1
EXHIBIT 13
PORTIONS OF 1999 REPORT TO SHAREHOLDERS
---------------------------------------
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
At September 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
SELECTED FINANCIAL CONDITION AND OTHER DATA:
TOTAL AMOUNT OF:
Assets $113,421 $117,800 $104,006 $108,098 $108,376
Cash and Amounts Due from Banks 937 631 612 549 543
Interest-Bearing Deposits in Banks 2,504 5,629 6,215 2,498 6,304
Investment Securities Held to Maturity 16,999 18,980 13,069 13,995 12,493
Investment Securities Available-for-Sale -- 4,091 1,003 1,002 988
Mortgage-Backed Securities 19,968 22,352 17,862 18,751 16,800
Loans Receivable, Net 69,089 62,161 61,578 67,741 68,270
FHLB Stock, at Cost 1,451 1,354 1,260 1,174 1,095
Deposits 81,654 79,484 90,195 94,657 95,806
Shareholders' Equity 30,179 37,718 13,090 12,537 12,149
Number of Offices (1) 5 5 5 5 5
Year Ended September 30,
------------------------------------------------------------
SUMMARY OF EARNINGS:
Interest Income $ 8,380 $ 8,275 $ 7,996 $ 8,198 $ 7,943
Interest Expense 3,667 4,191 4,451 4,578 4,446
-------- -------- -------- -------- --------
Net Interest Income 4,713 4,084 3,545 3,620 3,497
Provision for Losses on Loans 8 74 113 8 13
-------- -------- -------- -------- --------
Net Interest Income After Provision for
Losses on Loans 4,705 4,010 3,432 3,612 3,484
Non-Interest Income 117 111 88 96 92
Non-Interest Expense 3,324 2,997 2,667 3,120(2) 2,371
-------- -------- -------- -------- --------
Income Before Federal Income Tax Expense 1,498 1,124 853 588 1,205
Federal Income Tax Expense 509 380 300 200 389
-------- -------- -------- -------- --------
Net Income $ 989 $ 744 $ 553 $ 388 $ 816
======== ======== ======== ======== ========
Net Income Per Share $ 0.40 $ 0.22 N/A N/A N/A
======== ========
Dividends Declared Per Share $ 3.28 $ 0.07 N/A N/A N/A
======== ========
At or for the Year Ended September 30,
------------------------------------------------------------
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on Average Assets (3) .84% 0.66% 0.53% 0.36% 0.77%
Return on Average Equity (4) 2.81 3.61 4.30 3.10 6.92
Interest Rate Spread (5) 3.00 2.92 2.97 2.94 2.93
Net Interest Margin (6) 4.30 3.71 3.46 3.41 3.38
Non-Interest Expense to Average Total 2.83 2.65 2.53 2.87 2.24
Assets
Capital Ratios:
Average Equity to Average Assets 30.00 18.25 12.22 11.50 11.15
Equity to Assets at end of Period 26.56 32.02 12.59 11.60 11.21
Asset Quality Ratios and Other Data:
Nonperforming Loans to Total Net Loans
at End of Period 0.11 0.28 0.98 0.26 --
Nonperforming Assets to Total Assets at
end of Period 0.07 0.15 0.58 0.16 0.03
Allowance for Losses on Loans to Total
Net Loans at End of Period 0.43 0.48 0.49 0.28 0.28
Allowance for Losses on Loans to
Nonperforming Loans at End of Period 394.74 173.41 49.92 106.78 --
Net Charge-Offs to Average Loans 0.01 0.12 -- 0.01 0.02
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(1) All offices are full-service except that loan applications are accepted
only at the main office.
(2) Includes a non-recurrring pre-tax expense of $592,000 for a special
one-time deposit insurance assessment.
(3) Net income divided by average total assets.
(4) Net income divided by average total equity.
(5) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and the
accompanying Notes to the Consolidated Financial Statements and the other
sections contained in this Annual Report.
The Company's results of operations depend primarily on its net interest income,
which is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities. The Company's results of
operations also are affected by the provision for loan losses, resulting from
management's assessment of the adequacy of the allowance for loan losses; the
level of its other income; the level of its other expenses; and income tax
expense.
Net income for fiscal 1999, 1998 and 1997 amounted to $989,000, $744,000 and
$553,000, respectively. Net income during such periods primarily resulted from
net interest income, which amounted to $4.7 million, $4.1 million and $ 3.5
million, respectively for fiscal 1999, 1998 and 1997. Net interest income is
determined by the interest rate spread and the amount of interest-earning assets
and interest-bearing liabilities. During fiscal 1999, 1998 and 1997, the Savings
Bank's average interest rate spread was 3.00%, 2.92% and 2.97%, respectively. In
addition, at September 30, 1999, 1998, and 1997, the ratios of interest-earning
assets to interest-bearing liabilities amounted to 140.67%, 120.76% and 111.29%,
respectively.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
market interest rates generally and in the Company's market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's determination of the amount of and adequacy of the allowance
for loan losses;
2. The effect of changes in interest rates;
3. Management's opinion as to the effects of recent accounting pronouncements
on the Company's consolidated financial statements;
4. Management's belief that a significant portion of maturing deposits will
remain with the Savings Bank and that the Savings Bank will continue to
have sufficient funds to meet its current commitments; and
5. Computer problems related to the year 2000.
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ASSET AND LIABILITY MANAGEMENT
Columbia Federal, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. The Savings Bank has sought
to reduce its exposure of its earnings to changes in market interest rates by
managing asset and liability maturities and interest rates through the
origination of adjustable-rate mortgage loans ("ARMS"), the purchase of
adjustable-rate mortgage-backed securities and the offering of more competitive
rates on longer term deposits. Also, the Savings Bank has purchased shorter term
and available-for-sale investments as an additional way to reduce its exposure
to changes in market rates. If the Savings Bank's assets mature or reprice more
quickly or to a greater extent than its liabilities, the Savings Bank's net
portfolio value and net interest income would tend to increase during periods of
rising interest rates but decrease during periods of falling interest rates. If
the Savings Bank's assets mature or reprice more slowly or to a lesser extent
than its liabilities, the Savings Bank's net portfolio value and net interest
income would tend to decrease during periods of rising interest rates but
increase during periods of falling interest rates.
As a result of the Savings Bank's efforts, as of September 30, 1999,
$6.5 million, or 11.1%, of the Savings Bank's portfolio of one-to-four family
residential mortgage loans consisted of ARMs, and $6.7 million, or 33.7%, of
the Savings Bank's portfolio of mortgage-backed securities have adjustable
rates.
