1.13%
Savings accounts............................... 3,532 89 2.52% 3,346 87 2.60%
Certificates of deposit........................ 9,777 575 5.88% 9,888 571 5.77%
Other liabilities.............................. 212 9 4.26% 12 -- --%
-------- ----- ----- ------- -----
Total interest-bearing liabilities........... 14,632 696 4.76% 14,396 671 4.66%
------- ----- ------- -----
Non-interest bearing liabilities:...............
Other liabilities.............................. 1,811 596
------- -------
Total liabilities.............................. 16,443 14,992
======= =======
Stockholders' equity............................ 1,928 1,256
------- -------
Total liabilities and stockholders' equity..... $ 18,371 $16,248
======= =======
Net interest income............................. $ 648 $ 565
===== =====
Interest rate spread(3)......................... 3.01% 3.20%
====== ======
Net yield on interest-earning assets(4)......... 3.75% 3.59%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities.......... 118.20% 109.28%
====== ======
</TABLE>
_________________________________
(1) Average balances include non-accrual loans.
(2) Includes investment-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
8
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our
interest income and interest expense for the periods indicated. For each
category of interest-earning assets and interest- bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume). Increases and decreases due
to both rate and volume, which cannot be separated, have been allocated
proportionally to the change due to volume and the change due to rate.
Year Ended December 31,
1998 vs. 1997
Increase (Decrease)
Due to
--------------------------------------
Volume Rate Net
------ ---- ---
(In Thousands)
Interest income:
Loans receivable..................... $ 178 $(53) $125
Mortgage-backed securities........... (14) 3 (11)
Investment securities................ (4) 7 3
Other interest-earning assets........ (6) (3) (9)
----- ----- -----
Total interest-earning assets...... $154 $(46) $108
====== ===== =====
Interest expense:
NOW accounts........................ $ -- $10 $ 10
Savings deposits.................... 5 (3) 2
Certificates of deposit............. (6) 10 4
Other interest-bearing liabilities.. -- 9 9
----- ----- -----
Total interest-bearing liabilities. (1) 26 25
----- ----- -----
Change in net interest income........ $ 155 $(72) $ 83
====== ===== =====
The increase in interest income resulted primarily from an increase of
$125,000 or 14.3% in earnings on loans while offset by smaller fluctuations in
all other interest income categories. The average principal balance for loans
increased $1,979,000 or 20.3%, driven substantially by the Company's residential
real estate market. As stated previously, this increase is the result the
economic viability of the Company's market area. The overall increase in
interest income on loans was softened slightly by the impact of a decline in the
yield on loans from 8.97% for 1997 compared to 8.52% for 1998.
The increase in interest expense resulted from an increase in interest on
deposits and borrowings of $16,000 and $8,000, respectively, from a total of
$671,000 for the year ended December 31, 1997 to $696,000 for the same period
ended 1998. This increased expense was primarily due to an increase in the total
average principal balance of $236,000 coupled with a slight increase in the cost
of funds from 4.66% for the year ended December 31, 1997 to 4.76% for the same
period ended 1998.
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 $29,000 for the year ended December 31, 1998 compared
to the same period ended 1997. Management believes the allowance for loan losses
is at a level that is considered to be adequate to provide for estimated losses;
however, there can be no assurance that further additions will not be made to
the allowance and that such losses will not exceed the estimated amount.
9
<PAGE>
Noninterest income, which is comprised of service charges on deposit
accounts, gains and losses on sales of securities, and other income increased
$27,000 or 64.1% to $69,000 for the year ended 1998 compared to $42,000 for the
same period ended 1997. There was an increase of $8,000 resulting from the
addition of two ATM's during 1998 and the imposition of an ATM convenience
charge for noncustomers, as well as smaller dollar increases in various other
income accounts.
Noninterest expense increased $83,000 or 12.8% to $725,000 for the year
ended December 31, 1998 from $643,000 for the same period ended 1997.
Compensation and benefits increased $58,000 or 19.7% compared to the prior
period due to increased benefit costs associated with an increase in salaries to
employees coupled with the implementation of the ESOP. On January 11, 1999,
stockholders of the Company approved the implementation of a restricted stock
plan ("RSP") for the benefit of participating employees and directors.
Compensation and benefits will increase during fiscal year 1999 due to the
implementation of the RSP.
New data processing expenses increased $26,000 or 28.4% 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 $67,000 in
real estate operations expense due to the settlement of approximately $480,000
in previously foreclosed properties. Offsetting these increases was a decrease
in other expenses of $77,000 due mainly to the implementation of a director's
benefit plan in 1997.
Income tax benefit decreased $40,000 or 75.0% from $54,000 for the year
ended December 31, 1997 as compared $14,000 for the same period ended 1998. This
decrease is the result of a decrease in pretax loss of $56,000.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of
Pittsburgh. 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. The Bank uses its
resources primarily to fund existing and future loan commitments, maturing
certificates of deposit and demand deposit withdrawals, investments in other
interest-earning assets, maintenance of necessary liquidity, and to meet
operating expenses.
Net cash provided by operating activities for the year ended December 31,
1998 was $290,000 as compared to net cash used for operating activities of
$73,000 for the same period ended 1997. This increase was primarily the result
of an increase in the net losses on sales of real estate owned of $72,000, a
decrease in deferred income taxes of $61,000, and an increase in accrued
expenses relating to employee benefit plans and costs associated with operating
a public company. These increases to net cash provided by operating activities
were partially offset by a decreases of $29,000 in provision for loan losses.
Net cash used for investing activities for the year ended December 31, 1998
increased $2,394,000 to $3,511,000 from $3,117,000 for the year ended December
31, 1997. This increase was primarily attributable to a $4,835,000 increase in
net loans receivable while being offset somewhat by a net increase in cash
provided by investment and mortgage-backed securities of $2,200,000. As noted
previously, management funded its loan demand by reducing its holdings in
investment and mortgage-backed securities.
