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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-23935
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COLUMBIA FINANCIAL OF KENTUCKY, INC.
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(Exact name of registrant as specified in its charter)
Ohio 61-1319175
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2497 Dixie Highway, Ft. Mitchell, Kentucky 41017
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (606) 331-2419
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The issuer's revenues for the fiscal year ended September 30, 1999,
were $8.5 million.
Based upon the average bid and asked prices quoted by The Nasdaq Stock
Market, the aggregate market value of the voting stock held by non-affiliates of
the issuer on December 10, 1999, was $31,682,588.
2,650,950 of the issuer's common shares were issued and outstanding on
December 10, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the 1999 Annual Report to Shareholders of
Columbia Financial of Kentucky, Inc., are incorporated by reference into Part II
of this Form 10-K:
1. Management's Discussion and Analysis of Financial Condition and Results
of Operations;
2. Financial Statements and Supplemental Data; and
3. Selected Consolidated Financial Highlights
The following sections of the definitive Proxy Statement for the 2000
Annual Meeting of Shareholders of Columbia Financial of Kentucky, Inc., are
incorporated into Part III of this Form 10-K:
1. PROPOSAL ONE - ELECTION OF DIRECTORS;
2. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS; and
3. VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Columbia Financial of Kentucky, Inc. ("CFKY"), an Ohio corporation
formed in 1997, is a unitary savings and loan holding company which owns all of
the issued and outstanding common stock of Columbia Federal Savings Bank
("Columbia Federal"), a savings association chartered under the laws of the
United States. On April 15, 1998, CFKY acquired all of the common stock issued
by Columbia Federal upon its conversion from mutual to stock form (the
"Conversion").
Because CFKY's activities have been limited primarily to holding the
common stock of Columbia Federal since acquiring such common stock in connection
with the Conversion, the following discussion focuses primarily on the business
of Columbia Federal.
GENERAL
Columbia Federal is principally engaged in the business of making
permanent first mortgage loans secured by one- to four-family residential real
estate located in Columbia Federal's primary lending area and investing in U.S.
Government and agency obligations, interest-bearing deposits in other financial
institutions and mortgage-backed securities. Columbia Federal also originates
loans for the construction of residential real estate and loans secured by
multifamily real estate (over four units) and nonresidential real estate. The
origination of consumer loans, including loans secured by deposits and home
improvement loans, constitutes a small portion of Columbia Federal's lending
activities. Loan funds are obtained primarily from deposits, which are insured
up to applicable limits by the FDIC, and loan and mortgage-backed and related
securities repayments.
Columbia Federal conducts business from its main office located in Ft.
Mitchell, Kentucky, a branch office in each of the municipalities of Covington,
Crescent Springs and Erlanger, which are located in Kenton County, Kentucky, and
a branch office in Florence, which is located in Boone County, Kentucky.
Columbia Federal's primary market area consists of Boone County and Kenton
County, Kentucky.
In addition to the historic financial information included herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances and CFKY's operations and actual results
could differ significantly from those discussed in those forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein, but also include changes in the economy and
interest rates in the nation and in CFKY's general market area. See Exhibit 99
hereto, "Safe Harbor Under the Private Securities Litigation Reform Act of
1995," which is incorporated herein by reference.
LENDING ACTIVITIES
GENERAL. Columbia Federal's primary lending activity is the origination
of conventional mortgage loans secured by one- to four-family homes located in
Columbia Federal's primary lending area. Loans for the construction of one- to
four-family homes and mortgage loans on multifamily properties containing five
units or more and nonresidential properties are also offered by Columbia
Federal. Except for Title I home improvement loans which are insured by the
Federal Housing Administration ("FHA"), Columbia Federal does not originate
loans insured by the FHA or loans guaranteed by the Veterans Administration. In
addition to mortgage lending, Columbia Federal makes consumer loans secured by
deposits and home improvement loans. Columbia Federal originates its loans to
conform with the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines,
but has not sold any loans during the past five years.
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LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Columbia Federal's loan portfolio
at the dates indicated:
At September 30,
--------------------------------------------
1999 1998
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Percent Percent
of total of total
Amount loans Amount loans
------ ----- ------ -----
(Dollars in thousands)
Residential real estate loans:
One- to four-family residential $58,675 80.03% $53,579 81.21%
Multifamily residential 5,493 7.49 4,663 7.07
Nonresidential real estate loans 3,671 5.01 3,481 5.27
Construction loans 5,439 7.42 4,228 6.41
------- ------ ------- -------
Total real estate loans 73,278 99.95 65,951 99.96
Consumer loans:
Loans on deposits 38 .05 20 .03
Home improvement loans -- -- 5 .01
------- ------ ------- -------
Total consumer loans 38 .05 25 .04
------- ------ ------- -------
Total loans 73,316 100.00% 65,976 100.00%
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Less:
Loans in process 3,174 2,759
Deferred loan fees 753 756
Allowance for losses on loans 300 300
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Loans receivable, net $69,089 $62,161
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LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of September 30, 1999, regarding the dollar amount of loans
maturing in Columbia Federal's portfolio based on their contractual terms to
maturity. Demand loans and loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less.
Due during the years ending Due 4-5 Due 6-10 Due 11-20 Due more than
September 30, years years years 20 years
--------------------------- after after after after
2000 2001 2002 9/30/99 9/30/99 9/30/99 9/30/99 Total
---- ---- ---- ------- ------- ------- ------- -----
(In thousands)
FIXED-RATE LOANS
Residential real estate
loans:
One- to
four-family
(first mortgage) $ 37 $ 47 $165 $ 669 $ 8,910 $29,861 $12,388 $52,077
Home equity
(second mortgage) -- -- 3 -- 23 12 -- 38
Multifamily 22 -- -- -- 817 3,846 -- 4,685
Nonresidential real
estate loans -- -- 15 76 191 1,486 1,618 3,386
Construction loans 365 600 321 1,063 -- 2,563 527 5,439
---- ---- ---- ------ ------- ------- ------- -------
Total real
estate loans 424 647 504 1,808 9,941 37,768 14,533 65,625
Consumer loans:
Loans on deposits 38 -- -- -- -- -- -- 38
Other consumer -- -- -- -- -- -- -- --
---- ---- ---- ------ ------- ------- ------- -------
loans
Total consumer
loans 38 -- -- -- -- -- -- 38
---- ---- ---- ------ ------- ------- ------- -------
Total fixed-rate
loans 462 647 504 1,808 9,941 37,768 14,533 65,663
ADJUSTABLE-RATE LOANS
Residential real estate
loans:
One- to
four-family
(first mortgage) 12 18 25 197 986 3,204 2,084 6,526
Home Equity
(Second Mortgage) -- -- -- 34 -- -- -- 34
Multifamily -- -- -- -- 730 78 -- 808
Nonresidential real
estate loans -- -- 30 5 89 161 -- 285
Construction loans -- -- -- -- -- -- -- --
---- ---- ---- ------ ------- ------- ------- -------
Total real
estate loans 12 18 55 236 1,805 3,443 2,084 7,653
---- ---- ---- ------ ------- ------- ------- -------
Total loans $474 $665 $559 $2,044 $11,746 $41,211 $16,617 $73,316
==== ==== ==== ====== ======= ======= ======= =======
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Columbia Federal has been the origination of permanent conventional
loans secured by one- to four-family residences, primarily single-family
residences, located within Columbia Federal's primary market area. Each of such
loans is secured by a mortgage on the underlying real estate and improvements
thereon, if any. Of the total outstanding balance of one- to four-family
mortgage loans at September 30, 1999, approximately $19.9 million was secured by
non-owner occupied properties and $68,000 was secured by single-family
unimproved lots. Loans secured by non-owner-occupied properties are considered
to carry greater risk of loss because the borrower typically depends upon income
generated by the property to cover operating expenses and debt service. The
profitability of a property can be affected by economic conditions, governmental
policies and other factors beyond the control of the borrower.
OTS regulations limit the amount that Columbia Federal may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations, Columbia Federal
makes fixed-rate first mortgage loans on single-family or duplex, owner occupied
residences in amounts up to 80% of the value of the real estate and improvements
(the "Loan-to-Value Ratio" or "LTV"). Fixed-rate residential real estate loans
are offered by Columbia Federal for terms of up to 25 years, or 30 years for
first-time homebuyers.
