<PAGE> 1
FORM 10-K
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, 1999
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
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COLUMBIA FINANCIAL OF KENTUCKY, INC.
------------------------------------
(Exact name of registrant as specified 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-K 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-K or any
amendment to this Form 10-K. [X]
The issuer's revenues for the fiscal year ended September 30, 1999,
were $8.5 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 10, 1999, was $31,682,588.
2,650,950 of the issuer's common shares were issued and outstanding on
December 10, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the 1999 Annual Report to Shareholders of
Columbia Financial of Kentucky, Inc., are incorporated by reference into Part II
of this Form 10-K:
1. Management's Discussion and Analysis of Financial Condition and Results
of Operations;
2. Financial Statements and Supplemental Data; and
3. Selected Consolidated Financial Highlights
The following sections of the definitive Proxy Statement for the 2000
Annual Meeting of Shareholders of Columbia Financial of Kentucky, Inc., are
incorporated into Part III of this Form 10-K:
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.
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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.
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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,
--------------------------------------------
1999 1998
--------------------------------------------
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 $58,675 80.03% $53,579 81.21%
Multifamily residential 5,493 7.49 4,663 7.07
Nonresidential real estate loans 3,671 5.01 3,481 5.27
Construction loans 5,439 7.42 4,228 6.41
------- ------ ------- -------
Total real estate loans 73,278 99.95 65,951 99.96
Consumer loans:
Loans on deposits 38 .05 20 .03
Home improvement loans -- -- 5 .01
------- ------ ------- -------
Total consumer loans 38 .05 25 .04
------- ------ ------- -------
Total loans 73,316 100.00% 65,976 100.00%
====== =======
Less:
Loans in process 3,174 2,759
Deferred loan fees 753 756
Allowance for losses on loans 300 300
------- -------
Loans receivable, net $69,089 $62,161
======= =======
</TABLE>
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LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of September 30, 1999, 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 years ending Due 4-5 Due 6-10 Due 11-20 Due more than
September 30, years years years 20 years
--------------------------- after after after after
2000 2001 2002 9/30/99 9/30/99 9/30/99 9/30/99 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) $ 37 $ 47 $165 $ 669 $ 8,910 $29,861 $12,388 $52,077
Home equity
(second mortgage) -- -- 3 -- 23 12 -- 38
Multifamily 22 -- -- -- 817 3,846 -- 4,685
Nonresidential real
estate loans -- -- 15 76 191 1,486 1,618 3,386
Construction loans 365 600 321 1,063 -- 2,563 527 5,439
---- ---- ---- ------ ------- ------- ------- -------
Total real
estate loans 424 647 504 1,808 9,941 37,768 14,533 65,625
Consumer loans:
Loans on deposits 38 -- -- -- -- -- -- 38
Other consumer -- -- -- -- -- -- -- --
---- ---- ---- ------ ------- ------- ------- -------
loans
Total consumer
loans 38 -- -- -- -- -- -- 38
---- ---- ---- ------ ------- ------- ------- -------
Total fixed-rate
loans 462 647 504 1,808 9,941 37,768 14,533 65,663
ADJUSTABLE-RATE LOANS
Residential real estate
loans:
One- to
four-family
(first mortgage) 12 18 25 197 986 3,204 2,084 6,526
Home Equity
(Second Mortgage) -- -- -- 34 -- -- -- 34
Multifamily -- -- -- -- 730 78 -- 808
Nonresidential real
estate loans -- -- 30 5 89 161 -- 285
Construction loans -- -- -- -- -- -- -- --
---- ---- ---- ------ ------- ------- ------- -------
Total real
estate loans 12 18 55 236 1,805 3,443 2,084 7,653
---- ---- ---- ------ ------- ------- ------- -------
Total loans $474 $665 $559 $2,044 $11,746 $41,211 $16,617 $73,316
==== ==== ==== ====== ======= ======= ======= =======
</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, 1999, approximately $19.9 million was secured by
non-owner occupied properties and $68,000 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
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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 $58.7 million at September
30, 1999, and represented 80.0% of loans at such date. Of such amount,
approximately 11.1% were ARMs. The largest individual loan balance on a one- to
four-family loan at such date was $387,276. At such date, loans secured by one-
to four-family residential real estate with outstanding balances of $76,000, or
.1% 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, 1999, loans secured by multifamily properties totaled
approximately $5.5 million, or 7.5% 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, 1999, approximately $4.7
million, or 6.4% 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.
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At September 30, 1999, Columbia Federal had a total of $3.7 million
invested in nonresidential real estate loans, all of which were secured by
property located within Northern Kentucky. Such loans comprised approximately
5.0% 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 total capital. At September 30,
1999, Columbia Federal's nonresidential mortgage loans totaled 12.2% of Columbia
Federal's total 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. Approximately 76.2% of the construction loan balance at
September 30, 1999, 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, 1999, $5.4 million, or approximately 7.4% 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, 1999, 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, 1999, Columbia Federal had approximately $38,000, 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
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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. At September 30, 1999,
Columbia Federal had $1.8 million in purchased and participating loans.
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The following table presents Columbia Federal's mortgage loan
origination and purchase activity for the periods indicated:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Loan originations:
One- to four-family residential $15,849 $10,742
Multifamily residential 1,617 508
Nonresidential 2,056 1,044
Construction 3,770 4,552
Consumer 39 30
------- -------
Total loans originated 23,331 16,876
Loan purchases 1,674 972
------- -------
Total loans originated and purchased 25,005 17,848
Principal repayments 15,928 19,864
------- -------
Loan originations, net 9,077 (2,016)
Increase (decrease) due to other items,
net (1) (2,149) 2,599
------- -------
Net increase (decrease) in net loan portfolio $ 6,928 $ 583
======= =======
</TABLE>
- -----------------------------
(1) Consists of unearned and deferred fees, costs and the allowance for
losses on loans.
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
$4.1 million to one borrower at September 30, 1999. The largest amount Columbia
Federal had outstanding to one borrower at September 30, 1999, was $1.72
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, 1999.
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.
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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, 1999.
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,
----------------------------------------------------------
1999 1998
-------------------------- ------------------------------
Percent Percent
of net 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 33 $1,143 .97% 18 $ 670 1.08%
60 - 89 days 5 123 .18 17 485 .78
90 days and over 1 76 .11 5 173 .28
-- ------ ---- -- ------ ----
Total delinquent loans 39 $1,342(2) 1.26% 40 $1,328(2) 2.14%
-- ====== ==== -- ====== ====
</TABLE>
- ----------
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
(2) All delinquent loans at such date were secured by one- to four-family
residential real estate.
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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,
----------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Accruing loans greater than 90 days
delinquent:
Real estate:
Residential $ 76 $ 173
Nonresidential -- --
Consumer -- --
------- -------
Total nonperforming loans 76 173
Real estate owned -- --
------- -------
Total nonperforming assets $ 76 $ 173
======= =======
Total nonperforming loans as a percentage
of total net loans .11% 0.28%
======= =======
Total nonperforming assets as a
percentage of total assets .07% 0.15%
======= =======
Allowance for losses on loans as a
percentage of nonperforming loans 394.74% 173.41%
======= =======
</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,
----------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Substandard $76 $244
Doubtful -- --
Loss -- --
--- ----
Total classified assets $76 $244
=== ====
</TABLE>
-11-
<PAGE> 12
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.
-12-
<PAGE> 13
The following table sets forth an analysis of Columbia Federal's
allowance for losses on loans for the periods indicated.
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Total net loans outstanding $69,089 $62,161
======= =======
Average loans outstanding $66,549 $62,388
======= =======
Allowance for losses on loans
Balance at beginning of period $ 300 $ 300
Charge-offs
Real estate:
Residential 8 74
Nonresidential -- --
Consumer -- --
Recoveries
Real estate:
Residential -- --
Nonresidential -- --
Consumer -- --
------- -------
Net charge-offs 8 74
Provision for losses on loans 8 74
------- -------
Balance at end of period $ 300 $ 300
======= =======
Ratio of allowance for losses on
loans as a percent of net loans
outstanding 0.43% 0.48%
======= =======
Ratio of net charge-offs
(recoveries) to average net loans
outstanding during the period 0.01% 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 generally purchased at a premium over their original
principal amounts. Mortgage-backed securities present less credit risk
-13-
<PAGE> 14
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, 1999, $6.72 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,
-------------------------------------------
1999 1998
------------------- -------------------
Carrying Market Carrying Market
Value Value Value Value
----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
FNMA certificates $11,875 $11,648 $13,299 $13,356
GNMA certificates 4,444 4,452 4,382 4,484
FHLMC certificates 3,575 3,510 4,671 4,764
------- ------- ------- -------
Total mortgage-backed
securities $19,894 $19,610 $22,352 $22,604
======= ======= ======= =======
</TABLE>
-14-
<PAGE> 15
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, 1999. 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, 1999
------------------------------------------------------------------------------------------------------------
After one to After five to
One year or less five years ten years After ten years Total mortgage-backed portfolio
---------------- ------------ ------------- --------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Mark 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 $ -- -% $386 5.75% $278 5.75% $11,261 6.34% $11,925 $11,648 6.31%
GNMA certificates -- -- -- -- 68 8.50 4,394 7.30 4,452 4,452 7.32
FHLMC certificates -- -- 40 9.22 491 8.28 3,060 7.50 3,591 3,510 7.63
----- ----- ---- ----- ---- ----- ------- ----- ------- ------- ----
Total $ -- -% $426 6.08% $827 7.45% $18,715 6.76% $19,968 $19,610 6.77%
===== ===== ==== ===== ==== ===== ======= ===== ======= ======= ====
</TABLE>
-15-
<PAGE> 16
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,
------------------------------------------------------------------------------------
1999 1998
-------------------------------------- -----------------------------------------
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 $16,999 92% $16,664 92% $18,980 78% $19,148 78%
Corporate notes available for
sale -- -- -- 4,091 17 4,091 17
FHLB stock 1,451 8 1,451 8 1,354 5 1,354 5
------- --- ------- ----- ------- ----- ------- ---
Total investment securities $18,450 100% $18,115 100% $24,425 100% $24,593 100%
======= === ======= ===== ======= ----- ======= ===
</TABLE>
The following tables set forth the contractual maturities, carrying
values, market values and average yields for CFKY's investment securities at
September 30, 1999.
