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, 1999
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
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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. [ ]
State issuer's revenues for its most recent fiscal year. $2,000,344
The aggregate market value of the voting and non-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 1, 2000 was $1.4 million.
As of March 1, 2000, there were issued and outstanding 224,776 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, 1999 (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended December 31, 1999. (Part III)
<PAGE>
Item 1. Business
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PART I
Forward Looking Statements
Carnegie Financial Corporation (the "Company"or "Registrant") 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. References to the Company or Registrant generally refers to the
consolidated entity which includes the main operating company, the Bank, unless
the context indicates otherwise.
1
<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 Registrant'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 Registrant's loan portfolio by type of loan on the dates
indicated:
December 31,
-------------------------------------
1999 1998
------------------ -----------------
Amount Percent Amount Percent
(Dollars in thousands)
Type of Loans:
Real Estate Loans:
One- to four-family (1)............ $ 17,811 78.39% $10,989 75.00%
Construction....................... 1,573 6.92 1,252 8.55
Commercial......................... 1,070 4.71 491 3.35
Home equity and second mortgage loans 775 3.41 766 5.23
------- ------ ------- ------
Total real estate.............. 21,229 93.43 13,498 92.13
------- ------ ------- ------
Commercial........................... 565 2.49 304 2.07
------- ------ ------- ------
Consumer Loans:
Automobile loans................... 514 2.26 450 3.07
Unsecured loans.................... 270 1.19 288 1.97
Share loans........................ 144 .63 111 .76
------- ------ ------- ------
Total consumer.................. 928 4.08 849 5.80
------- ------ ------- ------
Total................................ $ 22,722 100.00% $14,651 100.00%
======= ====== ====== ======
--------------------
(1) Includes $126,000 and $16,000 for fiscal 1999 and 1998, respectively, of
multi-family loans.
2
<PAGE>
Loan Maturity Tables
The following sets forth the maturity of the Registrant's loan portfolio at
December 31, 1999. The table does not include prepayments or scheduled principal
repayments. At December 31, 1999, prepayments and scheduled principal repayments
of loans totaled $2.7 million. 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....... $ 2 $ 415 $17,394 $17,811
Construction.......................... 1,573 -- -- 1,573
Commercial real estate................ -- -- 1,070 1,070
Home equity and second mortgage loans. -- 286 489 775
Commercial............................ -- -- 565 565
Consumer.............................. 35 760 133 928
----- ------ ------ ------
Total........................... $1,610 $ 1,461 $19,651 $22,722
===== ====== ====== ======
The following table sets forth as of December 31, 1999, the dollar amount
of all loans due after December 31, 2000, based upon fixed rates of interest or
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
One-to-four family real estate... $17,199 $ 610 $17,809
Commercial real estate........... -- 1,070 1,070
Home equity and second
mortgage loans................. 775 -- 775
Commercial....................... -- 565 565
Consumer......................... 893 -- 893
------ ------ ------
Total.................. $18,867 $2,245 $21,112
====== ===== ======
Real Estate Loans. The Registrant's primary lending activity consists of
the origination of one- to -four family fixed rate residential mortgage loans
secured by property located in the its primary market area. The Registrant
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 Registrant retains all of its mortgage loans and originates these loans
with maturities of up to 30 years. Mortgage loans originated and held by the
Registrant generally include due-on-sale clauses. This gives the Registrant 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
Registrant's consent.
3
<PAGE>
The Registrant originates home equity loans and second mortgage loans which
are secured by one- to -four family residences. These loans have fixed rates of
interest with 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.
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.
The Registrant 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.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Registrant may be required to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of value
proves to be inaccurate, the Registrant may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
Commercial Business Loans. The Registrant maintains a small number of
commercial lines of credit made to local businesses and professionals.
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. Consumer loans consist of share loans, automobile loans,
and unsecured loans. The Registrant 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 Registrant 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.
4
<PAGE>
Loan Approval Authority and Underwriting. The Registrant establishes
various lending limits for its officers and maintains a loan committee
consisting of the board of directors. The President and the loan officer of the
Bank have authority to approve home equity loans up to $35,000 and $20,000,
respectively, and the Officer Loan Committee which consists of the Board of
Directors, 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
except home equity and second mortgage loans under $50,000. For home equity and
second mortgage loans under $50,000, the Registrant obtains a property report,
which indicates whether there are any liens or other encumbrances against the
property. Borrowers also must obtain fire and casualty insurance. Flood
insurance is required on loans that are 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, 1999, commitments to
cover originations of mortgage loans totaled $68,000. The Registrant believes
that virtually all of its commitments will be funded.
Loans to One Borrower. The maximum amount of loans which the Registrant may
make to any one borrower may not exceed the greater of $500,000 or 15% of the
Registrant's unimpaired capital and unimpaired surplus. The Registrant 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, 1999, the
Registrant's maximum loan-to-one borrower limit was $500,000.
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 Registrant had no loans categorized as troubled debt
restructurings within the meaning of SFAS 15 and no impaired loans within
5
<PAGE>
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 immaterial for the year ended December 31, 1999.
At December 31,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real estate loans:
One-to-four family.......................... $ 9 $ 22
Home equity and second mortgage loans....... -- --
Commercial.................................. -- --
Construction................................ -- --
Commercial.................................... -- 30
Consumer...................................... 41 --
----- -----
Total non-accrual loans....................... 50 52
----- -----
Accruing loans which are contractually past due
90 days or more: -- --
----- -----
Total non-performing loans.................... 50 52
----- -----
Real estate owned............................. -- --
----- -----
Other non-performing assets................... -- --
----- -----
Total non-performing assets................... 50 $ 52
===== =====
Total non-performing loans to total loans..... .22% .36%
===== =====
Total non-performing loans to total assets.... .17% .26%
===== =====
Total non-performing assets to total assets... .17% .26%
===== =====
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.
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
6
<PAGE>
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings bank classifies problem assets as
loss, it is required either to establish a specific allowance for losses equal
to 100% of that portion of the asset so classified or to charge off such amount.
A savings bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining a
savings bank's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital.
The following table sets forth the Registrant's classified assets in
accordance with its classification system.
At December 31, 1999
--------------------
(Dollars in thousands)
Special Mention................... $ --
Substandard....................... 271
Doubtful assets................... 24
Loss assets....................... --
-----
$ 295
=====
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 Registrant'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 Registrant's past loan loss experience,
(ii) known and inherent risks in the Registrant'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 Registrant monitors its allowance for loan losses and makes additions
to the allowance as economic conditions dictate. Although the Registrant
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 Registrant'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 Registrant's
earnings.
8
<PAGE>
The following table sets forth information with respect to the Registrant's
allowance for loan losses at the dates and for the periods indicated:
For the Years Ended
December 31,
-----------------------
1999 1998
------- --------
(Dollars in thousands)
Total loans outstanding................... $ 22,722 $ 14,651
======= =======
Average loans outstanding................. 19,068 11,709
======= =======
Allowance balance (at beginning of
period) $ 139 $ 115
Provision................................. 66 44
Charge-offs............................... (1) (20)
Recoveries................................ -- --
------- -------
Allowance balances (at end of period) $ 204 $ 139
======= =======
Allowance for loan losses as a percent
of total outstanding..................... .90 % .95 %
======= =======
Net loans charged off as percent of average
loans outstanding......................... .01 % .17 %
======= =======
Return on Equity and Assets Ratio
At Or For The Years
Ended December 31,
-----------------------
1999 1998
------ ------
Equity to Asset Ratio........................ 9.14% 15.12%
Return on Average Equity..................... 4.86 (1.97)
Return on Average Assets..................... .42 (.21)
Dividend Payout Ratio........................ 20.76 --
8
<PAGE>
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 Registrant's use of the allowance to absorb losses in
other loan categories.
At December 31,
--------------------------------------------
1999 1998
---------------------- ---------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Total Total
Amount Loans Amount Loans
-------- ------------ ------ --------------
(Dollars in thousands)
Type of Loans:
- --------------
Real Estate Loans:
One- to four-family..... $110 78.39% $100 74.99%
Construction............ 16 6.93 8 8.55
Commercial.............. 5 4.71 5 3.35
Home equity............. 8 3.41 8 5.23
Commercial................ 20 2.48 9 2.08
Consumer.................. 45 4.08 9 5.80
---- ------ ---- ------
Total..................... $204 100.00% $139 100.00%
==== ====== === ======
Investment Activities
The Registrant 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)
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities, (iii) expectation of future yield levels, and
(iv) management's projections as to the short-term demand for funds to be used
in loan origination and other activities. 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 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 the level yield method and recognized as adjustments of
interest income. All other debt securities are classified as available for sale
to serve principally as a source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require the Registrant to
categorize securities (including mortgage-backed securities) as "held to
maturity," "available for sale" or "trading." As of December 31, 1999,
Registrant had
9
<PAGE>
investment securities and mortgage-backed securities classified as "held to
maturity" and "available for sale" in the amount of $888,000 and $4,014,000,
respectively and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair market value with net changes in the market value from period to
period included as a separate component of stockholders' equity, net of income
taxes. At December 31, 1999, the Registrant's securities available for sale had
an amortized cost of $4,380,000 and market value of $4,014,000. Changes in the
market value of securities available for sale do not affect the Company's
income. In addition, changes in the market value of securities available for
sale do not affect the Bank's regulatory capital requirements or its loan-to-one
borrower limit.