Net cash provided from our financing activities for the year ended December
31, 1998 increased $1,851,000 to $3,336,000 from $1,484,000 for the same period
ended 1997. This increase consisted of receipt of $1,905,000 from net proceeds
in the initial public offering and an increase in borrowed funds
10
<PAGE>
of $1,200,000 offset by a decline in the increase in deposits of $1,606,000 due
primarily from conversion of subscription orders to common stock.
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
Company's commitment to make loans and management's assessment of the Company's
ability to generate funds. The Company is also subject to federal regulations
that impose certain minimum capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
inflation. The impact of inflation is reflected in the increased cost of our
operations. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
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 and electronic door lock). 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 spent approximately $4,000
through December 31, 1998 to upgrade its computer system and software. This
upgrade is expected to have eliminated the year 2000 risk. The Bank does not
expect to have material costs to address this risk after December 31, 1998. The
Bank considers itself, though there is no assurance, to be year 2000 "ready" in
this risk area as of December 31, 1998.
Computers of others used by the Bank's 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 "ready" in this risk area.
Computers of others who provide the Bank 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 "ready" and subsequent results
of testing by the Bank have been positive.
11
<PAGE>
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 "ready." 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.
Successful and timely completion of the year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of our
external provider, testing plans, and all vendors, suppliers and customer
readiness.
12
<PAGE>
SNODGRASS
[LOGO] CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Carnegie Financial Corporation
We have audited the accompanying consolidated balance sheet of Carnegie
Financial Corporation and subsidiary, as of December 31, 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
Carnegie Savings Bank as of December 31, 1997 and for the year then ended, were
audited by other auditors whose report, dated February 17, 1998, expressed an
unqualified opinion on those financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carnegie Financial
Corporation and subsidiary as of December 31, 1998 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
- -----------------------------------------------
Wexford, PA
February 12, 1999
S.P. SNODGRASS, A.C.
101 BRADFORD ROAD, SUITE 100 WEXFORD, PA 15090-6909 PHONE: 724-934-0344
FACSIMILE: 724-934-0345
13
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 316,515 $ 108,753
Interest-bearing overnight deposits in other banks 648,973 742,138
----------- ----------
Cash and cash equivalents 965,488 850,891
Certificates of deposit in other banks 199,000 199,000
Investment securities available for sale 1,259,532 1,516,685
Investment securities held to maturity (market
value of $503,083 and $922,716) 489,287 913,903
Mortgage-backed securities available for sale 1,026,442 906,869
Mortgage-backed securities held to maturity (market
value of $1,082,927 and $1,744,013) 1,066,910 1,721,250
Loans receivable (net of allowance for loan losses
of $138,860 and $114,832) 14,512,121 9,585,360
Accrued interest receivable 114,675 107,361
Premises and equipment 248,228 184,878
Real estate owned - 480,326
Federal Home Loan Bank stock 102,900 -
Other assets 100,061 252,918
---------- ----------
TOTAL ASSETS $ 20,084,644 $16,719,441
========== ==========
LIABILITIES
Deposits $ 15,372,170 $15,177,917
Borrowed funds 1,200,000 -
Advances by borrowers for taxes and insurance 179,563 143,129
Accrued interest payable and other liabilities 295,492 228,350
---------- ----------
TOTAL LIABILITIES 17,047,225 15,549,396
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 2,000,000 shares
authorized; none issued - -
Common stock, $.10 par value; 4,000,000 shares 23,805 -
authorized; 238,050 issued and outstanding
Additional paid-in capital 2,072,044 -
Retained earnings-substantially restricted 1,118,054 1,156,387
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (180,918) -
Net unrealized gain on securities 4,434 13,658
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 3,037,419 1,170,045
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,084,644 $16,719,441
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
14
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 997,850 $ 873,301
Interest-bearing deposits in other banks 44,351 53,305
Investment securities
Taxable 112,545 105,923
Exempt from federal income tax 27,371 31,393
Mortgage-backed securities 161,926 172,627
------------- -------------
Total interest and dividend income 1,344,043 1,236,549
------------- -------------
INTEREST EXPENSE
Deposits 686,825 670,680
Borrowed funds 8,941 567
------------- -------------
Total interest expense 695,766 671,247
------------- -------------
NET INTEREST INCOME 648,277 565,302
Provision for loan losses 43,938 73,000
------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 604,339 492,302
------------- -------------
NONINTEREST INCOME
Service fees 35,281 27,973
Investment securities gains, net 2,606 1,677
Other income 31,070 12,371
------------- -------------
Total noninterest income 68,957 42,021
------------- -------------
NONINTEREST EXPENSE
Compensation and employee benefits 352,756 294,604
Occupancy and equipment 43,114 34,262
Real estate operations, net 60,867 (6,178)
Data processing 117,611 91,600
Other 150,901 228,261
------------- -------------
Total noninterest expense 725,249 642,549
------------- -------------
Loss before income tax benefit (51,953) (108,226)
Income tax benefit (13,620) (54,425)
------------- -------------
NET LOSS $ (38,333) $ (53,801)
============= =============
LOSS PER SHARE (Since inception July 10, 1998) $ (0.13) $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING 219,429 N/A
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Additional Unrealized Total
Common Paid-in Retained Unearned Gain (Loss) Stockholders' Comprehensive
Stock Capital Earnings ESOP on Securities Equity Loss
-------- ----------- ----------- ----------- ------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ - $ - $1,210,188 $ - $ (14,514) $ 1,195,674
Net loss (53,801) (53,801) $(53,801)
Other comprehensive income:
Unrealized gain on available
for sale securities, net of
reclassification adjustment 28,172 28,172 28,172
--------
Comprehensive loss $(25,629)
------- ---------- --------- ----------- --------- ---------- ========
Balance, December 31, 1997 - - 1,156,387 - 13,658 1,170,045
Net loss (38,333) (38,333) $(38,333)
Other comprehensive income:
Unrealized loss on available
for sale securities, net of
reclassification adjustment (9,224) (9,224) (9,224)