<TABLE>
<CAPTION>
At September 30, 1999
--------------------------------------------------------------------------------------------
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 $2,000 5.65% $11,990 6.06% $3,009 6.04% $-- --%
FHLB stock (1) 1,451 7.00 -- -- -- -- -- --
------ ---- ------- ---- ------ ---- --- --
Total $3,451 6.22% $11,990 6.06% $3,009 6.04% $-- --%
====== ==== ======= ==== ====== ==== === ==
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
----------------------------------------------------
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 4.78 $16,999 $16,664 5.89%
FHLB stock N/A 1,451 1,451 7.00(1)
---- ------- ------- ----
Total 4.78 $18,460 $18,115 5.97%
==== ======= ======= ====
</TABLE>
- ----------
(1) 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 1999; there is no stated
yield.
-16-
<PAGE> 17
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, 1999, $14.3 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, 1999, Columbia Federal's certificates of deposit
totaled $53.7 million, or 65.7% of total deposits. Of such amount, approximately
$33.6 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,
------------------------------------------------------
1999 1998
-------------------------- --------------------------
Percent of Percent of
Amount total deposits Amount total deposits
------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
- ---------------------
NOW accounts (1) $ 5,187 6.35% $ 4,021 5.06%
Money market accounts (2) 9,638 11.81 9,953 12.52
Club Accounts 60 .07 64 0.08
Passbook savings accounts (3) 13,082 16.02 12,654 15.92
------- ------ ------- ------
Total transaction accounts 27,967 34.25 26,692 33.58
Certificates of deposit:
- ------------------------
2.01 - 4.00% 42 .05 42 0.05
4.01 - 6.00% 48,234 59.07 43,024 54.13
6.01 - 8.00% 5,411 6.63 9,726 12.24
------- ------ ------- ------
Total certificates of deposit 53,687 65.75 52,792 66.42
------- ------ ------- ------
Total deposits (4) $81,654 100.00% $79,484 100.00%
======= ====== ======= ======
</TABLE>
- ----------
(1) Columbia Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September
30, 1999 and 1998, the weighted average rates on NOW accounts were
2.20% and 2.24%, respectively.
(Footnotes continued on next page.)
-17-
<PAGE> 18
(2) Columbia Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. At
September 30, 1999 and 1998, the weighted average rates on money market
accounts were 2.73% and 2.78%, respectively.
(3) 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 2.75% at
September 30, 1999 and 1998, respectively.
(4) IRAs are included in the various certificates of deposit balances. IRAs
totaled $14.3 million and $14.0 million as of September 30, 1999 and
1998, respectively.
The following table shows rate and maturity information for Columbia
Federal's certificates of deposit as of September 30, 1999:
<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% $ -- $ -- $ 40 $ 2 $ 42
4.01 - 6.00% 31,747 9,176 4,679 2,632 48,234
6.01 - 8.00% 1,875 2,811 725 - 5,411
------- ------- ------ ------ -------
Total $33,622 $11,987 $5,444 $2,634 $53,687
======= ======= ====== ====== =======
</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, 1999:
<TABLE>
<CAPTION>
Amount Average interest rate
------ ---------------------
(In thousands)
<S> <C> <C>
In quarter ended
December 31, 1999 $ 642 4.50%
March 31, 2000 841 4.80
June 30, 2000 648 4.87
September 30, 2000 449 5.15
After September 30, 2000 2,051 5.40
------ ----
Total time deposits $100,000 or greater $4,631 5.07%
====== ====
</TABLE>
-18-
<PAGE> 19
The following table sets forth Columbia Federal's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance $79,484 $ 90,195
------- ---------
Deposits 63,221 135,648
Withdrawals 64,048 (150,001)
------- ---------
Net increases (decreases) before interest credited (827) (14,353)
------- ---------
Interest credited 2,997 3,642
------- ---------
Ending balance $81,654 $ 79,484
======= =========
Net increase (decrease) $ 2,170 $ (10,711)
Percent increase (decrease) 2.73% (11.88)%
</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, 1999, 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,
----------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Average balance outstanding $ 48 $ --
Maximum amount outstanding at any month end
during the period 1,000 --
Balance outstanding at end of period 1,000
Weighted average interest rate during the period 5.41% -%
Weighted average interest rate at end of period 5.77% -%
</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 daily balances, net of the allowance for losses on
loans.
-19-
<PAGE> 20
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------------------------
1998 1999
--------------------------------------- ----------------------------------
Average Interest Average Interest
balance earned/paid Yield/rate balance earned/paid Yeild/rate
------- ----------- ---------- ------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans receiveable, net $ 66,549 $5,553 8.34% $ 62,388 $5,392 8.64%
Mortgage-backed securities 20,736 1,318 6.83 18,870 1,263 6.69
Investment securitites(1) 21,545 1,471 6.36 18,419 1,108 6.02
Interest-bearing deposits 5,544 243 4.38 10,504 512 4.87
-------- ------ ---- -------- ------ ----
Total interest-earning assets 114,374 8,585 7.51 110,181 8,275 7.51
Non-interest earning assets
Cash and amounts due from depository 616 542
institutions
Premises and equipment, net 1,583 1,621
Other nonearning assets 755 615
-------- --------
2,778
Total assets $117,328 $112,959
======== ========
Interest-bearing liabilities
NOW accounts $ 4,526 105 2.32% $ 4,265 $ 100 2.34%
Money market accounts 9,388 273 2.91 16,740 403 2.41
Passbook savings accounts 12,828 359 2.80 13,325 391 2.93
Certificates of deposit 54,519 2,927 5.37 56,911 3,297 5.79
-------- ------ ------ -------- ------ ------
Total deposits 81,261 3,664 4.51 91,241 4,191 459
FHLB advances 48 3 6.25 -- -- --
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 81,309 3,667 4.51 91,241 4,191 4.59
Non-interest bearing liabilities 816 1,103
-------- -------
Total liabilities 82,125 92,344
Retained earnings 35,203 20,615
-------- -------
Total liabilities and retained earnings $117,328 $112,959
======== ========
Net interest income; interest rate spread $4,918 3.00% $4,084 2.92%
====== ====== ====== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 4.30% 3.71%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 140.67% 120.76%
====== ======
Amortized loan fees included in interest income $ 223 $ 256
====== ======
</TABLE>
- ----------
(1) Includes dividends on FHLB stock.
-20-
<PAGE> 21
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>
Years ended September 30,
---------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------------- --------------------------------------
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 $ 27 $(242) $(269) $(14) $ 328 $ 314
Investment securities 175 188 363 21 233 254
Mortgage-backed securities 9 46 55 (25) 145 120
Loans receivable (199) 360 161 21 (430) (409)
----- ----- ----- ---- ----- -----
Total interest income (42) 352 310 3 276 279
----- ----- ----- ---- ----- -----
Interest expense attributable to:
NOW accounts (1) 6 5 (5) 5 --
Money market accounts 47 (177) (130) (81) 101 20
Passbook savings accounts (17) (15) (32) (11) (1) (12)
Certificates of deposit (231) (139) (370) 30 (273) (243)
FHLB Advances -- 3 3 -- (25) (25)
----- ----- ----- ---- ----- -----
Total interest expense (202) (322) (524) (67) (193) (260)
----- ----- ----- ---- ----- -----
Increase (decrease) in net
interest income $ 160 $ 674 $ 834 $ 70 $ 469 $ 539
===== ===== ===== ==== ===== =====
</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, 1999, 2% of the present value of Columbia Federal's
assets was approximately $2.3 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 $5.0 million at September
30, 1999, Columbia Federal would have been required to deduct approximately
$1,350,000 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, 1999, would still have exceeded the regulatory
requirement by $21.3 million.
Presented below, as of September 30, 1999, 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.
-21-
<PAGE> 22
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
eposits generally have shorter periods to repricing. Assumptions used in
calculating the amounts in this table are OTS assumptions.
<TABLE>
<CAPTION>
At September 30, 1999
---------------------------------------------------------------
Change in $ Change Change
Interest Rates $ Amount Board Limit in NPV % Change NPV In
(basis points) (In Thousands) % Change (In Thousands) in NPV Ratio %
-------------- -------------- -------- -------------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
+300 $21,719 -45% -7,655 -26% 20% -5%
+200 24,380 -30% -4,993 -17% 22% -3%
+100 27,013 -15% -2,360 -8% 24% -1%
-- 29,373 -- -- -- 25% --
-100 31,110 -15% +1,736 +6% 26% 1%
-200 32,420 -30% +3,047 +10% 27% 2%
-300 33,745 -45% +4,372 +15% 28% 2%
</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, 1999, the portfolio included $3.7 million of
three-year ARMs, and $6.2 million of one-year ARMs. In addition, at September
30, 1999, $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.
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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 Savings Bank's operations rely extensively on computer
systems, the Savings Bank is addressing problems associated with the possibility
that computer systems will not recognize the year 2000 ("Y2K") correctly. The
Savings 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 Savings 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 has contacted all major vendors to assess
their Y2K readiness, and all modifications to existing hardware and software and
conversions to new hardware and software believed necessary to ensure that
critical systems will function properly, have been completed.
All date-dependent equipment and related software throughout the
Savings Bank have been inventoried and tested for Y2K capabilities. Equipment
identified as not being Y2K compatible has been replaced. The cost for this new
hardware and software was approximately $15,000.
If the modifications and conversions by both third-party vendors and
the Savings Bank fail to function properly, the operations and financial
condition of the Company could be materially adversely affected. The Savings
Bank has developed 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 Savings Bank has assessed
such risks among its customers. The Company could also be materially adversely
affected if other third parties, such as governmental agencies, clearinghouses,
telephone companies, utilities and other service providers fail to prepare
properly.
PERSONNEL
As of September 30, 1999, Columbia Federal had 37 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.