With respect to liabilities, the Savings Bank prices deposit accounts
based upon competitive factors. Pursuant to this policy, the Savings Bank has
generally neither engaged in sporadic increases or decreases in interest rates
paid nor offered the highest rates available in its deposit market except upon
specific occasions to control deposit flow or when market conditions have
created opportunities to attract longer-term deposits. In addition, the Savings
Bank does not pursue an aggressive growth strategy which would force the Savings
Bank to focus exclusively on competitors' rates rather than affordability. This
policy has assisted the Savings Bank in controlling its cost of funds.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes
in the fair value of financial instruments due to interest rate risk, exchange
rate risk, equity price risk and commodity price risk. The Savings Bank does not
maintain a trading account for any class of financial instrument, and is not
currently subject to foreign currency exchange rate risk, equity price risk or
commodity price risk. The Savings Bank's market risk is composed primarily of
interest rate risk.
The Savings Bank uses Net Portfolio Value ("NPV") as set forth
in regulations of the Office of Thrift Supervision (the "OTS") for reviewing the
interest rate sensitivity position of the Savings Bank and establishing policies
to monitor and limit exposure to interest rate risk.
Generally, NPV is the discounted present value of the
difference between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing and other liabilities. The application
of the methodology attempts to quantify interest rate risk as the change in the
NPV which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. Utilizing this measurement concept, at September 30, 1999, there
would have been a decrease in the Savings Bank's NPV of approximately 17% of the
2
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present value of its assets, assuming a 200 basis point increase in interest
rates. Under OTS regulation, if the NPV would decrease more than 2% of the
present value of the institution's assets with either an increase or a decrease
in market rates, the institution must deduct 50% of the amount of the decrease
in excess of such 2% in the calculation of the institution's risk-based capital.
Presented below, as of September 30, 1999, is an analysis of
Columbia Federal's interest rate risk as measured by changes in NPV for
instantaneous and substantial parallel shifts of 100 basis points in market
interest rates. The table also contains the policy limits set by the Board of
Directors of Columbia Federal as the maximum change in NPV that the Board of
Directors deems advisable in the event of various changes in interest rates.
Such limits have been established with consideration of the dollar impact of
various rate changes and Columbia Federal's strong capital position.
As illustrated in the table, Columbia Federal's NPV is more
sensitive to rising rates than declining rates. Such difference in sensitivity
occurs principally because, as rates rise, borrowers do not prepay fixed-rate
loans as quickly as they do when interest rates decline. As a result, in a
rising interest rate environment, the amount of interest Columbia Federal would
receive on its loans would increase relatively slowly as loans are slowly
prepaid and new loans at higher rates are made. Moreover, the interest Columbia
Federal would pay on its deposits would increase rapidly because Columbia
Federal's deposits generally have shorter periods to repricing. The following
table uses OTS assumptions.
At September 30, 1999
---------------------------------------------------
Change in
Interest $ Change Change
Rates(basis Board Limit in NPV % Change NPV In
points) $ Amount % Change (In Thousands) in NPV Ratio %
-------- -------- -------- -------------- -------- -------- --------
+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%
The NPV is reviewed by the Savings Bank's Board of Directors.
The primary goal of the asset/liability management function is to maximize net
interest income within the interest rate risk limits set by the Board. Interest
rate risk is monitored on a quarterly basis through Board of Directors'
meetings.
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CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1998 TO SEPTEMBER 30,
1999
GENERAL. CFKY's assets totaled $113.4 million at September 30, 1999, a
decrease of $4.4 million, or 3.7% from $117.8 million at September 30, 1998. The
decrease resulted primarily from a $2.8 million decrease in cash, a $4.1 million
decrease in available-for-sale securities, a $2.0 million decrease in
held-to-maturity securities and a $2.4 million decrease in mortgage-backed
securities offset by a $6.9 million increase in loans receivable. Deposits
increased $2.2 million.
LIQUID ASSETS AND INVESTMENTS. Liquid assets (cash and cash
equivalents) totaled $3.4 million at September 30, 1999, a decrease of $2.8
million, or 45%, from the total at September 30, 1998. Investment securities
held to maturity decreased from $19.0 million to $17.0 million. Investment
securities available for sale at September 30, 1998, with a market value of $4.1
million were sold. The decreases in cash and cash equivalents and investment
securities was primarily due to the payment of the $3.00 per share special
distribution made in June 1999 and an increase in loans receivable.
LOANS RECEIVABLE. Net loans receivable equaled $69.1 million at
September 30, 1999, compared to $62.2 million at September 30, 1998, an 11%
increase mainly attributable to one-to-four family mortgage loans being
originated more rapidly than these loans were being repaid.
ALLOWANCE FOR LOSSES OF LOANS. Columbia Federal's allowance for loan
losses totaled $300,000 at September 30, 1999 and September 30, 1998. The
allowance represented .43% of total net loans at September 30, 1999 and .48% at
September 30, 1998. As of September 30, 1999 there was $76,000 in nonperforming
loans, which was .11% of total loans. As of September 30, 1998, there was
$173,000 in nonperforming loans, which was .28% of total loans.
Although management believes that its allowance for loan losses at
September 30, 1999, was adequate based upon the available facts and
circumstances, there can be no assurances that additions to such allowance will
not be necessary in future periods, which could adversely affect CFKY's results
of operations.
DEPOSITS. Total deposits increased by $2.2 million, to $81.7 million,
at September 30, 1999, from $79.5 million at September 30, 1998. This increase
resulted primarily from the Savings Bank offering more competitive rates on
savings. At September 30, 1999, certificates of deposit that will mature within
one year accounted for 41.2% of Columbia Federal's deposit liabilities.
CAPITAL. Columbia Federal is required to meet each of three minimum
capital standards promulgated by the Office of Thrift Supervision (the "OTS"),
hereinafter described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement provides for the maintenance of tangible capital, consisting of
shareholders' equity less all-intangible assets, equal to 1.5% of adjusted total
assets. The core capital requirement provides for the maintenance of core
capital consisting of tangible capital plus certain forms of supervisory
goodwill, equal generally to 4% to 5% of adjusted total assets, depending upon
the Savings Bank's examination rating and overall risk. The risk-based capital
requirement mandates maintenance of risk-based capital, consisting of core
capital plus general loan loss allowances, equal to 8% of risk-weighted assets
as defined by OTS regulations. As of September 30, 1999, Columbia Federal's
tangible and core capital totaled $27.2 million, or 23.9 % of adjusted total
assets, which exceeded the minimum requirements of $4.6 million and $4.6 million
by $22.6 million and $22.6 million, respectively. As of September 30, 1999,
Columbia Federal's risk-based capital was $27.5 million, or 55.4 % of
risk-weighted assets, exceeding the minimum requirement by $23.6 million.
