<PAGE> 1
Exhibit 13
PORTIONS OF 2000 REPORT TO SHAREHOLDERS
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
SELECTED FINANCIAL CONDITION AND OTHER
DATA:
TOTAL AMOUNT OF:
<S> <C> <C> <C> <C> <C>
Assets $111,523 $113,421 $117,800 $104,006 $108,098
Cash and Amounts Due from Banks 605 937 631 612 549
Interest-Bearing Deposits in Banks 4,385 2,504 5,629 6,215 2,498
Investment Securities Held to Maturity 14,842 16,999 18,980 13,069 13,995
Investment Securities Available-for-Sale - - 4,091 1,003 1,002
Mortgage-backed Securities Held to 16,637 19,968 22,352 17,862 18,751
Maturity
Loans Receivable, Net 70,682 69,089 62,161 61,578 67,741
FHLB Stock, at Cost 1,559 1,451 1,354 1,260 1,174
Deposits 75,462 81,654 79,484 90,195 94,657
Short-Term Borrowings 6,000 1,000 - - -
Shareholders' Equity 29,111 30,179 37,718 13,090 12,537
Number of Offices (1) 5 5 5 5 5
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SUMMARY OF EARNINGS:
<S> <C> <C> <C> <C> <C>
Interest Income 3,830 3,667 4,191 4,451 4,578
------ ------ ------- ------- ------
Interest Expense
Net Interest Income 4,311 4,713 4,084 3,545 3,620
Provision for Losses on Loans - 8 74 113 8
------ ------ ------- ------- ------
Net Interest Income After Provision for
Losses on Loans 4,311 4,705 4,010 3,432 3,612
Non-Interest Income 121 117 111 88 96
Non-Interest Expense 3,417 3,324 2,997 2,667 3,120(2)
------ ------ ------- ------- ------
Income Before Federal Income Tax Expense 1,015 1,498 1,124 853 588
Federal Income Tax Expense 345 509 380 300 200
------ ------ ------- ------- ------
Net Income $ 670 $ 989 $ 744 $ 553 $ 388
====== ====== ======= ======= ======
Net Income Per Share $ 0.27 $ 0.40 $ 0.22 N/A N/A
====== ====== ======= ======= ======
Dividends Declared Per Share $ 0.28 $ 3.28 $ 0.07 N/A N/A
====== ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
---------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on Average Assets (3) .59% .84% 0.66% 0.53% 0.36%
Return on Average Equity (4) 2.17 2.81 3.61 4.30 3.10
Interest Rate Spread (5) 2.71 3.00 2.92 2.97 2.94
Net Interest Margin (6) 3.93 4.30 3.71 3.46 3.41
Non-Interest Expense to Average Total 3.02 2.83 2.65 2.53 2.87
Assets
Capital Ratios:
Average Equity to Average Assets 27.25 30.00 18.25 12.22 11.50
Equity to Assets at End of Period 26.10 26.56 32.02 12.59 11.60
Asset Quality Ratios and Other Data:
Nonperforming Loans to Total Net Loans at
End of Period 0.17 0.11 0.28 0.98 0.26
Nonperforming Assets to Total Assets at
End of Period 0.10 0.07 0.15 0.58 0.16
Allowance for Losses on Loans to Total
Net Loans at End of Period 0.42 0.43 0.48 0.49 0.28
Allowance for Losses on Loans to
Nonperforming Loans at End of Period 256.41 394.74 173.41 49.92 106.78
Net Charge-Offs to Average Loans - 0.01 0.12 - 0.01
</TABLE>
-------------------
(footnotes on next page)
1
<PAGE> 2
(1) All offices are full-service except that loan applications are accepted
only at the main office.
(2) Includes a non-recurring 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.
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.
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; and
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.
2
<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, 2000,
$8.1 million, or 13.3%, of the Savings Bank's portfolio of one-to-four family
residential mortgage loans consisted of ARMs, and $5.4 million, or 32.9%, 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, 2000, there
would have been a decrease in the Savings Bank's NPV of approximately 17% of the
present value of its assets, assuming a 200 basis point increase in interest
rates. Under OTS regulation, if the NPV
3
<PAGE> 4
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, 2000, 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 minimum NPV ratio 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>
Change in Board Limits $ Change Change
Interest Rates NPV Minimum in NPV % Change NPV In
(basis points) $ Amount NPV Ratio (In Thousands) in NPV Ratio %
-------------- -------- --------- -------------- ------------- ----- -
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
+300 $22,610 12% $-7,511 -25% 22% -5%
+200 25,112 13% -5,008 -17% 23% -4%
+100 27,661 14% -2,459 -8% 25% -2%
- 30,120 - - - 27% -
-100 32,060 14% 1,939 +6% 28% 1%
-200 33,267 13% 3,147 +10% 28% 1%
-300 34,477 12% 4,357 +14% 29% 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.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1999 TO SEPTEMBER 30, 2000
GENERAL. CFKY's consolidated assets totaled $111.5 million at
September 30, 2000, a decrease of $1.9 million, or 1.7%, from $113.4 million at
September 30, 1999. The decrease resulted primarily from a decrease of $5.5
million in investment and mortgage-backed securities partially offset by a $1.6
million increase in net loans receivable and a $1.5 million increase in cash and
cash equivalents. A $6.2 million decrease in the Bank's deposits was partially
offset by a $5.0 million increase in short-term borrowings.
4
<PAGE> 5
LIQUID ASSETS AND INVESTMENTS. Liquid assets (cash and cash
equivalents) totaled $5.0 million at September 30, 2000, an increase of $1.6
million, or 47%, from the total at September 30, 1999. Investment securities
held to maturity decreased from $17.0 million to $14.8 million, due to
maturities of investments that were not reinvested.