--------
Comprehensive loss $(47,557)
========
Issuance of 238,050 shares of
common stock on July 10, 1998,
net of conversion costs 23,805 2,072,044 (190,440) 1,905,409
Release of earned ESOP shares 9,522 9,522
-------- ------------ --------- ----------- --------- ----------
Balance, December 31, 1998 $ 23,805 $ 2,072,044 $1,118,054 $ (180,918) $ 4,434 $ 3,037,419
======== ============ ========= =========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Components of comprehensive loss:
Change in net unrealized gain (loss)
on investment securities available for sale $ (7,504) $ 29,279
Realized gains included in net income, net of tax (1,720) (1,107)
---------- ---------
Total $ (9,224) $ 28,172
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
16
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (38,333) $ (53,801)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Provision for loan losses 43,938 73,000
Depreciation, amortization, and accretion, net 10,973 10,246
Net losses (gains) on sale of real estate owned 58,479 (13,693)
Investment securities gains, net (2,606) (1,677)
Deferred income taxes (20,124) (81,525)
Increase in accrued interest receivable (7,314) (6,117)
Other, net 244,875 788
----------- ------------
Net cash used for operating activities 289,888 (72,779)
----------- ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (1,616,699) (2,322,748)
Proceeds from sales 417,248 748,062
Maturities and repayments 1,467,029 646,313
Maturities and repayments of investments held to maturity 425,000 548,450
Mortgage-backed securities available for sale:
Purchases (508,321) (1,053,921)
Proceeds from sales 143,493 -
Maturities and repayments 240,915 167,304
Maturities and repayments of mortgage-backed securities
held to maturity 656,853 291,936
Net increase in loans receivable (4,970,699) (135,810)
Proceeds from sale of real estate owned 421,847 10,000
Purchase of Federal Home Loan Bank stock (102,900) -
Purchase of premises and equipment, net (85,153) (17,025)
----------- ------------
Net cash used for investing activities (3,511,387) (1,117,439)
----------- ------------
FINANCING ACTIVITIES
Net increase in deposits 194,253 1,800,092
Net increase (decrease) in advances by borrowers
for taxes and insurance 36,434 (15,641)
Proceeds from borrowed funds 1,200,000 -
Repayment of borrowed funds - (300,000)
Net proceeds from the issuance of common stock 1,905,409 -
----------- ------------
Net cash provided by financing activities 3,336,096 1,484,451
----------- ------------
Increase in cash and cash equivalents 114,597 294,233
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 850,891 556,658
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 965,488 $ 850,891
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 705,086 $ 660,954
Income taxes 26,378 28,932
</TABLE>
See accompanying notes to the consolidated financial statements.
17
<PAGE>
CARNEGIE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
- ----------------------------------------------
On July 10, 1998, Carnegie Financial Corporation (the "Company") was formed as
part of a corporate reorganization completed in connection with the
mutual-to-stock conversion of the Carnegie Savings Bank (the "Bank") (see Note
15). As a result of this transaction, the Bank became a wholly-owned subsidiary
of the Company. The Company's principal sources of revenue emanate from interest
earnings on its investment, mortgage-backed securities, and mortgage loan
portfolios. The Bank is a federally-chartered stock savings bank located in
Carnegie, Pennsylvania. The Company and the Bank are subject to regulation and
supervision by the Office of Thrift Supervision.
The consolidated financial statements of the Company include the accounts of its
wholly-owned subsidiary, the Bank. All intercompany transactions have been
eliminated in consolidation. The investment in subsidiary on the parent
company's financial statements is carried at the parent company's equity in the
underlying net assets.
The accounting principles followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and with
general practice within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the balance sheet date and
revenues and expenses for the period. Actual results could differ significantly
from those estimates.
Investment and Mortgage-backed Securities
- -----------------------------------------
Investment securities, including mortgage-backed securities, are classified at
the time of purchase, based upon management's intentions and abilities, as
securities held to maturity or securities available for sale. Debt securities,
including mortgage-backed securities, acquired with the intent and ability to
hold to maturity are classified as held to maturity and are stated at cost and
adjusted for amortization of premium and accretion of discount, which are
computed using a method which approximates a level yield and recognized as
adjustments of interest income. Certain other debt securities have been
classified as available for sale to serve principally as a source of liquidity.
Unrealized holding gains and losses on available for sale securities are
reported as a separate component of stockholders' equity, net of tax, until
realized. Realized securities gains and losses are computed using the specific
identification method. Interest and dividends on investment securities are
recognized as income when earned.
Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership in
an institution which is wholly owned by other financial institutions. This
equity security is accounted for at cost and reported separately on the
accompanying balance sheet.
Loans Receivable
- ----------------
Loans receivable are stated at their unpaid principal amounts, net of the
allowance for loan losses. Interest on loans is recognized as income when earned
on the accrual method. Interest accrued on loans more than 90 days delinquent is
generally offset by a reserve for uncollected interest and is not recognized as
income.
18
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable (Continued)
- ----------------
The accrual of interest is generally discontinued when management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest is charged against income.
Interest received on nonaccrual loans is either applied to principal or reported
as interest income, according to management's judgment as to the collectibility
of principal.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance, and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses which is
charged to operations. The provision is based on management's 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
estimates used in determining the adequacy of the allowance for loan losses,
including the amounts and timing of future cash flows expected on impaired
loans, are particularly susceptible to significant changes in the near term.
A loan is considered impaired when it is probable the borrower will not repay
the loan according to the original contractual terms of the loan agreement.
