FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 0-23935
COLUMBIA FINANCIAL OF KENTUCKY, INC.
(Name of small business issuer in its charter)
Ohio 61-1319175
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2497 Dixie Highway, Ft. Mitchell, Kentucky 41017
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (606) 331-2419
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the issuer 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 pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended September 30, 1998,
were $8.3 million.
Based upon the average bid and asked prices quoted by The Nasdaq Stock
Market, the aggregate market value of the voting stock held by non-
affiliates of the issuer on December 17, 1998, was $28.7 million.
2,671,450 of the issuer's common shares were issued and outstanding on
December 17, 1998.
Documents Incorporated by Reference
The following sections of the 1998 Annual Report to Shareholders of
Columbia Financial of Kentucky, Inc., are incorporated by reference into
Part II of this Form 10-KSB:
1. Management's Discussion and Analysis of Financial Condition and
Results of Operations; and
2. Financial Statements.
The following sections of the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders of Columbia Financial of Kentucky, Inc., are
incorporated into Part III of this Form 10-KSB:
1. PROPOSAL ONE - ELECTION OF DIRECTORS;
2. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS; and
3. VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
PART I
Item 1. Description of Business
Columbia Financial of Kentucky, Inc. ("CFKY"), an Ohio corporation
formed in 1997, is a unitary savings and loan holding company which owns all
of the issued and outstanding common stock of Columbia Federal Savings Bank
("Columbia Federal"), a savings association chartered under the laws of the
United States. On April 15, 1998, CFKY acquired all of the common stock
issued by Columbia Federal upon its conversion from mutual to stock form
(the "Conversion").
Because CFKY's activities have been limited primarily to holding the
common stock of Columbia Federal since acquiring such common stock in
connection with the Conversion, the following discussion focuses primarily
on the business of Columbia Federal.
General
Columbia Federal is principally engaged in the business of making
permanent first mortgage loans secured by one- to four-family residential
real estate located in Columbia Federal's primary lending area and investing
in U.S. Government and agency obligations, interest-bearing deposits in
other financial institutions and mortgage-backed securities. Columbia
Federal also originates loans for the construction of residential real
estate and loans secured by multifamily real estate (over four units) and
nonresidential real estate. The origination of consumer loans, including
loans secured by deposits and home improvement loans, constitutes a small
portion of Columbia Federal's lending activities. Loan funds are obtained
primarily from deposits, which are insured up to applicable limits by the
FDIC, and loan and mortgage-backed and related securities repayments.
Columbia Federal conducts business from its main office located in Ft.
Mitchell, Kentucky, a branch office in each of the municipalities of
Covington, Crescent Springs and Erlanger, which are located in Kenton
County, Kentucky, and a branch office in Florence, which is located in Boone
County, Kentucky. Columbia Federal's primary market area consists of Boone
County and Kenton County, Kentucky.
In addition to the historic financial information included herein, the
following discussion contains forward-looking statements that involve risks
and uncertainties. Economic circumstances and CFKY's operations and actual
results could differ significantly from those discussed in those forward-
looking statements. Some of the factors that could cause or contribute to
such differences are discussed herein, but also include changes in the
economy and interest rates in the nation and in CFKY's general market area.
See Exhibit 99 hereto, "Safe Harbor Under the Private Securities Litigation
Reform Act of 1995," which is incorporated herein by reference.
Lending Activities
General. Columbia Federal's primary lending activity is the
origination of conventional mortgage loans secured by one- to four-family
homes located in Columbia Federal's primary lending area. Loans for the
construction of one- to four-family homes and mortgage loans on multifamily
properties containing five units or more and nonresidential properties are
also offered by Columbia Federal. Except for Title I home improvement loans
which are insured by the Federal Housing Administration ("FHA"), Columbia
Federal does not originate loans insured by the FHA or loans guaranteed by
the Veterans Administration. In addition to mortgage lending, Columbia
Federal makes consumer loans secured by deposits and home improvement loans.
Columbia Federal originates its loans to conform with the Federal Home Loan
Mortgage Corporation ("FHLMC") guidelines, but has not sold any loans during
the past five years.
Loan Portfolio Composition. The following table presents certain
information with respect to the composition of Columbia Federal's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1998 1997
-------------------- --------------------
Percent Percent
of total of total
Amount loans Amount loans
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential real estate loans:
One- to four-family residential $53,579 81.21% $53,584 83.79%
Multifamily residential 4,663 7.07 5,487 8.58
Nonresidential real estate loans 3,481 5.27 1,711 2.68
Construction loans 4,228 6.41 3,117 4.87
---------------------------------------------
Total real estate loans 65,951 99.96 63,899 99.92
Consumer loans:
Loans on deposits 20 .03 42 0.07
Home improvement loans 5 .01 7 0.01
---------------------------------------------
Total consumer loans 25 .04 49 0.08
---------------------------------------------
Total loans 65,976 100.00% 63,948 100.00%
=============================================
Less:
Loans in process 2,759 1,203
Deferred loan fees 756 867
Allowance for losses on loans 300 300
---------------------------------------------
Loans receivable, net $62,161 $61,578
=============================================
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information as of September 30, 1998, regarding the dollar amount of loans
maturing in Columbia Federal's portfolio based on their contractual terms to
maturity. Demand loans and loans having no stated schedule of repayments
and no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year
ending September 30, Due 4-5 Due 6-10 Due 11-20 Due more than
---------------------- years after years after years after 20 years after
1999 2000 2001 9/30/98 9/30/98 9/30/98 9/30/98 Total
---- ---- ---- ----------- ----------- ----------- -------------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
Residential real estate loans:
One- to four-family (first mortgage) $13 $53 $ 179 $509 $ 9,112 $25,253 $10,544 $45,663
Home equity (second mortgage) 3 - - - 52 - - 55
Multifamily - - 41 - 412 2,806 - 3,259
Nonresidential real estate loans - - - 18 168 1,565 1,384 3,135
Construction loans - - 750 - - 2,667 509 3,926
--------------------------------------------------------------------------------------
Total real estate loans 16 53 970 527 9,744 32,291 12,437 56,038
Consumer loans:
Loans on deposits 20 - - - - - - 20
Other consumer loans - - - - 5 - - 5
--------------------------------------------------------------------------------------
Total consumer loans 20 - - - 5 - - 25
--------------------------------------------------------------------------------------
Total fixed-rate loans 36 53 970 527 9,749 32,291 12,437 56,063
Adjustable-Rate Loans
Residential real estate loans:
One- to four-family (first mortgage) 10 17 34 144 942 3,824 2,848 7,819
Home equity (second mortgage) - - - 4 25 13 - 42
Multifamily - - - - 858 253 293 1,404
Nonresidential real estate loans 6 - - 38 101 201 - 346
Construction loans - - - - - - 302 302
--------------------------------------------------------------------------------------
Total real estate loans 16 17 34 186 1,926 4,291 3,443 9,913
Consumer loans:
Loans on deposits - - - - - - - -
Other consumer loans - - - - - - - -
Total consumer loans - - - - - - - -
Total adjustable-rate loans 16 17 34 186 1,926 4,291 3,443 9,913
--------------------------------------------------------------------------------------
Total loans $52 $70 $1,004 $713 $11,675 $36,582 $15,880 $65,976
======================================================================================
</TABLE>
One- to Four-Family Residential Real Estate Loans. The primary
lending activity of Columbia Federal has been the origination of permanent
conventional loans secured by one- to four-family residences, primarily
single-family residences, located within Columbia Federal's primary market
area. Each of such loans is secured by a mortgage on the underlying real
estate and improvements thereon, if any. Of the total outstanding balance
of one- to four-family mortgage loans at September 30, 1998, approximately
$20.5 million was secured by non-owner occupied properties and $51,000 was
secured by single-family unimproved lots. Loans secured by non-owner-
occupied properties are considered to carry greater risk of loss because the
borrower typically depends upon income generated by the property to cover
operating expenses and debt service. The profitability of a property can be
affected by economic conditions, governmental policies and other factors
beyond the control of the borrower.
OTS regulations limit the amount that Columbia Federal may lend in
relationship to the appraised value of the real estate and improvements at
the time of loan origination. In accordance with such regulations, Columbia
Federal makes fixed-rate first mortgage loans on single-family or duplex,
owner occupied residences in amounts up to 80% of the value of the real
estate and improvements (the "Loan-to-Value Ratio" or "LTV"). Fixed-rate
residential real estate loans are offered by Columbia Federal for terms of
up to 25 years, or 30 years for first-time homebuyers.
Columbia Federal commenced the origination of adjustable-rate mortgage
loans ("ARMs") in 1982. ARMs are offered by Columbia Federal on single-
family residences, two- to four-family properties and non-owner occupied
one- to four-family properties, in amounts up to 90% LTV for terms of up to
25 years and with various alternative features. Columbia Federal requires
private mortgage insurance ("PMI") for the amount of fixed-rate loans and
ARM loans in excess of 85% of the value of the real estate securing such
loans. The interest rate adjustment periods on the ARMs are either one year
or three years. The interest rate adjustments on ARMs presently originated
by Columbia Federal are tied to changes in the monthly average yield on the
one- and three-year U.S. Treasury constant maturities index, respectively.
Rate adjustments are computed by adding a stated margin, usually a minimum
of 2.5%, to the index. The maximum allowable adjustment for one-year
adjustment periods is usually 1.5% with a maximum adjustment of 6% over the
term of the loan. The maximum allowable adjustment for three-year
adjustment periods is usually 2% with a maximum adjustment of 5% over the
term of the loan. The initial rate is dependent, in part, on how often the
rate can be adjusted.
Columbia Federal offers ARMs secured by single-family unimproved lots.
Such loans are made for five-year terms, with an LTV of up to 80% on
properties of up to five acres, and require proof, including an affidavit,
that the owner intends to build on the lot during the term of the loan.
Interest rates for ARMs secured by two- to four-family, non-owner-occupied
or unimproved property are between 0.50% and 1.00% higher than the interest
rates for ARMs secured by single-family, owner-occupied properties.
Columbia Federal originates ARMs which have initial interest rates lower
than the sum of the index plus the margin. Such loans are subject to
increased risk of delinquency or default due to increasing monthly payments
as the interest rates on such loans increase to the fully-indexed level,
although such increase is considered in Columbia Federal's underwriting of
any such loans.
The aggregate amount of Columbia Federal's one- to four-family
residential real estate loans equaled approximately $53.6 million at
September 30, 1998, and represented 81.2% of loans at such date. Of such
amount, approximately 14.4% were ARMs. The largest individual loan balance
on a one- to four-family loan at such date was $369,408. At such date,
loans secured by one- to four-family residential real estate with
outstanding balances of $173,000, or .3% of its one- to four-family
residential real estate loan balance, were more than 90 days delinquent.
See "Delinquent Loans, Nonperforming Assets and Classified Assets."
Multifamily Residential Real Estate Loans. In addition to loans on
one- to four-family properties, Columbia Federal makes loans secured by
multifamily properties containing over four units. Such loans are made with
fixed or adjustable interest rates, a maximum LTV of 75% and a maximum term
of 25 years.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically
depends upon income generated by the project to cover operating expenses and
debt service. The profitability of a project can be affected by economic
conditions, government policies and other factors beyond the control of the
borrower. Columbia Federal attempts to reduce the risk associated with
multifamily lending by evaluating the credit-worthiness of the borrower and
the projected income from the project and by obtaining personal guarantees
on loans made to corporations and partnerships. Columbia Federal currently
requests financial statements annually to enable Columbia Federal to monitor
the loans and requires annual financial statements for larger multifamily
loans.
At September 30, 1998, loans secured by multifamily properties totaled
approximately $4.7 million, or 7.1% of total loans, all of which were
secured by property located within Columbia Federal's primary market area,
and all of which were performing in accordance with their terms. The
largest property securing such a loan is an apartment complex. At September
30, 1998, approximately $3.3 million, or 4.9% of total loans, were fixed-
rate multifamily loans.
Nonresidential Real Estate Loans. Columbia Federal also makes loans
secured by nonresidential real estate located in Northern Kentucky,
including retail stores, warehouses, churches, motels, restaurants and a
self-storage facility. Such loans generally are originated with terms of up
to 20 years and may have fixed or adjustable rates. Such loans have a
maximum LTV of 75%.
Nonresidential real estate lending is generally considered to involve
a higher degree of risk than residential lending due to the relatively
larger loan amounts and the effects of general economic conditions on the
successful operation of income-producing properties. If the cash flow on
the property is reduced, for example, as leases are not obtained or renewed,
the borrower's ability to repay may be impaired. Columbia Federal has
endeavored to reduce such risk by evaluating the credit history and past
performance of the borrower, the location of the real estate, the quality of
the management constructing and operating the property, the debt service
ratio, the quality and characteristics of the income stream generated by the
property and appraisals supporting the property's valuation. Columbia
Federal also requires personal guarantees on such loans.
At September 30, 1998, Columbia Federal had a total of $3.5 million
invested in nonresidential real estate loans, all of which were secured by
property located within Northern Kentucky. Such loans comprised
approximately 5.3% of Columbia Federal's total loans at such date. At such
date, Columbia Federal had no delinquent nonresidential real estate loans.
See "Delinquent Loans, Nonperforming Assets and Classified Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At September
30, 1998, Columbia Federal's nonresidential mortgage loans totaled 12.9% of
Columbia Federal's tangible capital.
Construction Loans. Columbia Federal makes loans for the construction
of residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed rates or adjustable rates of interest and for
terms of up to 30 years. All of the construction loans originated by
Columbia Federal have been made to borrowers who intended to occupy the
newly-constructed real estate or to developers who had a purchaser for the
property at the time the loan was made. Approximately 67.0% of the
construction loan balance at September 30, 1998, was secured by property
owned by developers. All construction loans are written as permanent loans
but require the payment of only interest until the construction is
completed.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties because such
loans are more difficult to evaluate and monitor. Loan funds are advanced
upon the security of the project under construction, which is more difficult
to value before the completion of construction. Moreover, because of the
uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the LTV and the total loan funds required
to complete a project. In the event a default on a construction loan occurs
and foreclosure follows, Columbia Federal must take control of the project
and attempt either to arrange for completion of construction or dispose of
the unfinished project. Columbia Federal attempts to reduce such risks on
loans to developers by requiring personal guarantees and reviewing current
personal financial statements and tax returns and other projects undertaken
by the developers.
At September 30, 1998, $4.2 million, or approximately 6.4% of Columbia
Federal's total loans, consisted of construction loans. All of Columbia
Federal's construction loans are secured by property located within Columbia
Federal's primary market area, and the economy of such lending area has been
relatively stable or growing. At September 30, 1998, all of such loans were
performing in accordance with their terms.
Consumer Loans. Columbia Federal makes loans secured by deposits and
a limited number of home improvement loans not secured by mortgages. Home
improvement loans are made only at fixed rates of interest for terms of up
to five years. Loans secured by deposits are made with adjustable rates
that vary with the interest paid on the deposit and have a margin of three
percent over the interest rate being paid on the deposit.
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during
periods of recession, high unemployment and other adverse economic
conditions. Although Columbia Federal has not had significant delinquencies
on consumer loans, no assurance can be provided that delinquencies will not
increase.
At September 30, 1998, Columbia Federal had approximately $25,000, or
less than 1 percent of its total loans, invested in consumer loans, and none
of such loans were more than 90 days delinquent or nonaccruing. See
"Delinquent Loans, Nonperforming Assets and Classified Assets."
Commercial Loans. Although Columbia Federal is considering offering
commercial loans, Columbia Federal does not currently issue any letters of
credit or originate or purchase any loans for commercial, business or
agricultural purposes, other than loans secured by real estate.
Loan Solicitation and Processing. Loan originations are developed
from a number of sources, including continuing business with depositors,
borrowers and real estate developers, periodic newspaper advertisements,
solicitations by Columbia Federal's lending staff and walk-in customers.
Columbia Federal does not use third-party brokers or originators.
Loan applications for permanent mortgage loans are taken by loan
personnel. Columbia Federal obtains a credit report concerning the credit-
worthiness of the borrower. Columbia Federal limits the ratio of mortgage
loan payments to the borrower's income to 28% and the ratio of the
borrower's total debt payments to income to 36%. An appraisal of the fair
market value of the real estate on which Columbia Federal will be granted a
mortgage to secure the loan is usually prepared by an employee of Columbia
Federal. As part of the appraisal and prior to foreclosure on any
delinquent loan, a visual inspection is performed to identify obvious
environmental concerns. If the visual inspection or the history of the
property provides reason to believe an environmental problem might exist,
Columbia Federal will conduct further investigations, which may include a
Phase I Environmental Site Assessment by an approved environmental
consultant.
For multifamily and nonresidential mortgage loans, a personal
guarantee of the borrower's obligation to repay the loan is required.
Columbia Federal also obtains the borrower's financial statement, tax
returns and information with respect to prior projects completed by the
borrower. Upon the completion of the appraisal and the receipt of
information on the borrower, the application for a loan is submitted to the
Loan Committee, comprised of certain management officials, for approval or
rejection if the loan amount does not exceed $250,000. If the loan amount
exceeds $250,000, or if the application does not conform in all respects
with Columbia Federal's underwriting guidelines, the application is accepted
or rejected by the Board of Directors.
If a mortgage loan application is approved, Columbia Federal does not
require title insurance but does obtain an attorney's opinion of title.
Borrowers are required to carry satisfactory fire and casualty insurance and
flood insurance, if applicable, and to name Columbia Federal as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs.
Columbia Federal also evaluates the feasibility of the proposed construction
project and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to
repay the loan and the value of the collateral, if any.
Columbia Federal's loans provide that the entire balance of the loan
is due upon sale of the property securing the loan, and Columbia Federal
generally enforces such due-on-sale provisions. Columbia Federal's
adjustable-rate loans carry no prepayment penalties, but fixed-rate loans
carry a 2% prepayment penalty if the property is refinanced with another
lender within five years of the loan's origination.
Loan Originations, Purchases and Sales. Columbia Federal originated
only fixed-rate loans until 1982. Columbia Federal has not generally sold
loans, although Columbia Federal does originate its loans in accordance with
secondary market guidelines. Columbia Federal has occasionally purchased
loans and participated in loans originated by other institutions but had
only one participation during the three years ended September 30, 1998, and
such participation was paid in full in fiscal year 1997.
The following table presents Columbia Federal's mortgage loan
origination and purchase activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Loan originations:
One- to four-family residential $10,742 $ 7,493
Multifamily residential 508 684
Nonresidential 1,044 232
Construction 4,552 3,170
Consumer 30 80
--------------------
Total loans originated 16,876 11,659
Loan purchases 972 -
--------------------
Total loans originated and purchased 17,848 11,659
Principal repayments 19,864 18,904
--------------------
Loan originations, net (2,016) (7,245)
Increase (decrease) due to other items,
net (1) 2,599 1,082
--------------------
Net increase (decrease) in net loan portfolio $ 583 $(6,163)
====================
- --------------------
<F1> Consists of unearned and deferred fees, costs and the allowance for
losses on loans.