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AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following average balance sheet table sets forth for the periods
indicated information on the Company regarding: (i) the total dollar amounts of
interest income on interest-earning assets and the resulting average yields;
(ii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average costs; (iii) net interest income; (iv)
interest rate spread; (v) net interest-earning assets (interest-bearing
liabilities); (vi) the net yield earned on interest-earning assets; and (vii)
the ratio of average interest-earning assets to average interest-bearing
liabilities. Information is based on average monthly balances during the periods
presented.
Year Ended September 30,
-----------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Total loans, net(1) $66,549 $5,553 8.34% $62,388 $5,392 8.64% $67,405 $ 5,802 8.61%
Mortgage-backed securities 20,736 1,318 6.83% 18,870 1,263 6.69% 16,723 1,143 6.83%
Investment securities 21,545 1,471 6.36% 18,419 1,108 6.02% 14,508 854 5.89%
Other interest-earning 5,554 243 4.38% 10,504 512 4.87% 3,755 197 5.25%
assets ------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning 114,374 8,585 7.51% 110,181 8,275 7.51% 102,391 7,996 7.81%
assets ------- ------- ------- ------- ------- ------- ------- ------- -------
Noninterest-earning assets 2,954 2,778 2,936
------- ------- -------
Total assets 117,328 112,959 105,327
------- ------- -------
Interest-bearing liabilities:
NOW Accounts 4,526 105 2.32% 4,265 100 2.34% 4,068 100 2.46%
Money Market Accounts 9,388 273 2.91% 16,740 403 2.41% 12,512 383 3.06%
Passbook Savings Accounts 12,828 359 2.80% 13,325 391 2.93% 13,361 403 3.02%
Certificates of Deposits 54,519 2,927 5.37% 56,911 3,297 5.79% 61,646 3,540 5.74%
FHLB Borrowings 48 3 6.25% - - - - - - - - - 417 25 6.00%
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing 81,309 3,667 4.51% 91,241 4,191 4.59% 92,004 4,451 4.84%
liabilities ------- ------- ------- ------- ------- ------- ------- ------- -------
Noninterest-bearing 816 1,103 448
liabilities ------- ------- -------
Total liabilities 82,125 92,344 92,452
------- ------- -------
Stockholders' equity 35,203 20,615 12,875
------- ------- -------
Total liabilities and 117,328 112,959 105,327
equity ------- ------- -------
Net interest income/interest
rate spread $4,918 3.00% $4,084 2.92% $ 3,545 2.97%
======= ======= ======= ======= ======= =======
Net interest margin(2) 4.30% 3.71% 3.46%
======= ======= =======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 140.67% 120.76% 111.29%
======= ======= =======
(1) Total loans, net, include nonaccruing loans.
(2) Net interest margin is net interest income divided by interest-earning
assets.
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RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Savings Bank's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in rate
and volume. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
Year Ended September 30,
---------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------------------------------------
Increase Increase
(Decrease) Due to (Decrease) Due to
----------------- -----------------
Total Total
Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ----------
(In Thousands)
Interest Income Attributable to:
Interest-Bearing Deposits $ (27) $(242) $(269) $(14) $ 328 $ 314
Investment Securities 175 188 363 21 233 254
Mortgage-Backed Securities 9 46 55 (25) 145 120
Loans Receivable (199) 360 161 21 (430) (409)
----- ----- ----- ---- ----- -----
Total Interest Income (42) 352 310 3 276 279
----- ----- ----- ---- ----- -----
Interest Expense Attributable to:
NOW Accounts (1) 6 5 (5) 5 --
Money Market Accounts 47 (177) (130) (81) 101 20
Passbook Savings Accounts (17) (15) (32) (11) (1) (12)
Certificates of Deposit (231) (139) (370) 30 (273) (243)
FHLB Advances -- 3 3 -- (25) (25)
----- ----- ----- ---- ----- -----
Total Interest Expense (202) (322) (524) (67) (193) (260)
----- ----- ----- ---- ----- -----
Increase (Decrease) in Net Interest $ 160 $ 674 $ 834 $ 70 $ 469 $ 539
Income ===== ===== ===== ==== ===== =====
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COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
1998
GENERAL. The Company recorded net income of $989,000 for the year ended
September 30, 1999, compared to $744,000 for the year ended September 30, 1998.
The increase resulted primarily from an increase in net interest income of
$629,000, a decrease in provision for loan losses of $66,000 and an increase of
$6,000 in non-interest income. Such changes were partially offset by a $327,000
increase in non-interest expenses and a $129,000 increase in federal income tax
expense.
NET INTEREST INCOME. Interest income increased $105,000 for the year
ended September 30, 1999, compared to the year ended September 30, 1998. This
was a result of a $4.2 million increase in average interest-earning assets from
$110.2 million for the year ended September 30, 1998 to $114.4 million for the
year ended September 30, 1999.
Interest expense for the year ended September 30, 1999 was $3.7
million, a decrease of $524,000 or 12.5%. The decrease in interest expense was a
result of a decrease of $9.9 million in the average balance of interest-bearing
liabilities and a decrease in the cost of funds from 4.59% for the year ended
September 30, 1998 to 4.51% for the year ended September 30, 1999.
The Company's net interest rate spread was 3.00% for the year ended
September 30, 1999, compared to 2.92% for the year ended September 30, 1998.