At December 31, 1999, the Registrant'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, and (vii) investment grade corporate bonds, and
commercial paper. The board of directors may authorize additional investments.
As a source of liquidity and to supplement Registrant's lending activities,
the Registrant 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,
like us. The quasi-governmental agencies guarantee the payment of principal and
interest to investors and include the Federal Home Loan Mortgage Corporation
("FHLMC"), Government National Mortgage Association ("GNMA"), and Federal
National Mortgage Association ("FNMA").
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FHLMC, GNMA, and FNMA make up a majority of
the pass-through certificates market.
10
<PAGE>
Securities Portfolio. The following table sets forth the carrying value of
the Registrant's investment securities at the dates indicated.
At December 31,
----------------------
1999 1998
------ -------
(Dollars in thousands)
Securities held to maturity:
Obligations of state and political subdivisions $ 145 $ 489
Mortgage-backed securities 743 1,067
------ -------
Total securities held to maturity 888 1,556
------ -------
Securities available for sale:
U.S. government agency securities 3,324 1,250
Mutual funds -- 10
Mortgage-backed securities 690 1,026
------ -------
Total securities available for sale 4,014 2,286
------ -------
Total $ 4,902 $ 3,842
====== =======
11
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Registrant's investment and mortgage-backed securities portfolio
at December 31, 1999 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, 1999
-------------------------------------------------------------------------------------------------------
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
securities................. $ -- -- % $341 6.29% $ 94 6.32% $2,889 6.77% $3,324 6.71% $3,324
Obligations of state and
political subdivisions(1).. 45 4.40 100 4.65 -- -- -- -- 145 4.57 145
Mortgage-backed securities... -- -- 29 8.65 71 5.49 1,333 6.62 1,433 6.72 1,441
---- ---- ---- ------ ------ ------
Total..................... $ 45 4.40% $470 6.09% $165 5.96% $4,222 6.72% $4,902 6.65% $4,910
==== ==== ==== ==== ==== ==== ====== ==== ====== ==== ======
</TABLE>
- -------------
(1) Average yields computed on a tax-equivalent basis.
12
<PAGE>
Sources of Funds
Deposits are the Registrant'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 Registrant'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, 1999, the Registrant had no brokered deposits.
The following table indicates the amount of the Registrant's certificates
of deposit of $100,000 or more by time remaining until maturity as of December
31, 1999.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Within three months $236
Three through six months 100
Six through twelve months 202
Over twelve months 718
-----
$1,256
=====
Borrowings. The Registrant 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 Registrant's stock in the FHLB of
Pittsburgh, a portion of the Registrant'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 Registrant may also
access the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements.
Employees
At December 31, 1999 the Registrant had 7 full-time and no part-time
employees. None of the Registrant's employees are represented by a collective
bargaining group. The Registrant 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.
13
<PAGE>
Recent Regulation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from engaging
in nonfinancial activities or from affiliating with an nonfinancial entity. As a
grandfathered unitary thrift holding company, the Corporation will retain its
authority to engage in nonfinancial activities. However, the Gramm-Leach-Bliley
Act will have few direct effects on the operations or powers of federal savings
associations or of savings and loan holding companies.
The Gramm-Leach-Bliley Act imposes significant new financial privacy
obligations and reporting requirements on all financial institutions, including
federal savings associations. Specifically, the statute, among other things,
will require financial institutions (a) to establish privacy policies and
disclose them to customers both at the commencement of a customer relationship
and on an annual basis and (b) to permit customers to opt out of a financial
institution's disclosure of financial information to nonaffiliated third
parties. The Gramm-Leach-Bliley Act requires the federal financial regulators to
promulgate regulations implementing these provisions within six months of
enactment, and the statute's privacy requirements will take effect one year
after enactment.
Regulation of the Company
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.
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. The Act terminated the "unitary thrift holding
company exemption" for all companies that applied to acquire savings
associations after May 4, 1999. Since the Company is grandfathered under this
provision of the Act, its unitary holding company powers and authorities were
not affected. However, if the Company were to acquire control of an additional
savings association, its business activities would be subject to restriction
under the Home Owners' Loan Act. Furthermore, if the Company were in the future
to sell control of the Bank to any
14
<PAGE>
other company, such company would not succeed to the Company's grandfathered
status under the Act and would be subject to the same business activity
restrictions. See "- Regulation of the Bank - Qualified Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that relate
to the regulation of the Bank. The description does not purport to be complete
and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-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 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 deposit accounts held by the Bank are
insured by the BIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). The Bank is required to pay insurance premiums based on
a percentage of its insured deposits to the FDIC for insurance of its deposits
by the BIF. The FDIC also maintains another insurance fund, the Savings
Institution Insurance Fund ("SAIF"), which primarily insures commercial bank
deposits. The FDIC has set the deposit insurance assessment rates for BIF-member
institutions for the first six months of 2000 at 0% to .027% of insured deposits
on an annualized basis, with the assessment rate for most savings institutions
set at 0%.
In addition, all FDIC-insured institutions are required to pay assessments
to the FDIC at an annual rate of approximately .0212% of insured deposits to
fund interest payments on bonds issued by the Financing Corporation ("FICO"), an
agency of the Federal government established to recapitalize the predecessor to
the SAIF. These assessments will continue until the FICO bonds mature in 2017.
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.
15
<PAGE>
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan holding
company, such as the Bank must file an application or a notice with the OTS at
least 30 days before making a capital distribution. Savings associations are not
required to file an application for permission to make a capital distribution
and need only file a notice if the following conditions are met: (1) they are
eligible for expedited treatment under OTS regulations, (2) they would remain
adequately capitalized after the distribution, (3) the annual amount of capital
distribution does not exceed net income for that year to date added to retained
net income for the two preceding years, and (4) the capital distribution would
not violate any agreements between the OTS and the savings association or any
OTS regulations. Any other situation would require an application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet one of two
Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by maintaining at
least 65% of its "portfolio assets" in certain"Qualified Thrift Investments"
(defined to include residential mortgages and related equity investments,
certain mortgage-related securities, small business loans, student loans and
credit card loans, and 50% of certain community development loans). For purposes
of the statutory QTL test, portfolio assets are defined as total assets minus
intangible assets, property used by the institution in conducting its business,
and liquid assets equal to 10% of total assets. A savings institution must
maintain its status as a QTL on a monthly basis in at least nine out of every 12
months. A failure to qualify as a QTL results in a number of sanctions,
including the imposition of certain operating restrictions and a restriction on
obtaining additional advances from its FHLB. At December 31, 1999, the Bank was
in compliance with its QTL requirement, with 96.87% of its assets invested in
Qualified Thrift Investments.
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 at
the beginning of each year.
16
<PAGE>
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1999, the Bank's liquid asset
ratio was 31.13%.
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, 1999, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Description of Property
- -------------------------------
(a) Property. The Registrant 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 Registrant's investment policies and any regulatory or Board of
Directors' percentage of assets limitations regarding certain investments.
The Registrant'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."
(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 is periodically
involved, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to the
Company'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.
17
<PAGE>
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, 1999 (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.
---------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
---------------------------------------
The information required under this item is incorporated herein by
reference to the Proxy Statement for the 2000 Annual Meeting (the "Proxy
Statement") contained under the sections captioned "Section 16(a) Beneficial
Ownership Reporting Compliance," "Proposal I - Election of Directors," and "-
Biographical Information."
Item 10. Executive Compensation
- --------------------------------
The information required by this item is incorporated by reference to the
Proxy Statement contained under the section captioned "Director and Executive
Officer Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
(b) Security Ownership of Management
The information required by items (a) and (b) is incorporated
herein by reference to the Proxy Statement contained under the
sections captioned "Principal Holders" and "Proposal I -
Election of Directors."
18
<PAGE>
(c) Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control
of the Company.
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, 1999 and 1998 and the related
consolidated statements of income, changes in stockholders'
equity and cash flows for each of the two years ended
December 31, 1999, 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, 1999.