</TABLE>
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital under the regulatory capital requirements plus
any additional loan reserve not included in total capital. A savings
association may lend to one borrower an additional amount not to exceed 10%
of total capital plus additional reserves if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is
not considered "readily marketable collateral." In addition, the
regulations require that loans to certain related or affiliated borrowers be
aggregated for purposes of such limits. An exception to these limits
permits loans to one borrower of up to $500,000 "for any purpose."
Based on such limits, Columbia Federal was able to lend approximately
$4.0 million to one borrower at September 30, 1998. The largest amount
Columbia Federal had outstanding to one borrower at September 30, 1998, was
$1.5 million, owed on several loans. Such loans were one- to four-family
real estate, nonresidential real estate and construction loans. All of such
loans were current at September 30, 1998.
Delinquent Loans, Nonperforming Assets and Classified Assets. When a
borrower fails to make a required payment on a loan, Columbia Federal
attempts to cause the delinquency to be cured by contacting the borrower.
In most cases, delinquencies are cured promptly.
When a loan is nineteen days delinquent, the borrower is assessed a
late penalty. When a loan is thirty days delinquent, Columbia Federal sends
the borrower a delinquency notice. Depending upon the circumstances,
Columbia Federal may also inspect the property and inform the borrower of
the availability of credit counseling from Columbia Federal and counseling
agencies. After a loan is delinquent for 45 to 60 days, an attorney
representing Columbia Federal will send the borrower a notice advising the
borrower of Columbia Federal's intention to foreclose on the property in
thirty days. Columbia Federal may, depending upon the circumstances,
arrange appropriate alternative payment arrangements. A decision as to
whether and when to initiate foreclosure proceedings is based on such
factors as the amount of the outstanding loan in relation to the original
indebtedness, the extent of the delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies. If a foreclosure occurs,
the real estate is sold at public sale and may be purchased by Columbia
Federal.
Real estate acquired by Columbia Federal as a result of foreclosure
proceedings is classified as REO until it is sold. When property is so
acquired, or deemed to have been acquired, it is initially recorded by
Columbia Federal at the lower of cost or fair value of the real estate, less
estimated costs to sell. Any reduction in fair value is reflected in a
valuation allowance account established by a charge to income. Costs
incurred to carry other real estate are charged to expense. Columbia
Federal had no REO at September 30, 1998.
Columbia Federal does not place a loan on nonaccrual status until
foreclosure has occurred, although it does write it down to fair market
value.
The following table reflects the amount of loans in a delinquent
status as of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Percent Percent
of total of total
Number Amount loans Number Amount loans
------ ------ -------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for (1):
30 - 59 days 18 $ 670 1.08% 15 $ 549 0.86%
60 - 89 days 17 485 .78 10 591 0.92
90 days and over 5 173 .28 23 601(3) 0.94
------------------------------------------------------
Total delinquent loans 40 $1,328(2) 2.14% 48 $1,741(4) 2.72%
======================================================
- --------------------
<F1> The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
<F2> All delinquent loans at such date were secured by one- to four-family
residential real estate.
<F3> Of such amount, $473,000 was due from one borrower with 18 loans,
which were all brought current in October 1997.
<F4> Of such amount, $1,651,000 was secured by one- to four-family
residential real estate, and $90,000 was secured by multi-family
residential real estate.
</TABLE>
The following table sets forth information with respect to Columbia
Federal's loans which are 90 days or more past due and other nonperforming
assets at the dates indicated. At such dates, Columbia Federal had no non-
accruing loans.
<TABLE>
<CAPTION>
At September 30,
------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Accruing loans greater than 90 days delinquent:
Real estate:
Residential $173 $601
Nonresidential - -
Consumer - -
------------------
Total nonperforming loans 173 601
Real estate owned - -
------------------
Total nonperforming assets $173 $601
==================
Total nonperforming loans as a percentage
of total net loans 0.28% 0.98%
==================
Total nonperforming assets as a percentage
of total assets 0.15% 0.58%
==================
Allowance for losses on loans as a percentage
of nonperforming loans 173.41% 49.92%
====================
</TABLE>
During the periods shown, Columbia Federal had no restructured loans
within the meaning of SFAS No. 15, as amended by SFAS No. 114. There are no
loans which are not currently classified as nonaccrual, more than 90 days
past due or restructured but which may be so classified in the near future
because management has concerns as to the ability of the borrowers to comply
with repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined
weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard"
assets, with the additional characteristics that (i) the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and (ii) there is a high possibility of
loss. An asset classified "loss" is considered uncollectible and of such
little value that its continuance as an asset of the institution is not
warranted. The regulations also contain a "special mention" category,
consisting of assets which do not currently expose an institution to a
sufficient degree of risk to warrant classification but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
Generally, Columbia Federal classifies as "substandard" all loans that
are delinquent more than 90 days, unless management believes the delinquency
status is short-term due to unusual circumstances. Loans delinquent fewer
than 90 days may also be classified if the loans have the characteristics
described above rendering classification appropriate.
The aggregate amount of Columbia Federal's classified assets at the
dates indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
----------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Substandard $244 $972
Doubtful - -
Loss - -
----------------
Total classified assets $244 $972
================
</TABLE>
Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an
asset, it may appeal this determination to the Regional Director of the OTS.
Columbia Federal had no disagreements with the examiners regarding the
classification of assets at the time of the last examination.
OTS regulations require that Columbia Federal establish prudent
general allowances for losses on loans for any loan classified as
substandard or doubtful. If an asset, or portion thereof, is classified as
loss, the association must either establish specific allowances for losses
in the amount of 100% of the portion of the asset classified loss, or charge
off such amount.
Allowance for Losses on Loans. Columbia Federal maintains an
allowance for losses on loans based upon a number of relevant factors,
including, but not limited to, the nature of the portfolio, credit
concentrations, an analysis of specific loans in the portfolio, known and
inherent risks in the portfolio, the estimated value of the underlying
collateral, the assessment of general trends in relevant real estate
markets, and current and prospective economic conditions, including property
values, employment and occupancy rates, interest rates and other conditions
that may affect a borrower's ability to comply with repayment terms.
The single largest component of Columbia Federal's loan portfolio
consists of one- to four-family residential real estate loans.
Substantially all of these loans are secured by residential real estate and
require a down payment of 20% of the lower of the sales price or appraised
value of the real estate. In addition, these loans are secured by property
located principally in Columbia Federal's lending area of Boone County and
Kenton County, Kentucky. Columbia Federal's practice of making loans only
in its local market area and requiring a 20% down payment have contributed
to a low historical charge-off history.
In addition to one- to four-family residential real estate loans,
Columbia Federal makes multifamily residential real estate, nonresidential
real estate and construction loans. These real estate loans are secured by
property in Columbia Federal's lending area and also require the borrower to
provide a down payment. Columbia Federal has not had any charge-offs from
these other real estate loan categories in the last 5 years.
A small portion of Columbia Federal's total loans consists of consumer
loans. Columbia Federal has recorded no charge-offs on consumer loans
during the last five years.
The allowance for losses on loans is reviewed quarterly by the Board
of Directors. While the Board of Directors believes that it uses the best
information available to determine the allowance for losses on loans,
unforeseen market conditions could result in material adjustments, and net
earnings could be significantly adversely affected, if circumstances differ
substantially from the assumptions used in making the final determination.
The following table sets forth an analysis of Columbia Federal's
allowance for losses on loans for the periods indicated.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Total net loans outstanding $62,161 $61,578
======================
Average loans outstanding $62,388 $67,405
======================
Allowance for losses on loans
Balance at beginning of period $ 300 $ 189
Charge-offs
Real estate:
Residential 74 2
Nonresidential - -
Consumer - -
Recoveries
Real estate:
Residential - -
Nonresidential - -
Consumer - -
----------------------
Net charge-offs 74 2
Provision for losses on loans 74 113
----------------------
Balance at end of period $ 300 $ 300
======================
Ratio of allowance for losses on loans
as a percent of net loans outstanding 0.48% 0.49%
======================
Ratio of net charge-offs (recoveries)
to average net loans outstanding during
the period 0.12% -
======================
</TABLE>
During the past five years, the allowance for losses on loans was
unallocated among the various types of loans made by Columbia Federal.
Mortgage-Backed Securities
Columbia Federal maintains a significant portfolio of mortgage-backed
securities in the form of Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National
Mortgage Association ("GNMA") participation certificates. Mortgage-backed
securities generally entitle Columbia Federal to receive a portion of the
cash flows from an identified pool of mortgages. FHLMC, FNMA and GNMA
securities are each guaranteed by their respective agencies as to principal
and interest.
The FHLMC is a corporation chartered by the U.S. Government and
guarantees the timely payment of interest and the ultimate return of
principal on participation certificates. The FNMA is a corporation
chartered by the U.S. Congress and guarantees the timely payment of
principal and interest on FNMA securities. Although FHLMC and FNMA
securities are not backed by the full faith and credit of the U.S.
Government, these securities are generally considered among the highest
quality investments with minimal credit risk. The GNMA is a government
agency. GNMA securities are backed by Federal Housing Authority-insured and
Veterans Administration-guaranteed loans. The timely payment of principal
and interest on GNMA securities is guaranteed by the GNMA and backed by the
full faith and credit of the U.S. Government.
Mortgage-backed securities generally yield less than individual loans
originated by Columbia Federal. In addition, a high rate of prepayment of
the underlying loans could have a material negative effect on the yield on
the securities, which are purchased at a premium over their original
principal amounts. Mortgage-backed securities present less credit risk than
loans originated by Columbia Federal and held in its portfolio, and Columbia
Federal has purchased some adjustable-rate mortgage-backed securities as
part of its effort to reduce its interest rate risk. If interest rates rise
in general, including the interest paid by Columbia Federal on its
liabilities, the interest rates on the loans backing the mortgage-backed
securities will also adjust upward. At September 30, 1998, $9.4 million of
Columbia Federal's mortgage-backed securities had adjustable rates.
The following table sets forth the carrying value and market value of
Columbia Federal's mortgage-backed securities at the dates indicated. All
of such securities are designated as held to maturity.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------
1998 1997
-------------------- --------------------
Carrying Market Carrying Market
Value Value Value Value
-------- ------ -------- ------
(In thousands)
<S> <C> <C> <C> <C>
FNMA certificates $13,299 $13,356 $ 9,297 $ 9,208
GNMA certificates 4,382 4,484 5,048 5,136
FHLMC certificates 4,671 4,764 3,517 3,549
-------------------------------------------
Total mortgage-backed
securities $22,352 $22,604 $17,862 $17,893
===========================================
</TABLE>
The following table sets forth information regarding scheduled
maturities, amortized costs, market value and weighted average yields of
Columbia Federal's mortgage-backed securities at September 30, 1998.
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. The following table does
not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
<TABLE>
<CAPTION>
At September 30, 1998
---------------------------------------------------------------------------------------------------------------
After After Total
One year or less one to five years five to ten years After ten years mortgage-backed portfolio
------------------ ------------------ ------------------ ------------------ ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
value yield value yield value yield value yield value value yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA certificates $ - -% $ 321 5.95% $3,073 6.19% $ 9,906 6.38% $13,300 $13,357 6.32%
GNMA certificates - - - - 48 8.00 4,334 7.08 4,382 4,484 7.09
FHLMC certificates - - 780 7.48 1,672 6.36 2,218 6.74 4,670 4,763 6.73
-----------------------------------------------------------------------------------------------------------
Total - -% $1,101 7.03% $4,793 6.27% $16,458 6.61% $22,352 $22,604 6.64%
===========================================================================================================
</TABLE>
Investment Activities
OTS regulations require that Columbia Federal maintain a minimum
amount of liquid assets, which may be invested in U. S. Treasury
obligations, securities of various federal agencies, certificates of deposit
at insured banks, bankers' acceptances and federal funds. Columbia Federal
is also permitted to make investments in certain commercial paper, corporate
debt securities rated in one of the four highest rating categories by one or
more nationally recognized statistical rating organizations, and mutual
funds, as well as other investments permitted by federal regulations. See
"REGULATION."
The following table sets forth the composition of CFKY's investment
securities at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
Carrying % of Market % of Carrying % of Market % of
value Total value Total value Total value Total
---------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agency securities held to maturity $18,980 78% $19,148 78% $14,072 92% $14,071 92%
Corporate notes available for sale 4,091 17 4,091 17 - - - -
FHLB stock 1,354 5 1,354 5 1,260 8 1,260 8
-------------------------------------------------------------------
Total investment securities $24,425 100% $24,593 100% $15,332 100% $15,331 100%
===================================================================
</TABLE>
The following tables set forth the contractual maturities, carrying
values, market values and average yields for CFKY's investment securities at
September 30, 1998.
<TABLE>
<CAPTION>
At September 30, 1998
-------------------------------------------------------------------------------------------
One year or less After one to five years After five to ten years After ten years
------------------ ----------------------- ----------------------- ------------------
Carrying Average Carrying Average Carrying Average Carrying Average
value yield value yield value yield value yield
-------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agency securities held to
maturity $1,999 5.31% $13,790 6.12% $3,191 6.24% $ - -%
Corporate notes available
for sale - - - - - - 4,091 5.49
FHLB stock (1) 1,354 7.18 - - - - - -
----------------------------------------------------------------------------------------
Total $3,353 6.05% $13,790 6.12% $3,191 6.24% $4,091 5.49%
====== ======= ====== ======
<CAPTION>
At September 30, 1998
----------------------------------------------
Weighted Weighted
average life Carrying Market average
in years value value yield
----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and federal agency
securities held to maturity 4.73 $18,980 $19,148 6.06%
Corporate notes available for sale 10.25 4,091 4,091 5.49
FHLB stock N/A 1,354 1,354 7.18(1)
------- -------
Total 5.71 $24,425 $24,593 6.01%
======= =======
- --------------------
<F1> The FHLB stock has no stated maturity. Columbia Federal is required
by regulation to maintain an investment in FHLB stock. The yield
indicated is the actual yield during fiscal 1998; there is no stated
yield.
</TABLE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of
Columbia Federal's funds for use in lending and other investment activities.
In addition to deposits, Columbia Federal derives funds from FHLB advances,
interest payments and principal repayments on loans and mortgage-backed
securities, service charges and gains on the sale of assets. Loan payments
are a relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions.
Deposits. Deposits are attracted principally from within Columbia
Federal's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW")
accounts, money market accounts, passbook savings accounts and term
certificate accounts. At September 30, 1998, $14.0 million of Columbia
Federal's deposits were individual retirement accounts ("IRAs"). Interest
rates paid, maturity terms, service fees and withdrawal penalties for the
various types of accounts are established periodically by the management of
Columbia Federal based on Columbia Federal's liquidity requirements, growth
goals and interest rates paid by competitors. Columbia Federal does not use
brokers to attract deposits.
At September 30, 1998, Columbia Federal's certificates of deposit
totaled $52.8 million, or 66.4% of total deposits. Of such amount,
approximately $31.2 million in certificates of deposit mature within one
year. Based on past experience and Columbia Federal's prevailing pricing
strategies, management believes that a substantial percentage of such
certificates will renew with Columbia Federal at maturity. If there is a
significant deviation from historical experience, Columbia Federal can
utilize borrowings from the FHLB as an alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Columbia Federal at the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------
1998 1997
------------------------ ------------------------
Percent of Percent of
Amount total deposits Amount total deposits
----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $ 4,021 5.06% $ 3,952 4.38%
Money market accounts (2) 9,953 12.52 11,919 13.21
Club Accounts 64 0.08 66 0.07
Passbook savings accounts (3) 12,654 15.92 13,167 14.60
------------------------------------------------
Total transaction accounts 26,692 33.58 29,104 32.26
Certificates of deposit:
2.01 - 4.00% 42 0.05 42 0.05
4.01 - 6.00% 43,024 54.13 31,457 34.88
6.01 - 8.00% 9,726 12.24 29,592 32.81
------------------------------------------------
Total certificates of deposit 52,792 66.42 61,091 67.74
------------------------------------------------
Total deposits (4) $79,484 100.00% $90,195 100.00%
================================================
- --------------------
<F1> Columbia Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September
30, 1998 and 1997, the weighted average rates on NOW accounts were
2.24% and 2.46%, respectively.
<F2> Columbia Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. At
September 30, 1998 and 1997, the weighted average rates on money
market accounts were 2.78% and 3.06%, respectively.
<F3> Columbia Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted
average interest rate on passbook accounts was 2.75% and 3.02% at
September 30, 1998 and 1997, respectively.
<F4> IRAs are included in the various certificates of deposit balances.
IRAs totaled $14.0 million and $16.2 million as of September 30, 1998
and 1997, respectively.
</TABLE>
The following table shows rate and maturity information for Columbia
Federal's certificates of deposit as of September 30, 1998:
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
-------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00% $ 2 $ - $ - $ 40 $ 42
4.01 - 6.00% 27,191 11,738 2,352 1,743 43,024
6.01 - 8.00% 3,973 2,011 3,041 701 9,726
-------------------------------------------------------
Total $31,166 $13,749 $5,393 $2,484 $52,792
=======================================================
</TABLE>
The following table presents the amount of Columbia Federal's
certificates of deposit of $100,000 or more by the time remaining until
maturity as of September 30, 1998:
<TABLE>
<CAPTION>
Average
Amount interest rate
------ -------------
(In thousands)
<S> <C> <C>
In quarter ended
December 31, 1998 $ 309 5.24%
March 31, 1999 648 6.47
June 30, 1999 419 6.54
September 30, 1999 443 5.39
After September 30, 1999 1,503 5.93
-------------------
Total time deposits $100,000 or greater $3,322 5.98%
===================
</TABLE>
The following table sets forth Columbia Federal's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $ 90,195 $ 94,657
Deposits 135,648 59,497
Withdrawals (150,001) (67,647)
------------------------
Net increases (decreases) before interest credited (14,353) (8,150)
Interest credited 3,642 3,688
------------------------
Ending balance $ 79,484 $ 90,195
========================
Net increase (decrease) $(10,711) $ (4,462)
Percent increase (decrease) (11.88)% (4.71)%
</TABLE>
Borrowings. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati,
Columbia Federal is authorized to apply for advances from the FHLB of
Cincinnati, provided certain standards of credit-worthiness have been met.
Under current regulations, an association must meet certain qualifications
to be eligible for FHLB advances. The extent to which an association is
eligible for such advances will depend upon whether it meets the Qualified
Thrift Lender Test (the "QTL Test"). If an association meets the QTL Test,
it will be eligible for 100% of the advances it would otherwise be eligible
to receive. If an association does not meet the QTL Test, it will be
eligible for such advances only to the extent it holds specified QTL Test
assets. At September 30, 1998, Columbia Federal was in compliance with the
QTL Test.