PROVISION FOR LOAN LOSSES. For the year ended September 30, 1999, the
provision for loan losses was $8,000, a decrease of $66,000, or 82.9%, compared
to the year ended September 30, 1998. In determining reasonably estimable losses
on loans, management considers loss experience, the nature of the portfolio,
credit concentrations, an analysis of specific loans in the assessment of
general trends in relevant real estate markets and current and prospective
economic conditions, including property values, employment rates, interest rates
and other conditions that affect a borrower's ability to comply with repayment
terms. Based upon these considerations, management decided the allowance for
loan losses should be $300,000 for September 30, 1999, the same balance as
September 30, 1998.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Savings Bank's allowance for losses
on loans. Such agencies may require the Savings Bank to provide additions to the
allowance based upon judgements different from those of management. Although
management uses the best information available, future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions that may be beyond the Savings Bank's control. There can be no
assurance that the amount of past or future provisions for losses on loans or
the balance of the allowance for losses on loans account will be adequate to
absorb actual losses on loans in the future.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE. Non-interest income
increased $6,000, or 5.4%, to $117,000 for the year ended September 30, 1999,
compared to $111,000 for the same period in 1998. This increase was primarily
due to an increase in fee income. Non-interest expense increased $327,000 or
10.91%, to $3.3 million. The primary reasons for this increase were an increase
in salaries and employee benefits of $181,000, an increase in property and
license tax of $21,000, an increase in advertising expense of $14,000 and an
increase in other expenses of $124,000. These increases were primarily the
result of costs associated with the ESOP, and costs associated with the
operation of a public company. These increases were partially offset by a
$26,000 decrease in office expenses and a $6,000 decrease in federal deposit
insurance premiums as a result of the recapitalization of the Savings
Association Insurance Fund.
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COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
1997
GENERAL. The Company recorded net income of $744,000 for the year ended
September 30, 1998, compared to $553,000 for the year ended September 30, 1997.
The increase resulted primarily from an increase in net interest income of
$539,000, a decrease in provision for loan losses of $39,000 and an increase of
$23,000 in non-interest income. Such changes were partially offset by a $330,000
increase in other expenses.
NET INTEREST INCOME. Interest income increased $279,000 for the year
ended September 30, 1998, compared to the year ended September 30, 1997. This
was a result of a $7.8 million increase in average interest-earning assets from
$102.4 million for the year ended September 30, 1997 to $110.2 million for the
year ended September 30, 1998. This increase in interest-earning assets was
partially offset by a reduction in yield on earning assets from 7.81% to 7.51%
for the year ended September 30, 1998. The increase in interest-earning assets
is a result of investing the net proceeds from the stock offering.
Interest expense for the year ended September 30, 1998 was $4.2
million, a decrease of $260,000 or 5.84%. This was a result of a decrease of
$763,000 in the average balance of interest-bearing liabilities and a .25%
decrease in the cost of funds from 4.84% for the year ended September 30, 1997
to 4.59% for the year ended September 30, 1998.
The Company's net interest rate spread was 2.92% for the year ended
September 30, 1998, compared to 2.97% for the year ended September 30, 1997.
PROVISION FOR LOAN LOSSES. For the year ended September 30, 1998 the
provision for loan losses was $74,000, a decrease of $39,000, or 34.5%, compared
to the year ended September 30, 1997. Historically management has emphasized
Columbia Federal's loss experience over other factors in establishing provisions
for losses on loans. During the years ended September 30, 1998 and 1997,
management determined that other factors should also be considered in
determining reasonably estimable losses on loans. Among the other factors to be
considered are the nature of the portfolio, credit concentrations, an analysis
of specific loans in the portfolio, known and inherent risks in the portfolio,
the estimated value of the underlying collateral, the assessment of general
trends in relevant real estate markets and current and prospective economic
conditions, including property values, employment rates, interest rates and
other conditions that affect a borrower's ability to comply with repayment
terms. Based upon these consideration management decided the allowance for loan
losses should be $300,000 for September 30, 1998, the same balance as September
30, 1997.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE. Non-interest income
increased $13,000, or 13.27%, to $111,000 for the year ended September 30, 1998,
compared to $98,000 for the same period in 1997. This increase was primarily due
to an increase in fee income. Non-interest expense increased $330,000, or 12.4%,
to $3.0 million. The primary reasons for this increase were an increase in
salaries and employee benefits of $241,000, an increase in office expense of
$40,000, an increase in other expenses of $61,000 and an increase in advertising
expense of $13,000. These increases were primarily the result of cost associated
with the Company's new Employee Stock Ownership Plan, the relocation of the
Florence office, which increased advertising, furniture, telephone and
stationary costs, and cost associated with the operation of a public company.
These increases were partially offset by a $28,000 decrease in federal deposit
insurance premiums as a result of the recapitalization of the Savings
Association Insurance Fund.
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LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing activities. The Savings
Bank's primary sources of funds are deposits, borrowings, amortization,
prepayments and maturities of outstanding loans, sales of loans, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled loan amortization and maturing investment securities
and short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Savings Bank manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Savings Bank
invests excess funds in overnight deposits and other short-term interest-earning
assets which provide liquidity to meet lending requirements. The Savings Bank
has generally been able to generate enough cash through the retail deposit
market, its traditional funding source, to offset the cash utilized in investing
activities. As an additional source of funds, the Savings Bank may borrow from
the FHLB of Cincinnati. At September 30, 1999, the Savings Bank had $1 million
in outstanding advances from the FHLB of Cincinnati.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Savings Bank maintains a
strategy of investing in various lending products. The Savings Bank uses its
sources of funds primarily to meet its ongoing commitments, to pay maturing
savings certificates and savings withdrawals and fund loan commitments. At
September 30, 1999, the total approved loan commitments outstanding, excluding
construction loans, amounted to $1.5 million. At the same date, the unadvanced
portion of construction loans approximated $3.2 million. Investment securities
scheduled to mature within one year or less is $2.0 million. Certificates of
deposit scheduled to mature in one year or less at September 30, 1999 totaled
$33.6 million. The Savings Bank did not have any mortgage-backed securities
scheduled to mature in one year or less at September 30, 1999. Management
believes that a significant portion of maturing deposits will remain with the
Savings Bank. The Savings Bank anticipates that it will continue to have
sufficient funds to meet its current commitments.
The Savings Bank is required by the OTS to maintain average daily
balances of liquid assets (as defined) in an amount equal to 4% of net
withdrawable deposits and borrowings payable in one year or less to assure its
ability to meet demand for withdrawals and repayment of short-term borrowings.
The liquidity requirements may vary from time to time at the direction of the
OTS depending upon economic conditions and deposit flows. The Savings Bank
generally maintains a liquidity ratio of at least 8% of its net withdrawable
deposits and borrowings payable in one year or less. The Savings Bank's average
quarterly liquidity ratio for September 1999 was 23.4%.