Columbia Federal commenced the origination of adjustable-rate mortgage
loans ("ARMs") in 1982. ARMs are offered by Columbia Federal on single-family
residences, two- to four-family properties and non-owner occupied one- to
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four-family properties, in amounts up to 90% LTV for terms of up to 25 years and
with various alternative features. Columbia Federal requires private mortgage
insurance ("PMI") for the amount of fixed-rate loans and ARM loans in excess of
85% of the value of the real estate securing such loans. The interest rate
adjustment periods on the ARMs are either one year or three years. The interest
rate adjustments on ARMs presently originated by Columbia Federal are tied to
changes in the monthly average yield on the one- and three-year U.S. Treasury
constant maturities index, respectively. Rate adjustments are computed by adding
a stated margin, usually a minimum of 2.5%, to the index. The maximum allowable
adjustment for one-year adjustment periods is usually 1.5% with a maximum
adjustment of 6% over the term of the loan. The maximum allowable adjustment for
three-year adjustment periods is usually 2% with a maximum adjustment of 5% over
the term of the loan. The initial rate is dependent, in part, on how often the
rate can be adjusted.
Columbia Federal offers ARMs secured by single-family unimproved lots.
Such loans are made for five-year terms, with an LTV of up to 80% on properties
of up to five acres, and require proof, including an affidavit, that the owner
intends to build on the lot during the term of the loan. Interest rates for ARMs
secured by two- to four-family, non-owner-occupied or unimproved property are
between 0.50% and 1.00% higher than the interest rates for ARMs secured by
single-family, owner-occupied properties. Columbia Federal originates ARMs which
have initial interest rates lower than the sum of the index plus the margin.
Such loans are subject to increased risk of delinquency or default due to
increasing monthly payments as the interest rates on such loans increase to the
fully-indexed level, although such increase is considered in Columbia Federal's
underwriting of any such loans.
The aggregate amount of Columbia Federal's one- to four-family
residential real estate loans equaled approximately $58.7 million at September
30, 1999, and represented 80.0% of loans at such date. Of such amount,
approximately 11.1% were ARMs. The largest individual loan balance on a one- to
four-family loan at such date was $387,276. At such date, loans secured by one-
to four-family residential real estate with outstanding balances of $76,000, or
.1% of its one- to four-family residential real estate loan balance, were more
than 90 days delinquent. See "Delinquent Loans, Nonperforming Assets and
Classified Assets."
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one-
to four-family properties, Columbia Federal makes loans secured by multifamily
properties containing over four units. Such loans are made with fixed or
adjustable interest rates, a maximum LTV of 75% and a maximum term of 25 years.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower.
Columbia Federal attempts to reduce the risk associated with multifamily lending
by evaluating the credit-worthiness of the borrower and the projected income
from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. Columbia Federal currently requests financial
statements annually to enable Columbia Federal to monitor the loans and requires
annual financial statements for larger multifamily loans.
At September 30, 1999, loans secured by multifamily properties totaled
approximately $5.5 million, or 7.5% of total loans, all of which were secured by
property located within Columbia Federal's primary market area, and all of which
were performing in accordance with their terms. The largest property securing
such a loan is an apartment complex. At September 30, 1999, approximately $4.7
million, or 6.4% of total loans, were fixed-rate multifamily loans.
NONRESIDENTIAL REAL ESTATE LOANS. Columbia Federal also makes loans
secured by nonresidential real estate located in Northern Kentucky, including
retail stores, warehouses, churches, motels, restaurants and a self-storage
facility. Such loans generally are originated with terms of up to 20 years and
may have fixed or adjustable rates. Such loans have a maximum LTV of 75%.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Columbia Federal has endeavored to reduce such
risk by evaluating the credit history and past performance of the borrower, the
location of the real estate, the quality of the management constructing and
operating the property, the debt service ratio, the quality and characteristics
of the income stream generated by the property and appraisals supporting the
property's valuation. Columbia Federal also requires personal guarantees on such
loans.
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At September 30, 1999, Columbia Federal had a total of $3.7 million
invested in nonresidential real estate loans, all of which were secured by
property located within Northern Kentucky. Such loans comprised approximately
5.0% of Columbia Federal's total loans at such date. At such date, Columbia
Federal had no delinquent nonresidential real estate loans. See "Delinquent
Loans, Nonperforming Assets and Classified Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its total capital. At September 30,
1999, Columbia Federal's nonresidential mortgage loans totaled 12.2% of Columbia
Federal's total capital.
CONSTRUCTION LOANS. Columbia Federal makes loans for the construction of
residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed rates or adjustable rates of interest and for terms
of up to 30 years. All of the construction loans originated by Columbia Federal
have been made to borrowers who intended to occupy the newly-constructed real
estate or to developers. Approximately 76.2% of the construction loan balance at
September 30, 1999, was secured by property owned by developers. All
construction loans are written as permanent loans but require the payment of
only interest until the construction is completed.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties because such
loans are more difficult to evaluate and monitor. Loan funds are advanced upon
the security of the project under construction, which is more difficult to value
before the completion of construction. Moreover, because of the uncertainties
inherent in estimating construction costs, it is relatively difficult to
evaluate accurately the LTV and the total loan funds required to complete a
project. In the event a default on a construction loan occurs and foreclosure
follows, Columbia Federal must take control of the project and attempt either to
arrange for completion of construction or dispose of the unfinished project.
Columbia Federal attempts to reduce such risks on loans to developers by
requiring personal guarantees and reviewing current personal financial
statements and tax returns and other projects undertaken by the developers.
At September 30, 1999, $5.4 million, or approximately 7.4% of Columbia
Federal's total loans, consisted of construction loans. All of Columbia
Federal's construction loans are secured by property located within Columbia
Federal's primary market area, and the economy of such lending area has been
relatively stable or growing. At September 30, 1999, all of such loans were
performing in accordance with their terms.
CONSUMER LOANS. Columbia Federal makes loans secured by deposits and a
limited number of home improvement loans not secured by mortgages. Home
improvement loans are made only at fixed rates of interest for terms of up to
five years. Loans secured by deposits are made with adjustable rates that vary
with the interest paid on the deposit and have a margin of three percent over
the interest rate being paid on the deposit.
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment and other adverse economic conditions. Although
Columbia Federal has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase.
At September 30, 1999, Columbia Federal had approximately $38,000, or
less than 1 percent of its total loans, invested in consumer loans, and none of
such loans were more than 90 days delinquent or nonaccruing. See "Delinquent
Loans, Nonperforming Assets and Classified Assets."
COMMERCIAL LOANS. Although Columbia Federal is considering offering
commercial loans, Columbia Federal does not currently issue any letters of
credit or originate or purchase any loans for commercial, business or
agricultural purposes, other than loans secured by real estate.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including continuing business with depositors, borrowers and
real estate developers, periodic newspaper advertisements, solicitations by
Columbia Federal's lending staff and walk-in customers. Columbia Federal does
not use third-party brokers or originators.
Loan applications for permanent mortgage loans are taken by loan
personnel. Columbia Federal obtains a credit report concerning the
credit-worthiness of the borrower. Columbia Federal limits the ratio of mortgage
loan payments to the borrower's income to 28% and the ratio of the borrower's
total debt payments to income to 36%. An appraisal of the fair market value of
the real estate on which Columbia Federal will be granted a mortgage to secure
the loan is usually prepared
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by an employee of Columbia Federal. As part of the appraisal and prior to
foreclosure on any delinquent loan, a visual inspection is performed to identify
obvious environmental concerns. If the visual inspection or the history of the
property provides reason to believe an environmental problem might exist,
Columbia Federal will conduct further investigations, which may include a Phase
I Environmental Site Assessment by an approved environmental consultant.
For multifamily and nonresidential mortgage loans, a personal guarantee
of the borrower's obligation to repay the loan is required. Columbia Federal
also obtains the borrower's financial statement, tax returns and information
with respect to prior projects completed by the borrower. Upon the completion of
the appraisal and the receipt of information on the borrower, the application
for a loan is submitted to the Loan Committee, comprised of certain management
officials, for approval or rejection if the loan amount does not exceed
$250,000. If the loan amount exceeds $250,000, or if the application does not
conform in all respects with Columbia Federal's underwriting guidelines, the
application is accepted or rejected by the Board of Directors.
If a mortgage loan application is approved, Columbia Federal does not
require title insurance but does obtain an attorney's opinion of title.
Borrowers are required to carry satisfactory fire and casualty insurance and
flood insurance, if applicable, and to name Columbia Federal as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Columbia
Federal also evaluates the feasibility of the proposed construction project and
the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Columbia Federal's loans provide that the entire balance of the loan is
due upon sale of the property securing the loan, and Columbia Federal generally
enforces such due-on-sale provisions. Columbia Federal's adjustable-rate loans
carry no prepayment penalties, but fixed-rate loans carry a 2% prepayment
penalty if the property is refinanced with another lender within five years of
the loan's origination.