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 *
10.4 Carnegie Financial Corporation 1999 Stock Plan **
10.5 Carnegie Savings Bank Restricted Stock Plan **
13 Portions of the 1999 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See "Item 1- Business")
23 Consent of S.R. Snodgrass, A.C.
27 Financial Data Schedule (electronic filing only)
(b) Not applicable.
- ---------------------
* Incorporated by reference to the identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-24579) declared effective
by the SEC on May 14, 1998.
** Incorporated by reference to the Proxy Statement for the Special Meeting on
January 11, 1999 and filed with the SEC on December 10, 1999.
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, 2000.
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, 2000.
/s/ Shirley Chiesa /s/ JoAnn V. Narduzzi
- --------------------------------- -------------------------------
Shirley Chiesa JoAnn V. Narduzzi
President, C.E.O. and Director
Chairman of the Board
(Principal Executive Officer)
/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
EXHIBIT 13
<PAGE>
CARNEGIE FINANCIAL CORPORATION
Corporate Profile
Carnegie Financial Corporation ("Carnegie"), a Pennsylvania corporation, is
the savings and loan holding company for Carnegie Savings Bank ("Carnegie
Savings"). Carnegie conducts no business of its own other than holding all of
the outstanding stock of Carnegie Savings.
Carnegie Savings is a federally chartered stock savings bank headquartered
in Carnegie, Pennsylvania and conducts business through its full service branch
located in the community of Carnegie, Pennsylvania. Carnegie Savings offers a
broad range of deposits and loan products to individuals, families, and small
businesses. Carnegie Savings is subject to examination and regulation by the
Office of Thrift Supervision and its deposits are insured by the Bank Insurance
Fund of the FDIC to applicable limits.
Stock Market Information
Carnegie's common stock has been traded on the OTC Electronic Bulletin
Board under the trading symbol of "CAFN". 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.
Dividends
Date High ($) Low ($) Declared ($)
---- -------- ------- ------------
July 10, 1998 to August 31, 1998 11.88 9.31 --
September 1, 1998 to December 31, 1998 10.00 8.31 --
January 1, 1999 to March 31, 1999 8.50 7.50 --
April 1, 1999 to June 30, 1999 10.25 9.00 --
July 1, 1999 to September 30, 1999 9.25 7.50 --
October 1, 1999 to December 31, 1999 9.00 7.50 .10
The number of shareholders of record of common stock as of the record date
of March 1, 1999, was approximately 169. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At March 1, 2000, there were 224,776 shares outstanding.
Carnegie's ability to pay dividends to stockholders is dependent upon the
dividends it receives from Carnegie Savings. Carnegie Savings may not declare or
pay a cash dividend on any of its stock if the effect would cause its regulatory
capital to be reduced below (1) the amount required for its liquidation account
established in connection with its stock conversion or the regulatory capital
requirements imposed by the Office of Thrift Supervision.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
"believes," "anticipates," "contemplates," "expects," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, the ability to control costs and expenses, year 2000 issues
and general economic conditions. The Company undertakes no obligation to
publicly release the results of any revisions to those forward looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Carnegie Financial Corporation is a savings and loan holding company
headquartered in Carnegie, Pennsylvania, which provides a broad range of
deposits and loan products through its wholly owned subsidiary, Carnegie Savings
Bank (collectively, the "Company").
Asset/Liability Management
The Company'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 Company
through its asset and liability committee which is comprised of the board of of
directors. The board of directors meets quarterly to monitor the impact of
interest rate risk and develops 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 resistant to
changes in interest rates and utilizing deposit marketing programs to adjust the
term or repricing of its liabilities.
Net Portfolio Value
The Company computes amounts by which the net present value of cash flow from
assets, liabilities and off balance sheet items ("net portfolio value" or "NPV")
would change in the event of a range of assumed changes in market interest
rates. The Interest Rate Sensitivity of Net Portfolio Value Report shows the
degree to which balance sheet line items and net portfolio value are potentially
affected by a 100 to 300 basis point (1/100th of a percentage point) upward and
downward parallel shift (shock) in the Treasury yield curve.
4
<PAGE>
The following table represents the Company's NPV at December 31, 1999. The
NPV was calculated by the OTS, based upon information that the Company provided
to the OTS.
Changes in Rates NPV Ratio%(1) Change(2)
---------------- ------------- ---------
+300 bp .68 -867 bp
+200 bp 2.34 -564 bp
+100 bp 5.29 -269 bp
Unchanged 7.99 --
-100 bp 10.06 207 bp
-200 bp 11.16 318 bp
-300 bp 11.37 338 bp
- -----------------------
(1) Calculated as the estimated NPV divided by present value of total assets.
(2) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
The calculations in the above table indicate that the Company's net portfolio
value could be adversely affected by increases in interest rates but could be
favorably affected by decreases in interest rates. Computations of prospective
effects of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, prepayments and deposit
run-offs and should not be relied upon as indicative of actual results. Certain
shortcomings are inherent in such computations. Although certain assets and
liabilities may have similar maturity or periods of repricing they may react at
different times and in different degrees to changes in the market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of assets and liabilities may lag behind changes in market interest rates.
Certain assets, such as adjustable rate mortgages, generally have features which
restrict changes in interest rates on a short term basis and over the life of
the asset. In the event of a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed in making
calculations set forth above. Additionally, an increased credit risk may result
as the ability of many borrowers to service their debt may decrease in the event
of an interest rate increase.
Financial Condition
Total assets increased approximately $9,400,000 ,or 46.8% , to $29.5 million at
December 31, 1999 from $20.1 million at December 31, 1998. The asset growth
primarily resulted from increases in net loans of $8,000,000 and securities
available for sale of $2,100,000. Federal Home Loan Bank advances of $8.3
million were used to fund the Company's asset growth during 1999.
Total investment securities available for sale increased $2,100,000 to
$3,300,000 at December 31, 1999 from $1,200,000 at December 31, 1998. Such
increase in securities primarily reflects investments in U.S. Government
Agencies securities. These investments have an overall average yield of 6.71%
and maturities that range from 15 to 30 years. Additionally, during 1999,
management transferred approximately
5
<PAGE>
$500,000 of held to maturity securities to the available for sale portfolio.
Such transfer was in compliance with generally accepted accounting principles.
Due to the declining interest rate yields, proceeds received from the maturities
and prepayments of mortgage-backed securities were not reinvested into such
securities. At December 31, 1999, total mortgage-backed securities (available
for sale and held to maturity) decreased $681,000 to $835,000 from $1,516,000 at
December 31, 1998.
Net loans receivable increased $8,006,000 at December 31, 1999 to $22,518,000
from $14,512,000 at December 31, 1998. Due to the growing demand for residential
real estate within the Company's market area, the net real estate mortgage
portfolio increased $7,152,000 during 1999 and was primarily driven by utilizing
the services of a mortgage broker, which resulted in a $5,061,000 increase in
the one-to-four family loan portfolio. At December 31, 1999, mortgage broker
services were no longer used and there is no assurance that in future periods
the Company will retain such services to increase its residential loan
portfolio.
Deposits increased $1,179,000 at December 31, 1999 to $16,552,000 from
$15,372,000 at December 31, 1998. This increase resulted from the overall
increase in the deposit portfolio. Such increase in deposits was the result of
management's ability to meet the competitive pricing of its market area.
Stockholder's equity decreased $344,000 to $2,693,000 at December 31, 1999, from
$3,037,000 at December 31, 1998. The decrease was the combined result of the
Company acquiring treasury stock of $129,000, the implementation of a Restricted
Stock Plan ("RSP") for the benefit of key employees and directors of $65,000,
amortization of the employee stock ownership plan("ESOP") of $19,000 and the
decrease in accumulated other comprehensive income of $245,000. Such decrease in
stockholders equity for the year ended December 31, 1999 was partially offset by
an increase in net income of $146,000 from the comparable 1998 fiscal year.
The decrease in accumulated other comprehensive income resulted from the
fluctuation in market value of the Company's investment in available for sale
securities. Because of interest rate volatility, accumulated other comprehensive
income and shareholders' equity could materially fluctuate for each interim
period and year-end period. The decrease in market value of the investment
securities available for sale is considered temporary in nature and will not
affect net income unless the securities are sold. The Company plans to hold
these securities until maturity or until the market values of these securities
increase. Accordingly, the Company does not expect, though there is no
assurance, that its investment in these securities will affect net income in
future periods. See Notes 3 and 4 to the consolidated financial statements.