Management has determined that first mortgage loans on one-to-four family
properties and all consumer loans represent large groups of smaller-balance
homogeneous loans that are to be collectively evaluated. Management considers an
insignificant delay, which is defined as less than 90 days by the Company, will
not cause a loan to be classified as impaired. A loan is not impaired during a
period of delay in payment if the Company expects to collect all amounts due
including interest accrued at the contractual interest rate for the period of
delay. All loans identified as impaired are evaluated independently by
management. The Company estimates credit losses on impaired loans based on the
present value of expected cash flows or the fair value of the underlying
collateral if the loan repayment is expected to come from the sale or operation
of such collateral. Impaired loans, or portions thereof, are charged off when it
is determined that a realized loss has occurred. Until such time, an allowance
for loan losses is maintained for estimated losses. Cash receipts on impaired
loans are applied first to accrued interest receivable, unless otherwise
required by the loan terms, except when an impaired loan is also a nonaccrual
loan in which case the portion of the receipts related to interest is recognized
as income.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the useful lives
of the related assets. Expenditures for maintenance and repairs are charged to
operations as incurred. Costs of major additions and improvements are
capitalized.
Real Estate Owned
- -----------------
Real estate owned acquired in settlement of foreclosed loans is carried at the
lower of cost or fair value minus estimated cost to sell. Valuation allowances
for estimated losses are provided when the carrying value exceeds the fair
value. Direct costs incurred on such properties are recorded as expenses of
current operations.
19
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Income Taxes
- --------------------
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax basis of assets and liabilities using the
enacted marginal tax rates. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
Comprehensive Income
- --------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." In adopting Statement No.
130, the Company is required to present comprehensive income and its components
in a full set of general purpose financial statements for all periods presented.
The Company has elected to report the effects of Statement No. 130 as part of
the Statement of Changes in Stockholders' Equity.
Loss Per Share
- --------------
The Company currently maintains a simple capital structure; therefore, there are
no dilutive effects on earnings per share. As such, earnings per share
computations are based upon the weighted number of shares outstanding for the
period since inception, July 10, 1998, to December 31, 1998 less unreleased ESOP
shares. The net operating loss during this same period, and used in the loss per
share calculation, was $27,516.
Reclassification of Comparative Amounts
- ---------------------------------------
Certain comparative account balances for the prior year have been reclassified
to conform to the current period classifications. Such reclassifications did not
affect net income or stockholders' equity.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement provides accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring the recognition of those items as
assets or liabilities in the statement of financial position, recorded at fair
value. Statement No. 133 precludes a held-to-maturity security from being
designated as a hedged item; however, at the date of initial application of this
Statement, an entity is permitted to transfer any held-to-maturity security into
the available-for-sale or trading categories. The unrealized holding gain or
loss on such transferred securities shall be reported consistent with the
requirements of Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Such transfers do not raise an issue regarding an
entity's intent to hold other debt securities to maturity in the future. This
Statement applies prospectively for all fiscal quarters of all years beginning
after June 15, 1999. Earlier adoption is permitted for any fiscal quarter that
begins after the issue date of this Statement.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on accounting for the costs
of computer software developed or obtained for internal use and provides
guidance for determining whether computer software is for internal use. The
Company will adopt SOP 98-1 in the first quarter of 1999 and does not believe
the effect of adoption will be material.
20
<PAGE>
2. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities
available for sale and held to maturity are summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Government agency
securities $ 1,258,263 $ - $ (9,025) $ 1,249,238
Mutual funds 9,203 1,091 - 10,294
----------------- ----------------- ----------------- -----------------
Total $ 1,267,466 $ 1,091 $ (9,025) $ 1,259,532
================= ================= ================= =================
Held to Maturity
Obligations of state and
political subdivisions $ 489,287 $ 13,796 $ - $ 503,083
================= ================= ================= =================
1997
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
Available for Sale
U.S. Treasury securities $ 204,645 $ 1,149 $ (1,466) $ 204,328
U.S. Government agency
securities 808,704 2,066 (1,404) 809,366
----------------- ----------------- ----------------- -----------------
Total debt securities 1,013,349 3,215 (2,870) 1,013,694
Mutual funds 502,991 - - 502,991
----------------- ----------------- ----------------- -----------------
Total $ 1,516,340 $ 3,215 $ (2,870) $ 1,516,685
================= ================= ================= =================
Held to Maturity
U.S. Government agency
securities $ 300,000 $ - $ (998) $ 299,002
Obligations of state and
political subdivisions 613,903 9,811 - 623,714
----------------- ----------------- ----------------- -----------------
Total $ 913,903 $ 9,811 $ (998) $ 922,716
================= ================= ================= =================
</TABLE>
21
<PAGE>
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investments in debt securities
by contractual maturity are shown below.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------------ ------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 45,030 $ 45,266
Due after one year through
five years - - 245,000 247,114
Due after five years through
ten years 298,805 300,076 199,257 210,703
Due after ten years 959,458 949,162 - -
---------- ----------- ------------ -----------
Total $1,258,263 $ 1,249,238 $ 489,287 $ 503,083
========== =========== ============ ===========
</TABLE>
Proceeds from sales of investment securities available for sale and gross gains
and losses realized on those sales for the year ended December 31, were as
follows:
1998 1997
---------- ----------
Proceeds from sales $ 417,248 $ 748,062
Gross gains 2,795 2,234
Gross losses 616 557
22
<PAGE>
3. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-backed securities
available for sale and held to maturity are summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
Government National
Mortgage Association $ 104,860 $ 559 $ - $ 105,419