LOAN ORIGINATIONS, PURCHASES AND SALES. Columbia Federal originated only
fixed-rate loans until 1982. Columbia Federal has not generally sold loans,
although Columbia Federal does originate its loans in accordance with secondary
market guidelines. Columbia Federal has occasionally purchased loans and
participated in loans originated by other institutions. At September 30, 1999,
Columbia Federal had $1.8 million in purchased and participating loans.
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The following table presents Columbia Federal's mortgage loan
origination and purchase activity for the periods indicated:
Years ended September 30,
-------------------------
1999 1998
---- ----
(In thousands)
Loan originations:
One- to four-family residential $15,849 $10,742
Multifamily residential 1,617 508
Nonresidential 2,056 1,044
Construction 3,770 4,552
Consumer 39 30
------- -------
Total loans originated 23,331 16,876
Loan purchases 1,674 972
------- -------
Total loans originated and purchased 25,005 17,848
Principal repayments 15,928 19,864
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Loan originations, net 9,077 (2,016)
Increase (decrease) due to other items,
net (1) (2,149) 2,599
------- -------
Net increase (decrease) in net loan portfolio $ 6,928 $ 583
======= =======
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(1) Consists of unearned and deferred fees, costs and the allowance for
losses on loans.
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital under the regulatory capital requirements plus any
additional loan reserve not included in total capital. A savings association may
lend to one borrower an additional amount not to exceed 10% of total capital
plus additional reserves if the additional amount is fully secured by certain
forms of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." In addition, the regulations require that loans to
certain related or affiliated borrowers be aggregated for purposes of such
limits. An exception to these limits permits loans to one borrower of up to
$500,000 "for any purpose."
Based on such limits, Columbia Federal was able to lend approximately
$4.1 million to one borrower at September 30, 1999. The largest amount Columbia
Federal had outstanding to one borrower at September 30, 1999, was $1.72
million, owed on several loans. Such loans were one- to four-family real estate,
nonresidential real estate and construction loans. All of such loans were
current at September 30, 1999.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Columbia Federal attempts
to cause the delinquency to be cured by contacting the borrower. In most cases,
delinquencies are cured promptly.
When a loan is nineteen days delinquent, the borrower is assessed a late
penalty. When a loan is thirty days delinquent, Columbia Federal sends the
borrower a delinquency notice. Depending upon the circumstances, Columbia
Federal may also inspect the property and inform the borrower of the
availability of credit counseling from Columbia Federal and counseling agencies.
After a loan is delinquent for 45 to 60 days, an attorney representing Columbia
Federal will send the borrower a notice advising the borrower of Columbia
Federal's intention to foreclose on the property in thirty days. Columbia
Federal may, depending upon the circumstances, arrange appropriate alternative
payment arrangements. A decision as to whether and when to initiate foreclosure
proceedings is based on such factors as the amount of the outstanding loan in
relation to the original indebtedness, the extent of the delinquency and the
borrower's ability and willingness to cooperate in curing delinquencies. If a
foreclosure occurs, the real estate is sold at public sale and may be purchased
by Columbia Federal.
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Real estate acquired by Columbia Federal as a result of foreclosure
proceedings is classified as REO until it is sold. When property is so acquired,
or deemed to have been acquired, it is initially recorded by Columbia Federal at
the lower of cost or fair value of the real estate, less estimated costs to
sell. Any reduction in fair value is reflected in a valuation allowance account
established by a charge to income. Costs incurred to carry other real estate are
charged to expense. Columbia Federal had no REO at September 30, 1999.
Columbia Federal does not place a loan on nonaccrual status until
foreclosure has occurred, although it does write it down to fair market value.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
At September 30,
----------------------------------------------------------
1999 1998
-------------------------- ------------------------------
Percent Percent
of net of total
Number Amount loans Number Amount loans
------ ------ ----- ------ ------ -----
(Dollars in thousands)
Loans delinquent for (1):
30 - 59 days 33 $1,143 .97% 18 $ 670 1.08%
60 - 89 days 5 123 .18 17 485 .78
90 days and over 1 76 .11 5 173 .28
-- ------ ---- -- ------ ----
Total delinquent loans 39 $1,342(2) 1.26% 40 $1,328(2) 2.14%
-- ====== ==== -- ====== ====
- ----------
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
(2) All delinquent loans at such date were secured by one- to four-family
residential real estate.
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The following table sets forth information with respect to Columbia
Federal's loans which are 90 days or more past due and other nonperforming
assets at the dates indicated. At such dates, Columbia Federal had no
non-accruing loans.
At September 30,
----------------
1999 1998
---- ----
(Dollars in thousands)
Accruing loans greater than 90 days
delinquent:
Real estate:
Residential $ 76 $ 173
Nonresidential -- --
Consumer -- --
------- -------
Total nonperforming loans 76 173
Real estate owned -- --
------- -------
Total nonperforming assets $ 76 $ 173
======= =======
Total nonperforming loans as a percentage
of total net loans .11% 0.28%
======= =======
Total nonperforming assets as a
percentage of total assets .07% 0.15%
======= =======
Allowance for losses on loans as a
percentage of nonperforming loans 394.74% 173.41%
======= =======
During the periods shown, Columbia Federal had no restructured loans
within the meaning of SFAS No. 15, as amended by SFAS No. 114. There are no
loans which are not currently classified as nonaccrual, more than 90 days past
due or restructured but which may be so classified in the near future because
management has concerns as to the ability of the borrowers to comply with
repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. "Doubtful" assets
have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable and
(ii) there is a high possibility of loss. An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
Generally, Columbia Federal classifies as "substandard" all loans that
are delinquent more than 90 days, unless management believes the delinquency
status is short-term due to unusual circumstances. Loans delinquent fewer than
90 days may also be classified if the loans have the characteristics described
above rendering classification appropriate.
The aggregate amount of Columbia Federal's classified assets at the
dates indicated were as follows:
At September 30,
----------------
1999 1998
---- ----
(In thousands)
Classified assets:
Substandard $76 $244
Doubtful -- --
Loss -- --
--- ----
Total classified assets $76 $244
=== ====
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Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an asset,
it may appeal this determination to the Regional Director of the OTS. Columbia
Federal had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Columbia Federal establish prudent general
allowances for losses on loans for any loan classified as substandard or
doubtful. If an asset, or portion thereof, is classified as loss, the
association must either establish specific allowances for losses in the amount
of 100% of the portion of the asset classified loss, or charge off such amount.
ALLOWANCE FOR LOSSES ON LOANS. Columbia Federal maintains an allowance
for losses on loans based upon a number of relevant factors, including, but not
limited to, the nature of the portfolio, credit concentrations, an analysis of
specific loans in the portfolio, known and inherent risks in the portfolio, the
estimated value of the underlying collateral, the assessment of general trends
in relevant real estate markets, and current and prospective economic
conditions, including property values, employment and occupancy rates, interest
rates and other conditions that may affect a borrower's ability to comply with
repayment terms.
The single largest component of Columbia Federal's loan portfolio
consists of one- to four-family residential real estate loans. Substantially all
of these loans are secured by residential real estate and require a down payment
of 20% of the lower of the sales price or appraised value of the real estate. In
addition, these loans are secured by property located principally in Columbia
Federal's lending area of Boone County and Kenton County, Kentucky. Columbia
Federal's practice of making loans only in its local market area and requiring a
20% down payment have contributed to a low historical charge-off history.
In addition to one- to four-family residential real estate loans,
Columbia Federal makes multifamily residential real estate, nonresidential real
estate and construction loans. These real estate loans are secured by property
in Columbia Federal's lending area and also require the borrower to provide a
down payment. Columbia Federal has not had any charge-offs from these other real
estate loan categories in the last 5 years.
A small portion of Columbia Federal's total loans consists of consumer
loans. Columbia Federal has recorded no charge-offs on consumer loans during the
last five years.
The allowance for losses on loans is reviewed quarterly by the Board of
Directors. While the Board of Directors believes that it uses the best
information available to determine the allowance for losses on loans, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected, if circumstances differ substantially from
the assumptions used in making the final determination.
-12-
13
The following table sets forth an analysis of Columbia Federal's
allowance for losses on loans for the periods indicated.
Years ended September 30,
-------------------------
1999 1998
---- ----
Total net loans outstanding $69,089 $62,161
======= =======
Average loans outstanding $66,549 $62,388
======= =======
Allowance for losses on loans
Balance at beginning of period $ 300 $ 300
Charge-offs
Real estate:
Residential 8 74
Nonresidential -- --
Consumer -- --
Recoveries
Real estate:
Residential -- --
Nonresidential -- --
Consumer -- --
------- -------
Net charge-offs 8 74
Provision for losses on loans 8 74
------- -------
Balance at end of period $ 300 $ 300
======= =======
Ratio of allowance for losses on
loans as a percent of net loans
outstanding 0.43% 0.48%
======= =======
Ratio of net charge-offs
(recoveries) to average net loans
outstanding during the period 0.01% 0.12%
======= =======
During the past five years, the allowance for losses on loans was
unallocated among the various types of loans made by Columbia Federal.