Results of Operations
The Company's results of operations are primarily dependent on its net interest
income, which is the difference between the interest income earned on assets,
primarily loans and investments, and the interest expense on liabilities,
primarily deposits and borrowings. Net interest income may be affected
significantly by general economic and competitive conditions and policies of
regulatory agencies, particularly those with respect to market interest rates.
The results of operations are also influenced by the level of non-interest
expenses, such as employee salaries and benefits and other income, such as
loan-related fees and fees on deposit-related services.
6
<PAGE>
Net income increased $146,000 to $108,000 for the years ended December 31, 1999
from a net loss of $38,000 for the same period ended 1998. Pretax income
increased $203,000 to $151,000 for fiscal 1999 from a loss of $52,000 for fiscal
1998. The increase in net income was primarily due to the increase in in net
interest income of $206,000.
Net interest income before the provision for loan losses increased $246,000 to
$855,000 for the year ended December 31, 1999 from $648,000 for the comparable
1998 fiscal year. The increase was primarily due to the increase in average
loans of 7,359,000 million and average investment securities of $848,000 million
coupled with a 13 basis point decrease in average cost of funds to 4.63% for
1999 from 4.76% for 1998. The increases in average loans and average investment
securities were primarily funded by the increase in average interest bearing
liabilities of $6,859,000. Offsetting the increase in net interest income was a
38 basis point decline in the yield on average interest earning assets to 7.39%
for 1999 from 7.77% for 1998. The yield on average interest-earning assets
declined for 1999 primarily due to an 83 basis point decrease in yields on loans
receivable to 7.69% for 1999 from 8.52% for 1998, which was the result of loans
refinancing at lower rates.
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.
7
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1999 1998
--------------------------------- ----------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) ...................... $19,068 $ 1,467 7.69% $11,709 $ 998 8.52%
Mortgage-backed securities ............... 1,789 105 5.87% 2,467 162 6.57%
Investment securities .................... 3,139 254 8.09% 2,291 140 6.11%
Other interest-earning assets(2) ......... 1,246 39 3.13% 829 44 5.31%
------- ------- ------ -----
Total interest-earning assets ........... 25,242 1,865 7.39% 17,296 1,344 7.77%
------- -----
Non-interest-earning assets ............... 719 1,075
------- ------
Total assets ............................ $25,961 $18,371
======= =======
Interest-bearing liabilities:
NOW accounts ............................. $ 1,491 29 1.95% $ 1,111 23 2.07%
Savings accounts ......................... 3,694 90 2.44% 3,532 89 2.52%
Certificates of deposit .................. 9,573 519 5.42% 9,777 575 5.88%
Other liabilities ........................ 7,071 372 5.26% 212 9 4.26%
------- ------- ------ -----
Total interest-bearing liabilities ...... 21,829 1,010 4.63% 14,632 696 4.76%
------- ------- ------ -----
Non-interest bearing liabilities:
Other liabilities ........................ 1,909 1,811
------- ------
Total liabilities ........................ 23,738 16,443
------- ------
Stockholders' equity ...................... 2,223 1,928
------- ------
Total liabilities and stockholders' equity $25,961 $18,371
======= =======
Net interest income ....................... $ 855 $ 648
======= =======
Interest rate spread(3) ................... 2.76% 3.01%
====== ======
Net yield on interest-earning assets(4) ... 3.39% 3.75%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities .... 115.64% 118.20%
====== ======
</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.
The following table 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 have been allocated proportionally to the change due to
volume and the change due to rate.
8
<PAGE>
Year Ended December 31,
-----------------------
1999 vs. 1998
-----------------------
Increase (Decrease)
Due to
-----------------------
Volume Rate Total
------ ---- -----
(In Thousands)
Interest income:
Loans receivable ................... $ 627 $(158) $ 469
Mortgage-backed securities ......... (45) (12) (57)
Investment securities .............. 52 62 114
Other interest-earning assets ...... 22 (27) (5)
----- ----- -----
Total interest-earning assets .... $ 656 $(135) $ 521
----- ----- -----
Interest expense:
NOW accounts ...................... $ 8 $ (2) $ 6
Savings deposits .................. 4 (3) 1
Certificates of deposit ........... (12) (44) (56)
Other interest-bearing liabilities 292 71 363
----- ----- -----
Total interest-bearing liabilities $ 292 $ 22 $ 314
===== ===== =====
Change in net interest income ...... $ 364 $(157) $ 207
===== ===== =====
The provision for loan losses increased $22,000 for the year ended December 31,
1999 to $66,000 from $44,000 for the comparable 1998 fiscal year. Management
continually evaluates 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 which may come to the attention of management. Although
the Company maintains its allowance for loan losses at a level that it considers
to be adequate to provide for the inherent risk of loss in its loan portfolio,
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan losses will not be required in future
periods.
Total noninterest income, which is comprised of service charges on deposit
accounts, investment securities gains (losses), net and other income increased
$45,000 to $114,000 for 1999 compared to $69,000 for 1998. Of this increase,
service charges on deposit accounts increased $52,000 due to an increased level
of transaction account activity and the addition of two automatic teller
machines ("ATMs"). Increases in fees associated with loan underwriting and
processing accounted for the majority of the $18,000 increases to other income.
Partially offsetting these increases was a $22,000 loss on the sale of
investment securities.
Total noninterest expense, increased $27,000 to $752,000 for the year ended
December 31, 1999 from $725,000 for the comparable 1998 fiscal year. The most
significant items affecting noninterest expense was a decline in costs of real
estate operations of $61,000 and increases in occupancy and equipment
9
<PAGE>
expense of $28,000 and professional fees of $47,000. During 1998 the Company
incurred costs associated with real estate acquired through foreclosure and
recognized no such costs in 1999. The increase in occupancy and equipment
expense is primarily related to a full year of fees paid to an outside service
that maintained two ATMs that were placed in service during the fourth quarter
of 1998. Such fees may increase during fiscal 2000, since the Company placed two
additional ATMs in service in the first quarter of fiscal 2000. Additionally,
the increase in professional fees was the result of additional services provided
by legal and accounting professionals in relation to filing requirements of a
public company.
Income tax expense increased $56,000 for the year ended December 31, 1999 to
$43,000 from a benefit of $14,000 for the comparable 1998 fiscal year. Such
increase was the result of an increase in pre-tax income of $203,000.
Year 2000
The Company relies on computers to conduct its business and information systems
processing. Industry experts were concerned that on January 1, 2000, some
computers might not be able to interpret the new year properly, causing computer
malfunctions. Some banking experts remain concerned that some computers may not
be able to interpret additional dates in the year 2000 properly. The Company has
operated and evaluated its computer operating systems following January 1, 2000
and has not identified any errors or experienced any computer system
malfunctions. Nevertheless, the Company continues to monitor its information
systems to assess whether its systems are at risk of misinterpreting any future
dates and will develop, if needed, appropriate contingency plans to prevent any
potential system malfunction or correct any system failures. The Company has not
been informed of any such problems experienced by its vendors or its customers.
It is too soon to conclude that there will not be any problems arising from the
Year 2000 problem. The Company will continue to monitor its significant vendors
of goods and services and customers with respect to any Year 2000 problems they
may encounter, as those issues may effect its ability to continue operations, or
might adversely affect the company's financial position, results of operations
and cash flows. At this time, the Company does not believe that these potential
problems will materially impact the ability to continue operations. However, any
delays, mistakes, or failures could have a significant impact on the Company's
financial condition and profitability.
Liquidity And Capital Resources
The Company's primary source of funds includes savings, deposits, loan
repayments and prepayments, cash flow from operations and borrowing from the
Federal Home Loan Bank. The Company uses its capital resources principally to
fund loan origination and purchases, repay maturing borrowings, purchase
investments, and for short-term liquidity needs. The Company expects to be able
to fund or refinance, on a timely basis, its commitments and long-term
liabilities.
The Company's liquid assets consist of cash and cash equivalents, which include
investments in short-term investments. The level of these assets are dependent
on the Company's operating financing and investment activities during any given
period. At December 31, 1999, cash and cash equivalents total $791,000.
Net cash provided by operating activities (the cash effects of transactions that
enter into the determination of net income -- e.g., non-cash items, amortization
and depreciation, investment securities, loss (gain )
10
<PAGE>
on sale of securities available for sale and provision for loan losses) for the
year ended December 31, 1999 was $266,000, a decrease of $24,000 from December
31, 1998.
Net cash used for investing activities (i.e., cash receipts, primarily from
investment securities and mortgage-backed securities portfolios, certificates of
deposits in other banks, and the loan portfolio) for the year ended December 31,
1999 totaled $9,843,000, an increase of $6,332,000 from December 31, 1998. This
increase was primarily attributable to net cash used of $2,360,000 to fund net
investments securities and $3,102,000 to fund the growth in the loan portfolio.