LOANS RECEIVABLE. Net loans receivable equaled $70.7 million at
September 30, 2000, compared to $69.1 million at September 30, 1999, a 2.3%
increase mainly attributable to one- to four- family mortgage loans being
originated more rapidly than these loans were being repaid.
ALLOWANCE FOR LOSSES ON LOANS. Columbia Federal's allowance for loan
losses totaled $300,000 at September 30, 2000 and September 30, 1999. The
allowance represented .42% of total net loans at September 30, 2000 and .43% at
September 30, 1999. As of September 30, 2000, there were $117,000 in
nonperforming loans, which was .17% of net loans. As of September 30, 1999,
there were $76,000 in nonperforming loans, which was .11% of net loans.
Although management believes that its allowance for loan losses at
September 30, 2000, 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 AND SHORT-TERM BORROWINGS. Total deposits decreased by $6.2
million, to $75.5 million, at September 30, 2000, from $81.7 million at
September 30, 1999. This decrease was mainly offset by a $5.0 million increase
in short-term borrowings from $1.0 million to $6.0 million. At September 30,
2000, certificates of deposit that will mature within one year accounted for
40.8% of Columbia Federal's deposit liabilities.
CAPITAL. Columbia Federal is required by applicable law and regulation
to meet certain minimum capital standards. Such capital standards include a
tangible capital requirement of 1.5%, a core capital requirement of, generally,
4%, and a risk-based capital requirement of 8%. As reflected in Note 19 of the
financial statements, Columbia Federal's capital ratios at September 30, 2000,
were a tangible capital ratio of 25.4%, a core capital ratio of 25.4% and a
risk-based capital ratio of 57.8%.
5
<PAGE> 6
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES
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,
----------------------------------------------------------------------------
2000 1999
--------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loans, net (1) $70,756 $5,780 8.17% $66,549 $5,553 8.34%
Mortgage-backed securities 18,401 1,151 6.26% 20,736 1,318 6.83%
Investment securities 17,418 1,050 6.03% 21,545 1,471 6.36%
Other interest-earning assets 3,142 160 5.09% 5,554 243 4.38%
------- ------ ----- ------- ------ -----
Total interest-earning assets 109,717 8,141 7.42% 114,374 8,585 7.51%
------- ------ ----- ------- ------ -----
Noninterest-earning assets 3,344 2,954
------- -------
Total assets 113,061 117,328
------- -------
Interest-bearing liabilities:
NOW accounts 4,940 114 2.31% 4,526 105 2.32%
Money market accounts 7,366 249 3.38% 9,388 273 2.91%
Passbook savings accounts 12,364 345 2.79% 12,828 359 2.80%
Certificates of deposits 51,072 2,770 5.42% 54,519 2,927 5.37%
FHLB borrowings 5,545 352 6.35% 48 3 6.25%
------- ------ ----- ------- ------ -----
Total interest-bearing liabilities 81,287 3,830 4.71% 81,309 3,667 4.51%
------- ------ ----- ------- ------ -----
Noninterest-bearing liabilities 961 816
------- -------
Total liabilities 82,248 82,125
------- -------
Stockholders' equity 30,813 35,203
------- -------
Total liabilities and equity 113,061 117,328
------- -------
Net interest income/interest rate $4,311 2.71% $4,918 3.00%
spread ====== ==== ====== ====
Net interest margin (2) 3.93% 4.30%
==== ====
Ratio of average interest-earning
assets to average interest-bearing 134.97% 140.67%
liabilities ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1998
-----------------------------------
Average Average
Balance Interest Yield/Rate
------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Total loans, net (1) $62,388 $5,392 8.64%
Mortgage-backed securities 18,870 1,263 6.69%
Investment securities 18,419 1,108 6.02%
Other interest-earning assets 10,504 512 4.87%
------- ------ -----
Total interest-earning assets 110,181 8,275 7.51%
------- ------ -----
Noninterest-earning assets 2,778
-------
Total assets 112,959
-------
Interest-bearing liabilities:
NOW accounts 4,265 100 2.34%
Money market accounts 16,740 403 2.41%
Passbook savings accounts 13,325 391 2.93%
Certificates of deposits 56,911 3,297 5.79%
FHLB borrowings - - -%
------- ------ -----
Total interest-bearing liabilities 91,241 4,191 4.59%
------- ------ -----
Noninterest-bearing liabilities 1,103
-------
Total liabilities 92,344
-------
Stockholders' equity 20,615
-------
Total liabilities and equity 112,959
-------
Net interest income/interest rate $4,084 2.92%
spread ====== ====
Net interest margin (2) 3.71%
====
Ratio of average interest-earning
assets to average interest-bearing 120.76%
liabilities ======
</TABLE>
(1) Total loans, net, include nonaccruing loans.
(2) Net interest margin is net interest income divided by interest-earning
assets.
6
<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,
-------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------ ------------------------------------------------------
Increase Increase
(Decrease) Due to (Decrease) Due to
----------------- -----------------
Total Total
Increases Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $ 22 $(105) $(83) $(27) $(242) $(269)
Investment securities (139) (282) (421) 175 188 363
Mortgage-backed securities (18) (149) (167) 9 46 55
Loans receivable (111) 338 227 (199) 360 161
---- ---- ---- ----- ----- -----
Total interest income (246) (198) (444) (42) 352 310
---- ---- ---- ----- ----- -----
Interest expense attributable to:
NOW accounts (1) 10 9 (1) 6 5
Money market accounts 35 (59) (24) 47 (177) (130)
Passbook savings accounts (1) (13) (14) (17) (15) (32)
Certificates of deposit 28 (185) (157) (231) (139) (370)
FHLB advances 5 344 349 - 3 3
---- ---- ---- ----- ----- -----
Total interest expense 66 97 163 (202) (322) (524)
---- ---- ---- ----- ----- -----
Increase (decrease) in net interest
income $(312) $(295) $(607) $ 160 $ 674 $ 834
====== ====== ====== ====== ======= =======
</TABLE>
7
<PAGE> 8
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND
1999
GENERAL. The Company recorded net income of $670,000 for the year ended
September 30, 2000, compared to $989,000 for the year ended September 30, 1999.