MORTGAGE-BACKED SECURITIES
Columbia Federal maintains a significant portfolio of mortgage-backed
securities in the form of Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA") participation certificates. Mortgage-backed securities
generally entitle Columbia Federal to receive a portion of the cash flows from
an identified pool of mortgages. FHLMC, FNMA and GNMA securities are each
guaranteed by their respective agencies as to principal and interest.
The FHLMC is a corporation chartered by the U.S. Government and
guarantees the timely payment of interest and the ultimate return of principal
on participation certificates. The FNMA is a corporation chartered by the U.S.
Congress and guarantees the timely payment of principal and interest on FNMA
securities. Although FHLMC and FNMA securities are not backed by the full faith
and credit of the U.S. Government, these securities are generally considered
among the highest quality investments with minimal credit risk. The GNMA is a
government agency. GNMA securities are backed by Federal Housing
Authority-insured and Veterans Administration-guaranteed loans. The timely
payment of principal and interest on GNMA securities is guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government.
Mortgage-backed securities generally yield less than individual loans
originated by Columbia Federal. In addition, a high rate of prepayment of the
underlying loans could have a material negative effect on the yield on the
securities, which are generally purchased at a premium over their original
principal amounts. Mortgage-backed securities present less credit risk
-13-
14
than loans originated by Columbia Federal and held in its portfolio, and
Columbia Federal has purchased some adjustable-rate mortgage-backed securities
as part of its effort to reduce its interest rate risk. If interest rates rise
in general, including the interest paid by Columbia Federal on its liabilities,
the interest rates on the loans backing the mortgage-backed securities will also
adjust upward. At September 30, 1999, $6.72 million of Columbia Federal's
mortgage-backed securities had adjustable rates.
The following table sets forth the carrying value and market value of
Columbia Federal's mortgage-backed securities at the dates indicated. All of
such securities are designated as held to maturity.
At September 30,
-------------------------------------------
1999 1998
------------------- -------------------
Carrying Market Carrying Market
Value Value Value Value
----- ----- ----- -----
(In thousands)
FNMA certificates $11,875 $11,648 $13,299 $13,356
GNMA certificates 4,444 4,452 4,382 4,484
FHLMC certificates 3,575 3,510 4,671 4,764
------- ------- ------- -------
Total mortgage-backed
securities $19,894 $19,610 $22,352 $22,604
======= ======= ======= =======
-14-
15
The following table sets forth information regarding scheduled
maturities, amortized costs, market value and weighted average yields of
Columbia Federal's mortgage-backed securities at September 30, 1999. Expected
maturities will differ from contractual maturities due to scheduled repayments
and because borrowers may have the right to call or prepay obligations with or
without prepayment penalties. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
At September 30, 1999
------------------------------------------------------------------------------------------------------------
After one to After five to
One year or less five years ten years After ten years Total mortgage-backed portfolio
---------------- ------------ ------------- --------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Mark Average
value yield value yield value yield value yield value value yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
FNMA certificates $ -- -% $386 5.75% $278 5.75% $11,261 6.34% $11,925 $11,648 6.31%
GNMA certificates -- -- -- -- 68 8.50 4,394 7.30 4,452 4,452 7.32
FHLMC certificates -- -- 40 9.22 491 8.28 3,060 7.50 3,591 3,510 7.63
----- ----- ---- ----- ---- ----- ------- ----- ------- ------- ----
Total $ -- -% $426 6.08% $827 7.45% $18,715 6.76% $19,968 $19,610 6.77%
===== ===== ==== ===== ==== ===== ======= ===== ======= ======= ====
-15-
16
INVESTMENT ACTIVITIES
OTS regulations require that Columbia Federal maintain a minimum amount
of liquid assets, which may be invested in U. S. Treasury obligations,
securities of various federal agencies, certificates of deposit at insured
banks, bankers' acceptances and federal funds. Columbia Federal is also
permitted to make investments in certain commercial paper, corporate debt
securities rated in one of the four highest rating categories by one or more
nationally recognized statistical rating organizations, and mutual funds, as
well as other investments permitted by federal regulations. See "REGULATION."
The following table sets forth the composition of CFKY's investment
securities at the dates indicated:
At September 30,
------------------------------------------------------------------------------------
1999 1998
-------------------------------------- -----------------------------------------
Carrying % of Market % of Carrying % of Market % of
value Total value Total value Total value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. Government and federal
agency securities held to
maturity $16,999 92% $16,664 92% $18,980 78% $19,148 78%
Corporate notes available for
sale -- -- -- 4,091 17 4,091 17
FHLB stock 1,451 8 1,451 8 1,354 5 1,354 5
------- --- ------- ----- ------- ----- ------- ---
Total investment securities $18,450 100% $18,115 100% $24,425 100% $24,593 100%
======= === ======= ===== ======= ----- ======= ===
The following tables set forth the contractual maturities, carrying
values, market values and average yields for CFKY's investment securities at
September 30, 1999.
At September 30, 1999
--------------------------------------------------------------------------------------------
One year or less After one to five years After five to ten years After ten years
-------------------- ----------------------- ----------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
value yield value yield value yield value yield
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
U.S. Government and
federal agency
securities held to
maturity $2,000 5.65% $11,990 6.06% $3,009 6.04% $-- --%
FHLB stock (1) 1,451 7.00 -- -- -- -- -- --
------ ---- ------- ---- ------ ---- --- --
Total $3,451 6.22% $11,990 6.06% $3,009 6.04% $-- --%
====== ==== ======= ==== ====== ==== === ==
At September 30, 1999
----------------------------------------------------
Weighted Weighted
average life Carrying Market average
in years value value yield
-------- ----- ----- -----
(Dollars in thousands)
U.S. Government
and federal
agency
securities
held to
maturity 4.78 $16,999 $16,664 5.89%
FHLB stock N/A 1,451 1,451 7.00(1)
---- ------- ------- ----
Total 4.78 $18,460 $18,115 5.97%
==== ======= ======= ====
- ----------
(1) The FHLB stock has no stated maturity. Columbia Federal is required by
regulation to maintain an investment in FHLB stock. The yield
indicated is the actual yield during fiscal 1999; there is no stated
yield.
-16-
17
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of
Columbia Federal's funds for use in lending and other investment activities. In
addition to deposits, Columbia Federal derives funds from FHLB advances,
interest payments and principal repayments on loans and mortgage-backed
securities, service charges and gains on the sale of assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows fluctuate
more in response to general interest rates and money market conditions.
DEPOSITS. Deposits are attracted principally from within Columbia
Federal's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
money market accounts, passbook savings accounts and term certificate accounts.
At September 30, 1999, $14.3 million of Columbia Federal's deposits were
individual retirement accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by the management of Columbia Federal based on Columbia
Federal's liquidity requirements, growth goals and interest rates paid by
competitors. Columbia Federal does not use brokers to attract deposits.
At September 30, 1999, Columbia Federal's certificates of deposit
totaled $53.7 million, or 65.7% of total deposits. Of such amount, approximately
$33.6 million in certificates of deposit mature within one year. Based on past
experience and Columbia Federal's prevailing pricing strategies, management
believes that a substantial percentage of such certificates will renew with
Columbia Federal at maturity. If there is a significant deviation from
historical experience, Columbia Federal can utilize borrowings from the FHLB as
an alternative to this source of funds.
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Columbia Federal at the dates
indicated:
At September 30,
------------------------------------------------------
1999 1998
-------------------------- --------------------------
Percent of Percent of
Amount total deposits Amount total deposits
------ -------------- ------ --------------
(Dollars in thousands)
Transaction accounts:
- ---------------------
NOW accounts (1) $ 5,187 6.35% $ 4,021 5.06%
Money market accounts (2) 9,638 11.81 9,953 12.52
Club Accounts 60 .07 64 0.08
Passbook savings accounts (3) 13,082 16.02 12,654 15.92
------- ------ ------- ------
Total transaction accounts 27,967 34.25 26,692 33.58
Certificates of deposit:
- ------------------------
2.01 - 4.00% 42 .05 42 0.05
4.01 - 6.00% 48,234 59.07 43,024 54.13
6.01 - 8.00% 5,411 6.63 9,726 12.24
------- ------ ------- ------
Total certificates of deposit 53,687 65.75 52,792 66.42
------- ------ ------- ------
Total deposits (4) $81,654 100.00% $79,484 100.00%
======= ====== ======= ======
- ----------
(1) Columbia Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September
30, 1999 and 1998, the weighted average rates on NOW accounts were
2.20% and 2.24%, respectively.