Net cash provided by financing activities (i.e., cash receipts primarily from
net increases in deposits) for the year ended December 31, 1999 totaled
$9,403,000, an increase of $6,067,000 from December 31, 1998. For 1999, cash
provided by financing activities reflected an increase in deposits of
$1,179,000, net borrowings of $8,338,000,offset by cash used to purchase
$130,000 of treasury shares and common stock acquired by the RSP of $81,000. For
1998, cash provided by financing activities reflected $1,905,0000 of cash
proceeds from the initial public offering and $1,2000,000 of borrowings.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, 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.
11
<PAGE>
[LOGO]
SNODGRASS
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, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years 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 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 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, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
- --------------------------------
Wexford, PA
February 29, 2000
<TABLE>
<CAPTION>
<S> <C>
S.R. Snodgrass, A.C.
1000 Stonewood Drive, Suite 200 Wexford, PA 15090-8399 Phone: 724-934-0344 Facsimile: 724-934-0345
</TABLE>
12
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 504,005 $ 316,515
Interest-bearing deposits in other banks 286,780 648,973
------------ ------------
Cash and cash equivalents 790,785 965,488
Certificates of deposit in other banks 100,000 199,000
Investment securities available for sale 3,323,894 1,259,532
Investment securities held to maturity (market
value of $144,870 and $503,083) 145,000 489,287
Mortgage-backed securities available for sale 690,164 1,026,442
Mortgage-backed securities held to maturity (market
value of $750,369 and $1,082,927) 743,385 1,066,910
Loans receivable (net of allowance for loan losses
of $203,648 and $138,860) 22,518,456 14,512,121
Accrued interest receivable 180,797 114,675
Premises and equipment 225,827 248,228
Federal Home Loan Bank stock 564,900 102,900
Other assets 205,393 100,061
------------ ------------
TOTAL ASSETS $ 29,488,601 $ 20,084,644
============ ============
LIABILITIES
Deposits $ 16,551,544 $ 15,372,170
Borrowed funds 9,537,500 1,200,000
Advances by borrowers for taxes and insurance 275,758 179,563
Accrued interest payable and other liabilities 431,191 295,492
------------ ------------
TOTAL LIABILITIES 26,795,993 17,047,225
------------ ------------
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 23,805
authorized, 238,050 issued
Additional paid-in capital 2,062,493 2,072,044
Retained earnings - substantially restricted 1,203,806 1,118,054
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (161,874) (180,918)
Unallocated shares held by Restricted Stock Plan (RSP) (64,750) --
Accumulated other comprehensive income (loss) (241,366) 4,434
Treasury stock, at cost (13,274 shares) (129,506) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,692,608 3,037,419
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,488,601 $ 20,084,644
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
13
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
----------- ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable $ 1,466,934 $ 997,850
Interest-bearing deposits in other banks 39,475 44,351
Investment securities
Taxable 241,616 112,545
Exempt from federal income tax 12,072 27,371
Mortgage-backed securities 104,609 161,926
----------- -----------
Total interest and dividend income 1,864,706 1,344,043
----------- -----------
INTEREST EXPENSE
Deposits 638,423 686,825
Borrowed funds 371,543 8,941
----------- -----------
Total interest expense 1,009,966 695,766
----------- -----------
NET INTEREST INCOME 854,740 648,277
Provision for loan losses 65,831 43,938
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 788,909 604,339
----------- -----------
NONINTEREST INCOME
Service fees 86,897 35,281
Investment securities gains (losses), net (21,578) 2,606
Other income 48,741 31,070
----------- -----------
Total noninterest income 114,060 68,957
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 378,036 352,756
Occupancy and equipment 71,296 43,114
Real estate operations, net -- 60,867
Data processing 109,035 117,611
Professional fees 69,501 22,203
Other 124,037 128,698
----------- -----------
Total noninterest expense 751,905 725,249
----------- -----------
Income (loss) before income tax expense (benefit) 151,064 (51,953)
Income tax expense (benefit) 42,834 (13,620)
----------- -----------
NET INCOME (LOSS) $ 108,230 $ (38,333)
=========== ===========
EARNINGS (LOSS) PER SHARE (Since inception July 10, 1998)
Basic $ 0.47 $ (0.13)
Diluted 0.46 (0.13)
</TABLE>
See accompanying notes to the consolidated financial statements.
14
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unallo- Unallo- Other
Retained cated cated Compre- Total
Additional Earnings Shares Shares hensive Stock- Compre-
Common Paid-in Substantially Held by Held by Income Treasury holders' hensive
Stock Capital Restricted ESOP RSP (Loss) Stock Equity Loss
------- ----------- ------------ -------- ---------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 $ -- $ -- $1,156,387 $ -- $ -- $ 13,658 $ -- $1,170,045
Net loss (38,333) (38,333) $ (38,333)
Other
comprehensive loss:
Unrealized loss
on available
for sale
securities,
net of tax
benefit of
$4,752 (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
Net income 108,230 108,230 $ 108,230
Other
comprehensive loss:
Unrealized loss
on available for
sale securities,
net of tax
benefit of
$126,624 (245,800) (245,800) (245,800)
---------
Comprehensive loss $(137,570)
=========
Release of earned
ESOP shares (2,409) 19,044 16,635
Treasury stock
purchased, at cost (129,506) (129,506)
Common stock acquired
by RSP (7,142) (80,937) (88,079)
Release of earned
RSP shares 16,187 16,187
Cash dividends paid
($.10 per share) (22,478) (22,478)
-------- ----------- ----------- ---------- --------- --------- --------- ----------
Balance,
December 31, 1999 $23,805 $2,062,493 $1,203,806 $(161,874) $(64,750) $(241,366) $(129,506) $2,692,608
======== =========== =========== ========== ========= ========= ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 1998
--------------- -----------
<S> <C> <C>
Components of other comprehensive loss:
Change in net unrealized loss on investment
securities available for sale $ (231,559) $ (7,504)
Realized (gains) losses included in net income,
net of tax benefit of $7,337 and tax expense of $886 14,241 (1,720)
---------- ------------
Total $ (245,800) $ (9,224)
========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
CARNEGIE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 108,230 $ (38,333)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Provision for loan losses 65,831 43,938
Depreciation, amortization, and accretion, net (22,536) 10,973
Net losses (gains) on sale of real estate owned - 58,479
Investment securities losses (gains), net 21,578 (2,606)
Deferred income taxes 42,119 (20,124)
Increase in accrued interest receivable (66,122) (7,314)
Increase (decrease) in accrued interest payable 137,722 (9,320)
Amortization of ESOP unearned compensation 19,044 -
Amortization of RSP unearned compensation 16,187 -
Other, net (55,969) 254,195
----------------- -----------------
Net cash provided by operating activities 266,084 289,888
----------------- -----------------
INVESTING ACTIVITIES
Decrease in certificates of deposit in other banks 99,000 -
Investment securities available for sale:
Purchases (2,993,369) (1,616,699)
Proceeds from sales 601,130 417,248
Maturities and repayments 300,000 1,467,029
Maturities and repayments of investments held to maturity 45,000 425,000
Mortgage-backed securities available for sale:
Purchases - (508,321)
Proceeds from sales - 143,493
Maturities and repayments 320,183 240,915
Maturities and repayments of mortgage-backed securities
held to maturity 323,229 656,853
Net increase in loans receivable (8,072,166) (4,970,699)
Proceeds from sale of real estate owned - 421,847
Purchase of Federal Home Loan Bank stock (462,000) (102,900)
Purchase of premises and equipment, net (4,420) (85,153)
----------------- -----------------
Net cash used for investing activities (9,843,413) (3,511,387)
----------------- -----------------
FINANCING ACTIVITIES
Net increase in deposits 1,179,374 194,253
Net increase in advances by borrowers
for taxes and insurance 96,195 36,434
Proceeds from borrowed funds 8,537,500 1,200,000
Repayment of borrowed funds (200,000) -
Purchase of treasury stock, at cost (129,506) -
Common stock acquired by RSP (80,937) -
Net proceeds from the issuance of common stock - 1,905,409
----------------- -----------------
Net cash provided by financing activities 9,402,626 3,336,096
----------------- -----------------
Increase (decrease) in cash and cash equivalents (174,703) 114,597
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 965,488 850,891
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 790,785 $ 965,488
================= =================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 872,244 $ 705,086
Income taxes 41,250 26,378
</TABLE>
See accompanying notes to the consolidated financial statements.
16
<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"). 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 compan's equity in the
underlying net assets of the Bank.