The decrease resulted primarily from a decrease in net interest income of
$402,000 and an increase in salaries and benefits of $228,000, offset by
decreases in various other non-interest expense of $135,000 and a decrease in
income taxes of $164,000.
NET INTEREST INCOME. Interest income decreased $239,000 for the year
ended September 30, 2000, compared to the year ended September 30, 1999. This
was a result of a decrease in average interest-earning assets of $4.7 million
resulting from a special $3 per share capital distribution to shareholders
totaling $8.0 million paid in June 1999.
Interest expense for the year ended September 30, 2000 was $3.8
million, an increase of $163,000 or 4.4%. The increase in interest expense was a
result of an increase in the cost of funds from 4.51% for the year ended
September 30, 1999 to 4.71% for the year ended September 30, 2000.
The Company's net interest rate spread was 2.71% for the year ended
September 30, 2000, compared to 3.00% for the year ended September 30, 1999.
PROVISION FOR LOAN LOSSES. For the year ended September 30, 2000, there
was no provision for loan losses; there was a provision of $8,000 for the year
ended September 30, 1999. 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 at September 30, 2000, the same balance at
September 30, 1999. The Savings Bank had no-charge offs in fiscal 2000.
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 $4,000, or 3.4%, to $121,000 for the year ended September 30, 2000,
compared to $117,000 for the same period in 1999. This increase was primarily
due to an increase in fee income. Non-interest expense increased $93,000 or
2.80%, to $3.4 million. The primary reason for this increase was an increase in
salaries and employee benefits of $228,000, partially offset by a $62,000
decrease in advertising and a $29,000 decrease in occupancy expenses. The
increase in salaries and employee benefits was primarily the result of costs
associated with the ESOP and the RRP.
8
<PAGE> 9
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 20, 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. 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.
9
<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, 2000 and
1999, the Savings Bank had $6 million and $1 million, respectively, 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, 2000, the total approved loan commitments outstanding,
excluding construction loans, amounted to $527,000. At the same date, the
unadvanced portion of construction loans approximated $1.8 million. There were
no investment securities scheduled to mature within one year or less.
Certificates of deposit scheduled to mature in one year or less at September 30,
2000 totaled $30.8 million. The Savings Bank did not have any mortgage-backed
securities scheduled to mature in one year or less at September 30, 2000.
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
liquidity for September 2000 was approximately $18.5 million or 22.4%.
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,
except for savings institutions with the highest examination rating and
acceptable levels of risk, 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. 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, 2000.
10
<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, 2000. 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 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.
Management has adopted SFAS No. 133, and it has not had 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.
11
<PAGE> 12
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 financial institutions may
increase as they engage in activities not permitted prior to enactment of the
GLB Act.
12
<PAGE> 13
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SEPTEMBER 30, 2000, 1999 AND 1998
PAGE
Independent Auditors' Report 14
Consolidated Financial Statements
Consolidated Statements of Financial Condition 15
Consolidated Statements of Income 16
Consolidated Statements of Shareholders' Equity 17
Consolidated Statements of Cash Flows 18
Notes to the Consolidated Financial Statements 19-41
13
<PAGE> 14
VONLEHMAN & COMPANY INC.
--------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS ADVISORS
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, 2000
and 1999 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the years ended September 30, 2000, 1999 and
1998. 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, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the years ended September 30, 2000, 1999 and 1998 in conformity with
generally accepted accounting principles.
VONLEHMAN & COMPANY INC.
Fort Mitchell, Kentucky
October 27, 2000
14
<PAGE> 15
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
2000 1999
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Cash and due from Banks $ 605 $ 937
Interest Bearing Deposits in Other Banks 4,385 2,504
--------- ---------
Total Cash and Cash Equivalents 4,990 3,441
Investment Securities Held to Maturity, At Cost (Market Value of
of $14,512 and $16,664 at September 30, 2000 and 1999, Respectively) 14,842 16,999
Mortgage-Backed Securities Held to Maturity, At Cost (Market Value of
$16,360 and $19,610 at September 30, 2000 and 1999, Respectively) 16,637 19,968
Loans Receivable, Net 70,682 69,089
Interest Receivable 836 867
Premises and Equipment, Net 1,500 1,534
Federal Home Loan Bank Stock, At Cost 1,559 1,451
Federal Income Tax - Refund Receivable 409 11
Other Assets 59 61
--------- ---------
TOTAL ASSETS $ 111,514 $ 113,421
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 75,462 $ 81,654
Short-Term Borrowings 6,000 1,000
Advances from Borrowers for Taxes
and Insurance 405 381
Deferred Federal Income Tax Liability 250 45
Other Liabilities 286 162
--------- ---------
TOTAL LIABILITIES 82,403 83,242
--------- ---------
EQUITY
Preferred Stock (1,000,000 Shares, No Par Value, Authorized,
No Shares Issued or Outstanding) - -
Common Stock (6,000,000 Shares, No Par Value, Authorized
2,625,950 in 2000 and 2,650,950 in 1999, Issued and
Outstanding) - -
Additional Paid in Capital 18,266 18,194
Retained Earnings-Substantially Restricted 13,817 13,890
Treasury Stock (45,500 Shares in 2000 and 20,500 Shares in 1999,
at Cost) (489) (262)
Unearned ESOP Shares (1,360) (1,643)
Shares Acquired by RRP Trust (1,123) -
--------- ---------
TOTAL EQUITY 29,111 30,179
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 111,514 $ 113,421
========= =========
</TABLE>
See auditors' report and accompanying notes.