Federally insured savings institutions are required to satisfy three
different OTS capital requirements. Under these standards, savings institutions
must maintain "tangible" capital equal to at least 1.5% of adjusted total
assets, "core" capital generally equal to at least 4% of adjusted total assets
and "total" capital (a combination of core and "supplementary" capital) equal to
at least 8% of "risk-weighted" assets. For purposes of the regulation, core
capital is defined as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and qualifying supervisory
goodwill. Core capital is generally reduced by the amount of a savings
institution's intangible assets. Tangible capital is core capital less all
intangible assets, with a limited exception for purchased mortgage servicing
rights. Risk-based capital is defined as core capital plus certain additional
items of capital, which in the case of the Savings Bank, includes a general
valuation allowance for losses on loans of $300,000 at September 30, 1999.
9
11
Under the "prompt corrective action" regulations of OTS, a savings bank
that has not received the highest possible examination rating may become subject
to corrective action if its core capital is less than 4% of its adjusted total
assets.
The Savings Bank substantially exceeded each of the above-described
regulatory capital requirements at September 30, 1999. See Note 19 of the Notes
to the Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events during the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The Statement is effective for fiscal
years beginning after December 15, 1997. Management has adopted SFAS No. 130,
and it has not had a material effect on the disclosures required for the
Company.
In July, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." Statement No. 131 requires disclosures
for each segment that are similar to those required under current standards with
the addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. The Statement is effective for
fiscal years beginning after December 15, 1997. Management has adopted SFAS No.
131, and it has not had a material effect on the disclosures required for the
Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, and is
not expected to have a material impact on the disclosures or accounting
principles of the Company.
In October, 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." Statement No. 134 requires
entities conducting certain mortgage banking activities to classify
mortgage-backed securities retained after a securitization as trading
securities. This pronouncement had no material effects on the disclosures or
accounting principles of the Company.
10
12
YEAR 2000 READINESS
Because the Savings Bank's operations rely extensively on computer
systems, the Savings Bank is addressing problems associated with the possibility
that computer systems will not recognize the year 2000 ("Y2K") correctly. The
Savings Bank has developed a Year 2000 Plan, which was presented to the Board of
Directors in 1997. The Board of Directors appointed a Year 2000 Committee, which
reports to the Board of Directors quarterly.
The Savings Bank relies primarily on third-party vendors for its
computer output and processing, as well as other significant functions and
services, such as securities safekeeping services, ATM service, and wire
transfers. The Year 2000 Committee has contacted all major vendors to assess
their Y2K readiness, and all modifications to existing hardware and software and
conversions to new hardware and software believed necessary to ensure that
critical systems will function properly, have been completed.
All date-dependent equipment and related software throughout the
Savings Bank have been inventoried and tested for Y2K capabilities. Equipment
identified as not being Y2K compatible has been replaced. The cost for this new
hardware and software was approximately $15,000.
If the modifications and conversions by both third-party vendors and
the Savings Bank fail to function properly, the operations and financial
condition of the Company could be materially adversely affected. The Savings
Bank has developed contingency plans for continued operations in the event of
system failure.
In addition, financial institutions may experience increases in problem
loans and credit losses in the event that borrowers fail to prepare properly for
Y2K, and higher funding costs could result if consumers react to publicity about
the issue by withdrawing deposits. The Savings Bank has assessed such risks
among its customers. The Company could also be materially adversely affected if
other third parties, such as governmental agencies, clearinghouses, telephone
companies, utilities and other service providers fail to prepare properly.
RECENT LEGISLATION
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including the Company, to continue to engage in all
activities in which they were permitted to engage prior to the enactment of the
Act. Such activities are essentially unlimited, provided that the thrift
subsidiary remains a qualified thrift lender. Any thrift holding company formed
after May 4, 1999, will be subject to the same restrictions as a multiple thrift
holding company. In addition, a unitary thrift holding company in existence on
May 4, 1999, may be sold only to a financial holding company engaged in
activities permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities
in which the Company and the Savings Bank currently engage, except to the extent
that competition with other types of
11
13
financial institutions may increase as they engage in activities not permitted
prior to enactment of the GLB Act.
MARKET PRICE OF COMPANY SHARES AND RELATED SHAREHOLDER MATTERS
The Conversion of Columbia Federal from mutual form to stock form and
the formation of the Company as the holding company of Columbia Federal (the
"Conversion") was completed on April 15, 1998. In connection with the
Conversion, the Company issued 2,671,450 common shares to certain depositors of
the Savings Bank and an employee benefit plan of the Company.
At December 1, 1999, the Company had 2,650,950 common shares
outstanding, which were held by approximately 1,348 stockholders. Such figure
does not reflect the number of beneficial owners of common shares.
Information about the Company's common shares is quoted on the Nasdaq
National Market under the symbol "CFKY." The high and low bid quotations for the
common shares for each of the quarters since the Conversion as well as cash
dividends declared during these periods were as follows:
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 June 8, 1999
The bid prices of the Company's common shares reflect inter-dealer
quotations and do not include markups, markdowns or commissions and may not
necessarily represent actual transactions.
In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings banks. Under OTS regulations applicable to converted
savings banks, the Savings Bank is not permitted to pay a cash dividend, be
reduced below the amount established for the purpose of granting a limited
priority claim on the assets of the Savings Bank in the event of a complete
liquidation to those members of the Savings Bank before the Conversion who
maintain a savings account at the Savings Bank after the Conversion or
applicable regulatory capital requirements prescribed by the OTS.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (1) if the
proposed distribution would cause total distributions for that calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (2) if the savings association will not
be at least adequately capitalized following the capital distribution; (3) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice; or, (4) if the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS.
12
14
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SEPTEMBER 30, 1999, 1998 AND 1997
PAGE
Independent Auditors' Report 17
Consolidated Financial Statements
Consolidated Statements of Financial Condition 18
Consolidated Statements of Income 19
Consolidated Statements of Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to the Consolidated Financial Statements 22-45
13
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50 GRANDVIEW DRIVE, SUITE 300
FORT MITCHELL, KY 41017-5610
VONLEHMAN & COMPANY INC.
- -----------------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS ADVISORS
4221 MALSBARY ROAD, SUITE 102
CINCINNATI, OHIO 45242-5502
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Columbia Financial of Kentucky, Inc. and Subsidiary
Fort Mitchell, Kentucky
We have audited the accompanying consolidated statements of financial
condition of Columbia Financial of Kentucky, Inc. and Subsidiary as of
September 30, 1999 and 1998 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the years ended
September 30, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Columbia Financial of Kentucky, Inc. and Subsidiary at
September 30, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the years ended September 30,
1999, 1998 and 1997 in conformity with generally accepted accounting
principles.