Columbia Federal obtained advances from the FHLB of Cincinnati as set
forth in the following table:
<TABLE>
<CAPTION>
At September 30,
----------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Average balance outstanding $ - $ 417
Maximum amount outstanding at any month
end during the period - 1,000
Balance outstanding at end of period
Weighted average interest rate during the period -% 6.00%
Weighted average interest rate at end of period -
</TABLE>
Yields Earned and Rates Paid
The following table presents certain information relating to CFKY's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of customer deposits and FHLB
advances for the periods indicated. Such yields and costs are derived by
dividing annual income or expense by the average monthly balance of
interest-earning assets or interest-bearing liabilities, respectively, for
the years presented. Average balances are derived from monthly balances,
net of the allowance for losses on loans.
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Average Interest Average Interest
balance earned/paid Yield/rate balance earned/paid Yield/rate
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-bearing deposits $ 10,504 $ 512 4.87% $ 3,755 $ 197 5.25%
Investment securities (1) 18,419 1,108 6.02 14,508 854 5.89
Mortgage-backed securities 18,870 1,263 6.69 16,723 1,143 6.83
Loans receivable, net 62,388 5,392 8.64 67,405 5,802 8.61
-------------------------------------------------------------------------
Total interest-earning assets 110,181 8,275 7.51 102,391 7,996 7.81
Non-interest earning assets
Cash and amounts due from
depository institutions 542 601
Premises and equipment, net 1,621 1,566
Other nonearning assets 615 769
-------- --------
2,778 2,936
Total assets $112,959 $105,327
======== ========
Interest-bearing liabilities
NOW accounts $ 4,265 $ 100 2.34% $ 4,068 $ 100 2.46%
Money market accounts 16,740 403 2.41 12,512 383 3.06
Passbook savings accounts 13,325 391 2.93 13,361 403 3.02
Certificates of deposit 56,911 3,297 5.79 61,646 3,540 5.74
-------- --------
Total deposits 91,241 91,587
FHLB advances - - - 417 25 6.00
-------------------------------------------------------------------------
Total interest-bearing liabilities 91,241 4,191 4.59 92,004 4,451 4.84
Non-interest bearing liabilities 1,103 448
-------- --------
Total liabilities 92,344 92,452
Retained earnings 20,615 12,875
-------- --------
Total liabilities and retained earnings $112,959 $105,327
======== ========
Net interest income; interest rate spread $4,084 2.92% $3,545 2.97%
====== ====== ====== ======
Net interest margin (net interest income as
a percent of average interest-earning assets) 3.71% 3.46%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 120.76% 111.29%
====== ======
Amortized loan fees included in interest income $ 256 $ 191
====== ======
- --------------------
<F1> Includes dividends on FHLB stock.
</TABLE>
The following table sets forth, at the date indicated, the weighted
average yields earned on CFKY's interest-earning assets, the weighted
average interest rates paid on interest-bearing liabilities, the interest
rate spread and the net interest margin on interest-earning assets. Such
yields and costs are derived by dividing income or expense by the average
balances of assets or liabilities, respectively.
<TABLE>
<CAPTION>
At September 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Weighted average yield on loan portfolio 8.12% 8.23%
Weighted average yield on mortgage-backed securities 6.64 6.81
Weighted average yield on investment securities 6.01 5.73
Weighted average yield on interest-bearing deposits 5.17 5.36
Weighted average yield on all interest-earning assets 7.26 7.44
Weighted average interest rate on deposits 4.48 4.94
Weighted average interest rate on FHLB advances - -
Weighted average interest rate paid on all
interest-bearing liabilities 4.48 4.94
Interest rate spread (spread between weighted
average interest rate on all interest-bearing
assets and all interest-bearing liabilities) 2.78 2.50
</TABLE>
The table below describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected CFKY's interest income and expense during the
years indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume) and (iii)
total changes in rate and volume. The combined effects of changes in both
volume and rate, which cannot be separately identified, have been allocated
proportionately to the change due to volume and the change due to rate:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------------- ----------------------------------------
Increase Increase Total Increase Increase Total
(decrease) (decrease) increase (decrease) (decrease) increase
due to rate due to volume (decrease) due to rate due to volume (decrease)
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $(14) $328 $314 $ (3) $ (39) $ (42)
Investment securities 21 233 254 34 (56) (22)
Mortgage-backed securities (25) 145 120 8 (79) (71)
Loans receivable 21 (430) (409) 7 (74) (67)
-----------------------------------------------------------------------------
Total interest income 3 276 279 46 (248) (202)
-----------------------------------------------------------------------------
Interest expense attributable to:
NOW accounts (5) 5 - (1) (8) (9)
Money market accounts (81) 101 20 (10) (60) (70)
Passbook savings accounts (11) (1) (12) (7) (2) (9)
Certificates of deposit 30 (273) (243) 40 (104) (64)
FHLB Advances - (25) (25) - 25 25
-----------------------------------------------------------------------------
Total interest expense (67) (193) (260) 22 (149) (127)
-----------------------------------------------------------------------------
Increase (decrease) in net
interest income $ 70 $469 $539 $ 24 $ (99) $ (75)
=============================================================================
</TABLE>
Asset and Liability Management
Columbia Federal, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, Columbia Federal uses the Net
Portfolio Value ("NPV") methodology recently adopted by the OTS as part of
its capital regulations. Although the implementation of such regulation has
been delayed and Columbia Federal is not subject to the NPV regulation
because the regulation does not apply to institutions with less than $300
million in assets and risk-based capital in excess of 12%, the application
of the NPV methodology may illustrate Columbia Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing and other liabilities. The
application of the methodology attempts to quantify interest rate risk as
the change in the NPV which would result from a theoretical 200 basis point
(1 basis point equals .01%) change in market interest rates. Both a 200
basis point increase in market interest rates and a 200 basis point decrease
in market interest rates are considered. If the NPV would decrease more
than 2% of the present value of the institution's assets with either an
increase or a decrease in market rates, the institution must deduct 50% of
the amount of the decrease in excess of such 2% in the calculation of the
institution's risk-based capital.
At September 30, 1998, 2% of the present value of Columbia Federal's
assets was approximately $2.5 million. Because the interest rate risk of a
200 basis point increase in market interest rates (which was greater than
the interest rate risk of a 200 basis point decrease) was $4.2 million at
September 30, 1998, Columbia Federal would have been required to deduct
approximately $850,000 (50% of the approximate $1.7 million difference) from
its capital in determining whether Columbia Federal met its risk-based
capital requirement if the NPV regulation had applied to Columbia Federal.
Regardless of such reduction, however, Columbia Federal's risk-based capital
at September 30, 1998, would still have exceeded the regulatory requirement
by $25.8 million.
Presented below, as of September 30, 1998, is an analysis of Columbia
Federal's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts of 100 basis points in market interest rates.
The table also contains the policy limits set by the Board of Directors of
Columbia Federal as the maximum change in NPV that the Board of Directors
deems advisable in the event of various changes in interest rates. Such
limits have been established with consideration of the dollar impact of
various rate changes and Columbia Federal's strong capital position.
As illustrated in the table, Columbia Federal's NPV is more sensitive
to rising rates than declining rates. Such difference in sensitivity occurs
principally because, as rates rise, borrowers do not prepay fixed-rate loans
as quickly as they do when interest rates are declining. As a result, in a
rising interest rate environment, the amount of interest Columbia Federal
would receive on its loans would increase relatively slowly as loans are
slowly prepaid and new loans at higher rates are made. Moreover, the
interest Columbia Federal would pay on its deposits would increase rapidly
because Columbia Federal's deposits generally have shorter periods to
repricing. Assumptions used in calculating the amounts in this table are
OTS assumptions.
<TABLE>
<CAPTION>
At September 30, 1998
-------------------------
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
- -------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
+400 (60)% $(9,246) (30)%
+300 (45) (6,695) (22)
+200 (30) (4,168) (14)
+100 (15) (1,869) (6)
- - - -
-100 (15) 1,556 5
-200 (30) 3,367 11
-300 (45) 5,567 18
-400 (60) 7,853 26
</TABLE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. Further, in
the event of a change in interest rates, expected rates of prepayment on
loans and mortgage-backed securities and early withdrawal levels from
certificates of deposit would likely deviate significantly from those
assumed in making the risk calculations.
If interest rates rise from the recent historically low levels,
Columbia Federal's net interest income will be negatively affected.
Moreover, rising interest rates may negatively affect Columbia Federal's
earnings due to diminished loan demand. Although Columbia Federal
originates loans in accordance with secondary market guidelines in order to
be able to sell loans if necessary for interest rate risk management, many
of the loans are not readily saleable because they are secured by non-owner
occupied real estate. Moreover the sale of loans would further reduce net
income as the proceeds from the sale would be directed into lower yielding
investments.
As part of management's overall strategy to manage interest rate risk,
Columbia Federal commenced the origination of adjustable-rate mortgage loans
("ARMs") in 1982. At September 30, 1998, the portfolio included $3.7
million of three-year ARMs, and $6.2 million of one-year ARMs. In addition,
at September 30, 1998, $9.4 million of Columbia Federal's mortgage-backed
and related securities were backed by mortgages with adjustable rates. On
the deposit side, management has sought to lengthen the average maturity of
its liabilities by adopting a tiered pricing program for its certificates of
deposit, which provides higher rates of interest on its longer term
certificates in order to encourage depositors to invest in certificates with
longer maturities.
Competition
Columbia Federal competes for deposits with other savings
associations, commercial banks and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, Columbia Federal competes
with other savings associations, commercial banks, consumer finance
companies, credit unions, leasing companies, mortgage companies and other
lenders. Columbia Federal competes for loan originations primarily through
the interest rates and loan fees offered and through the efficiency and
quality of services provided. Competition is affected by, among other
things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels and other factors which
are not readily predictable.
The size of financial institutions competing with Columbia Federal is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching
and acquisitions. Such increased competition may have an adverse effect
upon Columbia Federal.
Year 2000 Readiness
Because the Bank's operations rely extensively on computer systems,
the Bank is addressing problems associated with the possibility that
computer systems will not recognize the year 2000 ("Y2K") correctly. The
Bank has developed a Year 2000 Plan, which was presented to the Board of
Directors in 1997. The Board of Directors appointed a Year 2000 Committee,
which reports to the Board of Directors quarterly.
The Bank relies primarily on third-party vendors for its computer
output and processing, as well as other significant functions and services,
such as securities safekeeping services, ATM service, and wire transfers.
The Year 2000 Committee is working with the vendors to assess their Y2K
readiness. Based upon an initial assessment, the Board of Directors
believes that with planned modifications to existing software and hardware
and planned conversions to new software and hardware, the third-party
vendors are taking the appropriate steps to ensure that critical systems
will function properly. The planned modifications and conversions should be
completed and tested by June 30, 1999.
All date-dependent equipment and related software throughout the Bank
have been inventoried and tested for Y2K capabilities. Equipment identified
as not being Y2K compatible has been replaced. The Bank has estimated that
the cost for new hardware and software will be approximately $15,000.
If the modifications and conversions by both third-party vendors and
the Bank are not completed on a timely basis or if they fail to function
properly, the operations and financial condition of the Company could be
materially adversely affected. The Bank is developing contingency plans for
continued operations in the event of system failure.
In addition, financial institutions may experience increases in
problem loans and credit losses in the event that borrowers fail to prepare
properly for Y2K, and higher funding costs could result if consumers react
to publicity about the issue by withdrawing deposits. The Bank is assessing
such risks among its customers. The Company could also be materially
adversely affected if other third-parties, such as governmental agencies,
clearing houses, telephone companies, utilities and other service providers
fail to prepare properly. The Bank is therefore attempting to assess these
risks and take action to minimize their effect.
Personnel
As of September 30, 1998, Columbia Federal had 36 full-time employees.
Columbia Federal believes that relations with its employees are good.
Columbia Federal offers health and life insurance benefits, a 401(k) plan
and a defined benefit pension plan. None of the employees of Columbia
Federal are represented by a collective bargaining unit.
REGULATION
General
As a savings association organized under the laws of the United
States, Columbia Federal is subject to regulatory oversight by the OTS.
Because Columbia Federal's deposits are insured by the FDIC, Columbia
Federal is also subject to examination and regulation by the FDIC. Columbia
Federal must file periodic reports with the OTS concerning its activities
and financial condition. Examinations are conducted periodically by the OTS
to determine whether Columbia Federal is in compliance with various
regulatory requirements and is operating in a safe and sound manner.
Columbia Federal is a member of the FHLB of Cincinnati.
CFKY is a savings and loan holding company within the meaning of the
Home Owners Loan Act, as amended (the "HOLA"). Consequently, CFKY is
subject to regulation, examination and oversight by the OTS as the holding
company of Columbia Federal and is required to submit periodic reports to
the OTS. Because CFKY is a corporation organized under Ohio law, CFKY is
also subject to the provisions of the Ohio Revised Code applicable to
corporations generally.
Congress is considering legislation to eliminate the federal savings
association charter and the separate federal regulation of savings
associations. The Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial
institutions. Pursuant to such legislation, Congress may eliminate the OTS
and Columbia Federal may be regulated under federal law as a bank or be
required to change its charter. Such change in regulation or charter would
likely change the range of activities in which Columbia Federal may engage
and would probably subject Columbia Federal to more regulation by the FDIC.
In addition, CFKY may become subject to different holding company
regulations, including separate capital requirements. At this time, CFKY
cannot predict whether or when Congress may actually pass legislation
regarding CFKY's and Columbia Federal's regulatory requirements or charter.
Although such legislation may change or limit the activities in which
either CFKY or Columbia Federal may engage, it is not anticipated that the
current activities of CFKY or Columbia Federal will be materially affected
by such changes or limitations.
OTS Regulations
General. The OTS is an office in the Department of the Treasury and
is responsible for the regulation and supervision of all savings
associations the deposits of which are insured by the FDIC in the SAIF and
all federally chartered savings institutions. The OTS issues regulations
governing the operation of savings associations, regularly examines such
institutions and imposes assessments on savings associations based on their
asset size to cover the costs of this supervision and examination. It also
promulgates regulations that prescribe the permissible investments and
activities of federally chartered savings associations, including the type
of lending that such associations may engage in and the investments in real
estate, subsidiaries and securities they may make. The OTS also may
initiate enforcement actions against savings associations and certain
persons affiliated with them for violations of laws or regulations or for
engaging in unsafe or unsound practices. If the grounds provided by law
exist, the OTS may appoint a conservator or receiver for a savings
association.
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending
laws. These laws govern, among other things, truth-in-lending disclosure,
equal credit opportunity, fair credit reporting and community reinvestment.
Failure to abide by federal laws and regulations governing community
reinvestment could limit the ability of an association to open a new branch
or engage in a merger transaction. Community reinvestment regulations
evaluate how well and to what extent an institution lends and invests in its
designated service area, with particular emphasis on low-to-moderate income
areas and borrowers. Columbia Federal has received a "Satisfactory"
examination rating under those regulations.
Regulatory Capital Requirements. Columbia Federal is required by OTS
regulations to meet certain minimum capital requirements. These
requirements call for tangible capital of 1.5% of adjusted total assets,
core capital (which for Columbia Federal is equal to tangible capital) of 3%
of adjusted total assets, and risk-based capital (which for Columbia Federal
consists of core capital and general valuation allowances) equal to 8% of
risk-weighted assets. Assets and certain off balance sheet items are
weighted at percentage levels ranging from 0% to 100% depending on their
relative risk.
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and
exceed an acceptable level of risk will be required to maintain core capital
of from 4% to 5%, depending on the association's examination rating and
overall risk. Columbia Federal does not anticipate that it will be
adversely affected if the core capital requirement regulation is amended as
proposed. Columbia Federal's core capital ratio at September 30, 1998, was
22.3%.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates
on the value of its portfolio as determined under the methodology of the
OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
such excess exposure from its total capital when determining its risk-based
capital. In general, an association with less than $300 million in assets
and a risk-based capital ratio in excess of 12% will not be subject to the
interest rate risk component, and Columbia Federal currently qualifies for
such exemption. Pending implementation of the interest rate risk component,
the OTS has the authority to impose a higher individualized capital
requirement on any savings association it deems to have excess interest rate
risk. The OTS also may adjust the risk-based capital requirement on an
individualized basis to take into account risks due to concentrations of
credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution
is subject to more restrictive and numerous mandatory or discretionary
regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition,
the OTS can downgrade an association's designation notwithstanding its
capital level, based on less than satisfactory examination ratings in areas
other than capital or, after notice and an opportunity for hearing, if the
institution is deemed to be in an unsafe or unsound condition or to be
engaging in an unsafe or unsound practice. Each undercapitalized
association must submit a capital restoration plan to the OTS within 45 days
after it becomes undercapitalized. Such institution will be subject to
increased monitoring and asset growth restrictions and will be required to
obtain prior approval for acquisitions, branching and engaging in new lines
of business. A critically undercapitalized institution must be placed in
conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. Columbia
Federal's capital at September 30, 1998, met the standards for the highest
category, a "well-capitalized" association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having
control of the institution if, after such distribution or payment, the
institution would be undercapitalized. In addition, each company
controlling an undercapitalized institution must guarantee that the
institution will comply with the terms of an OTS-approved capital plan until
the institution has been adequately capitalized on an average during each of
four consecutive calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited
to the lesser of (a) an amount equal to 5% of the institution's total assets
at the time the institution became undercapitalized or (b) the amount which
is necessary to bring the institution into compliance with all capital
standards applicable to such institution at the time the institution fails
to comply with its capital restoration plan.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions according to ratings of associations based on their capital
level and supervisory condition. Capital distributions, for purposes of
such regulation, include, without limitation, payments of cash dividends,
repurchases and certain other acquisitions by an association of its shares
and payments to stockholders of another association in an acquisition of
such other association.
For purposes of the capital distribution regulations, each institution
is categorized into one of three tiers. The first rating category is Tier
1, consisting of associations that, before and after the proposed capital
distribution, meet their fully phased-in capital requirement. Associations
in this category may make capital distributions during any calendar year
equal to the greater of (i) 100% of its net income, current year-to-date,
plus 50% of the amount by which the lesser of the association's tangible,
core or risk-based capital exceeds its capital requirement for such capital
component, as measured at the beginning of the calendar year, or (ii) the
amount authorized for a Tier 2 association. The second category, Tier 2,
consists of associations that, before and after the proposed capital
distribution, meet their current minimum capital requirement, but not their
fully phased-in capital requirement, as such requirements are defined by OTS
regulations. Associations in this category may make capital distributions
up to 75% of their net income over the most recent four quarters. Tier 3
associations do not meet their current minimum capital requirement and must
obtain OTS approval of any capital distribution. A Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be
treated as a Tier 2 or a Tier 3 association.
Columbia Federal meets the requirements for a Tier 1 association and
has not been notified of any need for more than normal supervision.