Federal Home Loan
Mortgage Corporation 170,074 171,526
1,593 (141)
Federal National Mortgage
Association 394,215 397,162
3,371 (424)
Collaterized mortgage
obligations 342,641 9,694 - 352,335
-------------- ------------ ------------ ------------
Total $ 1,011,790 $ 15,217 $ (565) $ 1,026,442
============== ============ ============ ============
Held to Maturity
Government National
Mortgage Association $ 1,031,893 $ 16,039 $ - $ 1,047,932
Federal Home Loan
Mortgage Corporation 22,378 211 - 22,589
Federal National Mortgage
Association 12,639 - (233) 12,406
-------------- ------------ ------------ ------------
Total $ 1,066,910 $ 16,250 $ (233) $ 1,082,927
============== ============ ============ ============
</TABLE>
23
<PAGE>
3. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
Government National
Mortgage Association $ 210,083 $ 1,354 $ - $ 211,437
Federal Home Loan
Mortgage Corporation 67,156 1,736 - 68,892
Federal National Mortgage
Association 299,195 5,415 - 304,610
Collaterized mortgage
obligations 310,086 11,844 - 321,930
----------------- ----------------- ----------------- -----------------
Total $ 886,520 $ 20,349 $ - $ 906,869
================= ================= ================= =================
Held to Maturity
Government National
Mortgage Association $ 1,630,734 $ 25,545 $ - $ 1,656,279
Federal Home Loan
Mortgage Corporation 48,230 - (2,004) 46,226
Federal National Mortgage
Association 42,286 - (778) 41,508
----------------- ----------------- ----------------- -----------------
Total $ 1,721,250 $ 25,545 $ (2,782) $ 1,744,013
================= ================= ================= =================
</TABLE>
The amortized cost and estimated market value of mortgage-backed securities by
contractual maturity are shown below. Mortgage-backed securities provide for
periodic payments of principal and interest. Due to expected repayment terms
being significantly less than the underlying mortgage loan pool contractual
maturities, the estimated lives of these securities could be significantly
shorter. <TABLE> <CAPTION>
Available for Sale Held to Maturity
------------------------------------ -------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Due after one year through
five years $ 147,438 $ 147,700 $ - $ -
Due after five years through
ten years 87,682 87,897 22,378 22,588
Due after ten years 776,670 790,845 1,044,532 1,060,339
----------------- ----------------- ----------------- -----------------
Total $ 1,011,790 $ 1,026,442 $ 1,066,910 $ 1,082,927
================= ================= ================= =================
</TABLE>
Proceeds from sales of mortgage-backed securities available for sale was
$143,493 and gross gains of $427 were realized on those sales for the year ended
December 31, 1998. There were no sales in 1997.
24
<PAGE>
4. LOANS RECEIVABLE
Loans receivable consists of the following:
1998 1997
----------------- -----------------
Mortgage loans:
One-to-four family $ 10,988,748 $ 7,656,395
Home equity 766,497 578,979
Construction 1,251,904 251,322
Commercial 490,626 343,195
----------------- -----------------
13,497,775 8,829,891
----------------- -----------------
Consumer loans:
Share loans 111,061 119,764
Automobile loans 450,524 382,974
Other 287,887 367,563
----------------- -----------------
849,472 870,301
----------------- -----------------
Commercial:
Commercial lines of credit 303,734 -
----------------- -----------------
Subtotal 14,650,981 9,700,192
Less:
Allowance for loan losses 138,860 114,832
----------------- -----------------
Total $ 14,512,121 $ 9,585,360
================= =================
The Company's primary business activity is with customers located within its
local trade area. Residential, consumer, and commercial loans are granted.
Although the Company has a diversified loan portfolio at December 31, 1998 and
1997, the repayment of these loans is dependent upon the local economic
conditions in its immediate trade area.
Activity in the allowance for loan losses for the year ended December 31 is as
follows:
1998 1997
----------- ---------
Balance, January 1 $ 114,832 $ 39,144
Add:
Provisions charged to operations 43,938 73,000
Loan recoveries - 2,688
Less loans charged off 19,910 -
----------- ---------
Balance, December 31 $ 138,860 $ 114,832
=========== =========
The Company had nonaccrual loans of $57,000 and $42,000 at December 31, 1998 and
1997, respectively, which in management's opinion did not meet the definition of
impaired. Interest income on loans would have been increased by $1,919 and
$2,916, respectively, if these loans had performed in accordance with their
original terms.
In the normal course of business, loans are extended to directors, executive
officers, and their associates. A summary of loan activity for those directors,
executive officers, and their associates with aggregate loan balances in excess
of $60,000 for the year ended December 31, 1998, is as follows:
1997 Additions Repayments 1998
----------------- ----------------- ----------------- -----------------
$ 303,190 $ - $ 10,381 $ 292,809
25
<PAGE>
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
1998 1997
----------- ----------
Investment securities $ 21,191 $ 23,219
Mortgage-backed securities 17,772 22,802
Interest-bearing deposits 2,336 1,112
Loans receivable 73,376 60,228
----------- ----------
Total $ 114,675 $ 107,361
=========== ==========
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1998 1997
----------- ----------
Land and improvements $ 7,900 $ 7,900
Buildings and improvements 254,384 254,384
Furniture and equipment 173,630
88,477
----------- ----------
435,914 350,761
Less accumulated depreciation 187,686 165,883
----------- ----------
Total $ 248,228 $ 184,878
=========== ==========
Depreciation expense for the years ended December 31, 1998 and 1997 was $21,803
and $21,057, respectively.
7. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the FHLB System. As a member, the Bank maintains an
investment in the capital stock of the FHLB of Pittsburgh, at cost, in an amount
not less than the greater of one percent of its outstanding home loans or five
percent of its outstanding notes payable to the FHLB of Pittsburgh as calculated
at December 31 of each year.
26
<PAGE>
8. DEPOSITS
Comparative details of deposits are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- ---------------------------
Amount % Amount %
------------ -------- ------------ -------------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 582,489 3.79 % $ 546,886 3.60 %
------------ -------- ------------ -------------
Interest-bearing
Savings 3,647,869 23.73 3,374,959 22.24
NOW checking 1,247,990 8.12 1,031,088 6.79
------------ -------- ------------ -------------
4,895,859 31.85 4,406,047 29.03
------------ -------- ------------ -------------
Time certificates of deposit
2.00 - 3.99% 513,490 3.34 - -
4.00 - 5.99% 4,398,613 28.61 4,462,000 29.40
6.00 - 7.99% 4,879,018 31.74 5,510,000 36.30
8.00 - 9.99% 102,701 0.67 252,984 1.67
------------ -------- ------------ -------------
9,893,822 64.36 10,224,984 67.37
------------ -------- ------------ -------------
Total $ 15,372,170 100.00 % $ 15,177,917 100.00 %
============ ======== ============ =============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $1,253,000 and $1,441,000 at December 31, 1998 and 1997,
respectively. Deposits in excess of $100,000 are not federally insured.