15
<PAGE> 16
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999 1998
------------ ----------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 5,780 $ 5,553 $ 5,392
Mortgage-Backed Securities 1,151 1,318 1,263
Investments 1,050 1,266 1,108
Interest-Bearing Deposits 160 243 512
------------ ----------- ------------
Total Interest Income 8,141 8,380 8,275
------------ ----------- ------------
INTEREST EXPENSE
Deposits 3,478 3,665 4,191
FHLB Advances 352 2 -
------------ ----------- ------------
Total Interest Expense 3,830 3,667 4,191
------------ ----------- ------------
NET INTEREST INCOME 4,311 4,713 4,084
PROVISION FOR LOSSES ON LOANS - 8 74
------------ ----------- ------------
Net Interest Income After Provision for
Losses on Loans 4,311 4,705 4,010
------------ ----------- ------------
NON-INTEREST INCOME 121 117 111
------------ ----------- ------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 2,330 2,102 1,921
Occupancy Expense of Premises 270 268 244
Federal Deposit Insurance Premiums 25 54 60
Data Processing Services 120 109 114
Advertising 71 133 119
Property and License Taxes 102 119 98
Office Expenses 138 140 166
Other 361 399 275
------------ ----------- ------------
Total Non-Interest Expense 3,417 3,324 2,997
------------ ----------- ------------
Income Before Federal Income Tax 1,015 1,498 1,124
Expense
FEDERAL INCOME TAX EXPENSE 345 509 380
------------ ----------- ------------
NET INCOME $ 670 $ 989 $ 744
============ =========== ============
BASIC EARNINGS PER COMMON SHARE $ 0.27 $ 0.40 $ 0.22
============ =========== ============
DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ 0.40 $ 0.22
============ =========== ============
</TABLE>
See auditors' report and accompanying notes.
16
<PAGE> 17
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL SHARES SHARES
PAID-IN RETAINED TREASURY ACQUIRED ACQUIRED
CAPITAL EARNINGS STOCK BY ESOP BY RRP
-------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 $ - $ 13,090 $ - $ - $ -
NET INCOME - 744 - - -
DISPOSAL OF AFS SECURITIES - - - - -
PROCEEDS FROM PUBLIC OFFERING 25,930 - - (2,137) -
ESOP COMMON SHARES RELEASED
FOR ALLOCATION 63 - - 200 -
DIVIDENDS DECLARED 15 (187) - - -
-------------- ------------ ------------ ------------- ------------
BALANCE AT SEPTEMBER 30, 1998 26,008 13,647 - (1,937) -
NET INCOME - 989 - - -
RETURN OF CAPITAL DISTRIBUTION (7,983) - 30 - -
ESOP COMMON SHARES RELEASED
FOR ALLOCATION 110 - - 294 -
DIVIDENDS DECLARED 59 (746) - - -
TREASURY SHARES PURCHASED - - (292) - -
-------------- ------------ ------------ ------------- ------------
BALANCE AT SEPTEMBER 30, 1999 18,194 13,890 (262) (1,643) -
NET INCOME - 670 - - -
ESOP COMMON SHARES RELEASED FOR ALLOCATION 72 - - 283 -
RRP SHARES RELEASED FOR ALLOCATION - - - - (1,123)
DIVIDENDS DECLARED - (743) - - -
TREASURY SHARES PURCHASED - - (227) - -
-------------- ------------ ------------ ------------- ------------
BALANCE AT SEPTEMBER 30, 2000 $ 18,266 $ 13,817 $ (489) $ (1,360) $ (1,123)
============== ============ ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAINS TOTAL
ON AFS SHAREHOLDERS'
SECURITIES EQUITY
-------------- -------------------
<S> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 $ 1 $ 13,091
NET INCOME - 744
DISPOSAL OF AFS SECURITIES (1) (1)
PROCEEDS FROM PUBLIC OFFERING - 23,793
ESOP COMMON SHARES RELEASED
FOR ALLOCATION - 263
DIVIDENDS DECLARED - (172)
-------------- -------------------
BALANCE AT SEPTEMBER 30, 1998 - 37,718
NET INCOME - 989
RETURN OF CAPITAL DISTRIBUTION - (7,953)
ESOP COMMON SHARES RELEASED
FOR ALLOCATION - 404
DIVIDENDS DECLARED - (687)
TREASURY SHARES PURCHASED - (292)
-------------- -------------------
BALANCE AT SEPTEMBER 30, 1999 - 30,179
NET INCOME - 670
ESOP COMMON SHARES RELEASED FOR ALLOCATION - 355
RRP SHARES RELEASED FOR ALLOCATION - (1,123)
DIVIDENDS DECLARED - (743)
TREASURY SHARES PURCHASED - (227)
-------------- -------------------
BALANCE AT SEPTEMBER 30, 2000 $ - $ 29,111
============== ===================
</TABLE>
See auditors' report and accompanying notes.