(Footnotes continued on next page.)
-17-
18
(2) Columbia Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. At
September 30, 1999 and 1998, the weighted average rates on money market
accounts were 2.73% and 2.78%, respectively.
(3) Columbia Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted
average interest rate on passbook accounts was 2.75% and 2.75% at
September 30, 1999 and 1998, respectively.
(4) IRAs are included in the various certificates of deposit balances. IRAs
totaled $14.3 million and $14.0 million as of September 30, 1999 and
1998, respectively.
The following table shows rate and maturity information for Columbia
Federal's certificates of deposit as of September 30, 1999:
Amount Due
--------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- ------- ------- ------- -----
(In thousands)
2.01 - 4.00% $ -- $ -- $ 40 $ 2 $ 42
4.01 - 6.00% 31,747 9,176 4,679 2,632 48,234
6.01 - 8.00% 1,875 2,811 725 - 5,411
------- ------- ------ ------ -------
Total $33,622 $11,987 $5,444 $2,634 $53,687
======= ======= ====== ====== =======
The following table presents the amount of Columbia Federal's
certificates of deposit of $100,000 or more by the time remaining until maturity
as of September 30, 1999:
Amount Average interest rate
------ ---------------------
(In thousands)
In quarter ended
December 31, 1999 $ 642 4.50%
March 31, 2000 841 4.80
June 30, 2000 648 4.87
September 30, 2000 449 5.15
After September 30, 2000 2,051 5.40
------ ----
Total time deposits $100,000 or greater $4,631 5.07%
====== ====
-18-
19
The following table sets forth Columbia Federal's deposit account
balance activity for the periods indicated:
Years ended September 30,
-------------------------
1999 1998
---- ----
(Dollars in thousands)
Beginning balance $79,484 $ 90,195
------- ---------
Deposits 63,221 135,648
Withdrawals 64,048 (150,001)
------- ---------
Net increases (decreases) before interest credited (827) (14,353)
------- ---------
Interest credited 2,997 3,642
------- ---------
Ending balance $81,654 $ 79,484
======= =========
Net increase (decrease) $ 2,170 $ (10,711)
Percent increase (decrease) 2.73% (11.88)%
BORROWINGS. The FHLB System functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. As a member in good standing of the FHLB of Cincinnati, Columbia
Federal is authorized to apply for advances from the FHLB of Cincinnati,
provided certain standards of credit-worthiness have been met. Under current
regulations, an association must meet certain qualifications to be eligible for
FHLB advances. The extent to which an association is eligible for such advances
will depend upon whether it meets the Qualified Thrift Lender Test (the "QTL
Test"). If an association meets the QTL Test, it will be eligible for 100% of
the advances it would otherwise be eligible to receive. If an association does
not meet the QTL Test, it will be eligible for such advances only to the extent
it holds specified QTL Test assets. At September 30, 1999, Columbia Federal was
in compliance with the QTL Test.
Columbia Federal obtained advances from the FHLB of Cincinnati as set
forth in the following table:
At September 30,
----------------
1999 1998
---- ----
(Dollars in thousands)
Average balance outstanding $ 48 $ --
Maximum amount outstanding at any month end
during the period 1,000 --
Balance outstanding at end of period 1,000
Weighted average interest rate during the period 5.41% -%
Weighted average interest rate at end of period 5.77% -%
YIELDS EARNED AND RATES PAID
The following table presents certain information relating to CFKY's average
balance sheet information and reflects the average yield on interest-earning
assets and the average cost of customer deposits and FHLB advances for the
periods indicated. Such yields and costs are derived by dividing annual income
or expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years presented. Average
balances are derived from daily balances, net of the allowance for losses on
loans.
-19-
20
Years ended September 30,
-----------------------------------------------------------------------------
1998 1999
--------------------------------------- ----------------------------------
Average Interest Average Interest
balance earned/paid Yield/rate balance earned/paid Yeild/rate
------- ----------- ---------- ------- ----------- ----------
(Dollars in thousands)
Interest-earning assets
Loans receiveable, net $ 66,549 $5,553 8.34% $ 62,388 $5,392 8.64%
Mortgage-backed securities 20,736 1,318 6.83 18,870 1,263 6.69
Investment securitites(1) 21,545 1,471 6.36 18,419 1,108 6.02
Interest-bearing deposits 5,544 243 4.38 10,504 512 4.87
-------- ------ ---- -------- ------ ----
Total interest-earning assets 114,374 8,585 7.51 110,181 8,275 7.51
Non-interest earning assets
Cash and amounts due from depository 616 542
institutions
Premises and equipment, net 1,583 1,621
Other nonearning assets 755 615
-------- --------
2,778
Total assets $117,328 $112,959
======== ========
Interest-bearing liabilities
NOW accounts $ 4,526 105 2.32% $ 4,265 $ 100 2.34%
Money market accounts 9,388 273 2.91 16,740 403 2.41
Passbook savings accounts 12,828 359 2.80 13,325 391 2.93
Certificates of deposit 54,519 2,927 5.37 56,911 3,297 5.79
-------- ------ ------ -------- ------ ------
Total deposits 81,261 3,664 4.51 91,241 4,191 459
FHLB advances 48 3 6.25 -- -- --
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 81,309 3,667 4.51 91,241 4,191 4.59
Non-interest bearing liabilities 816 1,103
-------- -------
Total liabilities 82,125 92,344
Retained earnings 35,203 20,615
-------- -------
Total liabilities and retained earnings $117,328 $112,959
======== ========
Net interest income; interest rate spread $4,918 3.00% $4,084 2.92%
====== ====== ====== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 4.30% 3.71%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 140.67% 120.76%
====== ======
Amortized loan fees included in interest income $ 223 $ 256
====== ======
- ----------
(1) Includes dividends on FHLB stock.
-20-
21
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected CFKY's interest income and expense during the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate:
Years ended September 30,
---------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------------- --------------------------------------
Increase Increase Total Increase Increase Total
(decrease) (decrease) increase (decrease) (decrease) increase
due to rate due to volume (decrease) due to rate due to volume (decrease)
----------- ------------- ---------- ----------- ------------- ----------
(In thousands)
Interest income attributable to:
Interest-bearing deposits $ 27 $(242) $(269) $(14) $ 328 $ 314
Investment securities 175 188 363 21 233 254
Mortgage-backed securities 9 46 55 (25) 145 120
Loans receivable (199) 360 161 21 (430) (409)
----- ----- ----- ---- ----- -----
Total interest income (42) 352 310 3 276 279
----- ----- ----- ---- ----- -----
Interest expense attributable to:
NOW accounts (1) 6 5 (5) 5 --
Money market accounts 47 (177) (130) (81) 101 20
Passbook savings accounts (17) (15) (32) (11) (1) (12)
Certificates of deposit (231) (139) (370) 30 (273) (243)
FHLB Advances -- 3 3 -- (25) (25)
----- ----- ----- ---- ----- -----
Total interest expense (202) (322) (524) (67) (193) (260)
----- ----- ----- ---- ----- -----
Increase (decrease) in net
interest income $ 160 $ 674 $ 834 $ 70 $ 469 $ 539
===== ===== ===== ==== ===== =====
ASSET AND LIABILITY MANAGEMENT
Columbia Federal, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, Columbia Federal uses the Net Portfolio
Value ("NPV") methodology recently adopted by the OTS as part of its capital
regulations. Although the implementation of such regulation has been delayed and
Columbia Federal is not subject to the NPV regulation because the regulation
does not apply to institutions with less than $300 million in assets and
risk-based capital in excess of 12%, the application of the NPV methodology may
illustrate Columbia Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the present value of the
institution's assets with either an increase or a decrease in market rates, the
institution must deduct 50% of the amount of the decrease in excess of such 2%
in the calculation of the institution's risk-based capital.
At September 30, 1999, 2% of the present value of Columbia Federal's
assets was approximately $2.3 million. Because the interest rate risk of a 200
basis point increase in market interest rates (which was greater than the
interest rate risk of a 200 basis point decrease) was $5.0 million at September
30, 1999, Columbia Federal would have been required to deduct approximately
$1,350,000 from its capital in determining whether Columbia Federal met its
risk-based capital requirement if the NPV regulation had applied to Columbia
Federal. Regardless of such reduction, however, Columbia Federal's risk-based
capital at September 30, 1999, would still have exceeded the regulatory
requirement by $21.3 million.