The scheduled maturities of time certificates of deposit as of December 31, 1998
are as follows:
Within one year $ 6,315,726
Beyond one year but within two years 1,409,153
Beyond two years but within three years 592,837
Beyond three years but within five years 974,458
Beyond five years 601,648
-----------------
Total $ 9,893,822
=================
Interest expense by deposit category for the years ended December 31 is as
follows:
1998 1997
----------- -----------
Savings $ 89,104 $ 86,996
NOW 22,841 12,801
Time certificates of deposit 574,880 570,883
----------- -----------
Total $ 686,825 $ 670,680
=========== ===========
9. BORROWED FUNDS
In 1998, the Bank entered into a five-year "Convertible Select" fixed commitment
advance arrangement for $1,000,000 with the FHLB at an initial interest rate of
4.18 percent. Rates may be adjusted at the FHLB's discretion, on a quarterly
basis, based on the three-month LIBOR rate. At each rate change, the Bank may
exercise a put option and satisfy the obligation without penalty.
27
<PAGE>
9. BORROWED FUNDS (Continued)
On December 31, 1998, the Bank entered into a five-day "RepoPlus" advance credit
arrangement for $200,000 with the FHLB which bears interest at a fixed rate of
5.00 percent.
The Bank has the capability to borrow additional funds through the credit
arrangement with the FHLB. The FHLB borrowings are subject to annual renewal,
incur no service charges, and are secured by a blanket security agreement on
certain investment and mortgage-backed securities, qualifying residential
mortgages, and the Bank's investment in FHLB stock. As of December 31, 1998, the
Bank's maximum borrowing capacity with the FHLB was $11.2 million.
10. INCOME TAXES
The components of income tax benefit for the years ended December 31 are
summarized as follows:
1998 1997
------------ -------------
Current payable:
Federal $ (6,755) $ 27,100
State 13,259 -
------------- -----------
6,504 27,100
Deferred taxes:
Federal (20,124) (81,525)
------------- -----------
Total $ (13,620) $ (54,425)
============= ===========
The following temporary differences gave rise to the net deferred tax assets:
1998 1997
--------------- -------------
Deferred tax assets:
Allowance for loan losses $ 47,212 $ 39,043
Accrual to cash adjustment 58,504 31,857
State net operating loss carryforward 10,634 12,900
------------- ------------
Total gross deferred tax assets 116,350 83,800
Less valuation allowance (10,634) -
------------- ------------
Net deferred tax assets 105,716 83,800
------------- ------------
Deferred tax liabilities:
Net unrealized gain on securities 5,099 7,036
Premises and equipment 19,556 17,764
------------- ------------
Total gross deferred tax liabilities 24,655 24,800
------------- ------------
Net deferred tax assets $ 81,061 $ 59,000
============= ============
28
<PAGE>
10. INCOME TAXES (Continued)
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Benefit at statutory rate $ (17,664) (34.0) % $(36,797) (34.0) %
State tax expense (benefit),
net of federal tax 8,751 16.8 (8,514) (7.9)
Tax-exempt income (9,200) (17.7) (10,674) (9.9)
Other 4,493 8.7 1,560 1.5
------------ ------------ ----------- ------------
Actual tax benefit
and effective rate $ (13,620) (26.2) % $(54,425) (50.3) %
============ ============ =========== ============
</TABLE>
The Bank is subject to the Pennsylvania Mutual Thrift Institution's tax which is
calculated at 11.5 percent of earnings based on generally accepted accounting
principles with certain adjustments.
11. EMPLOYEE BENEFITS
Simplified Employee Pension Plan (SEP)
- --------------------------------------
The Company maintains a SEP plan which provides for an annual contribution at
the discretion of the Board of Directors up to 15 percent of the eligible
employee's compensation. Employees are eligible when they attain the age of 21
and have worked for the Company at least one and a half of the immediately
preceding five plan years and have received compensation of at least three
hundred dollars. Contributions charged to operations for the years ended
December 31, 1998 and 1997 were $22,067 and $14,799, respectively.
Directors Consultation and Retirement Plan
- ------------------------------------------
On December 15, 1997, the Board of Directors adopted a nonqualified Directors
Consultation and Retirement Plan (the "Directors Plan") to provide
post-retirement benefits over a period of ten years to members of the Board of
Directors who have completed not less than ten years of service and have
attained the age of 60. Pursuant to the Directors Plan benefits also become
fully-vested and payable upon disability, death, or change of control of the
Company. Directors Plan expense charged to operations for the year ended
December 31, 1997 was $122,920. No expense was incurred for year ended December
31, 1998.
Supplemental Executive Retirement Plan
- --------------------------------------
Effective December 15, 1997, the Board of Directors adopted a nonqualified
Supplemental Executive Retirement Plan (the "Plan") to provide an executive
officer with post-retirement benefits for a period of ten years, assuming not
less than 25 years of service following retirement after age 65. Pursuant to the
Plan, benefits become fully-vested and payable upon disability, death, or change
of control of the Company. Total expenses incurred for both years ended December
31, 1998 and 1997 amounted to $35,580.
29
<PAGE>
11. EMPLOYEE BENEFITS (Continued)
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 percent 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 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 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.
Compensation expense for the ESOP was $21,123 for the year ended December 31,
1998.