17
<PAGE> 18
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 670 $ 989 $ 744
Reconciliation of Net Income with
Cash Flows from Operations
Depreciation 110 108 102
Provision for Losses on Loans - 8 74
Shares Released to ESOP 355 404 263
FHLB Stock Dividends (108) (97) (94)
Deferred Federal Income Tax 205 (127) 10
Gain on Sale of REO - - (2)
Changes In
Interest Receivable 31 24 (179)
Other Assets 2 14 1
Federal Income Tax Receivable / Liability (398) (3) 18
Other Liabilities 124 81 (20)
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 991 1,401 917
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment Securities Held to Maturity
Purchased - (8,569) (20,502)
Matured 2,157 14,641 11,503
Mortgage-Backed Securities Held to Maturity
Purchased - (3,090) (9,103)
Principal Collected 3,331 5,474 4,613
Loan Originations and Repayments, Net (1,593) (7,074) (737)
Proceeds from Sale of Real Estate Owned - 138 81
Purchases of Property and Equipment (76) (16) (132)
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 3,819 1,504 (14,277)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on Short-Term Borrowings 6,000 1,000 -
Repayment on Short-Term Borrowings (1,000) - -
Advances from Borrowers for Taxes and Insurance 24 38 (117)
Changes in Deposits (6,192) 2,170 (10,711)
Capital Distributions Paid (743) (8,670) (172)
Net Proceeds from Issuance of Common Shares - - 23,793
Treasury Shares Acquired (227) (262) -
Shares Acquired by RRP (1,123) - -
-------------- -------------- --------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (3,261) (5,724) 12,793
-------------- -------------- --------------
CHANGE IN CASH AND CASH EQUIVALENTS 1,549 (2,819) (567)
BEGINNING BALANCE, CASH AND CASH EQUIVALENTS 3,441 6,260 6,827
-------------- -------------- --------------
ENDING BALANCE, CASH AND CASH EQUIVALENTS $ 4,990 $ 3,441 $ 6,260
============== ============== ==============
</TABLE>
See auditors report and accompany notes.
18
<PAGE> 19
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Columbia Financial of Kentucky, Inc. (the Company) provides financial
services to individuals and corporate customers, and is subject to
competition from other financial institutions. The Company is also subject
to the regulations of certain Federal agencies and undergoes periodic
examinations by those regulatory authorities.
The Company is a holding company whose activities are primarily limited to
holding the stock of Columbia Federal Savings Bank (the Bank). The Bank
conducts a general banking business in Northern Kentucky, which consists of
attracting deposits from the general public and primarily applying those
funds to the origination of loans for residential, consumer and
nonresidential purposes. The Bank's profitability is significantly dependent
on net interest income, which is the difference between interest income
generated from interest-earning assets (i.e., loans and investments) and the
interest expense paid on interest-bearing liabilities (i.e., customer
deposits and borrowed funds). Net interest income is affected by the
relative amount of interest-earning assets and interest-bearing liabilities
and the interest received or paid on these balances. The level of interest
rates paid or received by the Bank can be significantly influenced by a
number of environmental factors, such as governmental monetary policy, that
are outside management's control.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Columbia
Financial of Kentucky, Inc. and its subsidiary, Columbia Federal Savings
Bank. All material intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses
for the year. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains appraisals for significant properties.
Substantial portions of the Banks' loans are secured by real estate in local
markets. In addition, foreclosed real estate is located in this same market.
Accordingly, the ultimate collectibility of a substantial portion of the
Banks' loan portfolio and the recovery of a substantial portion of the
carrying amount of foreclosed real estate are susceptible to changes in
local market conditions.
19
<PAGE> 20
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. The
Company currently has no investments in this category.
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 discounts, if any, are amortized
to income using the interest method over the life of the securities.
20
<PAGE> 21
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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.
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 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, 2000 and 1999, 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.
21
<PAGE> 22
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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.
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. 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.
22
<PAGE> 23
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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>
2000 1999 1998
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Interest $3,830 $3,667 $4,191
====== ====== ======
Income Taxes $ 557 $ 633 $ 352
====== ====== ======
</TABLE>
The Company had non-cash investing or financing activities as follows:
<TABLE>
<S> <C> <C> <C>
Real Estate at Cost Acquired Through
Foreclosure of Mortgage Loans $ - $ 138 $ 153
====== ====== ======
FHLB Stock Dividends Received $ 108 $ 97 $ 94
====== ====== ======
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
Investment securities as of September 30, 2000 and 1999 consisted of the
following:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
2000 (In Thousands)
----
<S> <C> <C> <C> <C>
U.S. Government and Federal Agency
Obligations Held to Maturity $14,842 $ 42 $(372) $14,512
======= ==== ====== =======
1999
----
U.S. Government and Federal Agency
Obligations Held to Maturity $16,999 $ 4 $(339) $16,664
======= ==== ====== =======
</TABLE>
The following is a summary of maturities of securities held-to-maturity as
of September 30, 2000:
<TABLE>
<CAPTION>
Amortized Estimated
Amounts maturing in: Cost Market Value
--------- ------------
(In Thousands)
<S> <C> <C>
One year or less $ - $ -
After one year through five years 13,992 13,620
After five through ten years 850 892
------- -------
Totals $14,842 $14,512
======= =======
</TABLE>
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
The following is a summary of interest earned on investments:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
U.S. Government and Agency Securities $ 942 $1,133 $ 946
Corporate Notes - 35 68
Dividends on FHLB Stock 108 98 94
------ ------ ------
$1,050 $1,266 $1,108
====== ====== ======
</TABLE>
NOTE 4 - MORTGAGE-BACKED SECURITIES
The balances in mortgage-backed securities as of September 30, 2000 and 1999
were comprised of:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
2000 (In Thousands)
----
<S> <C> <C> <C> <C>
Government National Mortgage
Association $ 3,953 $ 35 $ (55) $ 3,933
Federal National Mortgage Association 9,874 1 (193) 9,682
Federal Home Loan Mortgage Corporation 2,810 3 (68) 2,745
------- ---- ------ -------
Totals $16,637 $ 39 $(316) $16,360
======= ==== ===== =======
1999 (In Thousands)
----
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
======= ==== ===== =======
</TABLE>
The following is a summary of maturities of mortgaged-backed securities held
to maturity as of September 30, 2000:
Amounts maturing in:
<TABLE>
<CAPTION>
Cost Market Value
---- ------------
(In Thousands)
<S> <C> <C>
After one year through five years $ 1,581 $ 1,539
After five years through ten years 2,662 2,613
After ten years 12,394 12,208
------- -------
Totals $16,637 $16,360
======= =======
</TABLE>
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES ON LOANS
The balances in loans receivable as of September 30, 2000 and 1999 were
comprised of:
<TABLE>
<CAPTION>
2000 1999
------- -------
(In Thousands)
<S> <C> <C>
Mortgage Loans:
One-to Four-Family Residential $60,994 $58,675
Other 12,330 14,603
Loans on Deposits 187 38
------- -------
73,511 73,316
Less:
Net Deferred Loan Origination Fees (711) (753)
Loans in Process (1,818) (3,174)
Allowance for Losses on Loans (300) (300)
------- -------
Loans Receivable, Net $70,682 $69,089
======= =======
</TABLE>
A summary of activity in the allowance for loan losses for September 30,
2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at Beginning of the Year $300 $300 $300
Additions to Allowance - 8 74
Charge Offs During the Year - (8) (74)
---- ---- ----
Balance at End of the Year $300 $300 $300
==== ==== ====
</TABLE>
The Bank had no loans on non-accrual status as of September 30, 2000 and
1999.