Fort Mitchell, Kentucky
November 2, 1999
14
16
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
-------------
1999 1998
--------- ---------
ASSETS
Cash and due from Banks $ 937 $ 631
Interest Bearing Deposits in Other Banks 2,504 5,629
--------- ---------
Total Cash and Cash Equivalents 3,441 6,260
Investment Securities
Held to Maturity, At Cost (Market Value of $16,664 for 1999
and $19,148 for 1998) 16,999 18,980
Available-for-Sale, At Market Value -- 4,091
Mortgage-Backed Securities, At Cost (Market Value of
$19,610 for 1999 and $22,604 for 1998) 19,968 22,352
Loans Receivable, Net 69,089 62,161
Interest Receivable 867 891
Premises and Equipment, Net 1,534 1,625
Federal Home Loan Bank Stock, At Cost 1,451 1,354
Federal Income Tax - Refund Receivable 11 13
Other Assets 61 86
--------- ---------
TOTAL ASSETS $113,421 $117,800
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 81,654 $ 79,484
Short Term Borrowings 1,000 --
Advances from Borrowers for Taxes
and Insurance 381 343
Accrued Federal Income Tax Liability -- 5
Deferred Federal Income Tax Liability 45 172
Other Liabilities 162 78
--------- ---------
TOTAL LIABILITIES 83,242 80,082
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Preferred Shares of $0 Par Value; 1,000,000 Shares
Authorized; No Shares Issued or Outstanding as of 1998 -- --
Common Shares of $0 Par Value; 6,000,000 Shares
Authorized; 2,650,950 and 2,671,450 Shares Issued -- --
and Outstanding as of 1999 and 1998, Respectively
Treasury Stock, 20,500 Shares at Cost (262) --
Additional Paid in Capital 18,194 26,008
Unearned ESOP Shares (1,643) (1,937)
Retained Earnings-Substantially Restricted 13,890 13,647
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 30,179 37,718
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $113,421 $117,800
========= =========
See auditors' report and accompanying notes.
15
17
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED SEPTEMBER 30,
------------------------------------
1999 1998 1997
---- ---- ----
INTEREST INCOME
Loans $5,553 $5,392 $5,802
Mortgage-Backed Securities 1,318 1,263 1,143
Investments 1,266 1,108 854
Interest-Bearing Deposits 243 512 197
------ ------ ------
Total Interest Income 8,380 8,275 7,996
------ ------ ------
INTEREST EXPENSE
Deposits 3,665 4,191 4,426
FHLB Advances 2 -- 25
------ ------ ------
Total Interest Expense 3,667 4,191 4,451
------ ------ ------
NET INTEREST INCOME 4,713 4,084 3,545
PROVISION FOR LOSSES ON LOANS 8 74 113
------ ------ ------
Net Interest Income After Provision for
Losses on Loans 4,705 4,010 3,432
------ ------ ------
NON-INTEREST INCOME 117 111 88
------ ------ ------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 2,102 1,921 1,680
Occupancy Expense of Premises 268 244 242
Federal Deposit Insurance Premiums 54 60 88
Data Processing Services 109 114 112
Advertising 133 119 106
Property and License Taxes 119 98 99
Office Expenses 140 166 126
Other 399 275 439
------ ------ ------
Total Non-Interest Expense 3,324 2,997 2,667
------ ------ ------
Income Before Federal Income Tax 1,498 1,124 853
Expense
FEDERAL INCOME TAX EXPENSE 509 380 300
------ ------ ------
NET INCOME $ 989 $ 744 $ 553
====== ====== ======
BASIC EARNINGS PER COMMON SHARE $ 0.40 $ 0.22 $ N/A
====== ====== ======
DILUTED EARNINGS PER COMMON SHARE $ 0.40 $ 0.22 $ N/A
====== ====== ======
See auditors' report and accompanying notes.
16
18
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
UNREALIZED
ADDITIONAL SHARES GAINS TOTAL
PAID-IN ACQUIRED TREASURY RETAINED ON AFS SHAREHOLDERS'
CAPITAL BY ESOP STOCK EARNINGS SECURITIES EQUITY
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1996 $ -- $ -- $ -- $12,537 $-- $12,537
NET INCOME -- -- -- 553 -- 553
UNREALIZED GAIN ON AFS SECURITIES,
NET OF TAX EFFECT -- -- -- -- 1 1
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1997 -- -- -- 13,090 1 13,091
NET INCOME -- -- -- 744 -- 744
DISPOSAL OF AFS SECURITIES -- -- -- -- (1) (1)
PROCEEDS FROM PUBLIC OFFERING 25,930 (2,137) -- -- -- 23,793
ESOP COMMON SHARES RELEASED
FOR ALLOCATION 63 200 -- -- -- 263
DIVIDENDS DECLARED 15 -- -- (187) -- (172)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1998 26,008 (1,937) -- 13,647 -- 37,718
NET INCOME -- -- -- 989 -- 989
RETURN OF CAPITAL DISTRIBUTION (7,983) -- 30 -- -- (7,953)
ESOP COMMON SHARES RELEASED
FOR ALLOCATION 110 294 -- -- -- 404
DIVIDENDS DECLARED 59 -- -- (746) -- (687)
TREASURY SHARES PURCHASED -- -- (292) -- -- (292)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1999 $18,194 $(1,643) $(262) $13,890 $-- $30,179
========== ========== ========== ========== ========== ==========
See auditors' report and accompanying notes.
17
19
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 989 $ 744 $ 553
Reconciliation of Net Income with
Cash Flows from Operations
Depreciation 108 102 86
Provision for Losses on Loans 8 74 113
Shares Released to ESOP 404 263 --
FHLB Stock Dividends (97) (94) (86)
Deferred Federal Income Tax (127) 10 228
Gain on Sale of REO -- (2) --
Changes In
Interest Receivable 24 (179) 106
Other Assets 14 1 88
Federal Income Tax Receivable / Liability (3) 18 (20)
Other Liabilities 81 (20) (535)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,401 917 533
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment Securities
Purchased (8,569) (20,502) (6,074)
Matured 14,641 11,503 7,000
Mortgage-Backed Securities
Purchased (3,090) (9,103) (2,377)
Principal Collected 5,474 4,613 3,266
Loan Originations and Repayments, Net (7,074) (737) 5,939
Proceeds from Sale of Real Estate Owned 138 81 110
Purchases of Property and Equipment (16) (132) (352)
---------- ---------- ----------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES 1,504 (14,277) 7,512
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from Borrowers for
Taxes and Insurance 38 (117) 197
Change in Deposits 2,170 (10,711) (4,462)
Dividends Paid (8,670) (172) --
Treasury Stock Purchases (262) -- --
Net Proceeds from Insurance of Common Shares -- 23,793 --
Payments on Advances From FHLB -- -- (2,000)
Proceeds from FHLB Advances 1,000 -- 2,000
---------- ---------- ----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (5,724) 12,793 (4,265)
---------- ---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS (2,819) (567) 3,780
BEGINNING BALANCE, CASH AND CASH EQUIVALENTS 6,260 6,827 3,047
---------- ---------- ----------
ENDING BALANCE, CASH AND CASH EQUIVALENTS $ 3,441 $ 6,260 $ 6,827
========== ========== ==========
See auditors report and accompany notes.