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On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was replaced. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including the Company, to continue to engage in all
activities in which they were permitted to engage prior to the enactment of the
Act. Such activities are essentially unlimited, provided that the thrift
subsidiary remains a qualified thrift lender. Any thrift holding company formed
after May 4, 1999, will be subject to the same restrictions as a multiple thrift
holding company. In addition, a unitary thrift holding company in existence on
May 4, 1999, may be sold only to a financial holding company engaged in
activities permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities
in which the Company and Savings Bank currently engage, except to the extent
that competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
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. All savings
associations must have tangible capital of 1.5% of adjusted total assets, core
capital (which for Columbia Federal is equal to tangible capital) of 4% of
adjusted total assets, except for associations with the highest examination
rating and acceptable levels of risk, 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 adopted an interest rate risk component to the risk-based
capital requirement. Pursuant to that requirement, a savings association must
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% is not subject to the interest rate risk
component, and Columbia Federal currently qualifies for such exemption.
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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, 1999, 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. 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.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (2) if the savings association will not
be at least adequately capitalized following the capital distribution; (3) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS.
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, 1999, was approximately $19.8 million, or 21.9%, and exceeded the 4%
liquidity requirement by approximately $15.6 million, or 17.9%.
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, 1999,
Columbia Federal met the QTL Test.
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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 deposits). 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, 1999.
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, 1999.
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, 1999, 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
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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.
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.
FRB REGULATIONS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $44.3
million (subject to an exemption of $5.0 million), and of 10% of net transaction
accounts in excess of $44.3 million. At September 30, 1999, 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, 1999.
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
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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, 1999, 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,
1999, is $164,000, 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.
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.
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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, 1999,
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, 1999,
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, 1999, 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) .4% 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.
-29-
<PAGE> 30
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, 1999, the amount of such expense for Columbia Federal was
$89,000.
ITEM 2. PROPERTIES
The following table sets forth certain information at September 30,
1999, 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 $228
Branch Offices:
Pike Street and Lee Street
Covington, Kentucky 41011 Owned 1937 4,520 $116
612 Buttermilk Pike
Crescent Springs, Kentucky 41017 Owned 1981 1,848 $ 45
3522 Dixie Highway
Erlanger, Kentucky 41018 Owned 1981 2,392 $ 20
7550 Dixie Highway
Florence, Kentucky 41042 Owned 1996 3,025 $569
</TABLE>
- ----------
(1) At September 30, 1999, Columbia Federal's office premises and equipment
had a total net book value of $1.5 million. For additional information
regarding Columbia Federal's office premises and equipment, see Note 8
of Notes to the Financial Statements.
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.
-30-
<PAGE> 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There were 2,650,950 common shares of CFKY outstanding on December 1,
1999, held of record by approximately 1,330 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 for the
year ended September 30, 1999, are set forth below. Such amounts do not include
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Quotations Dividends
---------- ---------
High Bid Low Bid Amount Payment Date
-------- ------- ------ ------------
<S> <C> <C> <C> <C>
June 30, 1998 $17.75 $14.38 N/A N/A
September 30, 1998 15.00 11.50 $ .07 August 7, 1998
December 31, 1998 12.38 12.25 .07 November 6, 1998
March 31, 1999 12.75 12.25 .07 February 12, 1999
June 30, 1999 11.50 11.50 .07 May 7, 1999
September 30, 1999 13.25 13.25 .07 August 6, 1999
3.00(2) June 8, 1999
</TABLE>
Dividend Payment Ratio:
1999 820.00%(3)
1998 31.82%
- ----------
(1) Common Shares of CFKY were sold in connection with the Conversion for
$10.00 per share.
(2) Consists of $3.00 per share return of capital.
(3) Including the $3.00 per share return of capital.
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.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (2) if the savings association will not
be at least adequately capitalized following the capital distribution; (3) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS.
-31-
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "SELECTED CONSOLIDATED
FINANCIAL HIGHLIGHTS" in Columbia Financial of Kentucky, Inc.'s 1999 Annual
Report to Shareholders (the "Annual Report") is incorporated herein by reference
and attached hereto in Exhibit 13.
ITEM 7. 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 the Annual Report
is incorporated herein by reference and attached hereto in Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the heading "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Market Risk
Management in the Annual Report" is incorporated herein by reference and
attached hereto in Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data contained in the Annual
Report are incorporated herein by reference and attached hereto in Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the definitive Proxy Statement for the 2000
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 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS " is incorporated herein by
reference.
ITEM 12. 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 13. 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.
-32-
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Statements of Financial Condition at September 30,
1999 and 1998, Statements of Income, Shareholders'
Equity and Cash Flows for the years ended September
30, 1999, 1998, and 1997(see Exhibit 13)
(2) Supplementary Financial Data (see Exhibit 13)
(3) Exhibits
3.1 Articles of Incorporation (incorporated by
reference)
3.2 Code of Regulations (incorporated by
reference)
10.1 Employment Agreement with Mr. Robert V.
Lynch (incorporated by reference)
10.2 Columbia Financial of Kentucky, Inc., 1999
Stock Option and Incentive Plan
(incorporated by reference)
10.3 Columbia Financial of Kentucky, Inc.,
Recognition and Retention Plan and Trust
Agreement (incorporated by reference)
13 Portions of 1999 Annual Report to
Shareholders
21 Subsidiaries of Columbia Financial of
Kentucky, Inc.
23 Consent of Independent Public Accountants
27 Financial Data Schedule
99.1 Proxy Statement for 2000 Annual Meeting of
Shareholders (incorporated by reference)
99.2 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
(b) Form 8-K. None
-33-
<PAGE> 34
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, 1999 Date December 23, 1999
By /s/ John C. Layne By /s/ Daniel T. Mistler
---------------------------------- ----------------------------------
John C. Layne Daniel T. Mistler
Director Director
Date December 23, 1999
By /s/ Kenneth R. Kelly By /s/ Fred A. Tobergte, Sr.
---------------------------------- ----------------------------------
Kenneth R. Kelly Fred A. Tobergte, Sr.
Chairman of the Board and Director Director
Date December 23, 1999
By /s/ Geraldine Zembrodt
----------------------------------
Geraldine Zembrodt
Director
Date December 23, 1999
-34-
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
3.1 Articles of Incorporation of Columbia Financial of Incorporated by reference to Registration Statement
Kentucky, Inc. on 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 Financial of Incorporated by reference to Registration Statement
Kentucky, Inc. on Form 8-A of the Registrant filed with the SEC on
March 20, 1998, Exhibit 2(c).
10.1 Employment Agreement with Mr. Robert V. Lynch Incorporated by reference to Registration Statement
on Form S-1 of the Registrant filed with the SEC on
December 17, 1997, Exhibit 10.3.
10.2 Columbia Financial of Kentucky, Inc. 1999 Stock Incorporated by reference to Definitive Proxy
Option and Incentive Plan Statement for Special Meeting of Shareholders on July
15, 1999, Exhibit A.
10.3 Columbia Financial of Kentucky, Inc. Recognition and Incorporated by reference to Definitive Proxy
Retention Plan and Trust Agreement Statement for Special Meeting of Shareholders on July
15, 1999, Exhibit B.
13 Portions of 1999 Annual Report to Shareholders
21 Subsidiaries of Columbia Financial of Kentucky, Inc.
23 Consent of Independent Public Accountants
27 Financial Data Schedule
99.1 Proxy Statement for the 2000 Annual Meeting of Incorporated by reference to definitive Proxy
Shareholders. Statement to be filed separately.
99.2 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
</TABLE>
-35-
<PAGE> 1
EXHIBIT 13
PORTIONS OF 1999 REPORT TO SHAREHOLDERS
---------------------------------------
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION AND OTHER DATA:
TOTAL AMOUNT OF:
Assets $113,421 $117,800 $104,006 $108,098 $108,376
Cash and Amounts Due from Banks 937 631 612 549 543
Interest-Bearing Deposits in Banks 2,504 5,629 6,215 2,498 6,304
Investment Securities Held to Maturity 16,999 18,980 13,069 13,995 12,493
Investment Securities Available-for-Sale -- 4,091 1,003 1,002 988
Mortgage-Backed Securities 19,968 22,352 17,862 18,751 16,800
Loans Receivable, Net 69,089 62,161 61,578 67,741 68,270
FHLB Stock, at Cost 1,451 1,354 1,260 1,174 1,095
Deposits 81,654 79,484 90,195 94,657 95,806
Shareholders' Equity 30,179 37,718 13,090 12,537 12,149
Number of Offices (1) 5 5 5 5 5
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest Income $ 8,380 $ 8,275 $ 7,996 $ 8,198 $ 7,943
Interest Expense 3,667 4,191 4,451 4,578 4,446
-------- -------- -------- -------- --------
Net Interest Income 4,713 4,084 3,545 3,620 3,497
Provision for Losses on Loans 8 74 113 8 13
-------- -------- -------- -------- --------
Net Interest Income After Provision for
Losses on Loans 4,705 4,010 3,432 3,612 3,484
Non-Interest Income 117 111 88 96 92
Non-Interest Expense 3,324 2,997 2,667 3,120(2) 2,371
-------- -------- -------- -------- --------
Income Before Federal Income Tax Expense 1,498 1,124 853 588 1,205
Federal Income Tax Expense 509 380 300 200 389
-------- -------- -------- -------- --------
Net Income $ 989 $ 744 $ 553 $ 388 $ 816
======== ======== ======== ======== ========
Net Income Per Share $ 0.40 $ 0.22 N/A N/A N/A
======== ========
Dividends Declared Per Share $ 3.28 $ 0.07 N/A N/A N/A
======== ========
<CAPTION>
At or for the Year Ended September 30,
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on Average Assets (3) .84% 0.66% 0.53% 0.36% 0.77%
Return on Average Equity (4) 2.81 3.61 4.30 3.10 6.92
Interest Rate Spread (5) 3.00 2.92 2.97 2.94 2.93
Net Interest Margin (6) 4.30 3.71 3.46 3.41 3.38
Non-Interest Expense to Average Total 2.83 2.65 2.53 2.87 2.24
Assets
Capital Ratios:
Average Equity to Average Assets 30.00 18.25 12.22 11.50 11.15
Equity to Assets at end of Period 26.56 32.02 12.59 11.60 11.21
Asset Quality Ratios and Other Data:
Nonperforming Loans to Total Net Loans
at End of Period 0.11 0.28 0.98 0.26 --
Nonperforming Assets to Total Assets at
end of Period 0.07 0.15 0.58 0.16 0.03
Allowance for Losses on Loans to Total
Net Loans at End of Period 0.43 0.48 0.49 0.28 0.28
Allowance for Losses on Loans to
Nonperforming Loans at End of Period 394.74 173.41 49.92 106.78 --
Net Charge-Offs to Average Loans 0.01 0.12 -- 0.01 0.02
</TABLE>
<PAGE> 2
(1) All offices are full-service except that loan applications are accepted
only at the main office.