NOTE 6 - LOAN COMMITMENTS
As of September 30, 2000, the Bank had fixed- and adjustable-rate loan
commitments as follows:
<TABLE>
<CAPTION>
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
First Mortgage Loans
on One- to Four-Family
Residential Property $252 $275 $ 527
==== ==== =====
Weighted Average Interest Rates 9.66% 7.64% 8.60%
==== ==== =====
</TABLE>
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest at September 30, 2000 and 1999 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
------- -------
(In Thousands)
<S> <C> <C>
Loans $ 477 $ 458
Mortgage-Backed Securities 107 127
Investments and Other 252 282
------- -------
Totals $ 836 $ 867
======= =======
</TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment as of September 30, 2000 and 1999 was comprised of:
<TABLE>
<S> <C> <C>
Land $ 347 $ 347
Buildings and Improvements 1,992 1,984
Furniture and Equipment 611 620
------- -------
2,950 2,951
Accumulated Depreciation (1,450) (1,417)
------- -------
Premises and Equipment, Net $ 1,500 $ 1,534
======= =======
</TABLE>
NOTE 9 - DEPOSITS
A breakdown of deposits by interest rates and types as of September 30, 2000
and 1999 follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Balances by Interest Rate Amount Percent Amount Percent
------------------------- ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C>
Passbooks (2000 - 2.75%,
1999 -2.75%) $11,900 15.77% $13,082 16.02%
Money Market Deposit Accounts
(2000 - 2.50%, 1999 - 2.50%) 7,759 10.28 9,638 11.81
Now Accounts (2000 - 2.00%,
1999 - 2.00%) 4,730 6.27 5,187 6.35
Christmas Club
(Non-Interest Bearing) 64 .09 60 .07
Certificates of Deposit:
3.00% - 4.00% 40 .05 42 .05
4.01% - 5.00% 4,343 5.76 30,781 37.70
5.01% - 6.00% 18,997 25.17 17,454 21.37
6.01% - 7.00% 27,173 36.01 5,410 6.63
7.01% - 8.00% 456 .60 - -
------- ------ ------- ------
Totals $75,462 100.00% $81,654 100.00%
======= ====== ======= ======
</TABLE>
For NOW accounts and money market accounts, bonus interest rates are paid
on balances over $2,500 of .25%.
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NOTE 9 - DEPOSITS (CONTINUED)
The scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------------
2001 2002 2003 2004 Total
------- ------- ------ ---- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00% and under $ - $ 40 $ - $ - $ 40
4.01%-4.50% - - - - -
4.51%-5.00% 3,411 932 - - 4,343
5.01%-5.50% 2,269 2,599 2,290 340 7,498
5.51%-6.00% 7,894 2,500 983 122 11,499
6.01%-6.50% 16,642 5,646 436 293 23,017
6.51%-7.00% 596 3,560 - - 4,156
7.01%-7.50% - 456 - - 456
------- ------- ------ ---- -------
Totals $30,812 $15,733 $3,709 $755 $51,009
======= ======= ====== ==== =======
</TABLE>
The total of deposit accounts with a balance of $100,000 or more was
approximately $5,884,000 and $7,913,000 at September 30, 2000 and 1999,
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,
------------------------------------------
2000 1999 1998
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Passbook Savings Accounts $ 345 $ 359 $ 392
Money Market Deposit Accounts 249 274 403
Certificates of Deposit 2,770 2,927 3,296
Now Accounts 114 105 100
------ ------ ------
Interest Expense on Deposits $3,478 $3,665 $4,191
====== ====== ======
</TABLE>
NOTE 10 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
At September 30, 2000 and 1999, the Bank had outstanding FHLB advances of
$6,000,000 and $1,000,000, respectively. FHLB advances which were 90-day
advances totaled $4,000,000 and carried an adjustable interest rate at
September 30, 2000 of 6.9%. FHLB advances which were 180-day advances, due
January 22, 2001, totaled $2,000,000 and carried a fixed interest rate of
6.89%. The advances were collateralized by the Bank's first mortgage loans.
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NOTE 11 - RETIREMENT PLANS
The Bank maintains a 401(k) retirement plan for the benefit of all its
employees. Employees can contribute up to fifteen percent (15%) of their
compensation to the plan. The Bank matches one-half of the employees'
contributions up to a maximum employer match of three percent (3%) of
compensation. By its nature, the plan is fully funded.
The Bank participates in a non-contributory multi-employer defined benefit
retirement plan covering substantially all employees. Eligibility for this
plan includes one year of service, age 21 and working 1,000 hours. Due to
the nature of this multi-employer plan, separate accumulated benefit and net
assets available for benefits is unavailable for the Bank's portion.
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 require that any third party borrowing by the ESOP be
reflected as a liability on the Company's consolidated statements of
financial condition. Since the ESOP borrowed from the Company, such
obligation is not treated as a liability, but is excluded from stockholders'
equity. If the ESOP purchases newly issued shares from the Company, total
shareholders' equity would neither increase nor decrease, but per share
shareholders' equity and per share net earnings would decrease as the newly
issued shares are allocated to the ESOP participants.