1998
-----------------
Allocated shares -
Shares released for allocation 952
Unreleased shares 18,092
-----------------
Total ESOP shares 19,044
=================
Fair value of unreleased shares $ 156,044
=================
12. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
- -----------
In the normal course of business, the Company makes various commitments which
are not reflected in the accompanying financial statements. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The Company's exposure to credit
loss in the event of nonperformance by the other parties to the financial
instruments is represented by the contractual amounts as disclosed. The Company
minimizes its exposure to credit loss under these commitments by subjecting them
to credit approval and review procedures and collateral requirements as deemed
necessary. Commitments generally have fixed expiration dates within one year of
their origination.
30
<PAGE>
12. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The off-balance sheet commitments were comprised of the following:
1998 1997
----------------- -----------------
Commitments to extend credit:
One-to-four family $ 2,112,904 $ 516,000
Lines of credit 467,491 297,000
----------------- -----------------
Total $ 2,580,395 $ 813,000
================= =================
All of the Company's commitments to fund future loans are fixed rate, and at
December 31, 1998 those rates ranged from 6.00 percent to 8.50 percent.
Contingent Liabilities
- ----------------------
In the normal course of business, the Company is involved in various legal
proceedings primarily involving the collection of outstanding loans. None of
these proceedings are expected to have a material effect on the financial
position or operations of the Company.
13. CAPITAL REQUIREMENTS
The Company, on a consolidated basis, is subject to various regulatory capital
requirements administered by the federal banking agencies. The Office of Thrift
Supervision sets forth capital standards applicable to all thrifts. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's and Bank's financial statements.
Capital adequacy guidelines involve quantitative measures of the Company's and
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk-weightings, and other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
and Tier I capital (as defined in the regulations) to Risk-weighted assets, and
of tangible and core capital (as defined in the regulations) to adjusted assets
(as defined). Management believes, as of December 31, 1998, the Company and the
Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Company's and the
Bank's primary regulator categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum tangible, core,
and Risk-based ratios. There have been no conditions or events since that
notification that management believes have changed the Company's or the Bank's
category.
31
<PAGE>
13. CAPITAL REQUIREMENTS (Continued)
The following table reconciles the Company's and the Bank's capital under
generally accepted accounting principles to regulatory capital at December 31:
1998 1997
------------ -----------
(Company) (Bank)
Total stockholder's equity $ 3,037,419 $ 1,170,045
Unrealized gain on securities available for sale (4,434) (13,658)
------------ ------------
Tier I, core, and tangible capital 3,032,985 1,156,387
General allowance for loan losses 128,537 101,938
Unrealized gains on equity securities 491 N/A
------------ ------------
Risk-based capital $ 3,162,013 $ 1,258,325
============ =============
The Company's and the Bank's actual capital amounts and ratios were as follows
at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ -------------------------------------
Amount Ratio Amount Ratio
----------------- ----------------- ----------------- -----------------
(Company) (Bank)
<S> <C> <C> <C> <C>
Total Capital
(to Risk-weighted Assets)
Actual $ 3,162,013 30.8 % $ 1,258,325 15.4 %
For Capital Adequacy Purposes 821,814 8.0 651,368 8.0
To Be Well Capitalized 1,027,268 10.0 814,211 10.0
Tier I Capital
(to Risk-weighted Assets)
Actual $ 3,032,985 29.5 % $ 1,156,387 14.2 %
For Capital Adequacy Purposes 410,907 4.0 325,684 4.0
To Be Well Capitalized 616,361 6.0 688,526 6.0
Core Capital
(to Adjusted Assets)
Actual $ 3,032,985 16.6 % $ 1,156,387 7.0 %
For Capital Adequacy Purposes 731,411 4.0 658,000 4.0
To Be Well Capitalized 914,263 6.0 822,500 5.0
Tangible Capital
(to Adjusted Assets)
Actual $ 3,032,985 16.6 % $ 1,156,387 7.0 %
For Capital Adequacy Purposes 548,558 3.0 493,500 3.0
To Be Well Capitalized N/A N/A N/A N/A
</TABLE>
32
<PAGE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits
in other banks $ 965,488 $ 965,488 $ 850,891 $ 850,891
Certificates of deposit in
other banks 199,000 199,000 199,000 199,000
Investment securities:
Available for sale 1,259,532 1,259,532 1,516,685 1,516,685
Held to maturity 489,287 503,083 913,903 922,716
Mortgage-backed securities:
Available for sale 1,026,442 1,026,442 906,869 906,869
Held to maturity 1,066,910 1,082,927 1,721,250 1,744,013
Loans receivable 14,512,121 14,680,910 9,585,360 10,003,917
Accrued interest receivable 114,675 114,675 107,361 107,361
FHLB stock 102,900 102,900 -- --
----------- ----------- ----------- -----------
Total 19,736,355 $ 19,934,957 $ 15,801,319 $ 16,251,452
=========== =========== =========== ===========
Financial liabilities:
Deposits $15,372,170 15,839,354 15,177,917 15,242,239
Borrowed funds 1,200,000 1,188,357 -- --
Advances by borrowers
for taxes and insurance 179,563 179,563 143,129 143,129
Accrued interest payable 12,480 12,480 21,800 21,800
----------- ----------- ----------- -----------
Total $ 16,764,213 $ 17,219,754 $ 15,342,846 $ 15,407,168
=========== =========== =========== ===========
</TABLE>
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments are based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made by
management based upon estimates which are inherently uncertain, the resulting
estimated fair values may not be indicative of the amount realizable in the sale
of a particular financial instrument. In addition, changes in the assumptions on
which the estimated fair values are based may have a significant impact on the
resulting estimated fair values.
As certain assets, such as deferred tax assets and premises and equipment, are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
33
<PAGE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The Company employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available based
upon the following assumptions:
Cash and Due from Banks, Interest-bearing Deposits in Other Banks, Certificates
of Deposit, Accrued Interest Receivable, FHLB Stock, Advances By Borrowers for
Taxes and Insurance, and Accrued Interest Payable
The fair value is equal to the current carrying value.