(2) Includes a non-recurrring pre-tax expense of $592,000 for a special
one-time deposit insurance assessment.
(3) Net income divided by average total assets.
(4) Net income divided by average total equity.
(5) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
Exhibit 13
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 operations 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 also are 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 1999, 1998 and 1997 amounted to $989,000, $744,000 and
$553,000, respectively. Net income during such periods primarily resulted from
net interest income, which amounted to $4.7 million, $4.1 million and $ 3.5
million, respectively for fiscal 1999, 1998 and 1997. Net interest income is
determined by the interest rate spread and the amount of interest-earning assets
and interest-bearing liabilities. During fiscal 1999, 1998 and 1997, the Savings
Bank's average interest rate spread was 3.00%, 2.92% and 2.97%, respectively. In
addition, at September 30, 1999, 1998, and 1997, the ratios of interest-earning
assets to interest-bearing liabilities amounted to 140.67%, 120.76% and 111.29%,
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;
3. Management's opinion as to the effects of recent accounting pronouncements
on the Company's consolidated financial statements;
4. Management's belief that a significant portion of maturing deposits will
remain with the Savings Bank and that the Savings Bank will continue to
have sufficient funds to meet its current commitments; and
5. Computer problems related to the year 2000.
<PAGE> 3
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. The Savings Bank has sought
to reduce its 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 Savings 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 Savings Bank's assets mature or reprice more
quickly or to a greater extent than its liabilities, the Savings 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 Savings Bank's assets mature or reprice more slowly or to a lesser extent
than its liabilities, the Savings 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 Savings Bank's efforts, as of September 30, 1999,
$6.5 million, or 11.1%, of the Savings Bank's portfolio of one-to-four family
residential mortgage loans consisted of ARMs, and $6.7 million, or 33.7%, of
the Savings Bank's portfolio of mortgage-backed securities have adjustable
rates.
With respect to liabilities, the Savings Bank prices deposit accounts
based upon competitive factors. Pursuant to this policy, the Savings 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 Savings
Bank does not pursue an aggressive growth strategy which would force the Savings
Bank to focus exclusively on competitors' rates rather than affordability. This
policy has assisted the Savings Bank in controlling its cost of funds.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes
in the fair value of financial instruments due to interest rate risk, exchange
rate risk, equity price risk and commodity price risk. The Savings Bank does not
maintain a trading account for any class of financial instrument, and is not
currently subject to foreign currency exchange rate risk, equity price risk or
commodity price risk. The Savings Bank's market risk is composed primarily of
interest rate risk.
The Savings Bank uses Net Portfolio Value ("NPV") as set forth
in regulations of the Office of Thrift Supervision (the "OTS") for reviewing the
interest rate sensitivity position of the Savings Bank and establishing policies
to monitor and limit exposure to 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. Utilizing this measurement concept, at September 30, 1999, there
would have been a decrease in the Savings Bank's NPV of approximately 17% of the
2
<PAGE> 4
present value of its assets, assuming a 200 basis point increase in interest
rates. Under OTS regulation, 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.
Presented below, as of September 30, 1999, is an analysis of
Columbia Federal'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 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 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 Columbia
Federal would pay on its deposits would increase rapidly because Columbia
Federal's deposits generally have shorter periods to repricing. The following
table uses OTS assumptions.
<TABLE>
<CAPTION>
At September 30, 1999
---------------------------------------------------
Change in
Interest $ Change Change
Rates(basis Board Limit in NPV % Change NPV In
points) $ Amount % Change (In Thousands) in NPV Ratio %
-------- -------- -------- -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
+300 $21,719 -45% -7,655 -26% 20% -5%
+200 24,380 -30% -4,993 -17% 22% -3%
+100 27,013 -15% -2,360 -8% 24% -1%
-- 29,373 -- -- -- 25% --
-100 31,110 -15% +1,736 +6% 26% 1%
-200 32,420 -30% +3,047 +10% 27% 2%
-300 33,745 -45% +4,372 +15% 28% 2%
</TABLE>
The NPV is reviewed by the Savings Bank's Board of Directors.
The primary goal of the asset/liability management function is to maximize net
interest income within the interest rate risk limits set by the Board. Interest
rate risk is monitored on a quarterly basis through Board of Directors'
meetings.
3
<PAGE> 5
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1998 TO SEPTEMBER 30,
1999
GENERAL. CFKY's assets totaled $113.4 million at September 30, 1999, a
decrease of $4.4 million, or 3.7% from $117.8 million at September 30, 1998. The
decrease resulted primarily from a $2.8 million decrease in cash, a $4.1 million
decrease in available-for-sale securities, a $2.0 million decrease in
held-to-maturity securities and a $2.4 million decrease in mortgage-backed
securities offset by a $6.9 million increase in loans receivable. Deposits
increased $2.2 million.
LIQUID ASSETS AND INVESTMENTS. Liquid assets (cash and cash
equivalents) totaled $3.4 million at September 30, 1999, a decrease of $2.8
million, or 45%, from the total at September 30, 1998. Investment securities
held to maturity decreased from $19.0 million to $17.0 million. Investment
securities available for sale at September 30, 1998, with a market value of $4.1
million were sold. The decreases in cash and cash equivalents and investment
securities was primarily due to the payment of the $3.00 per share special
distribution made in June 1999 and an increase in loans receivable.
LOANS RECEIVABLE. Net loans receivable equaled $69.1 million at
September 30, 1999, compared to $62.2 million at September 30, 1998, an 11%
increase mainly attributable to one-to-four family mortgage loans being
originated more rapidly than these loans were being repaid.
ALLOWANCE FOR LOSSES OF LOANS. Columbia Federal's allowance for loan
losses totaled $300,000 at September 30, 1999 and September 30, 1998. The
allowance represented .43% of total net loans at September 30, 1999 and .48% at
September 30, 1998. As of September 30, 1999 there was $76,000 in nonperforming
loans, which was .11% of total loans. As of September 30, 1998, there was
$173,000 in nonperforming loans, which was .28% of total loans.
Although management believes that its allowance for loan losses at
September 30, 1999, 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 CFKY's results
of operations.
DEPOSITS. Total deposits increased by $2.2 million, to $81.7 million,
at September 30, 1999, from $79.5 million at September 30, 1998. This increase
resulted primarily from the Savings Bank offering more competitive rates on
savings. At September 30, 1999, certificates of deposit that will mature within
one year accounted for 41.2% of Columbia Federal's deposit liabilities.
CAPITAL. Columbia Federal is required to meet each of three minimum
capital standards promulgated by the Office of Thrift Supervision (the "OTS"),
hereinafter described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement provides for the maintenance of tangible capital, consisting of
shareholders' equity less all-intangible assets, equal to 1.5% of adjusted total
assets. The core capital requirement provides for the maintenance of core
capital consisting of tangible capital plus certain forms of supervisory
goodwill, equal generally to 4% to 5% of adjusted total assets, depending upon
the Savings Bank's examination rating and overall risk. The risk-based capital
requirement mandates maintenance of risk-based capital, consisting of core
capital plus general loan loss allowances, equal to 8% of risk-weighted assets
as defined by OTS regulations. As of September 30, 1999, Columbia Federal's
tangible and core capital totaled $27.2 million, or 23.9 % of adjusted total
assets, which exceeded the minimum requirements of $4.6 million and $4.6 million
by $22.6 million and $22.6 million, respectively. As of September 30, 1999,
Columbia Federal's risk-based capital was $27.5 million, or 55.4 % of
risk-weighted assets, exceeding the minimum requirement by $23.6 million.
4
<PAGE> 6
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following average balance sheet table sets forth for the periods
indicated information on the Company 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,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans, net(1) $66,549 $5,553 8.34% $62,388 $5,392 8.64% $67,405 $ 5,802 8.61%
Mortgage-backed securities 20,736 1,318 6.83% 18,870 1,263 6.69% 16,723 1,143 6.83%
Investment securities 21,545 1,471 6.36% 18,419 1,108 6.02% 14,508 854 5.89%
Other interest-earning 5,554 243 4.38% 10,504 512 4.87% 3,755 197 5.25%
assets ------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning 114,374 8,585 7.51% 110,181 8,275 7.51% 102,391 7,996 7.81%
assets ------- ------- ------- ------- ------- ------- ------- ------- -------
Noninterest-earning assets 2,954 2,778 2,936
------- ------- -------
Total assets 117,328 112,959 105,327
------- ------- -------
Interest-bearing liabilities:
NOW Accounts 4,526 105 2.32% 4,265 100 2.34% 4,068 100 2.46%
Money Market Accounts 9,388 273 2.91% 16,740 403 2.41% 12,512 383 3.06%
Passbook Savings Accounts 12,828 359 2.80% 13,325 391 2.93% 13,361 403 3.02%
Certificates of Deposits 54,519 2,927 5.37% 56,911 3,297 5.79% 61,646 3,540 5.74%
FHLB Borrowings 48 3 6.25% - - - - - - - - - 417 25 6.00%
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing 81,309 3,667 4.51% 91,241 4,191 4.59% 92,004 4,451 4.84%
liabilities ------- ------- ------- ------- ------- ------- ------- ------- -------
Noninterest-bearing 816 1,103 448
liabilities ------- ------- -------
Total liabilities 82,125 92,344 92,452
------- ------- -------
Stockholders' equity 35,203 20,615 12,875
------- ------- -------
Total liabilities and 117,328 112,959 105,327
equity ------- ------- -------
Net interest income/interest
rate spread $4,918 3.00% $4,084 2.92% $ 3,545 2.97%
======= ======= ======= ======= ======= =======
Net interest margin(2) 4.30% 3.71% 3.46%
======= ======= =======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 140.67% 120.76% 111.29%
======= ======= =======
</TABLE>
(1) Total loans, net, include nonaccruing loans.