Columbia Federal is prohibited from declaring or paying any dividends or
from purchasing any of its stock if, as a result of such dividend or such
purchase, Columbia Federal's net worth would be reduced below the amount
required to be maintained for the liquidation account established in
connection with the conversion. As a subsidiary of CFKY, Columbia Federal
is required to give the OTS 30 days' notice prior to declaring any dividend
on its common shares. The OTS may object to the dividend during that 30-day
period based on safety and soundness concerns. Moreover, the OTS may
prohibit any capital distribution otherwise permitted by regulation if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time
deposits, bankers' acceptances and specified United States government, state
or federal agency obligations) equal to a monthly average of not less than
4% of its net withdrawable savings deposits plus borrowings payable in one
year or less. Monetary penalties may be imposed upon member institutions
failing to meet the liquidity requirement. The eligible liquidity of
Columbia Federal at September 30, 1998, was approximately $27.2 million, or
30.4%, and exceeded the 4% liquidity requirement by approximately $23.6
million, or 26.4%.
Qualified Thrift Lender Test. Savings associations are required to
meet the QTL Test. Prior to September 30, 1996, the QTL Test required
savings associations to maintain a specified level of investments in assets
that are designated as qualifying thrift investments ("QTI"), which are
generally related to domestic residential real estate and manufactured
housing and include stock issued by any FHLB, the FHLMC or the FNMA. Under
this test 65% of an institution's "portfolio assets" (total assets less
goodwill and other intangibles, property used to conduct business, and 20%
of liquid assets) must consist of QTI on a monthly average basis in 9 out of
every 12 months. Congress created a second QTL Test, effective September
30, 1996, pursuant to which a savings association may also qualify as a QTL
thrift if at least 60% of the institution's assets (on a tax basis) consist
of specified assets (generally loans secured by residential real estate or
deposits, educational loans, cash, and certain governmental obligations).
The OTS may grant exceptions to the QTL Test under certain circumstances.
If a savings association fails to meet the QTL Test, the association and its
holding company become subject to certain operating and regulatory
restrictions. A savings association that fails to meet the QTL Test will
not be eligible for new FHLB advances. At September 30, 1998, Columbia
Federal met the QTL Test.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association may lend to one borrower to an amount equal to
15% of the savings association's total capital under the regulatory capital
requirements plus any additional loan reserve not included in total capital.
A savings association may loan to one borrower an additional amount not to
exceed 10% of total capital plus additional reserves if the additional loan
amount is fully secured by certain forms of "readily marketable collateral."
Real estate is not considered "readily marketable collateral." Certain
types of loans are not subject to these limits. In applying these limits,
loans to certain borrowers may be aggregated. Notwithstanding the specified
limits, an association may lend to one borrower up to $500,000 "for any
purpose."
Transactions with Insiders and Affiliates. Loans to executive
officers, directors and principal shareholders and their related interests
must conform to the lending limits on loans to one borrower and the total of
such loans cannot exceed the association's total regulatory capital plus
additional loan reserves (or 200% of such capital amount for qualifying
institutions with less than $100 million in assets). Most loans to
directors, executive officers and principal shareholders must be approved in
advance by a majority of the "disinterested" members of the board of
directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions to the general public or as offered to all employees
in a company-wide benefit program. Loans to executive officers are subject
to additional limitations. Columbia Federal was in compliance with such
restrictions at September 30, 1998.
Savings associations must comply with Sections 23A and 23B of the
Federal Reserve Act (the "FRA") pertaining to transactions with affiliates.
An affiliate of a savings association is any company or entity that
controls, is controlled by or is under common control with the savings
association. CFKY is an affiliate of Columbia Federal. Generally, Sections
23A and 23B of the FRA (i) limit the extent to which the savings institution
or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such institution's capital stock and
surplus, (ii) limit the aggregate of all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and
(iii) require that all such transactions be on terms substantially the same,
or at least as favorable to the institution, as those provided in
transactions with a non-affiliate. The term "covered transaction" includes
the making of loans, purchase of assets, issuance of a guarantee and other
similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Columbia Federal
was in compliance with these requirements and restrictions at September 30,
1998.
Holding Company Regulation. CFKY is a savings and loan holding
company within the meaning of the Home Owners' Loan Act (the "HOLA"). As
such, CFKY has registered with the OTS and is be subject to OTS regulations,
examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding
company without prior approval of the OTS, or from acquiring or retaining
more than 5% of the voting shares of a savings association or holding
company thereof which is not a subsidiary. Under certain circumstances, a
savings and loan holding company is permitted to acquire, with the approval
of the OTS, up to 15% of the previously unissued voting shares of an
undercapitalized savings association for cash without such savings
association being deemed to be controlled by the holding company. Except
with the prior approval of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other
savings and loan holding company.
As a unitary savings and loan holding company, CFKY generally has no
restrictions on its activities. Such companies are the only financial
institution holding companies that may engage in commercial, securities and
insurance activities without limitation. Congress is considering
legislation which may limit CFKY's ability to engage in such activities and
CFKY cannot predict if and in what form these proposals might become law.
However, such limits would not impact CFKY's initial activity of holding
stock of Columbia Federal. The broad latitude to engage in activities under
current law can be restricted, however, if the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association. The
OTS may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii)
any activities of the savings association that might create a serious risk
that the liabilities of the holding company and its affiliates may be
imposed on the savings association. Notwithstanding the foregoing rules as
to permissible business activities of a unitary savings and loan holding
company, if the savings association subsidiary of a holding company fails to
meet the QTL Tests, then such unitary holding company would become subject
to the activities restrictions applicable to multiple holding companies. At
September 30, 1998, Columbia Federal met the QTL Tests.
If CFKY were to acquire control of another savings institution other
than through a merger or other business combination with Columbia Federal,
CFKY would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings association
meets the QTL Test, the activities of CFKY and any of its subsidiaries
(other than Columbia Federal or other subsidiary savings associations) would
thereafter be subject to further restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings institution shall commence, or
shall continue after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity other than (i) furnishing or
performing management services for a subsidiary savings institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing
or liquidating assets owned by or acquired from a subsidiary savings
institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust,
(vi) those activities previously directly authorized by federal regulation
as of March 5, 1987, to be engaged in by multiple holding companies, or
(vii) those activities authorized by the FRB as permissible for bank holding
companies, unless the OTS by regulation prohibits or limits such activities
for savings and loan holding companies. Those activities described in (vii)
above must also be approved by the OTS prior to being engaged in by a
multiple holding company.
The OTS may also approve an acquisition resulting in the formation of
a multiple savings and loan holding company that controls savings
associations in more than one state only, if the multiple savings and loan
holding company involved controls a savings association which operated a
home or branch office in the state of the association to be acquired as of
March 5, 1987, or if the laws of the state in which the institution to be
acquired is located specifically permit institutions to be acquired by
state-chartered institutions or savings and loan holding companies located
in the state where the acquiring entity is located (or by a holding company
that controls such state-chartered savings institutions). As under prior
law, the OTS may approve an acquisition resulting in a multiple savings and
loan holding company controlling savings associations in more than one state
in the case of certain emergency thrift acquisitions. Bank holding
companies have had more expansive authority to make interstate acquisitions
than savings and loan holding companies since August 1995.
FDIC Regulations
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally
insured banks and thrifts and safeguards the safety and soundness of the
banking and thrift industries. The FDIC administers two separate insurance
funds, the BIF for commercial banks and state savings banks and the SAIF for
savings associations. The FDIC is required to maintain designated levels of
reserves in each fund. Columbia Federal is a member of the SAIF and its
deposit accounts are insured by the FDIC up to the prescribed limits. The
FDIC has examination authority over all insured depository institutions,
including Columbia Federal, and has authority to initiate enforcement
actions against federally insured savings associations if the FDIC does not
believe the OTS has taken appropriate action to safeguard safety and
soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary
to restore the fund's ratio of reserves to insured deposits to its target
level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system
for both SAIF and BIF members. Under this system, assessments vary based on
the risk the institution poses to its deposit insurance fund. The risk
level is determined based on the institution's capital level and the FDIC's
level of supervisory concern about the institution.
Because of the differing reserve levels of the funds, deposit
insurance assessments paid by healthy savings associations were reduced
significantly below the level paid by healthy savings associations effective
in mid-1995. Federal legislation, which was effective September 30, 1996,
provided for the recapitalization of the SAIF by means of a special
assessment of $.657 per $100 of SAIF deposits held at March 31, 1995, in
order to increase SAIF reserves to the level required by law. Certain banks
holding SAIF deposits are required to pay the same special assessment on 80%
of deposits at March 31, 1995. In addition, the cost of prior thrift
failures, which had previously been paid only by SAIF members, will also be
paid by BIF members.
Columbia Federal is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. Columbia Federal had $90.0
million in SAIF-insured deposits at March 31, 1995. Columbia Federal paid a
special assessment of $592,000 in November 1996, which was accounted for and
recorded as of September 30, 1996. This assessment was tax-deductible but
reduced earnings for the year ended September 30, 1996.
FRB Regulations
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to
$46.5 million (subject to an exemption of $4.9 million), and of 10% of net
transaction accounts in excess of $46.5 million. At September 30, 1998,
Columbia Federal was in compliance with its reserve requirements.
Federal Home Loan Banks
The FHLBs provide credit to their members in the form of advances.
Columbia Federal is a member of the FHLB of Cincinnati and must maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal
to the greater of 1% of the aggregate outstanding principal amount of
Columbia Federal's residential mortgage loans, home purchase contracts, and
similar obligations at the beginning of each year, and 5% of its advances
from the FHLB. Columbia Federal is in compliance with this requirement with
an investment in stock of the FHLB of Cincinnati of $1.4 million at
September 30, 1998.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed,
whole first mortgage loans on improved residential property or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the U.S. Government or an agency thereof; deposits in any
FHLB; or other real estate related collateral (up to 30% of the member
association's capital) acceptable to the applicable FHLB, if such collateral
has a readily ascertainable value and the FHLB can perfect its security
interest in the collateral.
Each FHLB is required to establish standards of community investment
or service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending
to first-time home buyers. All long-term advances by each FHLB must be made
only to provide funds for residential housing finance.
TAXATION
Federal Taxation
CFKY and Columbia Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the
regular income tax, CFKY and Columbia Federal may be subject to an
alternative minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of
a corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986.
In addition, 75% of the amount by which a corporation's "adjusted current
earnings" exceeds its alternative minimum taxable income computed without
regard to this preference item and prior to reduction by net operating
losses, is included in alternative minimum taxable income. Net operating
losses can offset no more than 90% of alternative minimum taxable income.
The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years.
However, the Taxpayer Relief Act of 1997 repealed the alternative minimum
tax for certain "small corporations" for tax years beginning after December
31, 1997. A corporation initially qualifies as a small corporation if it
had average gross receipts of $5,000,000 or less for the three tax years
ending with its first tax year beginning after December 31, 1996. Once a
corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
Columbia Federal's average gross receipts for the three tax years
ending on September 30, 1998, is $8.2 million, and as a result, Columbia
Federal does not qualify as a small corporation exempt from the alternative
minimum tax. CFKY's average gross receipts for the three tax years ending on
September 30, 1998, is $112,000, and as a result, Columbia Financial of
Kentucky, Inc. does qualify as a small corporation exempt from the
alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, including Columbia Federal, were allowed deductions for
bad debts under methods more favorable than those granted to other
taxpayers. Qualified thrift institutions could compute deductions for bad
debts using either the specific charge off method of Section 166 of the
Code, or one of the two reserve methods of Section 593 of the Code. The
reserve methods under Section 593 of the Code permitted a thrift institution
annually to elect to deduct bad debts under either (i) the "percentage of
taxable income" method applicable only to thrift institutions, or (ii) the
"experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of
its taxable income (determined without regard to this deduction and with
additional adjustments). Under the experience method, a thrift institution
was generally allowed a deduction for an addition to its bad debt reserve
equal to the greater of (i) an amount based on its actual average experience
for losses in the current and five preceding taxable years, or (ii) an
amount necessary to restore the reserve to its balance as of the close of
the base year. A thrift institution could elect annually to compute its
allowable addition to bad debt reserves for qualifying loans either under
the experience method or the percentage of taxable income method. For tax
years 1995, 1994 and 1993, Columbia Federal used the percentage of taxable
income method because such method provided a higher bad debt deduction than
the experience method.
The Small Business Act eliminated the percentage of taxable income
reserve method of accounting for bad debts by thrift institutions, effective
for taxable years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated
as large banks are required to use only the specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent
of the Secretary of the Treasury. Section 481(a) of the Code requires
certain amounts to be recaptured with respect to such change. Generally,
the amounts to be recaptured will be determined solely with respect to the
"applicable excess reserves" of the taxpayer. The amount of the applicable
excess reserves will be taken into account ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject
to the residential loan requirement described below. In the case of a
thrift institution that becomes a large bank, the amount of the
institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses
on nonqualifying loans (all other types of loans) as of the close of its
last taxable year beginning before January 1, 1996, over (ii) the balances
of such reserves as of the close of its last taxable year beginning before
January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift
institution that becomes a small bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of
its reserve for losses on qualifying real property loans and its reserve
for losses on nonqualifying loans as of the close of its last taxable year
beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been
at the close of its last year beginning before January 1, 1996, had the
thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a
tax year, the recapture of the applicable excess reserves otherwise required
to be taken into account as a Code Section 481(a) adjustment for the year
will be suspended. A thrift meets the residential loan requirement if, for
the tax year, the principal amount of residential loans made by the thrift
during the year is not less then its base amount. The "base amount"
generally is the average of the principal amounts of the residential loans
made by the thrift during the six most recent tax years beginning before
January 1, 1996. A residential loan is a loan as described in Section
7701(a)(19)(C)(v) (generally a loan secured by residential real and church
property and certain mobile homes), but only to the extent that the loan is
made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act which require recapture
in the case of certain excessive distributions to shareholders. The pre-
1988 reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (excess to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated
earnings and profits; second, out of the pre-1988 reserves; and third, out
of such other accounts as may be proper. To the extent a distribution by
Columbia Federal to CFKY is deemed paid out of its pre-1988 reserves under
these rules, the pre-1988 reserves would be reduced and Columbia Federal's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such
amount in its gross income, equals the amount deemed paid out of the pre-
1988 reserves. As of September 30, 1998, Columbia Federal's pre-1988
reserves for tax purposes totaled approximately $2.7 million. Columbia
Federal believes it had approximately $11.1 million of accumulated earnings
and profits for tax purposes as of September 30, 1998, which would be
available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be
made as to whether Columbia Federal will have current or accumulated
earnings and profits in subsequent years.
The tax returns of Columbia Federal have been audited or closed
without audit through fiscal year 1993. In the opinion of management, any
examination of open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of Columbia
Federal.
Ohio Taxation
Under Ohio law, Columbia Federal would be subject to the special Ohio
corporation franchise tax applicable only to financial institutions if,
among other factors, it has sufficient nexus with Ohio for such tax to be
permissible under the United States Constitution. Columbia Federal believes
that presently it does not have such nexus with Ohio and is not subject to
the Ohio tax. Because it is a corporation organized under Ohio law, CFKY is
subject to the Ohio corporation franchise tax, which, as applied to CFKY, is
a tax measured by both net earnings and net worth. The tax liability is the
greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% of
taxable net worth. For tax years beginning after December 31, 1998, the
rate of tax is the greater of (i) 5.1% on the first $50,000 of computed
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000
or (ii) .400% times taxable net worth. Under these alternative measures of
computing tax liability, the states to which a taxpayer's adjusted total net
income and adjusted total net worth are apportioned or allocated are
determined by complex formulas. The minimum tax is $50 per year.
A special litter tax is also applicable to all corporations, including
CFKY, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the
litter tax is equal to .11% of the first $50,000 of computed Ohio taxable
income and .22% of computed Ohio taxable income in excess of $50,000. If
the franchise tax is paid on the net worth basis, the litter tax is equal to
.014% times taxable net worth.
Kentucky Taxation
The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. However, CFKY (on an unconsolidated basis) must pay a
Kentucky state income tax, as well as a tax on capital. The tax on income
is 4.0% for the first $25,000 of taxable income, 5.0% for the next $25,000,
6.0% for the next $50,000, 7.0% for the next $150,000 and 8.25% for all
income over $250,000. The tax on capital is .0021 times the capital
employed.
Columbia Federal is subject to an annual Kentucky ad valorem tax.
Assessed at the beginning of each calendar year, this tax is 0.1% of
Columbia Federal's savings accounts, common stock, capital and retained
income with certain deductions allowed for amounts borrowed by depositors
and for securities guaranteed by the U.S. Government or certain of its
agencies. During the year ended September 30, 1998, the amount of such
expense for Columbia Federal was $89,000.
Item 2. Description of Property
The following table sets forth certain information at September 30,
1998, regarding the properties on which the main office and the branch
offices of Columbia Federal are located:
<TABLE>
<CAPTION>
Owned Date Square Net
Location or leased acquired footage book value(1)
- ------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
2497 Dixie Highway
Ft. Mitchell, Kentucky 41017 Owned 1957 8,536 $248
Branch Offices:
Pike Street and Lee Street
Covington, Kentucky 41011 Owned 1937 4,520 121
612 Buttermilk Pike
Crescent Springs, Kentucky 41017 Owned 1981 1,848 49
3522 Dixie Highway
Erlanger, Kentucky 41018 Owned 1981 2,392 21
7550 Dixie Highway
Florence, Kentucky 41042 Owned 1996 3,025 585
- --------------------
<F1> At September 30, 1998, Columbia Federal's office premises and
equipment had a total net book value of $1.6 million. For additional
information regarding Columbia Federal's office premises and
equipment, see Note 8 of Notes to the Financial Statements.
</TABLE>
Item 3. Legal Proceedings
Neither CFKY nor Columbia Federal is presently involved in any legal
proceedings of a material nature. From time to time, Columbia Federal is a
party to legal proceedings incidental to its business to enforce its
security interest in collateral pledged to secure loans made by Columbia
Federal.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There were 2,671,450 common shares of CFKY outstanding on December 2,
1998, held of record by approximately 1,404 shareholders. Price information
with respect to CFKY's common shares is quoted on The Nasdaq National Market
("Nasdaq") under the symbol "CFKY." The high and low bids for the common
shares of CFKY, as quoted by Nasdaq, and dividends declared per common share
between April 15, 1998, the date of completion of the Conversion, and
September 30, 1998, are set forth below. Such amounts do not include retail
markups, markdowns or commissions.
<TABLE>
<CAPTION>
09/98 06/98
----- -----
<S> <C> <C>
Dividends Declared $ .07 $ N/A
High Bid During Quarter 15.00 17.75
Low Bid During Quarter $11.50 $10.00(1)
- --------------------
<F1> Common Shares of CFKY were sold in connection with the Conversion for
$10.00 per share.
</TABLE>
In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings associations.
Under OTS regulations applicable to converted savings associations,
Columbia Federal is not permitted to pay a cash dividend on its common
shares if the regulatory capital of Columbia Federal would, as a result of
the payment of such dividend, be reduced below the amount required for the
liquidation account (which was established for the purpose of granting a
limited priority claim on the assets of Columbia Federal, in the event of a
complete liquidation, to those members of Columbia Federal before the
Conversion who maintain a savings account at Columbia Federal after the
Conversion) or applicable regulatory capital requirements prescribed by the
OTS.