Investment and Mortgage-backed Securities
- -----------------------------------------
The fair value of these securities is equal to the available quoted market
price. If no quoted market price is available, fair value is estimated using the
quoted market price for similar securities.
Loans Receivable, Deposits, and Borrowed Funds
- ----------------------------------------------
The fair value of loans is estimated by discounting the future cash flows using
a simulation model which estimates future cash flows based upon current market
rates adjusted for prepayment risk and credit quality. Savings, checking, and
money market deposit accounts are valued at the amount payable on demand as of
year end. Fair values for time deposits and borrowed funds are estimated using a
discounted cash flow calculation that applies contractual costs currently being
offered in the existing portfolio to current market rates being offered for
deposits and borrowings of similar remaining maturities.
Commitments to Extend Credit
- ----------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment, and the fair value,
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 12.
15. CONVERSION TO A STOCK FORM OF OWNERSHIP AND FORMATION OF HOLDING COMPANY
On December 15, 1997, the Board of Trustees, 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 $1.0 million of the
proceeds received in the public offering for all of the common stock of the
Bank. From the proceeds of the Conversion, approximately $24,000 was allocated
to common stock and $2.1 million, which is net of $285,000 in conversion costs,
was allocated to additional paid-in capital.
34
<PAGE>
15. CONVERSION TO A STOCK FORM OF OWNERSHIP AND FORMATION OF HOLDING COMPANY
(Continued)
In accordance with regulations, at the time the Bank converted from a mutual
savings bank to a stock savings bank, a portion of retained earnings was
restricted by establishing a liquidation account. The liquidation account will
be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the Conversion. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation of the Bank, each account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held.
16. CONDENDSED FINANCIAL INFORMATION OF CARNEGIE FINANCIAL CORPORATION (PARENT
COMPANY ONLY)
CONDENSED BALANCE SHEET
1998
-------------
ASSETS
Cash and due from banks $ 622,933
Investment securities available for sale 248,413
Investment in subsidiary bank 1,980,429
Loan receivable from ESOP 180,918
Other assets 33,044
-------------
TOTAL ASSETS $ 3,065,737
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 28,318
Stockholders' equity 3,037,419
-------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,065,737
============
35
<PAGE>
16. CONDENDSED FINANCIAL INFORMATION OF CARNEGIE FINANCIAL CORPORATION (PARENT
COMPANY ONLY) (Continued)
CONDENSED STATEMENT OF INCOME
For the Period of
July 10, 1998
to
December 31, 1998
-------------------
INCOME
Interest income $ 11,898
EXPENSES 1,785
-------------
Income before equity in undistributed net loss of subsidiary 10,113
Equity in undistributed net loss of subsidiary (37,629)
-------------
NET LOSS $ (27,516)
=============
CONDENSED STATEMENT OF CASH FLOWS
For the Period of
July 10, 1998
to
December 31, 1998
-------------------
OPERATING ACTIVITIES
Net loss $ (27,516)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Equity in undistributed net loss of subsidiary 37,629
Other, net (4,186)
-------------
Net cash provided by operating activities 5,927
-------------
INVESTING ACTIVITIES
Purchase of investment securities available for sale (250,000)
Payments from ESOP 9,522
Purchase of savings bank stock (1,047,925)
-------------
Net cash used for investing activities (1,288,403)
-------------
FINANCING ACTIVITIES
Proceed from issuance of common stock 1,905,409
-------------
Net cash provided by financing activities 1,905,409
-------------
Increase in cash 622,933
CASH AT BEGINNING OF PERIOD -
-------------
CASH AT END OF PERIOD $ 622,933
=============
36
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 317
<INT-BEARING-DEPOSITS> 649
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,286
<INVESTMENTS-CARRYING> 1,556
<INVESTMENTS-MARKET> 3,872
<LOANS> 14,651
<ALLOWANCE> 139
<TOTAL-ASSETS> 20,085
<DEPOSITS> 15,372
<SHORT-TERM> 200
<LIABILITIES-OTHER> 475
<LONG-TERM> 1,000
0
0
<COMMON> 24
<OTHER-SE> 3,014
<TOTAL-LIABILITIES-AND-EQUITY> 20,085
<INTEREST-LOAN> 998
<INTEREST-INVEST> 302
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 1,344
<INTEREST-DEPOSIT> 687
<INTEREST-EXPENSE> 696
<INTEREST-INCOME-NET> 648
<LOAN-LOSSES> 44
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 725
<INCOME-PRETAX> (52)
<INCOME-PRE-EXTRAORDINARY> (52)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.75
<LOANS-NON> 52
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 115
<CHARGE-OFFS> 20
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 139
<ALLOWANCE-DOMESTIC> 139
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99
<PAGE>
Goff
Ellenbogen
Backa & Alfera, LLC
----------------------------
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Trustees
Carnegie Savings Bank
Carnegie, Pennsylvania
We have audited the accompanying statements of condition of Carnegie Savings
Bank as of December 31, 1997 and 1996, and the related statements of operations,
changes in retained earnings, and cash flows for the years then ended. These
financial statements are the representation of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Carnegie Savings Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/GOFF ELLENBOGEN BACKA & ALFERA, LLC.
GOFF ELLENBOGEN BACKA & ALFERA, LLC.
Pittsburgh, Pennsylvania
February 17, 1998
[LOGO]
South Hills Office:
3325 Saw Mill Run Blvd.
Pittsburgh, PA 15227-27361
412/885-5045
412/885-4870 Fax
Edgewood Office:
640 Allenby Avenue
Pittsburgh, PA 15218-1363
412/731-1500
412/731-9620 Fax
Member: American and Pennsylvania Institutes of Certified Public Accountants,
AICPA Private Companies and SEC Practice Sections.
An affiliate of INPACT International.