The ESOP is subject to the requirements of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and the regulations of the IRS and
the Department of Labor thereunder.
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NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
The fair value of the 169,333 and 204,519 unearned ESOP shares at September
30, 2000 and 1999 was approximately $1,439,000 and $2,710,000, respectively.
Shares committed to be released during 2000 and 1999 were 35,186 and 36,573,
respectively. Shares allocated during 2000 and 1999 were 35,186 and 36,573,
respectively.
Employee and employer contributions to the 401(k) plan, retirement plan
expense and ESOP expense were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
401(k) Plan
Employee Contributions $ 69 $ 66 $ 68
Employer Contributions 34 33 31
Multi-Employer Defined
Benefit Retirement Plan 84 81 87
ESOP 377 403 263
</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.
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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>
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Deferred Tax Assets
Net Operating Loss (Company) $ - $ 164
Accrued RRP 14 20
Allowance for Loan Losses 102 102
----- -----
Total Deferred Tax Asset 116 286
----- -----
Deferred Tax Liabilities
Book Value of Federal Home Loan
Bank Stock Over Tax Basis 291 250
Special Tax Bad Debt Deduction 42 58
Depreciation 33 23
----- -----
Total Deferred Tax Liabilities 366 331
----- -----
Net Deferred Asset (Liability) $(250) $ (45)
===== =====
</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>
2000 1999 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Computed Tax at the Expected
Statutory Rate $345 $509 $382
Nondeductible Expenses 1 - 1
Other Differences (1) - (3)
---- ---- ----
$345 $509 $380
==== ==== ====
Effective Rate 34% 34% 34%
==== ==== ====
</TABLE>
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 14 - INCOME TAXES (CONTINUED)
The components of income tax expense at September 30 are summarized as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current Tax Expense $140 $636 $370
Deferred Tax (Benefit) Expense 205 (127) 10
---- ---- ----
Income Tax Expense $345 $509 $380
==== ==== ====
</TABLE>
NOTE 15 - STOCK COMPENSATION PLANS
On July 15, 1999, the shareholders approved a Recognition and Retention Plan
("RRP") and the Company awarded 106,438 common shares to various employees.
These awards vest ratably over a five-year period commencing in July 2000. A
provision of $200,000 and $53,000 was charged to expense during the years
ended September 30, 2000 and 1999, respectively.
Also, on July 15, 1999, the shareholders approved a 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. Options have been granted for 252,600 shares to
members of the board, executive officers and certain employees at the fair
value of $11.00 per share. As of September 30, 2000, 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 its stock option plan. Accordingly, no compensation cost has
been recognized for the plan. Had compensation cost for the company's stock
option 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 Corporation's net earnings and earnings per share for 1999
would have been reduced to the pro forma amounts indicated below:
<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>
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NOTE 15 - STOCK COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant based
on 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,
employees and their relatives. The activity on these loans is shown below:
<TABLE>
<CAPTION>
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Balance at Beginning of Year $1,330 $1,078
New Loans Made 450 396
Payment of Principal (241) (144)
------ ------
Balance at End of Year $1,539 $1,330
====== ======
</TABLE>
The Bank has 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 $1,325,000 and $1,317,000 as of September 30, 2000 and 1999,
respectively.
NOTE 17 - INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage loans to
individuals on residential properties. At September 30, 2000, the Bank's
assets consisted of significant amounts of mortgages that earned interest at
fixed interest rates. Those assets were funded primarily with short-term
liabilities that have interest rates that vary with market rates over time.
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NOTE 17 - INTEREST RATE RISK (CONTINUED)
At September 30, 2000, the Bank had interest-earning loans (including
mortgage-backed securities) 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 MBS's $75.1 7.88% 30 Years
Adjustable Mortgages and MBS's $15.0 7.31% 30 Years
INTEREST-BEARING LIABILITIES
Deposit Accounts $75.5 4.59% 5 Years
Short-Term Borrowings $ 6.0 6.35% 1 Year
</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, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Net Income
Per OTS Report $ 500 $ 878 $ 540
Net Income from Holding Company
(Adjusted for Consolidating
Items) 170 111 204
Net Income Per Statements ------- ------- -------
of Income $ 670 $ 989 $ 744
======= ======= =======
Retained Earnings
Per OTS Report $15,624 $14,508 $13,630
Net Retained Earnings of Holding
Company (Adjusted for Con-
solidating Items) (1,807) (618) 17
------- ------- -------
Retained Earnings Per
Balance Sheets $13,817 $13,890 $13,647
======= ======= =======
</TABLE>
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NOTE 19 - REGULATORY CAPITAL REQUIREMENTS
Regulations require that the Bank meet certain minimum capital standards.
Additional regulations provide that the OTS may require corrective action
when a savings association's capital ratios fall below certain levels.
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less then 1.5% of the association's adjusted total
assets. Tangible capital is defined in the OTS regulations as core capital
minus intangible assets.
"Core capital" is comprised of common shareholders' equity (including
retained earnings), noncumulative preferred stock and related surplus,
minority interests in consolidated subsidiaries, certain nonwithdrawable
accounts and pledged deposits of mutual associations. OTS regulations
require savings associations to maintain core capital of at least 4% of the
association's total assets, except for those associations with the highest
examination rating and acceptable levels of risk.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of "risk-weighted assets." Risk-based
capital is defined as adjusted core capital plus certain additional items of
capital, which in the case of the Bank includes a general loan loss
allowance of $300,000 at September 30, 2000.