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 ability, as
securities held to maturity or securities available for sale. Debt 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 level yield method 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 stockholder' 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 consolidated 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.
17
<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 managemen'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. Loans that experience
insignificant payment delays, which are defined as 90 days or less, generally
are not 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.
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.
18
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options
- -------------
The Company maintains a stock option plan for the directors, officers, and
employees. When the exercise price of the Company's stock options is greater
than or equal to the market price of the underlying stock on the date of the
grant, no compensation expense is recognized in the Company's financial
statements. Pro forma net income and earnings per share are presented to reflect
the impact of the stock option plan assuming compensation expense had been
recognized based on the fair value of the stock options granted under this plan.
Comprehensive Loss
- ------------------
The Company is required to present comprehensive loss in a full set of general
purpose financial statements for all periods presented. Other comprehensive
income (loss) is comprised exclusively of unrealized holding gains (losses) on
the available for sale securities portfolio. The Company has elected to report
the effects of other comprehensive income (loss) as part of the Consolidated
Statement of Changes in Stockholders' Equity.
Earnings Per Share
- ------------------
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated utilizing net income or loss as reported
as the numerator and average shares outstanding as the denominator. The
computation of diluted earnings per share differs in that the dilutive effects
of any options, warrants, and convertible securities are adjusted for in the
denominator.
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.
19
<PAGE>
2. EARNINGS PER SHARE
There are no convertible securities which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income or loss
as presented on the Consolidated Statement of Income is used as the numerator.
The following table sets forth the composition of the weighted-average common
shares (denominator) used in the basic and diluted earnings per share
computation.
1999 1998
--------- ---------
Weighted-average common shares
outstanding 266,083 238,196
Average treasury shares (9,015) --
Average unearned ESOP and RSP shares (25,552) (18,767)
-------- --------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 231,516 219,429
Additional common stock equivalents
(RSP shares) used to calculate
diluted earnings per share
5,693 --
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share
504 --
-------- --------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 237,713 219,429
======== ========
3. INVESTMENT SECURITIES
On April 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In adopting Statement No. 133, the Company has reclassified certain
investment securities from the held to maturity classification to the available
for sale classification. These securities had an amortized cost of $489,000 and
an estimated market value of $502,000 at the date of reclassi-fication.
The amortized cost and estimated market values of investment securities
available for sale and held to maturity are summarized as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Government agency
securities $ 3,686,389 $ -- $ (362,495) $ 3,323,894
================= ================= ================= =================
Held to Maturity
Obligations of state and
political subdivisions $ 145,000 $ 90 $ (220) $ 144,870
================= ================= ================= =================
</TABLE>
20
<PAGE>
3. INVESTMENT SECURITIES (Continued)
<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
================= ================= ================= =================
</TABLE>
The amortized cost and estimated market value of investments in debt securities
at December 31, 1999, 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 $ -- $ -- $ 45,000 $ 45,090
Due after one year through
five years 350,000 340,850 100,000 99,780
Due after five years through
ten years 100,000 93,688 -- --
Due after ten years 3,236,389 2,889,356 -- --
----------------- ----------------- ----------------- -----------------
Total $ 3,686,389 $ 3,323,894 $ 145,000 $ 144,870
================= ================= ================= =================
</TABLE>
Proceeds from sales of investment securities available for sale and gross gains
and losses realized on those sales for the years ended December 31, were as
follows:
1999 1998
----------------- ----------------
Proceeds from sales $ 601,130 $ 417,248
Gross gains 14,468 2,795
Gross losses 36,046 616
21
<PAGE>
4. 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>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available for Sale
Government National
Mortgage Association $ 67,652 $ 229 $ (989) $ 66,892
Federal Home Loan
Mortgage Corporation 133,200 321 (1,007) 132,514
Federal National Mortgage
Association 307,302 715 (5,990) 302,027
Collateralized mortgage
obligations 185,222 3,509 -- 188,731
----------------- ----------------- ----------------- -----------------
Total $ 693,376 $ 4,774 $ (7,986) $ 690,164
================= ================= ================= =================
Held to Maturity
Government National
Mortgage Association $ 723,307 $ 7,239 $ (264) $ 730,282
Federal Home Loan
Mortgage Corporation 9,383 16 (7) 9,392
Federal National Mortgage
Association 10,695 -- -- 10,695
----------------- ----------------- ----------------- -----------------
Total $ 743,385 $ 7,255 $ (271) $ 750,369
================= ================= ================= =================
</TABLE>
22
<PAGE>
4. MORTGAGE-BACKED SECURITIES (Continued)
<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 1,593 (141) 171,526
Federal National Mortgage
Association 394,215 3,371 (424) 397,162
Collateralized 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>
The amortized cost and estimated market value of mortgage-backed securities at
December 31, 1999, 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 $ 28,271 $ 28,562 $ -- $ --
Due after five years through
ten years 60,444 61,829 9,383 9,399
Due after ten years 604,661 599,773 734,002 740,970
----------------- ----------------- ----------------- -----------------
Total $ 693,376 $ 690,164 $ 743,385 $ 750,369
================= ================= ================= =================
</TABLE>
Proceeds from sales of mortgage-backed securities available for sale was
$143,493 and gross gains of $427 was realized on those sales for the year ended
December 31, 1998. There were no sales in 1999.
23
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consists of the following:
1999 1998
----------------- ----------------
Mortgage loans:
One-to-four family $ 17,811,141 $ 10,988,748
Home equity 775,417 766,497
Construction 1,573,450 1,251,904
Commercial 1,069,936 490,626
--------------- ---------------
21,229,944 13,497,775
--------------- ---------------
Consumer loans:
Share loans 144,126 111,061
Automobile loans 513,457 450,524
Other 270,104 287,887
--------------- ---------------
927,687 849,472
--------------- ---------------
Commercial:
Commercial lines of credit 564,473 303,734
--------------- ---------------
Subtotal 22,722,104 14,650,981
Less:
Allowance for loan losses 203,648 138,860
--------------- ---------------
Total $ 22,518,456 $ 14,512,121
=============== ===============
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, 1999 and
1998, 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 years ended December 31, is as
follows:
1999 1998
------------ -----------
Balance, January 1 $ 138,860 $ 114,832
Add:
Provisions charged to operations 65,831 43,938
Loan recoveries 430 --
Less loans charged off 1,473 19,910
------------ -----------
Balance, December 31 $ 203,648 $ 138,860
============ ===========
The Company had nonaccrual loans of $38,720 and $57,000 at December 31, 1999 and
1998, respectively, which in management's opinion did not meet the definition of
impaired. Interest income on loans would have been increased by $997 and $1,919,
respectively, if these loans had performed in accordance with their original
terms.
24
<PAGE>
5. LOANS RECEIVABLE (Continued)
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, 1999, is as follows:
1998 Additions Repayments 1999
----------------- ----------------- ----------------- -----------------
$ 292,809 $ -- $ 5,664 $ 287,145
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
1999 1998
----------------- -----------------
Investment securities $ 56,730 $ 21,191
Mortgage-backed securities 14,160 17,772
Interest-bearing deposits 888 2,336
Loans receivable 109,019 73,376
----------------- -----------------
Total $ 180,797 $ 114,675
================= =================
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1999 1998
----------------- -----------------
Land and improvements $ 7,900 $ 7,900
Buildings and improvements 254,384 254,384
Furniture and equipment 177,976 173,630
----------------- -----------------
440,260 435,914
Less accumulated depreciation 214,433 187,686
----------------- -----------------
Total $ 225,827 $ 248,228
================= =================
Depreciation expense for the years ended December 31, 1999 and 1998 was $26,747
and $21,803, respectively.
8. 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.
25
<PAGE>
9. DEPOSITS
Comparative details of deposits are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ------------------------------------
Amount % Amount %
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 914,839 5.53 % $ 582,489 3.79 %
----------------- ------------------ ----------------- -----------------
Interest-bearing
Savings 3,739,191 22.59 3,647,869 23.73
NOW checking 1,479,222 8.94 1,247,990 8.12
----------------- ------------------ ----------------- -----------------
5,218,413 31.53 4,895,859 31.85
----------------- ------------------ ----------------- -----------------
Time certificates of deposit
2.00 - 3.99% 710,393 4.29 513,490 3.34
4.00 - 5.99% 5,566,611 33.63 4,398,613 28.61
6.00 - 7.99% 3,954,869 23.89 4,719,873 30.70
8.00 - 9.99% 186,419 1.13 261,846 1.71
----------------- ------------------ ----------------- -----------------
10,418,292 62.94 9,893,822 64.36
----------------- ------------------ ----------------- -----------------
Total $ 16,551,544 100.00 % $ 15,372,170 100.00 %
================= ================== ================= =================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $1,255,737 and $1,253,000 at December 31, 1999 and 1998,
respectively. Deposits in excess of $100,000 are not federally insured.