(2) Net interest margin is net interest income divided by interest-earning
assets.
5
<PAGE> 7
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 Savings 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,
---------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------------------------------------
Increase Increase
(Decrease) Due to (Decrease) Due to
----------------- -----------------
Total Total
Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income Attributable to:
Interest-Bearing Deposits $ (27) $(242) $(269) $(14) $ 328 $ 314
Investment Securities 175 188 363 21 233 254
Mortgage-Backed Securities 9 46 55 (25) 145 120
Loans Receivable (199) 360 161 21 (430) (409)
----- ----- ----- ---- ----- -----
Total Interest Income (42) 352 310 3 276 279
----- ----- ----- ---- ----- -----
Interest Expense Attributable to:
NOW Accounts (1) 6 5 (5) 5 --
Money Market Accounts 47 (177) (130) (81) 101 20
Passbook Savings Accounts (17) (15) (32) (11) (1) (12)
Certificates of Deposit (231) (139) (370) 30 (273) (243)
FHLB Advances -- 3 3 -- (25) (25)
----- ----- ----- ---- ----- -----
Total Interest Expense (202) (322) (524) (67) (193) (260)
----- ----- ----- ---- ----- -----
Increase (Decrease) in Net Interest $ 160 $ 674 $ 834 $ 70 $ 469 $ 539
Income ===== ===== ===== ==== ===== =====
</TABLE>
6
<PAGE> 8
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
1998
GENERAL. The Company recorded net income of $989,000 for the year ended
September 30, 1999, compared to $744,000 for the year ended September 30, 1998.
The increase resulted primarily from an increase in net interest income of
$629,000, a decrease in provision for loan losses of $66,000 and an increase of
$6,000 in non-interest income. Such changes were partially offset by a $327,000
increase in non-interest expenses and a $129,000 increase in federal income tax
expense.
NET INTEREST INCOME. Interest income increased $105,000 for the year
ended September 30, 1999, compared to the year ended September 30, 1998. This
was a result of a $4.2 million increase in average interest-earning assets from
$110.2 million for the year ended September 30, 1998 to $114.4 million for the
year ended September 30, 1999.
Interest expense for the year ended September 30, 1999 was $3.7
million, a decrease of $524,000 or 12.5%. The decrease in interest expense was a
result of a decrease of $9.9 million in the average balance of interest-bearing
liabilities and a decrease in the cost of funds from 4.59% for the year ended
September 30, 1998 to 4.51% for the year ended September 30, 1999.
The Company's net interest rate spread was 3.00% for the year ended
September 30, 1999, compared to 2.92% for the year ended September 30, 1998.
PROVISION FOR LOAN LOSSES. For the year ended September 30, 1999, the
provision for loan losses was $8,000, a decrease of $66,000, or 82.9%, compared
to the year ended September 30, 1998. In determining reasonably estimable losses
on loans, management considers loss experience, 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, 1999, the same balance as
September 30, 1998.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Savings Bank's allowance for losses
on loans. Such agencies may require the Savings 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 Savings 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 $6,000, or 5.4%, to $117,000 for the year ended September 30, 1999,
compared to $111,000 for the same period in 1998. This increase was primarily
due to an increase in fee income. Non-interest expense increased $327,000 or
10.91%, to $3.3 million. The primary reasons for this increase were an increase
in salaries and employee benefits of $181,000, an increase in property and
license tax of $21,000, an increase in advertising expense of $14,000 and an
increase in other expenses of $124,000. These increases were primarily the
result of costs associated with the ESOP, and costs associated with the
operation of a public company. These increases were partially offset by a
$26,000 decrease in office expenses and a $6,000 decrease in federal deposit
insurance premiums as a result of the recapitalization of the Savings
Association Insurance Fund.
7
<PAGE> 9
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 30, 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 on earning assets 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 stock offering.
Interest expense for the year ended September 30, 1998 was $4.2
million, a decrease of $260,000 or 5.84%. This was a result of a decrease of
$763,000 in the average balance of interest-bearing liabilities and a .25%
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
Columbia Federal's loss experience over other factors in establishing provisions
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 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 rates, interest rates and
other conditions that affect a borrower's ability to comply with repayment
terms. Based upon these consideration management decided the allowance for loan
losses should be $300,000 for September 30, 1998, the same balance as September
30, 1997.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE. Non-interest income
increased $13,000, or 13.27%, to $111,000 for the year ended September 30, 1998,
compared to $98,000 for the same period in 1997. This increase was primarily due
to an increase in fee income. Non-interest expense increased $330,000, or 12.4%,
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 cost associated
with the Company's new Employee Stock Ownership Plan, the relocation of the
Florence office, which increased advertising, furniture, telephone and
stationary costs, and cost 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.
8
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing activities. The Savings
Bank's primary sources of funds are deposits, borrowings, amortization,
prepayments and maturities of outstanding loans, sales of 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 Savings Bank manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Savings Bank
invests excess funds in overnight deposits and other short-term interest-earning
assets which provide liquidity to meet lending requirements. The Savings 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 Savings Bank may borrow from
the FHLB of Cincinnati. At September 30, 1999, the Savings Bank had $1 million
in 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 Savings Bank maintains a
strategy of investing in various lending products. The Savings 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, 1999, the total approved loan commitments outstanding, excluding
construction loans, amounted to $1.5 million. At the same date, the unadvanced
portion of construction loans approximated $3.2 million. Investment securities
scheduled to mature within one year or less is $2.0 million. Certificates of
deposit scheduled to mature in one year or less at September 30, 1999 totaled
$33.6 million. The Savings Bank did not have any mortgage-backed securities
scheduled to mature in one year or less at September 30, 1999. Management
believes that a significant portion of maturing deposits will remain with the
Savings Bank. The Savings Bank anticipates that it will continue to have
sufficient funds to meet its current commitments.
The Savings Bank is required by the OTS to maintain average daily
balances of liquid assets (as defined) in an amount equal to 4% 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 Savings Bank
generally maintains a liquidity ratio of at least 8% of its net withdrawable
deposits and borrowings payable in one year or less. The Savings Bank's average
quarterly liquidity ratio for September 1999 was 23.4%.
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 generally equal to at least 4% 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 stockholders' 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. 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 Savings Bank, includes a general
valuation allowance for losses on loans of $300,000 at September 30, 1999.
9
<PAGE> 11
Under the "prompt corrective action" regulations of 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 Savings Bank substantially exceeded each of the above-described
regulatory capital requirements at September 30, 1999. See Note 19 of the Notes
to the Financial Statements.
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 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. Management has adopted SFAS No. 130,
and it has not had a material effect on the disclosures 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. Management has adopted SFAS No.
131, and it has not had a material effect on the disclosures required for the
Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, and is
not expected to have a material impact on the disclosures or accounting
principles of the Company.
In October, 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." Statement No. 134 requires
entities conducting certain mortgage banking activities to classify
mortgage-backed securities retained after a securitization as trading
securities. This pronouncement had no material effects on the disclosures or
accounting principles of the Company.
10
<PAGE> 12
YEAR 2000 READINESS
Because the Savings Bank's operations rely extensively on computer
systems, the Savings Bank is addressing problems associated with the possibility
that computer systems will not recognize the year 2000 ("Y2K") correctly. The
Savings 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 Savings 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 has contacted all major vendors to assess
their Y2K readiness, and all modifications to existing hardware and software and
conversions to new hardware and software believed necessary to ensure that
critical systems will function properly, have been completed.
All date-dependent equipment and related software throughout the
Savings Bank have been inventoried and tested for Y2K capabilities. Equipment
identified as not being Y2K compatible has been replaced. The cost for this new
hardware and software was approximately $15,000.
If the modifications and conversions by both third-party vendors and
the Savings Bank fail to function properly, the operations and financial
condition of the Company could be materially adversely affected. The Savings
Bank has developed 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 Savings Bank has assessed such risks
among its customers. The Company could also be materially adversely affected if
other third parties, such as governmental agencies, clearinghouses, telephone
companies, utilities and other service providers fail to prepare properly.
RECENT LEGISLATION
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including the Company, to continue to engage in all
activities in which they were permitted to engage prior to the enactment of the
Act. Such activities are essentially unlimited, provided that the thrift
subsidiary remains a qualified thrift lender. Any thrift holding company formed
after May 4, 1999, will be subject to the same restrictions as a multiple thrift
holding company. In addition, a unitary thrift holding company in existence on
May 4, 1999, may be sold only to a financial holding company engaged in
activities permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities
in which the Company and the Savings Bank currently engage, except to the extent
that competition with other types of
11
<PAGE> 13
financial institutions may increase as they engage in activities not permitted
prior to enactment of the GLB Act.
MARKET PRICE OF COMPANY SHARES AND RELATED SHAREHOLDER MATTERS
The Conversion of Columbia Federal from mutual form to stock form and
the formation of the Company as the holding company of Columbia Federal (the
"Conversion") was completed on April 15, 1998. In connection with the
Conversion, the Company issued 2,671,450 common shares to certain depositors of
the Savings Bank and an employee benefit plan of the Company.
At December 1, 1999, the Company had 2,650,950 common shares
outstanding, which were held by approximately 1,348 stockholders. Such figure
does not reflect the number of beneficial owners of common shares.
Information about the Company's common shares is quoted on the Nasdaq
National Market under the symbol "CFKY." The high and low bid quotations for the
common shares for each of the quarters since the Conversion as well as cash
dividends declared during these periods were as follows:
<TABLE>
<CAPTION>
Quotations Dividends
High Bid Low Bid Amount Payment Date
-------- ------- ------ ------------
<S> <C> <C> <C> <C>
June 30, 1998 $17.75 $14.38 N/A N/A
September 30, 1998 15.00 11.50 $ .07 August 7, 1998
December 31, 1998 12.38 12.25 .07 November 6, 1998
March 31, 1999 12.75 12.25 .07 February 12, 1999
June 30, 1999 11.50 11.50 .07 May 7, 1999
September 30, 1999 13.25 13.25 .07 August 6, 1999
3.00 June 8, 1999
</TABLE>
The bid prices of the Company's common shares reflect inter-dealer
quotations and do not include markups, markdowns or commissions and may not
necessarily represent actual transactions.