OTS regulations applicable to all savings associations provide that a
savings association which immediately prior to, and on a pro forma basis
after giving effect to, a proposed capital distribution (including a
dividend) has total capital (as defined by OTS regulations) that is equal to
or greater than the amount of its capital requirements is generally
permitted without OTS approval (but subsequent to 30 days' prior notice to
the OTS) to make capital distributions, including dividends, during a
calendar year in an amount not to exceed the greater of (1) 100% of its net
earnings to date during the calendar year, plus an amount equal to one-half
the amount by which its total capital to assets ratio exceeded its required
capital to assets ratio at the beginning of the calendar year, or (2) 75% of
its net earnings for the most recent four-quarter period. Savings
associations with total capital in excess of the capital requirements that
have been notified by the OTS that they are in need of more than normal
supervision will be subject to restrictions on dividends. A savings
association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without prior approval of
the OTS. Columbia Federal currently meets all of its regulatory capital
requirements and, unless the OTS determines that Columbia Federal is an
institution requiring more than normal supervision, Columbia Federal may pay
dividends in accordance with the foregoing provisions of the OTS
regulations.
Item 6. Management's Discussion and Analysis or Plan of Operation
The discussion contained under the heading "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in Columbia
Financial of Kentucky, Inc.'s 1998 Annual Report to Shareholders (the
"Annual Report") is incorporated herein by reference and attached hereto in
Exhibit 13.
Item 7. Financial Statements
The financial statements contained in the Annual Report are
incorporated herein by reference and attached hereto in exhibit 13.
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 contained in the definitive Proxy Statement for the
1999 Annual Meeting of Shareholders of CFKY (the "Proxy Statement"), which
is included as Exhibit 99.1 hereto, under the caption "PROPOSAL ONE -
ELECTION OF DIRECTORS" is incorporated herein by reference.
Item 10. Executive Compensation
The information contained in the Proxy Statement under the caption
"COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS " is incorporated herein
by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information contained in the Proxy Statement under the caption
"VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information contained in the Proxy Statement under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS - Certain Transactions" is
incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (incorporated by reference)
3.2 Code of Regulations (incorporated by reference)
10 Employment Agreement with Mr. Robert V. Lynch
(incorporated by reference)
13 Portions of 1998 Annual Report to Shareholders
21 Subsidiaries of Columbia Financial of Kentucky, Inc.
27 Financial Data Schedule
99.1 Proxy Statement for 1999 Annual Meeting of
Shareholders (incorporated by reference)
99.2 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
(b) No reports on Form 8-K were filed during the last quarter of
the fiscal year ended September 30, 1998.
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.
COLUMBIA FINANCIAL OF KENTUCKY, INC.
By /s/ Robert V. Lynch
--------------------------
Robert V. Lynch
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Robert V. Lynch By /s/ Abijah Adams
-------------------------- --------------------------
Robert V. Lynch Abijah Adams
President and Director Treasurer
(Principal Financial Officer)
Date December 23, 1998 Date December 23, 1998
By /s/ J. Robert Bluemlein By /s/ John C. Layne
-------------------------- --------------------------
J. Robert Bluemlein John C. Layne
Director Director
Date December 23, 1998 Date December 23, 1998
By /s/ Daniel T. Mistler By /s/ Kenneth R. Kelly
-------------------------- --------------------------
Daniel T. Mistler Kenneth R. Kelly
Director Chairman of the Board and Director
Date December 23, 1998 Date December 23, 1998
By /s/ Fred A. Tobergte, Sr. By /s/ Geraldine Zembrodt
-------------------------- --------------------------
Fred A. Tobergte, Sr. Geraldine Zembrodt
Director Director
Date December 23, 1998 Date December 23, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
3.1 Articles of Incorporation of Incorporated by reference to
Columbia Financial of Kentucky, Registration Statement on
Inc. Form 8-A of the Registrant
filed with the SEC on March
20, 1998, Exhibit 2(a) and
2(b).
3.2 Code of Regulations of Columbia Incorporated by reference to
Financial of Kentucky, Inc. Registration Statement on
Form 8-A of the Registrant
filed with the SEC on March
20, 1998, Exhibit 2(c).
10 Employment Agreement with Mr. Incorporated by reference to
Robert V. Lynch Registration Statement on
Form S-1 of the Registrant
filed with the SEC on
December 17, 1997,
Exhibit 10.3.
13 Portions of 1998 Annual Report
to Shareholders
21 Subsidiaries of Columbia Financial
of Kentucky, Inc.
27 Financial Data Schedule
99.1 Proxy Statement for the 1999 Incorporated by reference to
Annual Meeting of Shareholders. definitive Proxy Statement
to be filed separately.
99.2 Safe Harbor Under the Private
Securities Litigation Reform Act
of 1995
</TABLE>
EXHIBIT 13
PORTIONS OF 1998 REPORT TO SHAREHOLDERS
---------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition
and results of operation of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and the accompanying Notes to the Consolidated Financial
Statements and the other sections contained in this Annual Report.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
results of operations are also affected by the provision for loan losses,
resulting from management's assessment of the adequacy of the allowance for
loan losses, the level of its other income, the level of its other expenses,
and income tax expense.
Net income for fiscal 1998, 1997 and 1996 totaled $744,000, $553,000 and
$388,000, respectively. Net Income during such periods primarily resulted
from net interest income, which was $4.1 million, $3.5 million and $ 3.6
million, respectively, for fiscal 1998, 1997 and 1996. Net interest income
is determined by the interest rate spread and the amount of interest-earning
assets and interest-bearing liabilities. During fiscal 1998, 1997 and 1996,
the Bank's average interest rate spread was 2.92%, 2.97% and 2.94%,
respectively. In addition, at September 30, 1998, 1997, and 1996, the ratio
of interest-earning assets to interest-bearing was 120.76%, 111.29% and
110.89%, respectively.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in the forward-
looking statements. Some of the factors that could cause or contribute to
such differences are discussed herein but also include changes in the
economy and market interest rates generally and in the Company's market
area. The forward-looking statements contained herein include, but are not
limited to, those with respect to the following matters:
1. Management's determination of the amount of and adequacy of the
allowance for loan losses;
2. The effect of changes in interest rates; and
3. Management's opinion as to the effects of recent accounting
pronouncements on the Company's consolidated financial statements.
Asset and Liability Management
The Bank has sought to reduce exposure of its earnings to changes in
market interest rates by managing asset and liability maturities and
interest rates through the origination of adjustable-rate mortgage loans
("ARMs"), the purchase of adjustable-rate mortgage-backed securities and the
offering of more competitive rates on longer term deposits. Also, the Bank
has purchased shorter term and available-for-sale investments as an
additional way to reduce its exposure to changes in market rates. If the
Bank's assets mature or reprice more quickly or to a greater extent than its
liabilities, the Bank's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Bank's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Bank's net
portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling
interest rates.
As a result of the Bank's efforts, as of September 30, 1998, $7.7
million or 14.4% of the Bank's portfolio of one- to four-family residential
mortgage loans consisted of ARMs and $9.4 million or 42.3% of the Bank's
portfolio of mortgage-backed securities had adjustable rates.
With respect to liabilities, the Bank prices deposit accounts based
upon competitive factors. Pursuant to this policy, the Bank has generally
neither engaged in sporadic increases or decreases in interest rates paid
nor offered the highest rates available in its deposit market except upon
specific occasions to control deposit flow or when market conditions have
created opportunities to attract longer-term deposits. In addition, the
Bank does not pursue an aggressive growth strategy which would force the
Bank to focus exclusively on competitors' rates rather than affordability.
This policy has assisted the Bank in controlling its cost of funds.
Net Portfolio Value
Columbia Federal, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, Columbia Federal uses the Net
Portfolio Value ("NPV") methodology recently adopted by the OTS as part of
its capital regulations. Although the implementation of such regulation has
been delayed and Columbia Federal is not subject to the NPV regulation
because the regulation does not apply to institutions with less than $300
million in assets and risk-based capital in excess of 12%, the application
of the NPV methodology may illustrate Columbia Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing and other liabilities. The
application of the methodology attempts to quantify interest rate risk as
the change in the NPV which would result from a theoretical 200 basis points
(1 basis point equals .01%) change in market interest rates. Both a 200
basis point increase in market interest rates and a 200 basis point decrease
in market interest rates are considered. If the NPV would decrease more
than 2% of the present value of the institution's assets with either an
increase or a decrease in market rates, the institution must deduct 50% of
the amount of the decrease in excess of such 2% in the calculation of the
institution's risk-based capital.
Utilizing this measurement concept, at September 30, 1998, there would
have been a decrease in the Bank's NPV of approximately 3.5% of the present
value of its assets, assuming a 200 basis point increase in interest rates.
Presented below, as of September 30, 1998, is an analysis the Bank's
interest rate risk as measured by changes in NPV for instantaneous and
substantial parallel shifts of 100 basis points in market interest rates.
The table also contains the policy limits set by the Board of Directors of
the Bank as the maximum change in NPV that the Board of Directors deems
advisable in the event of various changes in interest rates. Such limits
have been established with consideration of the dollar impact of various
rate changes and the Bank's strong capital position.
As illustrated in the table, the Bank's NPV is more sensitive to
rising rates than declining rates. Such difference in sensitivity occurs
principally because, as rates rise, borrowers do not prepay fixed-rate loans
as quickly as they do when interest rates decline. As a result, in a rising
interest rate environment, the amount of interest Columbia Federal would
receive on its loans would increase relatively slowly as loans are slowly
prepaid and new loans at higher rates are made. Moreover, the interest the
Bank would pay on its deposits would increase rapidly because the Bank's
deposits generally have shorter periods to repricing. The following table
uses OTS assumptions.
<TABLE>
<CAPTION>
At September 30, 1998
--------------------------
$ Change
Change in Interest Board Limit in NPV % Change
Rates (basis points) % Change (In Thousands) in NPV
- -----------------------------------------------------------------
<S> <C> <C> <C>
+400 (60)% $(9,246) (30)%
+300 (45)% (6,695) (22)%
+200 (30)% (4,168) (14)%
+100 (15)% (1,869) (6)%
-- -- -- --
-100 (15)% 1,556 5%
-200 (30)% 3,367 11%
-300 (45)% 5,567 18%
-400 (60)% 7,853 26%
</TABLE>
Changes in Financial Condition from September 30, 1997 to September 30, 1998
General. The Company's assets totaled $117.8 million at September 30,
1998, an increase of $13.8 million, or 13.3%, from $104.0 million at
September 30, 1997. The increase resulted in primarily from a $3.1 million
increase in available-for-sale securities, a $5.9 million increase in held-
to-maturity securities and a $4.5 million increase in mortgage-backed
securities. Deposits decreased $10.7 million.
Liquid Assets and Investments. Cash and cash equivalents totaled $6.3
million at September 30, 1998, a decrease of $567,000, or 8.3%, from the
total at September 30, 1997. The decrease resulted primarily from use of
cash to purchase investment securities and mortgage-backed securities and to
fund deposit withdrawals.
The increase in investments and mortgage-backed securities were
purchased with the funds received in conjunction with the Company's initial
public stock offering (the "offering"), which was completed on April 15,
1998.
Loans Receivable. Net loans receivable equaled $62.2 million at
September 30, 1998, compared to $61.6 million at September 30, 1997, a 1%
increase, attributable to loans being originated more rapidly than loans
were being repaid.
Allowance for Losses on Loans. The Bank's allowance for loan losses
totaled $300,000 at September 30, 1998 and September 30, 1997. The
allowance represented .48% of total loans at September 30, 1998 and .49% of
total loans at September 30, 1997. As of September 30, 1998, nonperforming
loans totaled $173,000, which was .28% of total loans. As of September 30,
1997, there was $601,000 in performing loans, which was .98% of total loans
at that date. Of such amount, $473,000 was due from one borrower with 18
loans.
Although management believes that its allowance for loan losses at
September 30, 1998, was adequate based upon the available facts and
circumstances, there can be no assurances that additions to such allowance
will not be necessary in future periods, which could adversely affect the
Company's results of operations.
Deposits. Total deposits decreased by $10.7 million, to $79.5
million, at September 30, 1998, from $90.2 million at September 30, 1997.
This decrease resulted primarily from depositors withdrawing funds to
purchase common shares in the conversion. At September 30, 1998,
certificates of deposit that will mature within one year accounted for 59.0%
of Columbia Federal's deposit liabilities.
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following average balance sheet table sets forth for the periods
indicated information regarding: (i) the total dollar amounts of interest
income on interest-earning assets and the resulting average yields; (ii) the
total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs; (iii) net interest income; (iv) interest rate
spread; (v) net interest-earning assets (interest-bearing liabilities); (vi)
the net yield earned on interest-earning assets; and (vii) the ratio of
average interest-earning assets to average interest-bearing liabilities.
Information is based on average monthly balances during the periods
presented.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loans, net(1) $ 62,388 $5,392 8.64% $ 67,405 $5,802 8.61% $ 68,269 $5,869 8.60%
Mortgage-backed securities 18,870 1,263 6.69% 16,723 1,143 6.83% 17,884 1,214 6.79%
Investment securities 18,419 1,108 6.02% 14,508 854 5.89% 15,498 876 5.65%
Other interest-earning
assets 10,504 512 4.87% 3,755 197 5.25% 4,494 239 5.32%
------------------------------------------------------------------------------------------------
Total interest-earning
assets 110,181 8,275 7.51% 102,391 7,996 7.81% 106,145 8,198 7.72%
Noninterest-earning assets 2,778 2,936 2,493
-------- -------- --------
Total assets 112,959 105,327 108,638
======== ======== ========
Interest-bearing liabilities:
NOW Accounts 4,265 100 2.34% 4,068 100 2.46% 4,375 109 2.49%
Money Market Accounts 16,740 403 2.41% 12,512 383 3.06% 14,438 453 3.14%
Passbook Savings Accounts 13,325 391 2.93% 13,361 403 3.02% 13,423 412 3.07%
Certificates of Deposits 56,911 3,297 5.79% 61,646 3,540 5.74% 63,483 3,604 5.68%
FHLB Borrowings -- -- -- 417 25 6.00% -- -- --
------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 91,241 4,191 4.59% 92,004 4,451 4.84% 95,719 4,578 4.78%
-------- -------- --------
Noninterest-bearing
liabilities 1,103 448 422
-------- -------- --------
Total liabilities 92,344 92,452 96,141
-------- -------- --------
Shareholders' equity 20,615 12,875 12,497
-------- -------- --------
Total liabilities and
equity 112,959 105,327 108,638
======== ======== ========
Net interest income/interest
rate spread $4,084 2.92% $3,545 2.97% $3,620 2.94%
====== ====== ====== ====== ====== ======
Net interest margin(2) 3.71% 3.46% 3.41%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 120.76% 111.29% 110.89%
====== ====== ======
======
- --------------------
<F1> Total loans, net, include nonaccruing loans.
<F2> Net interest margin is net interest income divided by interest-earning
assets.
</TABLE>
Rate / Volume Analysis
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Bank's interest income and expense during 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 (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both
rate and volume has been allocated proportionately to the change due to rate
and the change due to volume.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------- ----------------------------------
Increase Increase
(Decrease) Due to (Decrease) Due to
----------------- -----------------
Total Increase Total Increase
Rate Volume (Decrease) Rate Volume (Decrease)
------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income Attributable to:
Interest-Bearing Deposits $(14) $328 $314 $(3) $ (39) $(42)
Investment Securities 21 233 254 34 (56) (22)
Mortgage-Backed Securities (25) 145 120 8 (79) (71)
Loans Receivable 21 (430) (409) 7 (74) (67)
-------------------------------------------------------------------
Total Interest Income 3 276 279 46 (248) (202)
-------------------------------------------------------------------
Interest Expense Attributable to:
NOW Accounts (5) 5 - (1) (8) (9)
Money Market Accounts (81) 101 20 (10) (60) (70)
Passbook Savings Accounts (11) (1) (12) (7) (2) (9)
Certificates of Deposit 30 (273) (243) 40 (104) (64)
FHLB Advances - (25) (25) - 25 25
-------------------------------------------------------------------
Total Interest Expense (67) (193) (260) 22 (149) (127)
-------------------------------------------------------------------
Increase (Decrease) in Net
Interest Income $ 70 $469 $539 $24 $ (99) $(75)
===================================================================
</TABLE>
Comparison of Results of Operations for the Years Ended
September 30, 1998 and 1997
General. The Company recorded net income of $744,000 for the year
ended September 30, 1998, compared to $553,000 for the year ended September
30, 1997. The increase resulted primarily from an increase in net interest
income of $539,000, a decrease in provision for loan losses of $39,000 and
an increase of $23,000 in non-interest income. Such changes were partially
offset by a $330,000 increase in other expenses.
Net Interest Income. Interest income increased $279,000 for the year
ended September 30, 1998, compared to the year ended September 30, 1997.
This was a result of a $7.8 million increase in average interest-earning
assets from $102.4 million for the year ended September 20, 1997 to $110.2
million for the year ended September 30, 1998. This increase in interest-
earning assets was partially offset by a reduction in yield from 7.81% to
7.51% for the year ended September 30, 1998. The increase in interest-
earning assets is a result of investing the net proceeds from the sale of
the Company's shares in connection with the conversion.
Interest expense for the year ended September 20, 1998 was $4.2
million, a decrease of $260,000 or 5.84%. The decrease in interest expense
was a result of a decrease of $763,000 in the average balance of interest-
bearing liabilities and a decrease in the cost of funds from 4.84% for the
year ended September 30, 1997 to 4.59% for the year ended September 30,
1998.
The Company's net interest rate spread was 2.92% for the year ended
September 30, 1998, compared to 2.97% for the year ended September 30, 1997.
Provision for Loan Losses. For the year ended September 30, 1998, the
provision for loan losses was $74,000, a decrease of $39,000, or 34.5%,
compared to the year ended September 30, 1997. Historically, management has
emphasized the Bank's loss experience over other factors in establishing
provision for losses on loans. During the years ended September 30, 1998
and 1997, management determined that other factors should also be considered
in determining reasonably estimable losses on loans. Among the other
factors to be considered are the nature of the portfolio, credit
concentrations, an analysis of specific loans in the assessment of general
trends in relevant real estate markets and current and prospective economic
conditions, including property values, employment rates, interest rates and
other conditions that affect a borrower's ability to comply with repayment
terms. Based upon these considerations, management decided the allowance
for loan losses should be $300,000 for September 30, 1998, the same balance
as September 30, 1997.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for losses on
loans. Such agencies may require the Bank to provide additions to the
allowance based upon judgements different from those of management.
Although management uses the best information available, future adjustments
to the allowance may be necessary due to economic, operating, regulatory and
other conditions that may be beyond the Bank's control. There can be no
assurance that the amount of past or future provisions for losses on loans
or the balance of the allowance for losses on loans account will be adequate
to absorb actual losses on loans in the future.