The scheduled maturities of time certificates of deposit as of December 31, 1999
are as follows:
Within one year $ 4,803,812
Beyond one year but within two years 2,498,095
Beyond two years but within three years 1,704,994
Beyond three years but within five years 1,101,286
Beyond five years 310,105
-----------------
Total $ 10,418,292
=================
Interest expense by deposit category for the years ended December 31, is as
follows:
1999 1998
---------- -----------
Savings $ 90,408 $ 89,104
NOW 29,217 22,841
Time certificates of deposit 518,798 574,880
---------- -----------
Total $ 638,423 $ 686,825
========== ===========
26
<PAGE>
10. BORROWED FUNDS
Borrowed funds consist of fixed and adjustable rate advances from the FHLB of
Pittsburgh as follows:
Interest
Maturity Rate 1999 1998
------------------ -------- ---------- ---------
January 4, 1999 5.00% $ -- $ 200,000
January 24, 2000 6.44% 2,000,000 --
December 30, 2000 4.06% 2,537,500 --
October 16, 2003 6.28% 1,000,000 1,000,000
December 17, 2004 5.60% 2,000,000 --
January 22, 2009 4.99% 2,000,000 --
--------- ----------
$ 9,537,500 $1,200,000
========= ===========
The Bank has the capability to borrow additional funds through a credit
arrangement with the FHLB. This credit arrangement is subject to annual renewal
and incurs no service charges. Borrowings 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, 1999, the Bank's maximum borrowing capacity with the FHLB was $17.1 million.
11. INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
are summarized as follows:
1999 1998
----------------- -----------------
Current payable (receivable):
Federal $ 84,953 $ (6,755)
State -- 13,259
----------------- -----------------
84,953 6,504
Deferred taxes (35,938) (30,758)
Change in valuation allowance (6,181) 10,634
----------------- -----------------
Total $ 42,834 $ (13,620)
================= =================
27
<PAGE>
11. INCOME TAXES (Continued)
The following temporary differences gave rise to the net deferred tax assets:
<TABLE>
<CAPTION>
1999 1998
-------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 69,240 $ 47,212
Net unrealized loss on securities 124,340 --
Accrual to cash adjustment 64,683 58,504
Deferred loan fees 6,443 --
Management recognition plan 5,504 --
State net operating loss carryforward 4,453 10,634
--------- -----------
Total gross deferred tax assets 274,663 116,350
Less valuation allowance (4,453) (10,634)
--------- -------------
Total deferred tax assets 270,210 105,716
--------- -------------
Deferred tax liabilities:
Net unrealized gain on securities -- 5,099
Premises and equipment 17,591 19,556
--------- -------------
Total gross deferred tax liabilities 17,591 24,655
--------- -------------
Net deferred tax assets $ 252,619 $ 81,061
========= =============
</TABLE>
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
1999 1998
-------------------- -------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Loss
--------- --------- -------- ---------
Provision (benefit) at
statutory rat $ 58,582 34.0 % $(17,664) (34.0)%
State tax expense,
net of federal tax -- -- 8,751 16.8
Tax-exempt income (4,104) (2.4) (9,200) (17.7)
Other (11,644) (6.6) 4,493 8.7
--------- ------ ---------- --------
Actual tax expense (benefit)
and effective rate $ 42,834 25.0 % $(13,620) (26.2)%
========= ======= ========== =========
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.
12. 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,
have worked for the Company at least one and a half of the immediately preceding
five plan years, and have received annual compensation of at least three hundred
dollars. Contributions made for the year ended December 31, 1998 were $22,067.
No contributions were made in 1999.
28
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Directors Consultation and Supplemental Executive Retirement Plans
- ------------------------------------------------------------------
The Company maintains 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 at least ten years
of service and have attained the age of 60. Pursuant to the Directors Plan,
benefits become fully vested and payable upon disability, death, or change of
control of the Company. No expense was incurred for the years ended December 31,
1999 and 1998, respectively.
The Company also maintains a nonqualified Supplemental Executive Retirement Plan
(the "Plan") to provide an executive officer with post-retirement benefits for a
period of ten years, provided an officer has at least 25 years of service at
retirement at 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 the years ended December 31, 1999 and 1998 amounted to
$42,063 and $35,580, respectively.
The assumptions of 6.50 percent and 5.00 percent for the discount rate and rate
of compensation increase, respectively, were used in determining net periodic
post-retirement costs for the Directors Consultation and Retirement Plan and
Supplemental Retirement Plan for the executive officers in 1999 and 1998.
Stock Option Plan
- -----------------
On January 11, 1999, the Board of Directors approved, and stockholders ratified,
the formation of a stock option plan. The plan will provide for granting
incentive stock options and nonstatutory stock options for executive officers
and non-employee directors of the Company. A total of 23,805 shares of
authorized but unissued common stock are reserved for issuance under the plan,
which expires ten years from the date of shareholder ratification. The per share
exercise price of an option granted will not be less than the fair value of a
share of common stock on the date the option is granted.
On January 11, 1999, non-statutory stock options for non-employee directors were
granted for the purchase of 4,760 shares and incentive stock options for
officers and employees were granted for the purchase of 11,663 shares. The
recipients of these stock options vest over a five-year period of time.
The following table presents share data related to the outstanding options:
Weighted-
average
Exercise
1999 Price
----------------- -----------------
Outstanding, beginning -- $ --
Granted 16,423 8.50
Exercised -- --
Forfeited -- --
-----------------
Outstanding, ending 16,423 $ 8.50
=================
Exercisable at year-end --
=================
29
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
- -----------------
The following table summarizes the characteristics of stock options at December
31, 1999:
Outstanding Exercisable
------------------------------------ --------------------
Average Average
Average Exercise Exercise
Exercise Price Shares Life Price Shares Price
-------------- -------- --------- --------- -------- ---------
$ 8.50 16,423 9.00 $ 8.50 -- $ --
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 $35,780 and $21,123 for the years ended
December 31, 1999 and 1998, respectively.
1999 1998
--------- ---------
Allocated shares 952 --
Shares released for allocation 952 952
Unreleased shares 17,140 18,092
--------- ----------
Total ESOP shares 19,044 19,044
========= ==========
Fair value of unreleased shares $ 145,690 $ 156,044
========= ==========
Restricted Stock Plan ("RSP")
- -----------------------------
In 1999, the Board of Directors adopted a RSP for directors, officers, and
employees which was approved by stockholders at a meeting held on January 11,
1999. The objective of this plan is to enable the Company and the Bank to retain
its corporate officers, key employees, and directors who have the experience and
ability necessary to manage these entities. Directors, officers, and key
employees who are selected by members of a Board-appointed committee are
eligible to receive benefits under the RSP. The non-employee directors of the
Company and the Bank serve as trustees for the RSP, and have the responsibility
to invest all funds contributed by the Bank to the Trust created for the RSP.
30
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Restricted Stock Plan ("RSP") (Continued)
- -----------------------------
In 1999, the Trust purchased, with funds contributed by the Bank, 9,522 shares
of the common stock of the Company, of which 1,904 shares were issued to
directors, and 4,948 shares were issued to officers in 1999. As of December 31,
1999 2,670 shares remained unissued. Directors, officers, and key employees who
terminate their association with the Company shall forfeit the right to any
shares which were awarded but not earned.
The Company granted a total of 6,852 shares of common stock on January 11, 1999,
of which, under the plan, shares vest over a five-year period for directors,
officers, and employees beginning January 11, 2000. No shares were vested as of
December 31, 1999. The RSP shares purchased initially will be excluded from
stockholders' equity. The Company recognizes compensation expense in the amount
of fair value of the common stock at the grant date, pro rata, over the years
during which the shares are payable and recorded as an addition to the
stockholders' equity.
Net compensation expense attributable to the RSPs amounted to $16,187 for the
year ended December 31, 1999.
13. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
- -----------
In the normal course of business, the Company makes various commitments which
are not reflected in the accompanying consolidated financial statements. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated 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.
The off-balance sheet commitments were comprised of the following:
1999 1998
----------------- -----------------
Commitments to extend credit:
Fixed rate commitments $ 1,581,250 $ 2,112,904
Variable rate commitments 444,588 467,491
----------------- -----------------
Total $ 2,025,838 $ 2,580,395
================= =================
The range of fixed interest rate residential mortgage loan commitments was 6.75
percent to 7.50 percent at December 31, 1999.
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.