In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings banks. Under OTS regulations applicable to converted
savings banks, the Savings Bank is not permitted to pay a cash dividend, be
reduced below the amount established for the purpose of granting a limited
priority claim on the assets of the Savings Bank in the event of a complete
liquidation to those members of the Savings Bank before the Conversion who
maintain a savings account at the Savings Bank after the Conversion or
applicable regulatory capital requirements prescribed by the OTS.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for that calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (2) if the savings association will not
be at least adequately capitalized following the capital distribution; (3) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice; or, (4) if the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS.
12
<PAGE> 14
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SEPTEMBER 30, 1999, 1998 AND 1997
PAGE
Independent Auditors' Report 17
Consolidated Financial Statements
Consolidated Statements of Financial Condition 18
Consolidated Statements of Income 19
Consolidated Statements of Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to the Consolidated Financial Statements 22-45
13
<PAGE> 15
<TABLE>
<S> <C>
50 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
</TABLE>
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, 1999 and 1998 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the years ended
September 30, 1999, 1998 and 1997. 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, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the years ended September 30,
1999, 1998 and 1997 in conformity with generally accepted accounting
principles.
Fort Mitchell, Kentucky
November 2, 1999
14
<PAGE> 16
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Cash and due from Banks $ 937 $ 631
Interest Bearing Deposits in Other Banks 2,504 5,629
--------- ---------
Total Cash and Cash Equivalents 3,441 6,260
Investment Securities
Held to Maturity, At Cost (Market Value of $16,664 for 1999
and $19,148 for 1998) 16,999 18,980
Available-for-Sale, At Market Value -- 4,091
Mortgage-Backed Securities, At Cost (Market Value of
$19,610 for 1999 and $22,604 for 1998) 19,968 22,352
Loans Receivable, Net 69,089 62,161
Interest Receivable 867 891
Premises and Equipment, Net 1,534 1,625
Federal Home Loan Bank Stock, At Cost 1,451 1,354
Federal Income Tax - Refund Receivable 11 13
Other Assets 61 86
--------- ---------
TOTAL ASSETS $113,421 $117,800
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 81,654 $ 79,484
Short Term Borrowings 1,000 --
Advances from Borrowers for Taxes
and Insurance 381 343
Accrued Federal Income Tax Liability -- 5
Deferred Federal Income Tax Liability 45 172
Other Liabilities 162 78
--------- ---------
TOTAL LIABILITIES 83,242 80,082
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S 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; 2,650,950 and 2,671,450 Shares Issued -- --
and Outstanding as of 1999 and 1998, Respectively
Treasury Stock, 20,500 Shares at Cost (262) --
Additional Paid in Capital 18,194 26,008
Unearned ESOP Shares (1,643) (1,937)
Retained Earnings-Substantially Restricted 13,890 13,647
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 30,179 37,718
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $113,421 $117,800
========= =========
</TABLE>
See auditors' report and accompanying notes.
15
<PAGE> 17
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $5,553 $5,392 $5,802
Mortgage-Backed Securities 1,318 1,263 1,143
Investments 1,266 1,108 854
Interest-Bearing Deposits 243 512 197
------ ------ ------
Total Interest Income 8,380 8,275 7,996
------ ------ ------
INTEREST EXPENSE
Deposits 3,665 4,191 4,426
FHLB Advances 2 -- 25
------ ------ ------
Total Interest Expense 3,667 4,191 4,451
------ ------ ------
NET INTEREST INCOME 4,713 4,084 3,545
PROVISION FOR LOSSES ON LOANS 8 74 113
------ ------ ------
Net Interest Income After Provision for
Losses on Loans 4,705 4,010 3,432
------ ------ ------
NON-INTEREST INCOME 117 111 88
------ ------ ------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 2,102 1,921 1,680
Occupancy Expense of Premises 268 244 242
Federal Deposit Insurance Premiums 54 60 88
Data Processing Services 109 114 112
Advertising 133 119 106
Property and License Taxes 119 98 99
Office Expenses 140 166 126
Other 399 275 439
------ ------ ------
Total Non-Interest Expense 3,324 2,997 2,667
------ ------ ------
Income Before Federal Income Tax 1,498 1,124 853
Expense
FEDERAL INCOME TAX EXPENSE 509 380 300
------ ------ ------
NET INCOME $ 989 $ 744 $ 553
====== ====== ======
BASIC EARNINGS PER COMMON SHARE $ 0.40 $ 0.22 $ N/A
====== ====== ======
DILUTED EARNINGS PER COMMON SHARE $ 0.40 $ 0.22 $ N/A
====== ====== ======
</TABLE>
See auditors' report and accompanying notes.
16
<PAGE> 18
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL SHARES GAINS TOTAL
PAID-IN ACQUIRED TREASURY RETAINED ON AFS SHAREHOLDERS'
CAPITAL BY ESOP STOCK EARNINGS SECURITIES EQUITY
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 15 -- -- (187) -- (172)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1998 26,008 (1,937) -- 13,647 -- 37,718
NET INCOME -- -- -- 989 -- 989
RETURN OF CAPITAL DISTRIBUTION (7,983) -- 30 -- -- (7,953)
ESOP COMMON SHARES RELEASED
FOR ALLOCATION 110 294 -- -- -- 404
DIVIDENDS DECLARED 59 -- -- (746) -- (687)
TREASURY SHARES PURCHASED -- -- (292) -- -- (292)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1999 $18,194 $(1,643) $(262) $13,890 $-- $30,179
========== ========== ========== ========== ========== ==========
</TABLE>
See auditors' report and accompanying notes.
17
<PAGE> 19
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 989 $ 744 $ 553
Reconciliation of Net Income with
Cash Flows from Operations
Depreciation 108 102 86
Provision for Losses on Loans 8 74 113
Shares Released to ESOP 404 263 --
FHLB Stock Dividends (97) (94) (86)
Deferred Federal Income Tax (127) 10 228
Gain on Sale of REO -- (2) --
Changes In
Interest Receivable 24 (179) 106
Other Assets 14 1 88
Federal Income Tax Receivable / Liability (3) 18 (20)
Other Liabilities 81 (20) (535)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,401 917 533
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment Securities
Purchased (8,569) (20,502) (6,074)
Matured 14,641 11,503 7,000
Mortgage-Backed Securities
Purchased (3,090) (9,103) (2,377)
Principal Collected 5,474 4,613 3,266
Loan Originations and Repayments, Net (7,074) (737) 5,939
Proceeds from Sale of Real Estate Owned 138 81 110
Purchases of Property and Equipment (16) (132) (352)
---------- ---------- ----------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES 1,504 (14,277) 7,512
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from Borrowers for
Taxes and Insurance 38 (117) 197
Change in Deposits 2,170 (10,711) (4,462)
Dividends Paid (8,670) (172) --
Treasury Stock Purchases (262) -- --
Net Proceeds from Insurance of Common Shares -- 23,793 --
Payments on Advances From FHLB -- -- (2,000)
Proceeds from FHLB Advances 1,000 -- 2,000
---------- ---------- ----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (5,724) 12,793 (4,265)
---------- ---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS (2,819) (567) 3,780
BEGINNING BALANCE, CASH AND CASH EQUIVALENTS 6,260 6,827 3,047
---------- ---------- ----------
ENDING BALANCE, CASH AND CASH EQUIVALENTS $ 3,441 $ 6,260 $ 6,827
========== ========== ==========
See auditors report and accompany notes.
</TABLE>
18
<PAGE> 20
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 Bank's 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 Bank's 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.
19
<PAGE> 21
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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, 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
20
<PAGE> 22
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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 Company). The Company
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 Company
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 Company 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
21
<PAGE> 23
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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, 1999 and 1998, the Company 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
Company'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 are 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:
Office Properties 5-40 Years
Equipment 5-10 Years
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.
22
<PAGE> 24
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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 PLANS
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
$403,000, $263,000 and $0 for the years ended September 30, 1999, 1998,
and 1997, 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>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Interest $3,667 $4,191 $4,451
====== ====== ======
Income Taxes $ 633 $ 352 $ 92
====== ====== ======
</TABLE>
23
<PAGE> 25
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 2 - CASH FLOWS INFORMATION (Continued)
The Company had non-cash investing or financing activities as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Real Estate at Cost Acquired Through
Foreclosure of Mortgage Loans $138 $153 $111
==== ==== ====
FHLB Stock Dividends Received $ 97 $ 94 $ 86
==== ==== ====
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
Investment securities as of September 30, 1999 and 1998 consisted of
the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- ------
<S> <C> <C> <C> <C>
1999 (In Thousands)
----
U.S. Government and Federal Agency
Obligations Held to Maturity $16,999 $ 4 $(339) $16,664
======= ==== ===== =======
1998
----
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
======= ==== ===== =======
</TABLE>
The following is a summary of maturities of securities held-to-maturity
as of September 30, 1999:
<TABLE>
<CAPTION>
Amortized Estimated
Amounts maturing in: Cost Market Value
---- ------------
(In Thousands)
<S> <C> <C>
One year or less $ 2,000 $ 1,996
After one year through five years 11,990 11,694
After five through ten years 3,009 2,974
------- -------
Totals $16,999 $16,664
======= =======
</TABLE>
The following is a summary of interest earned on investments:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
U.S. Government and Agency Securities $1,134 $ 946 $768
Corporate Notes 35 68 --
Dividends on FHLB Stock 97 94 86
------ ------ ----
$1,266 $1,108 $854
====== ====== ====
</TABLE>
24
<PAGE> 26
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 4 - MORTGAGE-BACKED SECURITIES
The balances in mortgage-backed securities as of September 30, 1999 and
1998 were comprised of:
<TABLE>
<CAPTION>
Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------ ------ ------ ------
1999 (In Thousands)
----
<S> <C> <C> <C> <C>
Government National Mortgage
Association $ 4,452 $ 57 $ (57) $ 4,452
Federal National Mortgage Association 11,925 24 (301) 11,648
Federal Home Loan Mortgage
Corporation 3,591 27 (108) 3,510
------- ------- ------- -------
Totals $19,968 $108 $(466) $19,610
======= ======= ======= =======
1998
----
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
======= ======= ======= =======
</TABLE>
The following is a summary of maturities of mortgaged-backed securities
held to maturity as of September 30, 1999:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
Amounts maturing in: ---- ------------
(In Thousands)
<S> <C> <C>
After one year through five years $ 1,234 $ 1,232
After five years through ten years 4,213 4,123
After ten years 14,447 14,255
------- -------
Totals $19,894 $19,610
======= =======
</TABLE>
25
<PAGE> 27
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES ON LOANS
The balances in loans receivable as of September 30, 1999 and 1998 were
comprised of:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Mortgage Loans:
One-to-Four Family Residential $58,675 $53,579
Other 14,603 12,372
Home Improvements Loans - 5
Loans on Deposits 38 20
------- -------
73,316 65,976
Less Net Deferred Loan Origination Fees (753) (756)
Loans in Process (3,174) (2,759)
Allowance for Loss on Loans (300) (300)
------- -------
Loans Receivable, Net $69,089 $62,161
======= =======
</TABLE>
<TABLE>
<CAPTION>
A summary of activity in the allowance for loan losses for September
30, 1999, 1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at Beginning of the Year $300 $300 $189
Additions to Allowance 8 74 113
Charge Offs During the Year (8) (74) (2)
---- ---- ----
Balance at End of the Year $300 $300 $300
==== ==== ====
The Bank had no loans on non-accrual status as of September 30, 1999 and 1998.