18
20
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
FORT MITCHELL, KENTUCKY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Columbia Financial of Kentucky, Inc. (the Company) provides financial
services to individuals and corporate customers, and is subject to
competition from other financial institutions. The Company is also
subject to the regulations of certain Federal agencies and undergoes
periodic examinations by those regulatory authorities.
The Company is a holding company whose activities are primarily limited
to holding the stock of Columbia Federal Savings Bank (the Bank). The
Bank conducts a general banking business in Northern Kentucky, which
consists of attracting deposits from the general public and primarily
applying those funds to the origination of loans for residential,
consumer and nonresidential purposes. The Bank's profitability is
significantly dependent on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e.,
loans and investments) and the interest expense paid on
interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the
interest received or paid on these balances. The level of interest
rates paid or received by the Bank can be significantly influenced by a
number of environmental factors, such as governmental monetary policy,
that are outside management's control.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Columbia
Financial of Kentucky, Inc. and its subsidiary, Columbia Federal
Savings Bank. All material intercompany balances and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statement of financial condition
and revenues and expenses for the year. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans
and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for losses on loans and foreclosed real
estate, management obtains appraisals for significant properties.
Substantial portions of the Bank's loans are secured by real estate in
local markets. In addition, foreclosed real estate is located in this
same market. Accordingly, the ultimate collectibility of a substantial
portion of the Bank's loan portfolio and the recovery of a substantial
portion of the carrying amount of foreclosed real estate are
susceptible to changes in local market conditions.
19
21
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on loans
and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
INVESTMENT SECURITIES
The Company's investments in securities are classified in three
categories and accounted for as follows:
TRADING SECURITIES
Government bonds held principally for resale in the near term
and mortgaged-backed securities held for sale in conjunction
with the Company's mortgage banking activities are classified
as trading securities and recorded at their fair market
values. Unrealized gains and losses on trading securities are
included in other income. The Company currently has no
investments in this category.
SECURITIES HELD TO MATURITY
Bonds, notes and debentures that the Company has the positive
intent and ability to hold until maturity are reported at
cost, adjusted for amortization of premiums and accretion of
discounts which are recognized in interest income using the
interest method over the period to maturity.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consist of bonds, notes,
debentures, and certain equity securities not classified as
trading securities or as securities to be held to maturity.
Unrealized holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a separate
component of equity until realized.
Gains and losses on the sale of securities available-for-sale
are determined using the specific-identification method.
FEDERAL HOME LOAN BANK STOCK
The Bank, as a member of the Federal Home Loan Bank System, is required
to maintain an investment in capital stock of the FHLB of Cincinnati.
The stock is recorded at cost, which represents anticipated redemption
value.
MORTGAGE-BACKED SECURITIES
These assets are carried at cost, adjusted for amortization of premiums
and accretion of discounts on purchases. They are not adjusted to the
lower of cost or market because management has the intention and
ability to hold these assets until maturity. Premiums and
20
22
COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
discounts, if any, are amortized to income using the interest method
over the life of the securities.
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company does not participate in interest-rate exchange agreements,
hedging or other similar financial instruments.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less the
allowance for loan losses, loans in process and deferred loan
origination fees.
Loan origination and commitment fees, as well as certain direct
origination costs, are deferred and amortized as a yield adjustment
over the contractual lives of the related loans using the interest
method. Amortization of deferred loan fees is discontinued when a loan
is placed on a nonaccrual status.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical
loss experience, specific impaired loans, and economic conditions. The
allowance is increased by a provision for loan losses, which is charged
to expense, and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for loan losses.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting
by Creditors for Impairment of a Loan." This Statement, which was
amended by SFAS No. 118 as to certain income recognition provisions and
financial statement disclosure requirements, requires that impaired
loans be measured based upon the present value of expected future cash
flows discounted at the loans' effective interest rate or, as an
alternative, at the loans' observable market price or fair value of the
collateral. SFAS No. 114 was effective for years beginning after
December 15, 1994 (October 1, 1995, as to the Company). The Company
adopted SFAS No. 114 effective October 1, 1995, without material effect
on financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. In applying the provisions of SFAS No. 114, the Company
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and, therefore, excluded
from separate identification for evaluation of impairment. With respect
to the Company investment in impaired nonresidential and multifamily
residential real estate loans, such loans are generally collateral
dependent and, as a result, are carried as a practical expedient at the
lower of
21
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
cost or fair value. Collateral dependent loans which are more than
ninety days delinquent are considered to constitute more than a minimum
delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
At September 30, 1999 and 1998, the Company had no loans that would be
defined as impaired under SFAS No. 114.
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans includes charges to reduce the recorded
balances of mortgage loans receivable, uncollected interest and real
estate to their estimated net realizable value or fair value, as
applicable. Such provisions are based on management's estimate of net
realizable value or fair value of the collateral, as applicable,
considering the current and currently anticipated future operating or
sales conditions, thereby causing these estimates to be particularly
susceptible to changes that could result in a material adjustment to
results of operations in the near term. Recovery of the carrying value
of such loans and real estate is dependent to a great extent on
economic, operating and other conditions that may be beyond the
Company's control. It is the opinion of management, however, that
adequate provision has been made for losses on loans and real estate.
PREMISES AND EQUIPMENT
The cost of premises and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on the
straight-line and accelerated methods.
Maintenance and repairs are charged to operations when incurred.
Significant betterments and renewals are capitalized. When premises and
equipment are sold or otherwise disposed of, the asset account and
related accumulated depreciation account are relieved, and any gain or
loss is included in operations.