Non-interest Income and Non-interest Expense. Non-interest income
increased $23,000, or 26.14%, to $111,000 for the year ended September 30,
1998, compared to $88,000 for the same period in 1997. This increase was
primarily due to an increase in fee income. Non-interest expense increased
$330,000 or 12.37%, to $3.0 million. The primary reasons for this increase
were an increase in salaries and employee benefits of $241,000, an increase
in office expense of $40,000, an increase in other expenses of $61,000 and
an increase in advertising expense of $13,000. These increases were
primarily the result of costs associated with the ESOP, the relocation of
the Florence office, which increased advertising, furniture, telephone and
stationary costs, and costs associated with the operation of a public
company. These increases were partially offset by a $28,000 decrease in
federal deposit insurance premiums as a result of the recapitalization of
the Savings Association Insurance Fund.
Comparison of Results of Operations for the Years Ended
September 30, 1997 and 1996
General. The Company's net income for the year ended September 30,
1997, was $553,000, an increase of approximately $165,000, or 42.5%, from
the $388,000 in net income recorded for the year ended September 30, 1996.
The increase in income resulted primarily from a one-time deposit insurance
assessment of $592,000 in 1996, which was partially offset by a $202,000
reduction in interest income in fiscal year 1997. Net income for the year
ended September 30, 1996, would have been $779,000 if the one-time
assessment had not been assessed.
Net Interest Income. Total interest income was $8.0 million for the
year ended September 30, 1997, a $202,000 or 2.5% decrease from the
comparable 1996 period. Interest income on loans totaled $5.8 million in
1997, a decrease of $67,000 or 1.1%, from 1996. The decrease resulted
primarily from the decline of $864,000 in average balances outstanding due
to the repayment of loans more rapidly than loans were originated. Interest
income on investment securities and interest-bearing deposits totaled $1.1
million in 1997, a decrease of $64,000 or 5.7%, from 1996. The decrease
resulted primarily from the decline of $1.7 million in average balances
outstanding to $18.3 million for the year ended September 30, 1997.
Interest income on mortgage-backed securities decreased by $71,000 or 5.8%,
during fiscal year 1997, as compared to 1996, as a result of a decline of
$1.2 million in the average balance outstanding.
Interest expense on deposits totaled $4.4 million for the year ended
September 30, 1997, a decrease of $152,000 or 3.3%, from the comparable 1996
period. This decrease was due primarily to a $4.1 million decrease in the
average balances outstanding, coupled with a 6 basis point (100 basis points
equals 1%) increase in the average cost of deposits, from 4.78% in the 1996
period to 4.84% in the 1997 period.
As a result of the foregoing changes in interest income and interest
expense, net interest income declined by $75,000 or 2.1%, for the year ended
September 30, 1997, compared to fiscal 1996. The interest rate spread
increased by 3 basis points, from 2.94% in 1996 to 2.97% in 1997, while the
net interest margin increased by 5 basis points, from 3.41% in 1996 to 3.46%
in 1997.
Provision for Losses on Loans. The provision for losses on loans for
the year ended September 30, 1997, was $113,000 compared to $8,000 for the
year ended September 30, 1996. The allowance for losses on loans was
increased in fiscal year 1997 due, in part, to an increase in nonperforming
loans. Nonperforming loans totaled $601,000 at September 30, 1997, and
$177,000 at September 30, 1996. The Bank's allowance for losses on loans
totaled $300,000 at September 30, 1997, an increase of $111,000 over the
balance at September 30, 1996. The increase is primarily due to
delinquencies by one individual with eighteen loans. These loans were
brought current in October 1997.
The amount of the provision for losses on loans for the year ended
September 30, 1997 was determined to be necessary by management to bring the
reserve to a level considered to be appropriate based on these additional
factors. The $105,000 increase in the provision for losses on loans equaled
approximately 25% of the increase in the amount of loans delinquent more
than 90 days, which were in the process of collection.
Non-interest Income and Non-interest Expense. Non-interest income,
primarily service fees from NOW accounts, safe-deposit box rental receipts
and fees on the sale of money orders and traveler's checks, totaled $88,000
for the year ended September 30, 1997, a decrease of $8,000 or 8.3%, from
the 1996 amount.
Non-interest expense totaled $2.7 million for the year ended September
30, 1997, a decrease of $453,000 or 14.5% from the 1996 fiscal year amount.
The decrease resulted primarily from a $721,000 or 89.1% decrease in
federal deposit insurance premiums, which was partially offset by a $222,000
or 15.2% increase in salaries and employee benefits, a $14,000 or 6.1%
increase in occupancy expense and a $21,000 or 10.9% increase in other
expenses. The decrease in federal deposit insurance premiums was primarily
attributable to the one-time SAIF recapitalization assessment of
approximately $592,000 in 1996 and the decrease in premiums in 1997. The
increase in salaries and employee benefits resulted primarily from normal
merit increases, bonuses and the addition of a loan officer. Non-interest
expense can be expected to increase after the Conversion due to the expense
associated with the ESOP and the RRP, as well as the increased costs
associated with the SEC reporting requirements and other expenses for a
public company.
Federal Income Tax Expense. The provision for federal income taxes
was $300,000 for the year ended September 30, 1997, an increase of $100,000
or 50.0%, from the provision recorded in fiscal 1996. The increase resulted
primarily from a $265,000 or 45.1% increase in earnings before taxes. The
effective tax rates were 35.2% and 34.0% for the years ended September 30,
1997 and 1996, respectively.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's
primary sources of funds are deposits, borrowings, amortization, prepayments
and maturities of outstanding loans, maturities of investment securities and
other short-term investments and funds provided from operations. While
scheduled loan amortization and maturing investment securities and short-
term investments are relatively predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Bank manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Bank
invests excess funds in overnight deposits and other short-term interest-
earning assets which provide liquidity to meet lending requirements. The
Bank has generally been able to generate enough cash through the retail
deposit market, its traditional funding source, to offset the cash utilized
in investing activities. As an additional source of funds, the Bank may
borrow from the FHLB of Cincinnati. At September 30, 1998, the Bank had no
outstanding advances from the FHLB of Cincinnati.
Liquidity management is both a daily and long-term function of
business management. Excess liquidity is generally invested in short-term
investments, such as overnight deposits. On a longer-term basis, the Bank
maintains a strategy of investing in various lending products. The Bank
uses its sources of funds primarily to meet its ongoing commitments, to pay
maturing savings certificates and savings withdrawals and fund loan
commitments. At September 30, 1998, the total approved loan commitments
outstanding, excluding construction loans, amounted to $719,000. At the
same date, the unadvanced portion of construction loans approximated
$2,759,000. Certificates of deposit scheduled to mature in one year or less
at September 30, 1998 totaled $31.2 million. The Bank did not have any
investment securities or mortgage-backed securities scheduled to mature in
one year or less at September 30, 1998. Management believes that a
significant portion of maturing deposits will remain with the Bank. The
Bank anticipates that it will continue to have sufficient funds to meet its
current commitments.
The Bank is required by the OTS to maintain average daily balances of
liquid assets and short-term liquid assets (as defined) in amounts equal to
5% and 1%, respectively, of net withdrawable deposits and borrowings payable
in one year or less to assure its ability to meet demand for withdrawals and
repayment of short-term borrowings. The liquidity requirements may vary
from time to time at the direction of the OTS depending upon economic
conditions and deposit flows. The Bank generally maintains a liquidity
ratio of between 5% and 10% of its net withdrawable deposits and borrowings
payable in one year or less. The Bank's average monthly liquidity ratio for
September 1998 was 31.8%.
Federally insured savings institutions are required to satisfy three
different OTS capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of
adjusted total assets, "core" capital equal to at least 3% of adjusted total
assets and "total" capital (a combination of core and "supplementary"
capital) equal to at least 8% of "risk-weighted" assets. For purposes of
the regulation, core capital is defined as common shareholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and qualifying supervisory goodwill. Core capital is generally
reduced by the amount of a savings institution's intangible assets, although
limited exceptions to the deduction of intangible assets are provided for
purchased mortgage servicing rights, qualifying supervisory goodwill and
certain other intangibles, all of which are currently not relevant to the
calculation of the Bank's regulatory capital. Tangible capital is core
capital less all intangible assets, with a limited exception for purchased
mortgage servicing rights. Risk-based capital is defined as core capital
plus certain additional items of capital, which in the case of the Bank
includes a general valuation allowance for losses on loans of $300,000 at
September 30, 1998.
Under the "prompt corrective action" regulations of the OTS, a savings
bank that has not received the highest possible examination rating may
become subject to corrective action if its core capital is less than 4% of
its adjusted total assets.
The Bank substantially exceeded each of the above-described regulatory
capital requirements at September 30, 1998. See Note 18 of the Notes to the
Financial Statements for additional information on these regulatory capital
requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to
inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. SFAS No. 128 simplifies the
standards for computing earnings per share previously found in APB Opinion
No. 15, Earnings Per Share and makes them comparable to international EPS
standards. It replaces the presentation of basic and diluted EPS on the
face of the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS No. 128 requires restatement of all
prior-period EPS data presented. SFAS No. 128 will not have a material
effect on the disclosure required for the Company.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." Statement No. 129 continues the
existing requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. Specifically, the
Statement requires all entities to provide the capital structure disclosures
previously required by Opinion 15. Companies that were exempt from the
provisions of Opinion 15 will now need to make those disclosures. SFAS No.
129 will not have a material effect on the disclosure required for the
Company.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure
of all changes in equity of an enterprise that result from transactions and
other economic events during the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total of net income
and all other nonowner changes in equity. The Statement is effective for
fiscal years beginning after December 15, 1997 with earlier application
permitted. SFAS No. 130 will not have a material effect on the disclosure
required for the Company.
In July, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." Statement No. 131 requires
disclosures for each segment that are similar to those required under
current standards with the addition of quarterly disclosure requirements and
a finer partitioning of geographic disclosures. It requires limited segment
data on a quarterly basis. It also requires geographic data by country, as
opposed to broader geographic regions as permitted under current standards.
The Statement is effective for fiscal years beginning after December 15,
1997 with earlier application permitted. SFAS No. 131 will not have a
material effect on the disclosure required for the Company.
Year 2000 Readiness
Because the Bank's operations rely extensively on computer systems,
the Bank is addressing problems associated with the possibility that
computer systems will not recognize the year 2000 ("Y2K") correctly. The
Bank has developed a Year 2000 Plan, which was presented to the Board of
Directors in 1997. The Board of Directors appointed a Year 2000 Committee,
which reports to the Board of Directors quarterly.
The Bank relies primarily on third-party vendors for its computer
output and processing, as well as other significant functions and services,
such as securities safekeeping services, ATM service, and wire transfers.
The Year 2000 Committee is working with the vendors to assess their Y2K
readiness. Based upon an initial assessment, the Board of Directors
believes that with planned modifications to existing software and hardware
and planned conversions to new software and hardware, the third-party
vendors are taking the appropriate steps to ensure that critical systems
will function properly. The planned modifications and conversions should be
completed and tested by June 30, 1999.
All date-dependent equipment and related software throughout the Bank
have been inventoried and tested for Y2K capabilities. Equipment
identified as not being Y2K compatible has been replaced. The Bank has
estimated that the cost for new hardware and software will be approximately
$15,000.
If the modifications and conversions by both third-party vendors and
the Bank are not completed on a timely basis or if they fail to function
properly, the operations and financial condition of the Company could be
materially adversely affected. The Bank is developing contingency plans for
continued operations in the event of system failure.
In addition, financial institutions may experience increases in
problem loans and credit losses in the event that borrowers fail to prepare
properly for Y2K, and higher funding costs could result if consumers react
to publicity about the issue by withdrawing deposits. The Bank is assessing
such risks among its customers. The Company could also be materially
adversely affected if other third parties, such as governmental agencies,
clearing houses, telephone companies, utilities and other service providers
fail to prepare properly. The Bank is therefore attempting to assess these
risks and take action to minimize their effect.
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
September 30, 1998, 1997 and 1996
PAGE
Independent Auditors' Report 49
Consolidated Financial Statements
Consolidated Statements of Financial Condition 50
Consolidated Statements of Income 51
Consolidated Statements of Shareholders' Equity 52
Consolidated Statements of Cash Flows 53
Notes to the Consolidated Financial Statements 54-75
250 Grandview Drive, Suite 300
Fort Mitchell, KY 41017-5610
VonLehman & Company Inc.
- ----------------------------------------------------------------------------
Certified Public Accountants and Business Advisors
4221 Malsbary Road, Suite 102
Cincinnati, Ohio 45242-5502
INDEPENDENT AUDITORS' REPORT
Board of Directors
Columbia Financial of Kentucky, Inc. and Subsidiary
Fort Mitchell, Kentucky
We have audited the accompanying consolidated statements of financial
condition of Columbia Financial of Kentucky, Inc. and Subsidiary as of
September 30, 1998 and 1997 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the years ended
September 30, 1998, 1997 and 1996. 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 consolidated financial
position of Columbia Financial of Kentucky, Inc. and Subsidiary at September
30, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the years ended September 30, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
VonLehman & Company Inc.
Fort Mitchell, Kentucky
November 10, 1998
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share Data)
ASSETS
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Assets
Cash and Due from Banks $ 631 $ 612
Interest Bearing Deposits in Other Banks 5,629 6,215
----------------------
Total Cash and Cash Equivalents 6,260 6,827
Investment Securities
Held to Maturity, At Cost (Market Value of
$19,148 for 1998 and $13,068 for 1997) 18,980 13,069
Available-for-Sale, At Market Value 4,091 1,003
Mortgage-Backed Securities, At Cost (Market
Value of $22,604 for 1998 and $17,893 for 1997) 22,352 17,862
Loans Receivable, Net 62,161 61,578
Interest Receivable 891 712
Premises and Equipment, Net 1,625 1,595
Federal Home Loan Bank Share, At Cost 1,354 1,260
Federal Income Tax - Refund Receivable - 13
Other Assets 86 87
----------------------
Total Assets $117,800 $104,006
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 79,484 $ 90,195
Advances from Borrowers for Taxes
and Insurance 343 460
Accrued Federal Income Tax Liability 5 -
Deferred Federal Income Tax Liability 172 162
Other Liabilities 78 98
----------------------
Total Liabilities 80,082 90,915
----------------------
Commitments and Contingencies
Shareholders' Equity
Preferred Shares of $0 Par Value; 1,000,000
Shares Authorized; No Shares Issued or
Outstanding as of 1998 - -
Common Shares of $0 Par Value; 6,000,000
Shares Authorized; 2,671,450 Shares Issued
and Outstanding as of 1998 - -
Additional Paid in Capital 25,821 -
Unearned ESOP Shares (1,937) -
Retained Earnings - Substantially Restricted 13,834 13,090
Unrealized Gain on Available-for-Sale
Securities, Net of Related Taxes - 1
----------------------
Total Shareholders' Equity 37,718 13,091
----------------------
Total Liabilities and Shareholders' Equity $117,800 $104,006
======================
</TABLE>
See auditors' report and accompanying notes.
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest Income
Loans $5,392 $5,802 $5,869
Mortgage-Backed Securities 1,263 1,143 1,214
Investments 1,108 854 876
Interest-Bearing Deposits 512 197 239
------------------------------
Total Interest Income 8,275 7,996 8,198
------------------------------
Interest Expense
Deposits 4,191 4,426 4,578
FHLB Advances - 25 -
------------------------------
Total Interest Expense 4,191 4,451 4,578
------------------------------
Net Interest Income 4,084 3,545 3,620
Provision for Losses on Loans 74 113 8
------------------------------
Net Interest Income After
Provision for Losses on Loans 4,010 3,432 3,612
------------------------------
Non-Interest Income 111 88 96
------------------------------
General & Administrative Expense
Salaries and Employee Benefits 1,921 1,680 1,458
Occupancy Expense of Premises 244 242 228
Federal Deposit Insurance Premiums 60 88 809
Data Processing Services 114 112 109
Advertising 119 106 104
Personal Property Tax 98 99 101
Office Expenses 166 126 118
Other 275 214 193
------------------------------
Total General & Administrative
Expense 2,997 2,667 3,120
------------------------------
Income Before Federal Income
Tax Expense 1,124 853 588
Federal Income Tax Expense 380 300 200
------------------------------
Net Income $ 744 $ 553 $ 388
==============================
Earnings Per Common Share $ 0.22 $ N/A $ N/A
==============================
</TABLE>
See auditors' report and accompanying notes.
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Additional Shares Gains Total
Paid-In Acquired Retained on AFS Shareholders'
Capital By ESOP Earnings Securities Equity
---------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $ - $ - $12,149 $ - $12,149
Net Income - - 388 - 388
------------------------------------------------------------
Balance at September 30, 1996 - - 12,537 - 12,537
Net Income - - 553 - 553
Unrealized Gain on AFS Securities,
Net of Tax Effect - - - 1 1
------------------------------------------------------------
Balance at September 30, 1997 - - 13,090 1 13,091
Net Income - - 744 - 744
Disposal of AFS Securities - - - (1) (1)
Proceeds from Public Offering 25,930 (2,137) - - 23,793
ESOP Common Shares Released
for Allocation 63 200 - - 263
Dividends Declared (172) - - - (172)
------------------------------------------------------------
Balance at September 30, 1998 $25,821 $(1,937) $13,834 $ - $37,718
============================================================
</TABLE>
See auditors' report and accompanying notes.
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income $ 744 $ 553 $ 388
Reconciliation of Net Income with
Cash Flows from Operations
Depreciation 102 86 54
Provision for Losses on Loans 74 113 8
Amortization of Premiums and Discounts - 1 (14)
Shares Released to ESOP 263 - -
FHLB Stock Dividends (94) (86) (79)
Deferred Federal Income Tax 10 228 (139)
Gain on Sale of REO (2) - -
Changes In
Interest Receivable (179) 106 (111)
Other Assets 1 88 19
Federal Income Tax Receivable / Liability 18 (20) 100
Other Liabilities (20) (536) 585
----------------------------------
Net Cash Provided by Operating Activities 917 533 811
----------------------------------
Cash Flows From Investing Activities
Investment Securities
Purchased (20,502) (6,074) (2,501)
Matured 11,503 7,000 1,000
Mortgage-Backed Securities
Purchased (9,103) (2,377) (5,247)
Principal Collected 4,613 3,266 3,298
Loan Originations and Repayments, Net (737) 5,939 529
Proceeds from Sale of Real Estate Owned 81 110 23
Purchases of Premises and Equipment (132) (352) (526)
----------------------------------
Net Cash (Used) Provided by Investing
Activities (14,277) 7,512 (3,424)
----------------------------------
Cash Flows From Financing Activities
Advances from Borrowers for
Taxes and Insurance (117) 197 (37)
Change in Deposits (10,711) (4,462) (1,149)
Dividends Paid (172) - -
Net Proceeds from Issuance of Common Shares 23,793 - -
Payments on Advances From FHLB - (2,000) -
Proceeds from FHLB Advances - 2,000 -
----------------------------------
Net Cash (Used) Provided by Financing
Activities 12,793 (4,265) (1,186)
----------------------------------
Change in Cash and Cash Equivalents (567) 3,780 (3,799)
Cash and Cash Equivalents, Beginning of Year 6,827 3,047 6,846
----------------------------------
Cash and Cash Equivalents, End of Year $ 6,260 $ 6,827 $ 3,047
==================================
</TABLE>
See auditors report and accompany notes.