Presented below, as of September 30, 1999, is an analysis of Columbia
Federal's interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts of 100 basis points in market interest rates. The
table also contains the policy limits set by the Board of Directors of Columbia
Federal as the maximum change in NPV that the Board of Directors deems advisable
in the event of various changes in interest rates. Such limits have been
established with consideration of the dollar impact of various rate changes and
Columbia Federal's strong capital position.
-21-
22
As illustrated in the table, Columbia Federal's NPV is more sensitive
to rising rates than declining rates. Such difference in sensitivity occurs
principally because, as rates rise, borrowers do not prepay fixed-rate loans as
quickly as they do when interest rates are declining. As a result, in a rising
interest rate environment, the amount of interest Columbia Federal would receive
on its loans would increase relatively slowly as loans are slowly prepaid and
new loans at higher rates are made. Moreover, the interest Columbia Federal
would pay on its deposits would increase rapidly because Columbia Federal's
eposits generally have shorter periods to repricing. Assumptions used in
calculating the amounts in this table are OTS assumptions.
At September 30, 1999
---------------------------------------------------------------
Change in $ Change Change
Interest Rates $ Amount Board Limit in NPV % Change NPV In
(basis points) (In Thousands) % Change (In Thousands) in NPV Ratio %
-------------- -------------- -------- -------------- ------ ----- ------
+300 $21,719 -45% -7,655 -26% 20% -5%
+200 24,380 -30% -4,993 -17% 22% -3%
+100 27,013 -15% -2,360 -8% 24% -1%
-- 29,373 -- -- -- 25% --
-100 31,110 -15% +1,736 +6% 26% 1%
-200 32,420 -30% +3,047 +10% 27% 2%
-300 33,745 -45% +4,372 +15% 28% 2%
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example, although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Further, in the event of a change in
interest rates, expected rates of prepayment on loans and mortgage-backed
securities and early withdrawal levels from certificates of deposit would likely
deviate significantly from those assumed in making the risk calculations.
If interest rates rise from the recent historically low levels,
Columbia Federal's net interest income will be negatively affected. Moreover,
rising interest rates may negatively affect Columbia Federal's earnings due to
diminished loan demand. Although Columbia Federal originates loans in accordance
with secondary market guidelines in order to be able to sell loans if necessary
for interest rate risk management, many of the loans are not readily saleable
because they are secured by non-owner occupied real estate. Moreover the sale of
loans would further reduce net income as the proceeds from the sale would be
directed into lower yielding investments.
As part of management's overall strategy to manage interest rate risk,
Columbia Federal commenced the origination of adjustable-rate mortgage loans
("ARMs") in 1982. At September 30, 1999, the portfolio included $3.7 million of
three-year ARMs, and $6.2 million of one-year ARMs. In addition, at September
30, 1999, $9.4 million of Columbia Federal's mortgage-backed and related
securities were backed by mortgages with adjustable rates. On the deposit side,
management has sought to lengthen the average maturity of its liabilities by
adopting a tiered pricing program for its certificates of deposit, which
provides higher rates of interest on its longer term certificates in order to
encourage depositors to invest in certificates with longer maturities.
COMPETITION
Columbia Federal competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, Columbia Federal competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. Columbia Federal
competes for loan originations primarily through the interest rates and loan
fees offered and through the efficiency and quality of services provided.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable.
-22-
23
The size of financial institutions competing with Columbia Federal is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon
Columbia Federal.
YEAR 2000 READINESS
Because the Savings Bank's operations rely extensively on computer
systems, the Savings Bank is addressing problems associated with the possibility
that computer systems will not recognize the year 2000 ("Y2K") correctly. The
Savings Bank has developed a Year 2000 Plan, which was presented to the Board of
Directors in 1997. The Board of Directors appointed a Year 2000 Committee, which
reports to the Board of Directors quarterly.
The Savings Bank relies primarily on third-party vendors for its
computer output and processing, as well as other significant functions and
services, such as securities safekeeping services, ATM service, and wire
transfers. The Year 2000 Committee has contacted all major vendors to assess
their Y2K readiness, and all modifications to existing hardware and software and
conversions to new hardware and software believed necessary to ensure that
critical systems will function properly, have been completed.
All date-dependent equipment and related software throughout the
Savings Bank have been inventoried and tested for Y2K capabilities. Equipment
identified as not being Y2K compatible has been replaced. The cost for this new
hardware and software was approximately $15,000.
If the modifications and conversions by both third-party vendors and
the Savings Bank fail to function properly, the operations and financial
condition of the Company could be materially adversely affected. The Savings
Bank has developed contingency plans for continued operations in the event of
system failure.
In addition, financial institutions may experience increases in
problem loans and credit losses in the event that borrowers fail to prepare
properly for Y2K, and higher funding costs could result if consumers react to
publicity about the issue by withdrawing deposits. The Savings Bank has assessed
such risks among its customers. The Company could also be materially adversely
affected if other third parties, such as governmental agencies, clearinghouses,
telephone companies, utilities and other service providers fail to prepare
properly.
PERSONNEL
As of September 30, 1999, Columbia Federal had 37 full-time employees.
Columbia Federal believes that relations with its employees are good. Columbia
Federal offers health and life insurance benefits, a 401(k) plan and a defined
benefit pension plan. None of the employees of Columbia Federal are represented
by a collective bargaining unit.
REGULATION
GENERAL
As a savings association organized under the laws of the United States,
Columbia Federal is subject to regulatory oversight by the OTS. Because Columbia
Federal's deposits are insured by the FDIC, Columbia Federal is also subject to
examination and regulation by the FDIC. Columbia Federal must file periodic
reports with the OTS concerning its activities and financial condition.
Examinations are conducted periodically by the OTS to determine whether Columbia
Federal is in compliance with various regulatory requirements and is operating
in a safe and sound manner. Columbia Federal is a member of the FHLB of
Cincinnati.
CFKY is a savings and loan holding company within the meaning of the
Home Owners Loan Act, as amended (the "HOLA"). Consequently, CFKY is subject to
regulation, examination and oversight by the OTS as the holding company of
Columbia Federal and is required to submit periodic reports to the OTS. Because
CFKY is a corporation organized under Ohio law, CFKY is also subject to the
provisions of the Ohio Revised Code applicable to corporations generally.
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On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was replaced. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including the Company, to continue to engage in all
activities in which they were permitted to engage prior to the enactment of the
Act. Such activities are essentially unlimited, provided that the thrift
subsidiary remains a qualified thrift lender. Any thrift holding company formed
after May 4, 1999, will be subject to the same restrictions as a multiple thrift
holding company. In addition, a unitary thrift holding company in existence on
May 4, 1999, may be sold only to a financial holding company engaged in
activities permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities
in which the Company and Savings Bank currently engage, except to the extent
that competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
OTS REGULATIONS
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations the
deposits of which are insured by the FDIC in the SAIF and all federally
chartered savings institutions. The OTS issues regulations governing the
operation of savings associations, regularly examines such institutions and
imposes assessments on savings associations based on their asset size to cover
the costs of this supervision and examination. It also promulgates regulations
that prescribe the permissible investments and activities of federally chartered
savings associations, including the type of lending that such associations may
engage in and the investments in real estate, subsidiaries and securities they
may make. The OTS also may initiate enforcement actions against savings
associations and certain persons affiliated with them for violations of laws or
regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending laws.
These laws govern, among other things, truth-in-lending disclosure, equal credit
opportunity, fair credit reporting and community reinvestment. Failure to abide
by federal laws and regulations governing community reinvestment could limit the
ability of an association to open a new branch or engage in a merger
transaction. Community reinvestment regulations evaluate how well and to what
extent an institution lends and invests in its designated service area, with
particular emphasis on low-to-moderate income areas and borrowers. Columbia
Federal has received a "Satisfactory" examination rating under those
regulations.
REGULATORY CAPITAL REQUIREMENTS. Columbia Federal is required by OTS
regulations to meet certain minimum capital requirements. All savings
associations must have tangible capital of 1.5% of adjusted total assets, core
capital (which for Columbia Federal is equal to tangible capital) of 4% of
adjusted total assets, except for associations with the highest examination
rating and acceptable levels of risk, and risk-based capital (which for Columbia
Federal consists of core capital and general valuation allowances) equal to 8%
of risk-weighted assets. Assets and certain off balance sheet items are weighted
at percentage levels ranging from 0% to 100% depending on their relative risk.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement. Pursuant to that requirement, a savings association must
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% is not subject to the interest rate risk
component, and Columbia Federal currently qualifies for such exemption.