The regulatory requirements and the Bank's actual capital at September 30,
2000 and 1999, are set forth below:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- --------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000
Total Risk-Based Capital $28,665 57.8% $3,966 8.0% $4,957 10.0%
(to Risk-Weighted Assets)
Tier 1 Capital 28,365 57.2 N/A N/A 2,974 6.0
(to Risk-Weighted Assets)
Tier 1 Capital 28,365 25.4 4,466 4.0 5,583 5.0
(to Total Assets)
Tangible Capital 28,365 25.4 1,675 1.5 n/a n/a
(to Total Assets)
As of September 30, 1999
Total Risk-Based Capital 27,549 55.4 3,981 8.0 4,976 10.0
(to Risk-Weighted Assets)
Tier 1 Capital 27,249 54.8 N/A N/A 2,986 6.0
(to Risk-Weighted Assets)
Tier 1 Capital 27,249 23.9 4,560 4.0 5,699 5.0
(to Total Assets)
Tangible Capital 27,249 23.9 1,710 1.5 n/a n/a
(to Total Assets)
</TABLE>
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NOTE 19 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Bank's management believes that, under the current regulations, the Bank
will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Bank, such as increased
interest rates or a downturn in the economy in areas where the Bank has most
of its loans, could adversely affect future earnings and, consequently, the
ability of the Bank to meet its future minimum capital requirements.
Under the "prompt corrective action" regulations of the OTS, a savings bank
that has not received the highest possible examination rating may become
subject to corrective action if its core capital is less than 4% of its
adjusted total assets.
NOTE 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.
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NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to amounts payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits. The
carrying amount of accrued interest payable approximates fair value.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------------
AMOUNT VALUE
------- -------
(In Thousands)
<S> <C> <C>
Financial Assets:
Cash and Cash Equivalents $ 4,990 $ 4,990
Investment Securities 14,842 14,512
Mortgage-backed Securities 16,637 16,360
Loans, Net 70,682 70,542
Financial Liabilities:
Deposits 75,462 74,993
FHLB Advances 6,000 6,000
</TABLE>
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
The basic earnings per share amounts for the years ended September 30, 2000
and 1999 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 2,448,000
and 2,458,000 for the years ended September 30, 2000 and 1999,
respectively.
The diluted earnings per share amounts are based upon the basic shares
outstanding, because options on 252,600 shares were not taken into account
because of their anti-dilutive effects.
36
<PAGE> 37
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 for $2.1 million, resulted in net proceeds of
$23.8 million.
At the time of the 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 that are both well-capitalized and
given favorable qualitative examination ratings by the OTS.
37
<PAGE> 38
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, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
December 31, March 31, June 30, September 30,
1999 2000 2000 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total Interest Income $2,047 $2,028 $2,023 $2,043
Total Interest Expense 899 928 987 1,015
------ ------ ------ ------
Net Interest Income 1,148 1,100 1,036 1,028
Provision for Losses on Loans - - - -
Other Income 48 24 23 25
General, Administrative and
Other Expense 912 898 779 828
------ ------ ------ ------
Earnings Before Income Taxes 284 226 280 225
Federal Income Taxes 96 77 95 77
------ ------ ------ ------
Net Earnings $ 188 $ 149 $ 185 $ 148
====== ====== ====== ======
Earnings Per Share:
Basic $ .08 $ .06 $ .07 $ .06
====== ====== ====== ======
Diluted $ .08 $ .06 $ .07 $ .06
====== ====== ====== ======
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
------ ------ ------ ------
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 800 128 140 96
------ ------ ------ ------
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
====== ====== ====== ======
</TABLE>
38
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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, 2000 and 1999 and the results of operations and cash flows for the
years ended September 30, 2000 and 1999.
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
ASSETS
Cash and Cash Equivalents $ 366 $ 2,796
Investment in Columbia Federal Savings Bank 28,365 27,249
Other Assets 3 2
Due from Columbia Federal Savings Bank 404 -
Deferred Tax Asset 14 184
------- -------
TOTAL ASSETS $29,152 $30,231
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued RRP Expenses $ 41 $ 53
------- -------
SHAREHOLDERS' EQUITY
Common Shares and Additional Paid-In Capital 32,129 31,862
Treasury Shares (489) (262)
Retained (Deficit) Earnings (46) 221
Unearned ESOP (1,360) (1,643)
Unearned RRP (1,123) -
------- -------
TOTAL SHAREHOLDERS' EQUITY 29,111 30,178
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,152 $30,231
======= =======
</TABLE>
39
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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>
Years Ended September 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
REVENUE
Interest Income $ 197 $ 423
Equity in Earnings of Columbia Federal
Savings Bank 1,116 878
------ ------
Total Revenue 1,313 1,301
GENERAL AND ADMINISTRATIVE EXPENSES 725 644
------ ------
Net Income Before Income Taxes 588 657
Federal Income Tax (Expense) Benefit (113) 138
------ ------
NET INCOME $ 475 $ 795
====== ======
</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 CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 475 $ 795
Reconciliation of Net Income with
Cash Flows from Operations:
Undistributed Earnings of Columbia Federal Savings Bank (1,116) (879)
Deferred Federal Income Tax 170 (138)
Shares Released to ESOP 355 403
Changes In
Accrued Interest Receivable - 15
Other Assets (1) 2
Accrued RRP Expenses (12) 53
------- --------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (129) 251
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Repayment of Loan to ESOP 196 194
Proceeds from Investment Securities - 1,091
Increase in Advances to Subsidiary (404) -
------- --------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (208) 1,285
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Treasury Shares Purchased (227) (262)
RRP Shares Purchased (1,123) -
Capital Distributions Paid (743) (8,670)
------- --------
NET CASH USED BY FINANCING ACTIVITIES (2,093) (8,932)
------- --------
CHANGES IN CASH AND CASH EQUIVALENTS (2,430) (7,396)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,796 10,192
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 366 $ 2,796
======= ========
</TABLE>
41