</TABLE>
NOTE 6 - LOAN COMMITMENTS
As of September 30, 1999, the Bank had fixed- and adjustable-rate loan
commitments as follows:
<TABLE>
<CAPTION>
Fixed Adjustable Total
----- ---------- -----
(Dollars In Thousands)
<S> <C> <C> <C>
First Mortgage Loans
on One-to-Four Family
Residential Property $ 700 $-- $ 700
Other 775 -- 775
------ --- ------
Total $1,475 $-- $1,475
====== === ======
Weighted Average Interest Rates 8.32% $-- 8.32%
==== === ====
</TABLE>
26
<PAGE> 28
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest at September 30, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Loans $458 $427
Mortgage-Backed Securities 127 145
Investments and Other 282 319
---- ----
Totals $867 $891
==== ====
</TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment as of September 30, 1999 and 1998 was comprised
of:
<S> <C> <C>
Land $ 347 $ 347
Buildings and Improvements 1,984 1,981
Furniture and Equipment 620 606
------- -------
2,951 2,934
Accumulated Depreciation (1,417) (1,309)
------- -------
Premises and Equipment, Net $ 1,534 $ 1,625
======= =======
</TABLE>
NOTE 9 - DEPOSITS
A breakdown of deposits by interest rates and types as of September 30,
1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Balances by Interest Rate Amount Percent Amount Percent
------------------------- ------ ------- ------ -------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Passbooks (1999 - 2.75%, 1998 - 2.75%) $13,082 16.02% $12,654 15.9%
Money Market Deposit Accounts
(1999 - 2.50%, 1998 - 2.75%) 9,638 11.81 9,953 12.3
Now Accounts (1999 - 2.00%,
1998 - 2.25%) 5,187 6.35 4,021 5.0
Christmas Club
(Non-Interest Bearing) 60 .07 64 .1
Certificates of Deposit:
3.00% - 4.00% 42 .05 42 --
4.01% - 5.00% 30,781 37.70 5,913 7.4
5.01% - 6.00% 17,454 21.37 37,111 46.7
6.01% - 7.00% 5,410 6.63 7,248 9.1
7.01% - 8.00% -- -- 2,478 3.5
------- ------- ------- -------
Totals $81,654 100.0% $79,484 100.0%
======= ======= ======= =======
</TABLE>
For NOW accounts and money market accounts, bonus interest rates are
paid on balances over $2,500 of .25%.
27
<PAGE> 29
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 9 - DEPOSITS (CONTINUED)
The scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 2001 2002 2003 Total
---- ---- ---- ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00% and under $ -- $ -- $ 40 $ 2 $ 42
4.01%-4.50% 6,780 -- -- -- 6,780
4.51%-5.00% 18,412 5,074 515 -- 24,001
5.01%-5.50% 987 1,748 1,892 2,134 6,761
5.51%-6.00% 5,569 2,354 2,272 498 10,693
6.01%-6.50% 1,875 2,811 724 -- 5,410
------- ------- ------- ------- -------
Totals $33,623 $11,987 $5,443 $2,634 $53,687
======= ======= ======= ======= =======
</TABLE>
The total of deposit accounts with a balance of $100,000 or more was
approximately $7,913,000 and $4,751,000 at September 30, 1999 and 1998,
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,
-------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Passbook Savings Accounts $ 359 $ 392 $ 402
Money Market Deposit Accounts 274 403 378
Certificates of Deposit 2,297 3,296 3,548
Now Accounts 105 100 98
------ ------ ------
Interest Expense on Deposits $3,665 $4,191 $4,426
====== ====== ======
</TABLE>
NOTE 10 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
At September 30, 1999, the Bank had outstanding FHLB advances of
$1,000,000. The Bank had no outstanding FHLB advances at September 30,
1998. 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.
28
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 11 - RETIREMENT PLANS (CONTINUED)
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 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 distributions 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 requires 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.
29
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
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 204,519 and 193,661 unearned ESOP shares at
September 30, 1999 and 1998 was approximately $2,710,000 and
$2,541,000, respectively. Shares committed to be released during 1999
and 1998 were 36,573 and 20,055, respectively. Shares allocated during
1999 and 1998 were 36,573 and 20,055, respectively.
Employee and employer contributions to the 401(k) plan and retirement
plan expense were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
401(k) Plan
Employee Contributions $ 66 $ 68 $82
Employer Contributions 33 31 30
Multi-Employer Defined
Benefit Retirement Plan 81 87 75
ESOP 403 263 --
</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.
30
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
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>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Deferred Tax Assets
Deferred Loan Fees $ -- $ 21
Net Operating Loss (Company) 164 46
Accrued RRP 20 --
Allowance for Loan Losses 102 102
--- ---
Total Deferred Tax Asset 286 169
--- ---
Deferred Tax Liabilities
Book Value of Federal Home Loan
Bank Stock Over Tax Basis 250 240
Special Tax Bad Debt Deduction 58 80
Depreciation 23 21
--- ---
Total Deferred Tax Liabilities 331 341
--- ---
Net Deferred Asset (Liability) $(45) $(172)
=== ===
</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>
1999 1998 1997
---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C>
Computed Tax at the Expected
Statutory Rate $509 $ 382 $290
Nondeductible Expenses -- 1 2
Other Differences -- (3) 8
---- ---- ----
$509 $380 $300
==== ==== ====
Effective Rate 34% 34% 35%
==== ==== ====
</TABLE>
31
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 14 - INCOME TAXES (CONTINUED)
The components of income tax expense at September 30 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current Tax Expense $ 636 $370 $ 72
Deferred Tax (Benefit) Expense (127) 10 228
----- ---- ----
Income Tax Expense $ 509 $380 $300
===== ==== ====
</TABLE>
During the Company's 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 - STOCK COMPENSATION PLANS
On July 15, 1999, the Company adopted the Columbia Financial of
Kentucky, Inc. Recognition and Retention Plan ("RRP") and awarded
106,438 shares of stock to various employees. These awards vest ratably
over a five-year period commencing in July 2000. A provision of $53,000
was charged to expense in the fourth quarter of the year ended
September 30, 1999.
Also, on July 15, 1999 the Company adopted the Columbia Financial of
Kentucky, Inc. 1999 Stock Option and Incentive Plan (the "Plan")
providing for 266,095 shares of the Company to be reserved for issuance
upon the exercise of options at the fair value at the date of the
grant. During the year, options have been granted for 252,600 shares to
directors, executive officers and certain employees at the fair value
of $11.00 per share. As of September 30, 1999, none of the stock
options granted have been exercised.
SFAS No. 123 "Accounting for Stock-Based Compensation" contains a
fair-value based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue to account for
stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25. "Accounting for Stock Issued
to Employees". Entities that continue to account for stock options
using APB Opinion No. 25, are required to make pro forma disclosures of
net earnings and earnings per share, as if the fair-value based method
of accounting defined in SFAS No. 123 had been applied.
The Company utilized APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Company's Plan
been determined based on the fair value at the grant dates for awards
under the Plan consistent with the accounting method utilized in SFAS
No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated as follows:
32
<PAGE> 34
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 15 - STOCK COMPENSATION PLANS (CONTINUED)
<TABLE>
<CAPTION>
1999
-------------------------
As Reported Pro Forma
----------- ---------
(In Thousands except share data)
<S> <C> <C>
Net Income $989 $741
===== =====
Earnings Per Share
Basic $0.40 $0.30
===== =====
Diluted $0.40 $0.30
===== =====
</TABLE>
The fair value of each option grant is estimated on the date of the
grant using the following assumptions: dividend yield of 2.00%,
expected volatility of 10%, a risk-free interest rate of 5.5% and
expected lives of ten years.
NOTE 16 - RELATED PARTY TRANSACTIONS
The Bank has mortgage loans outstanding with various officers,
directors and employees and their relatives. The activity on these
loans is shown below:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Balance at Beginning of Year $ 1,078 $ 909
New Loans Made 396 219
Payment of Principal (144) (50)
------- -------
Balance at End of Year $ 1,330 $ 1,078
======= =======
</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 and directors totaling
approximately $1,317,000 and $1,248,000 as of September 30, 1999 and
1998, respectively.
NOTE 17 - INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage loans to
individuals on residential properties. At September 30, 1999, 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 that
vary with market rates over time.