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The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. In addition, the OTS can downgrade an
association's designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or, after notice
and an opportunity for hearing, if the institution is deemed to be in an unsafe
or unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institution must be placed
in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. Columbia Federal's
capital at September 30, 1999, met the standards for the highest category, a
"well-capitalized" association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with the terms of an
OTS-approved capital plan until the institution has been adequately capitalized
on an average during each of four consecutive calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution at the time the
institution fails to comply with its capital restoration plan.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions, for purposes of such regulation, include,
without limitation, payments of cash dividends, repurchases and certain other
acquisitions by an association of its shares and payments to stockholders of
another association in an acquisition of such other association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (2) if the savings association will not
be at least adequately capitalized following the capital distribution; (3) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS.
LIQUIDITY. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 4% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet the
liquidity requirement. The eligible liquidity of Columbia Federal at September
30, 1999, was approximately $19.8 million, or 21.9%, and exceeded the 4%
liquidity requirement by approximately $15.6 million, or 17.9%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL Test. Prior to September 30, 1996, the QTL Test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally related
to domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the FHLMC or the FNMA. Under this test 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business, and 20% of liquid assets) must
consist of QTI on a monthly average basis in 9 out of every 12 months. Congress
created a second QTL Test, effective September 30, 1996, pursuant to which a
savings association may also qualify as a QTL thrift if at least 60% of the
institution's assets (on a tax basis) consist of specified assets (generally
loans secured by residential real estate or deposits, educational loans, cash,
and certain governmental obligations). The OTS may grant exceptions to the QTL
Test under certain circumstances. If a savings association fails to meet the QTL
Test, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
the QTL Test will not be eligible for new FHLB advances. At September 30, 1999,
Columbia Federal met the QTL Test.
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TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limits on loans to one borrower and the total of such loans cannot
exceed the association's total regulatory capital plus additional loan reserves
(or 200% of such capital amount for qualifying institutions with less than $100
million in deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions to the general public or as offered to all employees
in a company-wide benefit program. Loans to executive officers are subject to
additional limitations. Columbia Federal was in compliance with such
restrictions at September 30, 1999.
Savings associations must comply with Sections 23A and 23B of the
Federal Reserve Act (the "FRA") pertaining to transactions with affiliates. An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. CFKY is
an affiliate of Columbia Federal. Generally, Sections 23A and 23B of the FRA (i)
limit the extent to which the savings institution or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus, (ii) limit the aggregate of all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Columbia Federal was
in compliance with these requirements and restrictions at September 30, 1999.
HOLDING COMPANY REGULATION. CFKY is a savings and loan holding company
within the meaning of the Home Owners' Loan Act (the "HOLA"). As such, CFKY has
registered with the OTS and is be subject to OTS regulations, examination,
supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
As a unitary savings and loan holding company, CFKY generally has no
restrictions on its activities. Such companies are the only financial
institution holding companies that may engage in commercial, securities and
insurance activities without limitation. Congress is considering legislation
which may limit CFKY's ability to engage in such activities and CFKY cannot
predict if and in what form these proposals might become law. However, such
limits would not impact CFKY's initial activity of holding stock of Columbia
Federal. The broad latitude to engage in activities under current law can be
restricted, however, if the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association. The OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Tests, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At September 30, 1999, Columbia Federal met the QTL
Tests.
If CFKY were to acquire control of another savings institution other
than through a merger or other business combination with Columbia Federal, CFKY
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL Test,
the activities of CFKY and any of its subsidiaries (other than Columbia Federal
or other subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among
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other things, no multiple savings and loan holding company or subsidiary thereof
which is not a savings institution shall commence, or shall continue after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the OTS prior to
being engaged in by a multiple holding company.
The OTS may also approve an acquisition resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only, if the multiple savings and loan holding company
involved controls a savings association which operated a home or branch office
in the state of the association to be acquired as of March 5, 1987, or if the
laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the banking and
thrift industries. The FDIC administers two separate insurance funds, the BIF
for commercial banks and state savings banks and the SAIF for savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund. Columbia Federal is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including Columbia Federal,
and has authority to initiate enforcement actions against federally insured
savings associations if the FDIC does not believe the OTS has taken appropriate
action to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
FRB REGULATIONS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $44.3
million (subject to an exemption of $5.0 million), and of 10% of net transaction
accounts in excess of $44.3 million. At September 30, 1999, Columbia Federal was
in compliance with its reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances.
Columbia Federal is a member of the FHLB of Cincinnati and must maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal to
the greater of 1% of the aggregate outstanding principal amount of Columbia
Federal's residential mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, and 5% of its advances from the FHLB.
Columbia Federal is in compliance with this requirement with an investment in
stock of the FHLB of Cincinnati of $1.4 million at September 30, 1999.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or
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guaranteed by the U.S. Government or an agency thereof; deposits in any FHLB; or
other real estate related collateral (up to 30% of the member association's
capital) acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
TAXATION
FEDERAL TAXATION
CFKY and Columbia Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, CFKY and Columbia Federal may be subject to an alternative minimum
tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on
"alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax. Payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. However, the Taxpayer Relief Act of 1997 repealed the
alternative minimum tax for certain "small corporations" for tax years beginning
after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5,000,000 or less for the three
tax years ending with its first tax year beginning after December 31, 1996. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
Columbia Federal's average gross receipts for the three tax years
ending on September 30, 1999, is $8.2 million, and as a result, Columbia Federal
does not qualify as a small corporation exempt from the alternative minimum tax.
CFKY's average gross receipts for the three tax years ending on September 30,
1999, is $164,000, and as a result, Columbia Financial of Kentucky, Inc. does
qualify as a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, including Columbia Federal, were allowed deductions for bad
debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions could compute deductions for bad debts using
either the specific charge off method of Section 166 of the Code, or one of the
two reserve methods of Section 593 of the Code. The reserve methods under
Section 593 of the Code permitted a thrift institution annually to elect to
deduct bad debts under either (i) the "percentage of taxable income" method
applicable only to thrift institutions, or (ii) the "experience" method that
also was available to small banks. Under the "percentage of taxable income"
method, a thrift institution generally was allowed a deduction for an addition
to its bad debt reserve equal to 8% of its taxable income (determined without
regard to this deduction and with additional adjustments). Under the experience
method, a thrift institution was generally allowed a deduction for an addition
to its bad debt reserve equal to the greater of (i) an amount based on its
actual average experience for losses in the current and five preceding taxable
years, or (ii) an amount necessary to restore the reserve to its balance as of
the close of the base year. A thrift institution could elect annually to compute
its allowable addition to bad debt reserves for qualifying loans either under
the experience method or the percentage of taxable income method.
The Small Business Act eliminated the percentage of taxable income
reserve method of accounting for bad debts by thrift institutions, effective for
taxable years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the experience method applicable to such
institutions, while thrift institutions that are treated as large banks are
required to use only the specific charge off method.
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A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that becomes a
large bank, the amount of the institution's applicable excess reserves generally
is the excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate) and its reserve
for losses on nonqualifying loans (all other types of loans) as of the close of
its last taxable year beginning before January 1, 1996, over (ii) the balances
of such reserves as of the close of its last taxable year beginning before
January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift
institution that becomes a small bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less then its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential real and church property and certain mobile homes), but only to the
extent that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act which require recapture in
the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (excess to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated earnings
and profits; second, out of the pre-1988 reserves; and third, out of such other
accounts as may be proper. To the extent a distribution by Columbia Federal to
CFKY is deemed paid out of its pre-1988 reserves under these rules, the pre-1988
reserves would be reduced and Columbia Federal's gross income for tax purposes
would be increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of September 30, 1999,
Columbia Federal's pre-1988 reserves for tax purposes totaled approximately $2.7
million. Columbia Federal believes it had approximately $11.1 million of
accumulated earnings and profits for tax purposes as of September 30, 1999,
which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. No representation
can be made as to whether Columbia Federal will have current or accumulated
earnings and profits in subsequent years.
The tax returns of Columbia Federal have been audited or closed without
audit through fiscal year 1993. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Columbia Federal.
OHIO TAXATION
Under Ohio law, Columbia Federal would be subject to the special Ohio
corporation franchise tax applicable only to financial institutions if, among
other factors, it has sufficient nexus with Ohio for such tax to be permissible
under the United States Constitution. Columbia Federal believes that presently
it does not have such nexus with Ohio and is not subject to the Ohio tax.