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Columbia Financial of Kentucky, Inc. (the Company) provides financial
services to individuals and corporate customers, and is subject to
competition from other financial institutions. The Company is also subject
to the regulations of certain Federal agencies and undergoes periodic
examinations by those regulatory authorities.
The Company is a holding company whose activities are primarily limited to
holding the stock of Columbia Federal Savings Bank (the Bank). The Bank
conducts a general banking business in Northern Kentucky, which consists of
attracting deposits from the general public and primarily applying those
funds to the origination of loans for residential, consumer and
nonresidential purposes. The Bank's profitability is significantly
dependent on net interest income, which is the difference between interest
income generated from interest-earning assets (i.e., loans and investments)
and the interest expense paid on interest-bearing liabilities (i.e.,
customer deposits and borrowed funds). Net interest income is affected by
the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level
of interest rates paid or received by the Bank can be significantly
influenced by a number of environmental factors, such as governmental
monetary policy, that are outside management's control.
Basis of Presentation
The consolidated financial statements include the accounts of Columbia
Financial of Kentucky, Inc. and its subsidiary, Columbia Federal Savings
Bank. All material intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses
for the year. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains appraisals for significant properties.
Substantial portions of the Banks' loans are secured by real estate in local
markets. In addition, foreclosed real estate is located in this same
market. Accordingly, the ultimate collectibility of a substantial portion
of the Banks' loan portfolio and the recovery of a substantial portion of
the carrying amount of foreclosed real estate are susceptible to changes in
local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
Investment Securities
The Company's investments in securities are classified in three categories
and accounted for as follows:
Trading Securities
Government bonds held principally for resale in the near term and
mortgaged-backed securities held for sale in conjunction with the
Company's mortgage banking activities are classified as trading
securities and recorded at their fair market values. Unrealized gains
and losses on trading securities are included in other income. The
Company currently has no investments in this category.
Securities Held to Maturity
Bonds, notes and debentures that the Company has the positive intent
and ability to hold until maturity are reported at cost, adjusted for
amortization of premiums and accretion of discounts which are
recognized in interest income using the interest method over the
period to maturity.
Securities Available-for-Sale
Securities available-for-sale consist of bonds, notes, debentures, and
certain equity securities not classified as trading securities or as
securities to be held to maturity. Unrealized holding gains and
losses, net of tax, on securities available-for-sale are reported as a
net amount in a separate component of equity until realized.
Gains and losses on the sale of securities available-for-sale are
determined using the specific-identification method.
Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank System (FHLB), is
required to maintain an investment in capital stock of the FHLB of
Cincinnati. The stock is recorded at cost, which represents anticipated
redemption value.
Mortgage-Backed Securities
These assets are carried at cost, adjusted for amortization of premiums and
accretion of discounts on purchases. They are not adjusted to the lower of
cost or market because management has the intention and ability to hold
these assets until maturity. Premiums and discounts, if any, are amortized
to income using the interest method over the life of the securities.
Financial Instruments With Off Balance Sheet Risk
The Company does not participate in interest-rate exchange agreements,
hedging or other similar financial instruments.
Loans Receivable
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses, loans in process and deferred loan origination fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the contractual
lives of the related loans using the interest method. Amortization of
deferred loan fees is discontinued when a loan is placed on a nonaccrual
status.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation
of the collectibility of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. The allowance is
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision for loan
losses.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan." This Statement, which was amended by
SFAS No. 118 as to certain income recognition provisions and financial
statement disclosure requirements, requires that impaired loans be measured
based upon the present value of expected future cash flows discounted at the
loans' effective interest rate or, as an alternative, at the loans'
observable market price or fair value of the collateral. SFAS No. 114 was
effective for years beginning after December 15, 1994 (October 1, 1995, as
to the Bank). The Bank adopted SFAS No. 114 effective October 1, 1995,
without material effect on financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Bank considers
its investment in one-to-four family residential loans and consumer
installment loans to be homogeneous and, therefore, excluded from separate
identification for evaluation of impairment. With respect to the Bank's
investment in impaired nonresidential and multifamily residential real
estate loans, such loans are generally collateral dependent and, as a
result, are carried as a practical expedient at the lower of cost or fair
value.
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
At September 30, 1998 and 1997, the Bank had no loans that would be defined
as impaired under SFAS No. 114.
Provision for Losses on Loans
Provision for losses on loans includes charges to reduce the recorded
balances of mortgage loans receivable, uncollected interest and real estate
to their estimated net realizable value or fair value, as applicable. Such
provisions are based on management's estimate of net realizable value or
fair value of the collateral, as applicable, considering the current and
currently anticipated future operating or sales conditions, thereby causing
these estimates to be particularly susceptible to changes that could result
in a material adjustment to results of operations in the near term.
Recovery of the carrying value of such loans and real estate is dependent to
a great extent on economic, operating and other conditions that may be
beyond the Bank's control. It is the opinion of management, however, that
adequate provision has been made for losses on loans and real estate.
Premises and Equipment
The cost of premises and equipment is depreciated over the estimated useful
lives of the related assets. Depreciation is computed on the straight-line
and accelerated methods.
Maintenance and repairs are charged to operations when incurred. Significant
betterments and renewals are capitalized. When premises and equipment is
sold or otherwise disposed of, the asset account and related accumulated
depreciation account are relieved, and any gain or loss is included in
operations.
The useful lives of premises and equipment for purposes of computing
depreciation are:
<TABLE>
<S> <C>
Office Properties 5-40Years
Equipment 5-10Years
</TABLE>
Real Estate Owned
Real estate acquired in settlement of loans is carried at the lower of cost
or fair value at the date of acquisition. Costs include the uncollected
loan balance as well as other out-of-pocket costs of acquiring the property.
Federal Income Taxes
The Company accounts for federal income taxes in accordance with established
financial accounting and reporting standards. A deferred tax liability or
deferred tax asset is computed by applying the current statutory tax rates
to net taxable or deductible differences between the tax basis of an asset
or liability and its reported amount in the consolidated financial
statements that will result in taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the
amount of net deductible temporary differences or carryforward attributes
may be utilized against current period earnings, carried back against prior
years earnings, offset against taxable temporary differences reversing in
future periods or utilized to the extent of management's estimate of future
taxable income. A valuation allowance is provided for deferred tax assets
to the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total
amount of net temporary differences taxable in the future.
Stock Benefit Plan
In conjunction with its offering of common shares, the Company implemented
the Columbia Financial of Kentucky, Inc.'s Employee Stock Ownership Plan
(ESOP). The ESOP provides retirement benefits for substantially all full-
time employees who have completed one year of service. The Company accounts
for the ESOP compensation expense using the fair value of ESOP shares
allocated to participants during a fiscal year. Expense recognized related
to the plan totaled approximately $263,000, $0 and $0 for the years ended
September 30, 1998, 1997, and 1996, respectively.
Advertising
Advertising costs are expensed as incurred.
NOTE 2 - CASH FLOWS INFORMATION
For purposes of the cash flows statement, cash and cash equivalents includes
cash on hand and in demand and time accounts.
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------
(In Thousands)
<S> <C> <C> <C>
Interest $4,191 $4,451 $4,578
=========================
Income Taxes $ 352 $ 92 $ 239
==========================
</TABLE>
The Company had non-cash investing or financing activities as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------
(In Thousands)
<S> <C> <C> <C>
Real Estate at Cost Acquired Through
Foreclosure of Mortgage Loans $153 $111 $ -
====================
FHLB Stock Dividends Received $ 94 $ 86 $ 79
====================
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
Investment securities as of September 30, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------
1998 (In Thousands)
- ----
<S> <C> <C> <C> <C>
U.S. Government and Federal Agency
Obligations Held to Maturity $18,980 $179 $(11) $19,148
===============================================
Corporate Notes Available-for-Sale $ 4,091 $ - $ - $ 4,091
===============================================
1997
- ----
U.S. Government and Federal Agency
Obligations Held to Maturity $13,069 $ 55 $(56) $13,068
===============================================
U.S. Government Treasury Bills Available-
for-Sale $ 1,002 $ 1 $ - $ 1,003
===============================================
</TABLE>
The following is a summary of maturities of securities held-to-maturity as
of September 30, 1998:
<TABLE>
<CAPTION>
Amounts maturing in: Cost Market Value
-----------------------
(In Thousands)
<S> <C> <C>
One year or less $ 1,999 $ 2,002
After one year through five years 13,790 13,937
After five through ten years 3,191 3,209
---------------------
Totals $18,980 $19,148
=====================
</TABLE>
The following is a summary of maturities of securities available-for-sale as
of September 30, 1998:
<TABLE>
<CAPTION>
Amortized Estimated
----------------------
Amounts maturing in: (In Thousands)
<S> <C> <C>
After Five-Years Through Ten Years $2,000 $2,000
Over Ten Years 2,091 2,091
-------------------
Totals $4,091 $4,091
===================
</TABLE>
The following is a summary of interest earned on investments:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and Agency Securities $ 946 $768 $797
Corporate Notes 68 - -
Dividends on FHLB Stock 94 86 79
----------------------
$1,108 $854 $876
======================
</TABLE>
NOTE 4 - MORTGAGE-BACKED SECURITIES
The balances in mortgage-backed securities held to maturity as of September
30, 1998 and 1997 were comprised of:
<TABLE>
<CAPTION>
Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------
1998 (In Thousands)
- ----
<S> <C> <C> <C> <C>
Government National Mortgage
Association $ 4,382 $107 $ (5) $ 4,484
Federal National Mortgage Association 13,299 99 (42) 13,356
Federal Home Loan Mortgage Corporation 4,671 95 (2) 4,764
-----------------------------------------------
Totals $22,352 $301 $ (49) $22,604
===============================================
1997
- ----
Government National Mortgage
Association $ 5,048 $ 93 $ (5) $ 5,136
Federal National Mortgage Association 9,297 30 (119) 9,208
Federal Home Loan Mortgage Corporation 3,517 40 (8) 3,549
-----------------------------------------------
Totals $17,862 $163 $(132) $17,893
===============================================
</TABLE>
The following is a summary of maturities of mortgaged-backed securities held
to maturity as of September 30, 1998:
<TABLE>
<CAPTION>
Amounts maturing in: Cost Market Value
-----------------------
(In Thousands)
<S> <C> <C>
After one year through five years $ 1,102 $ 1,110
After five years through ten years 4,793 4,854
After ten years 16,457 16,640
--------------------
Totals $22,352 $22,604
====================
</TABLE>
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES ON LOANS
The balances in loans receivable as of September 30, 1998 and 1997 were
comprised of:
<TABLE>
<CAPTION>
1998 1997
-----------------
(In Thousands)
<S> <C> <C>
Mortgage Loans:
One-to-Four Family Residential $53,579 $53,584
Other 12,372 10,315
Home Improvements Loans 5 7
Loans on Deposit 20 42
------------------
65,976 63,948
Less Net Deferred Loan Origination Fees (756) (867)
Loans in Process (2,759) (1,203)
Allowance for Losses on Loans (300) (300)
------------------
Loans Receivable, Net $62,161 $61,578
==================
</TABLE>
A summary of activity in the allowance for loan losses for September 30,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------
(In Thousands)
<S> <C> <C> <C>
Balance at Beginning of the Year $300 $189 $189
Additions to Allowance 74 113 8
Charge Offs During the Year (74) (2) (8)
-------------------
Balance at End of the Year $300 $300 $189
====================
</TABLE>
The Bank had no loans on non-accrual status as of September 30, 1998 and
1997.
NOTE 6 - LOAN COMMITMENTS
As of September 30, 1998, the Bank had fixed- and adjustable-rate loan
commitments as follows:
<TABLE>
<CAPTION>
Fixed Adjustable Total
----------------------------
(In Thousands)
<S> <C> <C> <C>
First Mortgage Loans
on One-to-Four Family
Residential Property $719 $ - $719
===========================
Weighted Average Interest Rates 7.4% $ - 7.4%
===========================
</TABLE>
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest at September 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------------
(In Thousands)
<S> <C> <C>
Loans $427 $440
Mortgage-Backed Securities 145 124
Investments and Other 319 147
-------------
Totals $891 $712
==============
</TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment as of September 30, 1998 and 1997 was comprised of:
<TABLE>
<S> <C> <C>
Land $ 347 $ 347
Buildings and Improvements 1,981 1,879
Furniture and Equipment 606 574
-------------------
2,934 2,800
Accumulated Depreciation (1,309) (1,205)
-------------------
Premises and Equipment, Net $1,625 $1,595
===================
</TABLE>
NOTE 9 - DEPOSITS
A breakdown of deposits by interest rates and types as of September 30, 1998
and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Balances by Interest Rate Amount Percent Amount Percent
- -----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Passbooks (1998 - 2.75%,
1997 -3.00%) $12,654 15.9 $13,167 14.6%
Money Market Deposit Accounts
(1998 - 2.75%, 1997 - 2.75%) 9,953 12.3 11,919 13.2
Now Accounts (1998 - 2.25%,
1997 - 2.25%) 4,021 5.0 3,952 4.4
Christmas Club
(Non-Interest Bearing) 64 .1 66 .1
Certificates of Deposit:
3.00% - 4.00% 42 - 42 -
4.01% - 5.00% 5,913 7.4 - -
5.01% - 6.00% 37,111 46.7 31,457 34.9
6.01% - 7.00% 7,248 9.1 26,579 29.5
7.01% - 8.00% 2,478 3.5 3,013 3.3
--------------------------------------
Totals $79,484 100.0% $90,195 100.0%
======================================
</TABLE>
For NOW accounts and money market accounts, bonus interest rates are paid on
balances over $2,500 of .15% and .25%, respectively.
The scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------
1999 2000 2001 2002 Total
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00% and under $ 2 $ - $ - $ 40 $ 42
4.51%-5.00% 5,913 - - - 5,913
5.01%-5.50% 7,582 670 55 - 8,307
5.51%-6.00% 13,696 11,068 2,297 1,743 28,804
6.01%-6.50% 907 2,011 3,041 701 6,660
6.51%-7.00% 588 - - - 588
7.01%-7.50% 2,239 - - - 2,239
7.51% - 8.00% 239 - - - 239
-------------------------------------------------
Totals $31,166 $13,749 $5,393 $2,484 $52,792
=================================================
</TABLE>
The total of deposit accounts with a balance of $100,000 or more was
approximately $4,751,000 and $5,113,000 at September 30, 1998 and 1997,
respectively. Deposits in excess of $100,000 are not totally insured.
Savings deposit customers are primarily Northern Kentucky area individuals
and businesses.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------
1998 1997 1996
--------------------------
(In Thousands)
<S> <C> <C> <C>
Passbook Savings Accounts $ 392 $ 402 $ 411
Money Market Deposit Accounts 403 378 446
Certificates of Deposit 3,296 3,548 3,613
Now Accounts 100 98 108
--------------------------
Interest Expense on Deposits $4,191 $4,426 $4,578
==========================
</TABLE>
NOTE 10 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
The Bank had no outstanding FHLB advances at September 30, 1998 and 1997.
The Bank did have outstanding advances during 1997 to meet current liquidity
needs. The FHLB advances were 90-day advances, which carry an adjustable
interest rate. The advances were collateralized by the Bank's first
mortgage loans.
NOTE 11 - RETIREMENT PLANS
The Bank maintains a 401(k) retirement plan for the benefit of all its
employees. Employees can contribute up to fifteen percent (15%) of their
compensation to the plan. The Bank matches one-half of the employees'
contributions up to a maximum employer match of three percent (3%) of
compensation. By its nature, the plan is fully funded.
The Bank participates in a non-contributory multi-employer defined benefit
retirement plan covering substantially all employees. Eligibility for this
plan includes one year of service, age 21 and working 1,000 hours. Due to
the nature of this multi-employer plan, separate accumulated benefit and net
assets available for benefits is unavailable for the Bank's portion. The
plan is funded through annuity contracts.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an ESOP for its employees. As part of the
Conversion, the ESOP borrowed funds from the Company. The loan was equal to
100% of the aggregate purchase price of the Company's shares acquired by the
ESOP. The loan to the ESOP is being repaid principally from the the Bank's
contributions to the ESOP over a period of eleven years, and the collateral
for the loan is the common shares purchased by the ESOP. The interest rate
for the ESOP loan is a fixed rate of 9.5%. The Company may, in any plan
year, make additional discretionary contributions for the benefit of the
plan participants in either cash or shares, which may be acquired through
the purchase of outstanding shares in the market or from individual
shareholders, upon the original issuance of additional shares by the Company
or upon the sale of treasury shares by the Company.
Such purchases, if made, would be funded through dividends or other capital
distribution paid by the Company on shares held by the ESOP. The timing,
amount and manner of future contributions to the ESOP will be affected by
various factors, including prevailing regulatory policies, the requirements
of applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan are held in a
suspense account and released on a pro rata basis as debt service payments
are made. Discretionary contributions to the ESOP and shares released from
the suspense account are allocated among participants on the basis of
compensation. Participants are 100% vested in their right to receive their
account balances within the ESOP.
Accounting principles require that any third party borrowing by the ESOP be
reflected as a liability on the Company's consolidated statements of
financial condition. Since the ESOP borrowed from the Company, such
obligation is not treated as a liability, but is excluded from shareholders'
equity. If the ESOP purchases newly issued shares from the Company, total
shareholders' equity would neither increase nor decrease, but per share
shareholders' equity and per share net earnings would decrease as the newly
issued shares are allocated to the ESOP participants.
The ESOP is subject to the requirements of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and the regulations of the IRS and
the Department of Labor.
The fair value of the 193,661 unearned ESOP shares at September 30, 1998 was
approximately $2,541,000. Shares committed to be released during 1998 were
20,055. Shares allocated during the current year were 20,055.
Employee and employer contributions to the 401(k) plan and retirement plan
expense were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997 1996
-------------------------
401(k) Plan (In Thousands)
<S> <C> <C> <C>
Employee Contributions $ 68 $82 $72
Employer Contributions $ 31 $30 $27
Multi-Employer Defined
Benefit Retirement Plan $ 87 $75 $89
ESOP $263 $ - $ -
</TABLE>
NOTE 13 - RETAINED EARNINGS
Through 1996, the Bank was allowed a special bad debt deduction for federal
income tax purposes limited to a certain percentage of otherwise taxable
income. This deduction was subject to certain limitations based on
aggregate loans and savings account balances. If the amounts that qualify
for this deduction are later used for purposes other than for bad debt
losses, they will be subject to federal income tax at the then current
corporate rate.