33
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 17 - INTEREST RATE RISK (CONTINUED)
At September 30, 1999, 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 $ 64.9 8.19% 30 years
Adjustable Mortgages and Participations 8.4 7.60% 30 years
INTEREST-BEARING LIABILITIES
Deposit Accounts 81.7 4.27% 5 years
</TABLE>
NOTE 18 - 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, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
NET INCOME
Per OTS Report $ 878 $ 540 $ 553
Audit Adjustments
Accrued Liabilities -- -- --
Net Income from Holding Company
(Adjusted for Consolidating
Items) 111 204 --
------- ------- -------
Net Income Per Statements
of Income $ 989 $ 744 $ 553
======= ======= =======
RETAINED EARNINGS
Per OTS Report $14,508 $13,630 $13,090
Net Retained Earnings of Holding
Company (Adjusted for Con-
solidating Items) (618) 17 --
------- ------- -------
Retained Earnings Per
Balance Sheets $13,890 $13,647 $13,090
======= ======= =======
</TABLE>
34
<PAGE> 36
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 19 - 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 generally
between 4% and 5% of adjusted total assets, depending on the bank's
examination rating and overall risk, and (iii) risk-based capital equal
to 8.0% of risk-weighted assets.
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, 1999 information with respect to the Bank's capital
ratios is summarized as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C>
Capital under Generally Accepted
Accounting Principles $27,249 $27,249 $27,249
Capital Reconciling Items:
General Valuation Allowance -- -- 300
------- ------- -------
Regulatory Capital 27,249 27,249 27,549
Less Minimum Capital Requirements 4,560 4,560 3,981
------- ------- -------
Capital in Excess of
Minimum Requirements $22,689 $22,689 $23,568
======= ======= =======
Regulatory Capital as a Percentage
of Applicable Total Assets 23.9% 23.9% 55.4%
Less Minimum Capital as a Percentage
of Applicable Total Assets 1.5% 4.0% 8.0%
------- ------- -------
Regulatory Capital as a Percentage of
Applicable Total Assets in Excess
of Requirements 22.4% 19.9% 47.4%
======= ======= =======
</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.
35
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 19 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
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 20 - 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.
36
<PAGE> 38
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's financial instruments are as
follows:
September 30, 1999
------------------
Carrying Fair
Amount Value
------ -----
(In Thousands)
Financial Assets:
Cash and Cash Equivalents $ 3,441 $ 3,441
Investment Securities 16,999 16,664
Mortgage-backed Securities 19,968 19,610
Loans, Net 69,089 69,251
Financial Liabilities:
Deposits 81,654 81,829
FHLB Advances 1,000 1,000
The carrying amounts in the preceding table are included in the
statement of financial condition under the applicable captions.
NOTE 21 - 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.
NOTE 22 - EARNINGS PER SHARE
Basic earnings per share amounts for the years ended September 30, 1999
and 1998 are based upon the average outstanding shares of the Company
reduced by the unreleased shares of the ESOP.
The basic average number of shares outstanding was approximately
2,458,000 for the year ended September 30, 1999 and for the period
after conversion through September 30, 1998. The earnings per share for
1998 is for the income earned for the period from the Conversion (April
15, 1998) through September 30, 1998.
The diluted average number of shares outstanding was approximately
2,467,000 for the years ended September 30, 1999 and 1998. The diluted
earnings per share amount is based upon the basic shares outstanding.
37
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 23 - 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.
38
<PAGE> 40
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 24 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company's quarterly results for the
years ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Interest Income $2,132 $2,126 $2,085 $2,037
Total Interest Expense 935 929 911 892
- -----------------------------------------------------------------------------------------------
Net Interest Income 1,197 1,197 1,174 1,145
Provision for Losses on Loans -- -- -- 8
Other Income 31 27 27 32
General, Administrative and
Other Expense 800 848 790 886
- -----------------------------------------------------------------------------------------------
Earnings Before Income Taxes 428 376 411 283
Federal Income Taxes 145 128 140 96
- -----------------------------------------------------------------------------------------------
Net Earnings $ 283 $ 248 $ 271 $ 187
===============================================================================================
Earnings Per Share:
Basic $ .11 $ .10 $ .11 $ .08
===============================================================================================
Diluted $ .11 $ .10 $ .11 $ .08
===============================================================================================
December 31, March 31, June 30, September 30,
1997 1998 1998 1998
---- ---- ---- ----
Total Interest Income $1,932 $1,957 $2,226 $2,160
Total Interest Expense 1,098 1,103 1,057 933
- -----------------------------------------------------------------------------------------------
Net Interest Income 834 854 1,169 1,227
Provision for Losses on Loans 74 -- -- --
Other Income 27 29 25 30
General, Administrative and
Other Expense 707 654 830 806
- -----------------------------------------------------------------------------------------------
Earnings Before Income Taxes 80 229 364 451
Federal Income Taxes 27 76 125 152
- -----------------------------------------------------------------------------------------------
Net Earnings $ 53 $ 153 $ 239 $ 299
===============================================================================================
Earnings Per Share:
Basic N/A N/A $ .10 $ .12
===============================================================================================
Diluted N/A N/A $ .10 $ .12
===============================================================================================
</TABLE>
39
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 25 - 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, 1999 and 1998 and the results of operations and cash
flows for the year ended September 30, 1999 and from inception (April
15, 1998) until September 30, 1998.
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30,
--------------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
ASSETS $ 2,796 $10,192
Cash and Cash Equivalents
Investment Securities
Available for Sale - at Market Value -- 6,091
Investment in Columbia Federal Savings Bank 13,954 13,075
Other Assets 19 19
Deferred Tax Asset 184 46
------- -------
TOTAL ASSETS $16,936 $24,423
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued RRP Expenses $ 53 $ --
SHAREHOLDERS' EQUITY
Common Shares and Additional Paid-In Capital 18,567 26,015
Treasury Shares (262) --
Retained Earnings 221 345
Unearned ESOP (1,643) (1,937)
------- -------
TOTAL SHAREHOLDERS' EQUITY 16,883 24,423
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,936 $24,423
======= =======
</TABLE>
40
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 25 - CONDENSED FINANCIAL STATEMENTS OF COLUMBIA FINANCIAL
OF KENTUCKY, INC. (CONTINUED)
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
From Inception,
April 15, 1998
Year Ended Until
September 30, September 30,
------------- -------------
1999 1998
---- ----
<S> <C> <C>
REVENUE
Interest Income $ 423 $ 337
Equity in Earnings of Columbia Federal
Savings Bank 878 334
------ ------
Total Revenue 1,301 671
GENERAL AND ADMINISTRATIVE EXPENSES 644 373
------ ------
Net Income Before Income Taxes 657 298
Federal Income Tax Benefit 138 46
------ ------
NET INCOME $ 795 $ 344
====== ======
</TABLE>
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 795 $ 344
Reconciliation of Net Income with
Cash Flows from Operations:
Undistributed Earnings of Columbia Federal Savings Bank (879) (334)
Deferred Federal Income Tax (138) (46)
Shares Released to ESOP 403 263
Changes In
Accrued Interest Receivable 15 (15)
Prepaid Assets 2 (3)
Accrued RRD Expenses 53 --
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 251 $ 209
===== =====
</TABLE>
41
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 25 - CONDENSED FINANCIAL STATEMENTS OF COLUMBIA FINANCIAL
OF KENTUCKY, INC. (CONTINUED)
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF CASH FLOWS (CONT.)
(IN THOUSANDS)
<TABLE>
<CAPTION>
From Inception,
April 15, 1998
Year Ended Until
September 30, September 30,
------------- -------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Repayment of Loan to ESOP $ 194 $ 194
Purchase of Investment Securities -- (1,091)
Proceeds from Investment Securities 1,091 --
Investment in Columbia Federal Savings Bank -- (12,741)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES 1,285 (13,638)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds from Issuance of Common Shares -- 23,793
Treasury Shares Purchased
Dividends Paid (8,670) (172)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES (8,932) 23,621
-------- --------
CHANGES IN CASH AND CASH EQUIVALENTS (7,396) 10,192
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,192 --
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,796 $ 10,192
======== ========
</TABLE>
42
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF COLUMBIA FINANCIAL OF KENTUCKY, INC.
NAME STATE OF INCORPORATION
Columbia Federal Savings Bank Ohio
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 of Columbia Financial of Kentucky, Inc., filed on August 20, 1999, of
our report dated November 2, 1999, on the 1999 Consolidated Financial Statements
of Columbia Financial of Kentucky, Inc.
/s/ VonLehman & Company Inc.
Fort Mitchell, Kentucky
December 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 937
<INT-BEARING-DEPOSITS> 2,504
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 36,967
<INVESTMENTS-MARKET> 36,274
<LOANS> 69,089
<ALLOWANCE> 300
<TOTAL-ASSETS> 113,421
<DEPOSITS> 81,654
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 588
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 30,179
<TOTAL-LIABILITIES-AND-EQUITY> 113,421
<INTEREST-LOAN> 5,553
<INTEREST-INVEST> 2,584
<INTEREST-OTHER> 243
<INTEREST-TOTAL> 8,380
<INTEREST-DEPOSIT> 3,665
<INTEREST-EXPENSE> 3,667
<INTEREST-INCOME-NET> 4,713
<LOAN-LOSSES> 8
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,324
<INCOME-PRETAX> 1,498
<INCOME-PRE-EXTRAORDINARY> 1,498
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 989
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 4.30
<LOANS-NON> 0
<LOANS-PAST> 76
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 300
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 300
<ALLOWANCE-DOMESTIC> 300
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
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-K for fiscal year 1999 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
<PAGE> 2
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.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was replaced. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including CFKY, to continue to engage in all
activities in which they were permitted to engage prior to the enactment of the
Act. Such activities are essentially unlimited, provided that the thrift
subsidiary remains a qualified thrift lender. Any thrift holding company formed
after May 4, 1999, will be subject to the same restrictions as a multiple thrift
holding company. In addition, a unitary thrift holding company in existence on
May 4, 1999, may be sold only to a financial holding company engaged in
activities permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities
in which CFKY and Columbia Federal currently engage, except to the extent that
competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