Because it is a corporation organized under Ohio law, CFKY is subject to the
Ohio corporation franchise tax, which, as applied to CFKY, is a tax measured by
both net earnings and net worth. The tax liability is the greater of (i) 5.1% on
the first $50,000 of computed Ohio taxable income and 8.9% of computed Ohio
taxable income in excess of $50,000 or (ii) 0.582% of taxable net worth. For tax
years beginning after December 31, 1999, the rate of tax is the greater of (i)
5.1% on the first $50,000 of computed taxable income and 8.5% of computed Ohio
taxable income in excess of $50,000 or (ii) .4% times taxable net worth. Under
these alternative measures of computing tax liability, the states to which a
taxpayer's adjusted total net income and adjusted total net worth are
apportioned or allocated are determined by complex formulas. The minimum tax is
$50 per year.
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A special litter tax is also applicable to all corporations, including
CFKY, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
KENTUCKY TAXATION
The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. However, CFKY (on an unconsolidated basis) must pay a
Kentucky state income tax, as well as a tax on capital. The tax on income is
4.0% for the first $25,000 of taxable income, 5.0% for the next $25,000, 6.0%
for the next $50,000, 7.0% for the next $150,000 and 8.25% for all income over
$250,000. The tax on capital is .0021 times the capital employed.
Columbia Federal is subject to an annual Kentucky ad valorem tax.
Assessed at the beginning of each calendar year, this tax is 0.1% of Columbia
Federal's savings accounts, common stock, capital and retained income with
certain deductions allowed for amounts borrowed by depositors and for securities
guaranteed by the U.S. Government or certain of its agencies. During the year
ended September 30, 1999, the amount of such expense for Columbia Federal was
$89,000.
ITEM 2. PROPERTIES
The following table sets forth certain information at September 30,
1999, regarding the properties on which the main office and the branch offices
of Columbia Federal are located:
Owned Date Square Net
Location or leased acquired footage book value(1)
- -------- --------- -------- ------- -------------
(In thousands)
Main Office:
2497 Dixie Highway
Ft. Mitchell, Kentucky 41017 Owned 1957 8,536 $228
Branch Offices:
Pike Street and Lee Street
Covington, Kentucky 41011 Owned 1937 4,520 $116
612 Buttermilk Pike
Crescent Springs, Kentucky 41017 Owned 1981 1,848 $ 45
3522 Dixie Highway
Erlanger, Kentucky 41018 Owned 1981 2,392 $ 20
7550 Dixie Highway
Florence, Kentucky 41042 Owned 1996 3,025 $569
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(1) At September 30, 1999, Columbia Federal's office premises and equipment
had a total net book value of $1.5 million. For additional information
regarding Columbia Federal's office premises and equipment, see Note 8
of Notes to the Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Neither CFKY nor Columbia Federal is presently involved in any legal
proceedings of a material nature. From time to time, Columbia Federal is a party
to legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by Columbia Federal.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There were 2,650,950 common shares of CFKY outstanding on December 1,
1999, held of record by approximately 1,330 shareholders. Price information with
respect to CFKY's common shares is quoted on The Nasdaq National Market
("Nasdaq") under the symbol "CFKY." The high and low bids for the common shares
of CFKY, as quoted by Nasdaq, and dividends declared per common share for the
year ended September 30, 1999, are set forth below. Such amounts do not include
retail markups, markdowns or commissions.
Quotations Dividends
---------- ---------
High Bid Low Bid Amount Payment Date
-------- ------- ------ ------------
June 30, 1998 $17.75 $14.38 N/A N/A
September 30, 1998 15.00 11.50 $ .07 August 7, 1998
December 31, 1998 12.38 12.25 .07 November 6, 1998
March 31, 1999 12.75 12.25 .07 February 12, 1999
June 30, 1999 11.50 11.50 .07 May 7, 1999
September 30, 1999 13.25 13.25 .07 August 6, 1999
3.00(2) June 8, 1999
Dividend Payment Ratio:
1999 820.00%(3)
1998 31.82%
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(1) Common Shares of CFKY were sold in connection with the Conversion for
$10.00 per share.
(2) Consists of $3.00 per share return of capital.
(3) Including the $3.00 per share return of capital.
In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings associations.
Under OTS regulations applicable to converted savings associations,
Columbia Federal is not permitted to pay a cash dividend on its common shares if
the regulatory capital of Columbia Federal would, as a result of the payment of
such dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Columbia Federal, in the event of a complete liquidation, to those
members of Columbia Federal before the Conversion who maintain a savings account
at Columbia Federal after the Conversion) or applicable regulatory capital
requirements prescribed by the OTS.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (2) if the savings association will not
be at least adequately capitalized following the capital distribution; (3) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS.
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ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "SELECTED CONSOLIDATED
FINANCIAL HIGHLIGHTS" in Columbia Financial of Kentucky, Inc.'s 1999 Annual
Report to Shareholders (the "Annual Report") is incorporated herein by reference
and attached hereto in Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The discussion contained under the heading "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Annual Report
is incorporated herein by reference and attached hereto in Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the heading "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Market Risk
Management in the Annual Report" is incorporated herein by reference and
attached hereto in Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data contained in the Annual
Report are incorporated herein by reference and attached hereto in Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the definitive Proxy Statement for the 2000
Annual Meeting of Shareholders of CFKY (the "Proxy Statement"), which is
included as Exhibit 99.1 hereto, under the caption "PROPOSAL ONE - ELECTION OF
DIRECTORS" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS " is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption
"COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS - Certain Transactions" is
incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Statements of Financial Condition at September 30,
1999 and 1998, Statements of Income, Shareholders'
Equity and Cash Flows for the years ended September
30, 1999, 1998, and 1997(see Exhibit 13)
(2) Supplementary Financial Data (see Exhibit 13)
(3) Exhibits
3.1 Articles of Incorporation (incorporated by
reference)
3.2 Code of Regulations (incorporated by
reference)
10.1 Employment Agreement with Mr. Robert V.
Lynch (incorporated by reference)
10.2 Columbia Financial of Kentucky, Inc., 1999
Stock Option and Incentive Plan
(incorporated by reference)
10.3 Columbia Financial of Kentucky, Inc.,
Recognition and Retention Plan and Trust
Agreement (incorporated by reference)
13 Portions of 1999 Annual Report to
Shareholders
21 Subsidiaries of Columbia Financial of
Kentucky, Inc.
23 Consent of Independent Public Accountants
27 Financial Data Schedule
99.1 Proxy Statement for 2000 Annual Meeting of
Shareholders (incorporated by reference)
99.2 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
(b) Form 8-K. None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COLUMBIA FINANCIAL OF KENTUCKY, INC.
By /s/ Robert V. Lynch
----------------------------------
Robert V. Lynch
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By /s/ Robert V. Lynch By /s/ Abijah Adams
---------------------------------- ----------------------------------
Robert V. Lynch Abijah Adams
President and Director Treasurer
(Principal Financial Officer)
Date December 23, 1999 Date December 23, 1999
By /s/ John C. Layne By /s/ Daniel T. Mistler
---------------------------------- ----------------------------------
John C. Layne Daniel T. Mistler
Director Director
Date December 23, 1999
By /s/ Kenneth R. Kelly By /s/ Fred A. Tobergte, Sr.
---------------------------------- ----------------------------------
Kenneth R. Kelly Fred A. Tobergte, Sr.
Chairman of the Board and Director Director
Date December 23, 1999
By /s/ Geraldine Zembrodt
----------------------------------
Geraldine Zembrodt
Director
Date December 23, 1999
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of Columbia Financial of Incorporated by reference to Registration Statement
Kentucky, Inc. on Form 8-A of the Registrant filed with the SEC on
March 20, 1998, Exhibit 2(a) and 2(b).
3.2 Code of Regulations of Columbia Financial of Incorporated by reference to Registration Statement
Kentucky, Inc. on Form 8-A of the Registrant filed with the SEC on
March 20, 1998, Exhibit 2(c).
10.1 Employment Agreement with Mr. Robert V. Lynch Incorporated by reference to Registration Statement
on Form S-1 of the Registrant filed with the SEC on
December 17, 1997, Exhibit 10.3.
10.2 Columbia Financial of Kentucky, Inc. 1999 Stock Incorporated by reference to Definitive Proxy
Option and Incentive Plan Statement for Special Meeting of Shareholders on July
15, 1999, Exhibit A.
10.3 Columbia Financial of Kentucky, Inc. Recognition and Incorporated by reference to Definitive Proxy
Retention Plan and Trust Agreement Statement for Special Meeting of Shareholders on July
15, 1999, Exhibit B.
13 Portions of 1999 Annual Report to Shareholders
21 Subsidiaries of Columbia Financial of Kentucky, Inc.
23 Consent of Independent Public Accountants
27 Financial Data Schedule
99.1 Proxy Statement for the 2000 Annual Meeting of Incorporated by reference to definitive Proxy
Shareholders. Statement to be filed separately.
99.2 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
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