Retained earnings include approximately $3.1 million for which federal
income tax has not been provided.
NOTE 14 - INCOME TAXES
Deferred income taxes arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. The principal source of temporary differences are
depreciation methods, allowance for loan losses, different methods of
recognizing income on loan closing fees, accrued expense, and nontaxable
stock dividends. The net deferred tax asset (liability) includes the
following components:
<TABLE>
<CAPTION>
1998 1997
--------------
(In Thousands)
<S> <C> <C>
Deferred Tax Assets
Deferred Loan Fees $ 21 $ 40
Depreciation - 4
Net Operating Loss (Company) 46 -
Allowance for Loan Losses 102 102
---------------
Total Deferred Tax Asset 169 146
---------------
Deferred Tax Liabilities
Book Value of Federal Home Loan
Bank Stock Over Tax Basis 240 213
Special Tax Bad Debt Deduction 80 94
Depreciation 21 -
Unrealized Gain on Available For Sale Securities - 1
---------------
Total Deferred Tax Liabilities 341 308
---------------
Net Deferred Liability $(172) $(162)
===============
</TABLE>
No valuation allowance has been provided for deferred tax assets because
management expects to be able to benefit from these temporary deductible
differences.
A reconciliation of income tax expense at the statutory rate (34% for all
periods) to income tax expense at the Company's effective rate is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------
(In Thousands)
<S> <C> <C> <C>
Computed Tax at the Expected
Statutory Rate $382 $290 $200
Nondeductible Expenses 1 2 1
Other Differences (3) 8 (1)
--------------------
$380 $300 $200
====================
Effective Rate 34% 35% 34%
====================
</TABLE>
The components of income tax expense at September 30 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------
(In Thousands)
<S> <C> <C> <C>
Current Tax Expense $370 $ 72 $339
Deferred Tax (Benefit) Expense 10 228 (139)
--------------------
Income Tax Expense $380 $300 $200
====================
</TABLE>
During the 1997 tax year, a new tax law required the Bank to recapture, over
a six year period, approximately $300,000 of bad debt deductions taken
between 1988 and 1996. This new tax law did not have a significant effect
on the Company's financial statements.
NOTE 15 - RELATED PARTY TRANSACTIONS
The Bank has mortgage loans outstanding with various officers, directors,
employees and their relatives. The activity on these loans is shown below:
<TABLE>
<CAPTION>
1998 1997
--------------
(In Thousands)
<S> <C> <C>
Balance at Beginning of Year $ 909 $799
New Loans Made 219 363
Payment of Principal (50) (253)
--------------
Balance at End of Year $1,078 $909
==============
</TABLE>
During 1997, the Bank adopted a policy that loans are granted to officers
and employees on their primary residence at interest rates that are
discounted by 1% from the Bank's normal lending rate. The rate is only in
effect while the person is affiliated with the Bank. Also, this policy
allows officers and employees to finance investment property at rates and
costs available to the general public. All of these loans require board
approval and will be repaid with regular monthly payments in the ordinary
course of business.
The Bank had deposits from various officers, directors and employees
totaling approximately $1,248,000 and $1,464,000 as of September 30, 1998
and 1997, respectively.
NOTE 16 - INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage loans to
individuals on residential properties. At September 30, 1998, the Bank's
assets consisted of significant amounts of mortgages which earned interest
at fixed interest rates. Those assets were funded primarily with short-term
liabilities which have interest rates which vary with market rates over
time.
At September 30, 1998, the Bank had interest-earning loans and interest-
bearing deposits as follows:
<TABLE>
<CAPTION>
Effective
Interest Maximum
Amount Rate Terms/Duration
-------------------------------------
(In millions, except percents)
<S> <C> <C> <C>
Interest-Earning Loans
Fixed Mortgages and Participations $55.9 8.19% 30 Years
Adjustable Mortgages and Participations $10.1 7.76% 30 Years
Interest-Bearing Liabilities
Deposit Accounts $79.5 4.48% 5 Years
</TABLE>
NOTE 17 - RECONCILIATION OF NET INCOME AND RETAINED EARNINGS
A reconciliation of net income and retained earnings per these audited
financial statements with reports filed with the Office of Thrift
Supervision (OTS) as of September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------
1998 1997 1996
-----------------------------
(In Thousands)
<S> <C> <C> <C>
Net Income
Per OTS Report $ 540 $ 553 $ 409
Audit Adjustments
Accrued Liabilities - - (21)
Net Income from Holding Company
(Adjusted for Consolidating Items) 204 - -
-----------------------------
Net Income Per Statements
of Income $ 744 $ 553 $ 388
=============================
Retained Earnings
Per OTS Report $13,630 $13,090 $12,537
Net Retained Earnings of Holding
Company (Adjusted for
Consolidating Items) 204 - -
-----------------------------
Retained Earnings Per Statements
of Financial Condition $13,834 $13,090 $12,537
=============================
</TABLE>
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
Banks are required to maintain capital at least sufficient to meet three
separate requirements: (i) tangible capital equal to 1.5% of adjusted total
assets, (ii) core capital equal to an amount between 4% and 5% of adjusted
total assets, depending on the examination rating and overall risk, and
(iii) risk-based capital equal to 8.0% of risk-weighted assets. The Bank's
management does not anticipate any adverse financial effect of the core
capital requirement regulation is amended as proposed.
Any Bank that is not in compliance with the capital standards may have
growth restrictions placed on it by the OTS. Additionally, the OTS has
discretion to treat the failure of any Bank to maintain capital at or above
the minimum required level as an "unsafe and unsound practice" subject to a
number of enforcement actions.
At September 30, 1998 information with respect to the Bank's capital ratios
is summarized as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
---------------------------------
(In Thousands)
<S> <C> <C> <C>
Capital under Generally Accepted
Accounting Principles $26,371 $26,371 $26,371
Capital Reconciling Items:
General Valuation Allowances - - 300
--------------------------------
Regulatory Capital 26,371 26,371 26,671
Less Minimum Capital Requirements 1,775 3,550 4,006
--------------------------------
Capital in Excess of
Minimum Requirements $24,596 $22,821 $22,665
================================
Regulatory Capital as a Percentage
of Applicable Total Assets 22.3% 22.3% 53.3%
Less Minimum Capital as a Percentage
of Applicable Total Assets 1.5% 3.0% 8.0%
--------------------------------
Regulatory Capital as a Percentage of
Applicable Total Assets in Excess
of Requirements 20.8% 19.3% 45.3%
================================
</TABLE>
The Bank's management believes that, under the current regulations, the Bank
will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Bank, such as increased
interest rates or a downturn in the economy in areas where the Bank has most
of its loans, could adversely affect future earnings and, consequently, the
ability of the Bank to meet its future minimum capital requirements.
Under the "prompt corrective action" regulations of the OTS, a savings bank
that has not received the highest possible examination rating may become
subject to corrective action if its core capital is less than 4% of its
adjusted total assets.
NOTE 19 - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
Investment Securities and Mortgage-Backed Securities: Fair values for
these securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and commercial
and industrial loans) are estimated using discounted cash flow analysis,
based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates
include judgments regarding future expected loss experience and risk
characteristics. The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest- bearing checking accounts and passbook accounts) are, by
definition, equal to amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits.
The carrying amount of accrued interest payable approximates fair value.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
September 30, 1998
------------------
Amount Value
------------------
(In Thousands)
<S> <C> <C>
Financial Assets:
Cash and Cash Equivalents $ 6,260 $ 6,260
Investment Securities 23,071 23,239
Mortgage-backed Securities 22,352 22,604
Loans, Net 62,161 66,563
Financial Liabilities:
Deposits 79,484 89,910
</TABLE>
The carrying amounts in the preceding table are included in the statement of
financial condition under the applicable captions.
NOTE 20 - DEPOSIT INSURANCE
Deposits of the Bank are currently insured by the Savings Association
Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance Fund ("BIF"),
the deposit insurance fund that covers most commercial bank deposits, are
statutorily required to be recapitalized to a ratio of 1.25% of insured
reserve deposits.
On September 30, 1996 a law was passed to recapitalize the SAIF with a one-
time assessment of SAIF-insured institutions of 65.7 [cent] for every $100 of
assessable deposits. The assessment to the Bank was $591,600. This
assessment was accrued in the year ended September 30, 1996 and was paid in
November, 1996.
Congress is considering legislation that would merge the SAIF and BIF on
January 1, 1999. The proposed legislation currently provides for the
elimination of the thrift charter or separate thrift regulation under
Federal law prior to the merger of the deposit insurance funds. The Bank
would then be regulated as a bank under Federal law and subject to the more
restrictive activity limits imposed on national banks.
NOTE 21 - EARNINGS PER SHARE
Primary earnings per share amount for the year ended September 30, 1998 is
based upon the average outstanding shares of the Company reduced by the
unreleased shares of the ESOP.
The average number of shares outstanding was approximately 2,458,000 for the
period after conversion through September 30, 1998. The earnings per share
is for the income earned for the period from the Conversion (April 15, 1998)
through September 30, 1998.
NOTE 22 - CORPORATE REORGANIZATION
On October 9, 1997, the Board of Directors of Columbia Federal unanimously
adopted a Plan of Conversion to convert Columbia Federal from a federal
mutual savings bank to a federal stock savings bank with the concurrent
formation of a newly formed holding company. The Company incorporated under
the laws of the State of Ohio. The Conversion was accomplished through the
adoption of a Federal Stock Charter and Federal Stock Bylaws and the sale of
the Company's common shares in an amount equal to the proforma market value
of the Bank after giving effect to the Conversion. A subscription offering
of the shares of the Company to the Bank's members and to the ESOP was
conducted.
The Conversion was completed on April 15, 1998, and resulted in the issuance
of 2,671,450 common shares of the Company which, after consideration of
offering expenses totaling approximately $775,000 and shares purchased by
the ESOP of $2.1 million, resulted in net proceeds of $23.8 million.
At the time of Conversion, the Bank established a liquidation account in an
amount equal to its regulatory capital as of September 30, 1997. The
liquidation account will be maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank. The
liquidation account will be reduced annually to the extent eligible
depositors have reduced their qualifying deposits. Subsequent increases in
deposits will not restore an eligible account holder's interest in the
liquidation account. In the event of complete liquidation, and only in such
event, each eligible depositor 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. The Bank may not pay
dividends that would reduce shareholders' equity below the required
liquidation account balance.
Under OTS regulations, limitations have been imposed on all "capital
distributions", including cash dividends by savings institutions. The
regulation establishes a three-tiered system of restrictions, with the
greatest flexibility afforded to thrifts which are both well-capitalized and
given favorable qualitative examination ratings by the OTS.
Conversion costs reduced the proceeds from the shares sold in connection
with the Conversion.
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF COLUMBIA FINANCIAL
OF KENTUCKY, INC.
The following condensed financial statements summarize the consolidated
financial position of Columbia Financial of Kentucky, Inc. as of September
30, 1998 and the results of operations and cash flows from inception (April
15, 1998) until September 30, 1998.
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF FINANCIAL CONDITION
(In Thousands)
<TABLE>
<CAPTION>
September 30,
1998
-------------
ASSETS
<S> <C>
Assets
Cash and Cash Equivalents $10,192
Investment Securities Available for Sale - at Market Value 1,091
Investment in Columbia Federal Savings Bank 13,075
Other Assets 19
Deferred Tax Asset 46
-------
Total Assets $24,423
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity
Common Shares and Additional Paid-In Capital $26,015
Retained Earnings 345
Unearned ESOP (1,937)
-------
Total Shareholders' Equity 24,423
-------
Total Liabilities and Shareholders' Equity $24,423
=======
</TABLE>
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
From Inception, April 15, 1998
Until September 30,
1998
------------------------------
<S> <C>
Revenue
Interest Income $337
Equity in Earnings of Columbia Federal
Savings Bank 334
Total Revenue 671
General and Administrative Expenses 373
Net Income Before Income Taxes 298
Federal Income Tax Benefit 46
----
Net Income $344
====
</TABLE>
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net Income $ 344
Reconciliation of Net Income with
Cash Flows from Operations:
Undistributed Earnings of
Columbia Federal Savings Bank (334)
Deferred Federal Income Tax (46)
Shares Released to ESOP 263
Changes In Accrued Interest Receivable
Prepaid Assets (3) (15)
Net Cash Provided by Operating Activities $ 209
=======
Cash Flows from Investing Activities
Proceeds from Repayment of Loan to ESOP $ 194
Purchase of Investment Securities (1,091)
Investment in Columbia Federal Savings Bank (12,741)
-------
Net Cash Used by Investing Activities (13,638)
-------
Cash Flows from Financing Activities
Net Proceeds from Issuance of Common Shares 23,793
Dividends Paid (172)
-------
Net Cash Provided by Financing Activities 23,621
-------
Changes in Cash and Cash Equivalents 10,192
Cash and Cash Equivalents, Beginning of Period -
-------
Cash and Cash Equivalents, End of Period $10,192
=======
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF COLUMBIA FINANCIAL OF KENTUCKY, INC.
Name State of Incorporation
- ---- ----------------------
Columbia Federal Savings Bank Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 631
<INT-BEARING-DEPOSITS> 5,629
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,091
<INVESTMENTS-CARRYING> 41,332
<INVESTMENTS-MARKET> 41,752
<LOANS> 62,161
<ALLOWANCE> 300
<TOTAL-ASSETS> 117,800
<DEPOSITS> 79,484
<SHORT-TERM> 0
<LIABILITIES-OTHER> 598
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 37,718
<TOTAL-LIABILITIES-AND-EQUITY> 117,800
<INTEREST-LOAN> 5,392
<INTEREST-INVEST> 2,371
<INTEREST-OTHER> 512
<INTEREST-TOTAL> 8,275
<INTEREST-DEPOSIT> 4,191
<INTEREST-EXPENSE> 4,191
<INTEREST-INCOME-NET> 4,084
<LOAN-LOSSES> 74
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,997
<INCOME-PRETAX> 1,124
<INCOME-PRE-EXTRAORDINARY> 1,124
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 744
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 4.25
<LOANS-NON> 0
<LOANS-PAST> 173
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 300
<CHARGE-OFFS> 74
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 300
<ALLOWANCE-DOMESTIC> 300
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99.2
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about their companies, so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed in the
statement. Columbia Financial of Kentucky, Inc. ("CFKY") desires to take
advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance and finances
and plans and objectives of management, contained or incorporated by
reference in CFKY's Annual Report on Form 10-KSB for fiscal year 1998 is
forward-looking. In some cases, information regarding certain important
factors that could cause actual results of operations or outcomes of other
events to differ materially from any such forward-looking statement appear
together with such statement. In addition, forward-looking statements are
subject to other risks and uncertainties affecting the financial
institutions industry, including, but not limited to, the following:
Interest Rate Risk
CFKY's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from
loans and investments and interest expense on deposits and borrowings. The
interest income and interest expense of CFKY change as the interest rates on
mortgages, securities and other assets and on deposits and other liabilities
change. Interest rates may change because of general economic conditions,
the policies of various regulatory authorities and other factors beyond
CFKY's control. The interest rates on specific assets and liabilities of
CFKY will change or "reprice" in accordance with the contractual terms of
the asset or liability instrument and in accordance with customer reaction
to general economic trends. In a rising interest rate environment, loans
tend to prepay slowly and new loans at higher rates increase slowly, while
interest paid on deposits increases rapidly because the terms to maturity of
deposits tend to be shorter than the terms to maturity or prepayment of
loans. Such differences in the adjustment of interest rates on assets and
liabilities may negatively affect CFKY's income. Moreover, rising interest
rates tend to decrease loan demand in general, negatively affecting CFKY's
income.
Possible Inadequacy of the Allowance for Loan Losses
Columbia Federal Savings Bank ("Columbia Federal") maintains an
allowance for loan losses based upon a number of relevant factors,
including, but not limited to, trends in the level of nonperforming assets
and classified loans, current and anticipated economic conditions in the
primary lending area, past loss experience, possible losses arising from
specific problem assets and changes in the composition of the loan
portfolio. While the Board of Directors of Columbia Federal believes that
it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in material adjustments,
and net earnings could be significantly adversely affected if circumstances
differ substantially from the assumptions used in making the final
determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one- to four-family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from
the operation of the property, which may be negatively affected by national
and local economic conditions that cause leases not to be renewed or that
negatively affect the operations of a commercial borrower. Construction
loans may also be negatively affected by such economic conditions,
particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases
during periods of recession, high unemployment and other adverse economic
conditions. When consumers have trouble paying their bills, they are more
likely to pay mortgage loans than consumer loans, and the collateral
securing such loans, if any, may decrease in value more rapidly than the
outstanding balance of the loan.
Competition
Columbia Federal competes for deposits with other savings
associations, commercial banks and credit unions and issuers of commercial
paper and other securities, such as shares in money market mutual funds.
The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, Columbia Federal competes
with other savings associations, commercial banks, consumer finance
companies, credit unions, leasing companies, mortgage companies and other
lenders. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions,
current interest rate levels and other factors which are not readily
predictable. The size of financial institutions competing with Columbia
Federal is likely to increase as a result of changes in statutes and
regulations eliminating various restrictions on interstate and inter-
industry branching and acquisitions. Such increased competition may have an
adverse effect upon CFKY.
Legislation and Regulation that may Adversely Affect CFKY's Earnings
Columbia Federal is subject to extensive regulation by the Office of
Thrift Supervision (the "OTS") and the Federal Deposit Insurance Corporation
(the "FDIC") and is periodically examined by such regulatory agencies to
test compliance with various regulatory requirements. As a savings and loan
holding company, CFKY is also subject to regulation and examination by the
OTS. Such supervision and regulation of Columbia Federal and CFKY are
intended primarily for the protection of depositors and not for the
maximization of shareholder value and may affect the ability of the company
to engage in various business activities. The assessments, filing fees and
other costs associated with reports, examinations and other regulatory
matters are significant and may have an adverse effect on the CFKY's net
earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance fund (the "BIF") and
the Savings Association Insurance Fund (the "SAIF"). The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to the target level within a reasonable time
and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members.
Under such system, assessments may vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is
determined by reference to the institution's capital level and the FDIC's
level of supervisory concern about the institution.
Congress recently enacted a plan to recapitalize the SAIF. The
recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings associations under
federal law. Congress is considering legislation to eliminate the federal
thrift charter and the separate federal regulation of savings and loan
associations. As a result, Columbia Federal may have to convert to a
different financial institution charter or might be regulated under federal
law as a bank. If Columbia Federal becomes a bank or is regulated as a
bank, it would become subject to the more restrictive activity limitations
imposed on national banks. Moreover, CFKY might become subject to more
restrictive holding company requirements, including activity limits and
capital requirements similar to those imposed on Columbia Federal. CFKY
cannot predict the impact of the conversion of Columbia Federal to, or
regulation of Columbia Federal as, a bank until any legislation requiring
such change is enacted.