31
<PAGE>
14. CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank to maintain minimum amounts
of capital. Specifically, each is required to maintain certain minimum dollar
amounts and ratios of Total and Tier I capital to risk-weighted assets and of
Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should any
institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly restrictive
regulatory actions.
As of December 31, 1999 and 1998, the Office of Thrift Supervision categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be classified as a well capitalized financial institution,
Total risk-based, Tier 1 risk-based, and Tier 1 Leverage capital, and Tangible
equity capital ratios must be at least 10.0 percent, 6.0 percent, 5.0 percent,
and 1.5 percent, respectively.
The following table reconciles the Company's capital under generally accepted
accounting principles to regulatory capital.
1999 1998
------------ -----------------
Total capital $ 2,692,608 $ 3,037,419
Accumulated other comprehensive (income) loss 241,366 (4,434)
------------ --------------
Tier I, core, and tangible capital 2,933,974 3,032,985
Allowance for loan losses 187,263 128,537
Unrealized gain on equity securities -- 491
------------ --------------
Risk-based capital $ 3,121,237 $ 3,162,013
============ ==============
32
<PAGE>
14. CAPITAL REQUIREMENTS (Continued)
The consolidated capital position of the Company does not materially differ from
the Bank's; therefore, the following table sets forth the Company's capital
position and minimum requirements for the years ended December 31:
1999 1998
-------------------- ------------------------
Amount Ratio Amount Ratio
--------- -------- ------------------------
Total Capital
(to Risk-weighted Assets)
-------------------------
Actual $3,121,237 20.5 % $3,162,013 30.8 %
For Capital Adequacy Purposes 1,216,249 8.0 821,814 8.0
To Be Well Capitalized 1,520,311 10.0 1,027,268 10.0
Tier I Capital
(to Risk-weighted Assets)
-------------------------
Actual $2,933,974 19.3 % $3,032,985 29.5 %
For Capital Adequacy Purposes 608,124 4.0 410,907 4.0
To Be Well Capitalized 912,187 6.0 616,361 6.0
Core Capital
(to Adjusted Assets)
--------------------
Actual $2,933,974 9.8 % $3,032,985 16.6 %
For Capital Adequacy Purposes 900,466 3.0 548,558 3.0
To Be Well Capitalized 1,500,777 5.0 914,263 5.0
Tangible Capital
(to Adjusted Assets)
--------------------
Actual $2,933,974 9.8 % $3,032,985 16.6 %
For Capital Adequacy Purposes 450,233 1.5 274,279 1.5
To Be Well Capitalized N/A N/A N/A N/A
33
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
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 $ 790,785 $ 790,785 $ 965,488 $ 965,488
Certificates of deposit in
other banks 100,000 100,000 199,000 199,000
Investment securities:
Available for sale 3,323,894 3,323,894 1,259,532 1,259,532
Held to maturity 145,000 144,870 489,287 503,083
Mortgage-backed securities:
Available for sale 690,164 690,164 1,026,442 1,026,442
Held to maturity 743,385 750,369 1,066,910 1,082,927
Loans receivable 22,518,456 21,624,939 14,512,121 14,680,910
Accrued interest receivable 180,797 180,797 114,675 114,675
FHLB stock 564,900 564,900 102,900 102,900
----------------- ----------------- ----------------- -----------------
Total $ 29,057,381 $ 28,170,718 $ 19,736,355 $ 19,934,957
================= ================= ================= =================
Financial liabilities:
Deposits $ 16,551,544 $ 16,369,247 $ 15,372,170 $ 15,839,354
Borrowed funds 9,537,500 9,354,042 1,200,000 1,188,357
Advances by borrowers
for taxes and insurance 275,758 275,758 179,563 179,563
Accrued interest payable 150,202 150,202
12,480 12,480
----------------- ----------------- ----------------- -----------------
Total $ 26,515,004 $ 26,149,249 $ 16,764,213 $ 17,219,754
================= ================= ================= =================
</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.
34
<PAGE>
15. 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 in Other Banks, 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 13.
16. 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
"Conversion") 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.
35
<PAGE>
16. 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.
17. CONDENSED FINANCIAL INFORMATION OF CARNEGIE FINANCIAL CORPORATION (PARENT
COMPANY ONLY)
CONDENSED BALANCE SHEET
December 31,
1999 1998
------------ --------------
ASSETS
Cash and due from banks $ 145,546 622,933
Investment securities available for sale 233,146 248,413
Investment in subsidiary bank 2,234,680 1,980,429
Loan receivable from ESOP 161,874 180,918
Other assets 78,597 33,044
------------ --------------
TOTAL ASSETS $ 2,853,843 $ 3,065,737
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 22,478 $ --
RSP payable 64,750 --
Other liabilities 74,007 28,318
Stockholders' equity 2,692,608 3,037,419
------------ --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,853,843 $ 3,065,737
============ ==============
36
<PAGE>
17. CONDENSED FINANCIAL INFORMATION OF CARNEGIE FINANCIAL CORPORATION (PARENT
COMPANY ONLY) (Continued)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Period of
July 10, 1998
Year Ended to
December 31, 1999 December 31, 1998
---------------------- ----------------------
<S> <C> <C>
INCOME
Interest income $ 30,304 $ 11,898
EXPENSES 43,330 1,785
---------------------- ----------------------
Income (loss) before equity in undistributed
earnings of subsidiary (13,026) 10,113
Equity in undistributed earnings of subsidiary 121,256 (37,629)
---------------------- ----------------------
NET INCOME (LOSS) $ 108,230 $ (27,516)
====================== ======================
CONDENSED STATEMENT OF CASH FLOWS
For the Period of
July 10, 1998
Year Ended to
December 31, 1999 December 31, 1998
---------------------- ----------------------
OPERATING ACTIVITIES
Net income (loss) $ 108,230 $ (27,516)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (121,256) 37,629
Other, net 77,038 (4,186)
---------------------- ----------------------
Net cash provided by operating activities 64,012 5,927
---------------------- ----------------------
INVESTING ACTIVITIES
Additional investment at subsidiary bank (350,000) --
Purchase of investment securities available for sale -- (250,000)
Payments from ESOP 19,044 9,522
Purchase of savings bank stock -- (1,047,925)
---------------------- ----------------------
Net cash used for investing activities (330,956) (1,288,403)
---------------------- ----------------------
FINANCING ACTIVITIES
Common stock acquired by RSP (80,937) --
Purchase of treasury stock, at cost (129,506) --
Net proceeds from issuance of common stock -- 1,905,409
---------------------- ----------------------
Net cash provided by (used for) financing activities (210,443) 1,905,409
---------------------- ----------------------
Increase (decrease) in cash (477,387) 622,933
CASH AT BEGINNING OF PERIOD 622,933 --
---------------------- ----------------------
CASH AT END OF PERIOD $ 145,546 $ 622,933
====================== ======================
</TABLE>
37
EXHIBIT 23
<PAGE>
[LOGO]
SNODGRASS
Certified Public Accountants and Consolidations
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement of
Carnegie Financial Corporation on Form S-8 of our report dated February 25, 2000
appearing in the Annual Report on Form 10-KSB of Carnegie Financial Corporation
for the year ended December 31, 1999.
/s/ S.R. Snodgrass, A.C.
Wexford, Pennsylvania
March 29, 2000
<TABLE>
<CAPTION>
<S> <C>
S.R. Snodgrass, A.C.
1000 Stonewood Drive, Suite 200 Wexford, PA 15090-8399 Phone: 724-934-0344 Facsimile: 724-934-0345
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 504
<INT-BEARING-DEPOSITS> 387
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,014
<INVESTMENTS-CARRYING> 888
<INVESTMENTS-MARKET> 895
<LOANS> 22,722
<ALLOWANCE> 204
<TOTAL-ASSETS> 29,489
<DEPOSITS> 16,522
<SHORT-TERM> 0
<LIABILITIES-OTHER> 707
<LONG-TERM> 9,538
0
0
<COMMON> 24
<OTHER-SE> 2,669
<TOTAL-LIABILITIES-AND-EQUITY> 29,489
<INTEREST-LOAN> 1,467
<INTEREST-INVEST> 359
<INTEREST-OTHER> 39
<INTEREST-TOTAL> 1,865
<INTEREST-DEPOSIT> 638
<INTEREST-EXPENSE> 1,010
<INTEREST-INCOME-NET> 855
<LOAN-LOSSES> 66
<SECURITIES-GAINS> (22)
<EXPENSE-OTHER> 752
<INCOME-PRETAX> 151
<INCOME-PRE-EXTRAORDINARY> 151
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-BASIC> .47
<EPS-DILUTED> .46
<YIELD-ACTUAL> 3.39
<LOANS-NON> 50
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 139
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 204
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