The useful lives of premises and equipment for purposes of computing
depreciation are:
Office Properties 5-40 Years
Equipment 5-10 Years
REAL ESTATE OWNED
Real estate acquired in settlement of loans is carried at the lower of
cost or fair value at the date of acquisition. Costs include the
uncollected loan balance as well as other out-of-pocket costs of
acquiring the property.
22
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NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
The Company accounts for federal income taxes in accordance with
established financial accounting and reporting standards. A deferred
tax liability or deferred tax asset is computed by applying the current
statutory tax rates to net taxable or deductible differences between
the tax basis of an asset or liability and its reported amount in the
consolidated financial statements that will result in taxable or
deductible amounts in future periods. Deferred tax assets are recorded
only to the extent that the amount of net deductible temporary
differences or carryforward attributes may be utilized against current
period earnings, carried back against prior years earnings, offset
against taxable temporary differences reversing in future periods or
utilized to the extent of management's estimate of future taxable
income. A valuation allowance is provided for deferred tax assets to
the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable
on future taxable income. Deferred tax liabilities are provided on the
total amount of net temporary differences taxable in the future.
STOCK BENEFIT PLANS
In conjunction with its offering of common shares, the Company
implemented the Columbia Financial of Kentucky, Inc.'s Employee Stock
Ownership Plan (ESOP). The ESOP provides retirement benefits for
substantially all full-time employees who have completed one year of
service. The Company accounts for the ESOP compensation expense using
the fair value of ESOP shares allocated to participants during a fiscal
year. Expense recognized related to the plan totaled approximately
$403,000, $263,000 and $0 for the years ended September 30, 1999, 1998,
and 1997, respectively.
ADVERTISING
Advertising costs are expensed as incurred.
NOTE 2 - CASH FLOWS INFORMATION
For purposes of the cash flows statement, cash and cash equivalents
includes cash on hand and in demand and time accounts.
Cash paid for interest and income taxes was as follows:
1999 1998 1997
---- ---- ----
(In Thousands)
Interest $3,667 $4,191 $4,451
====== ====== ======
Income Taxes $ 633 $ 352 $ 92
====== ====== ======
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 2 - CASH FLOWS INFORMATION (Continued)
The Company had non-cash investing or financing activities as follows:
1999 1998 1997
---- ---- ----
(In Thousands)
Real Estate at Cost Acquired Through
Foreclosure of Mortgage Loans $138 $153 $111
==== ==== ====
FHLB Stock Dividends Received $ 97 $ 94 $ 86
==== ==== ====
NOTE 3 - INVESTMENT SECURITIES
Investment securities as of September 30, 1999 and 1998 consisted of
the following:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- ------
1999 (In Thousands)
----
U.S. Government and Federal Agency
Obligations Held to Maturity $16,999 $ 4 $(339) $16,664
======= ==== ===== =======
1998
----
U.S. Government and Federal Agency
Obligations Held to Maturity $18,980 $179 $ (11) $19,148
======= ==== ===== =======
Corporate Notes Available-for-Sale $ 4,091 $ -- $ -- $ 4,091
======= ==== ===== =======
The following is a summary of maturities of securities held-to-maturity
as of September 30, 1999:
Amortized Estimated
Amounts maturing in: Cost Market Value
---- ------------
(In Thousands)
One year or less $ 2,000 $ 1,996
After one year through five years 11,990 11,694
After five through ten years 3,009 2,974
------- -------
Totals $16,999 $16,664
======= =======
The following is a summary of interest earned on investments:
1999 1998 1997
---- ---- ----
(In Thousands)
U.S. Government and Agency Securities $1,134 $ 946 $768
Corporate Notes 35 68 --
Dividends on FHLB Stock 97 94 86
------ ------ ----
$1,266 $1,108 $854
====== ====== ====
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 4 - MORTGAGE-BACKED SECURITIES
The balances in mortgage-backed securities as of September 30, 1999 and
1998 were comprised of:
Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------ ------ ------ ------
1999 (In Thousands)
----
Government National Mortgage
Association $ 4,452 $ 57 $ (57) $ 4,452
Federal National Mortgage Association 11,925 24 (301) 11,648
Federal Home Loan Mortgage
Corporation 3,591 27 (108) 3,510
------- ------- ------- -------
Totals $19,968 $108 $(466) $19,610
======= ======= ======= =======
1998
----
Government National Mortgage
Association $ 4,382 $107 $ (5) $ 4,484
Federal National Mortgage Association 13,299 99 (42) 13,356
Federal Home Loan Mortgage Corporation 4,671 95 (2) 4,764
------- ------- ------- -------
Totals $22,352 $301 $ (49) $22,604
======= ======= ======= =======
The following is a summary of maturities of mortgaged-backed securities
held to maturity as of September 30, 1999:
Amortized Estimated
Cost Market Value
Amounts maturing in: ---- ------------
(In Thousands)
After one year through five years $ 1,234 $ 1,232
After five years through ten years 4,213 4,123
After ten years 14,447 14,255
------- -------
Totals $19,894 $19,610
======= =======
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES ON LOANS
The balances in loans receivable as of September 30, 1999 and 1998 were
comprised of:
1999 1998
---- ----
(In Thousands)
Mortgage Loans:
One-to-Four Family Residential $58,675 $53,579
Other 14,603 12,372
Home Improvements Loans - 5
Loans on Deposits 38 20
------- -------
73,316 65,976
Less Net Deferred Loan Origination Fees (753) (756)
Loans in Process (3,174) (2,759)
Allowance for Loss on Loans (300) (300)
------- -------
Loans Receivable, Net $69,089 $62,161
======= =======
A summary of activity in the allowance for loan losses for September
30, 1999, 1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
(In Thousands)
Balance at Beginning of the Year $300 $300 $189
Additions to Allowance 8 74 113
Charge Offs During the Year (8) (74) (2)
---- ---- ----
Balance at End of the Year $300 $300 $300
==== ==== ====
The Bank had no loans on non-accrual status as of September 30, 1999 and 1998.
NOTE 6 - LOAN COMMITMENTS
As of September 30, 1999, the Bank had fixed- and adjustable-rate loan
commitments as follows:
Fixed Adjustable Total
----- ---------- -----
(Dollars In Thousands)
First Mortgage Loans
on One-to-Four Family
Residential Property $ 700 $-- $ 700
Other 775 -- 775
------ --- ------
Total $1,475 $-- $1,475
====== === ======
Weighted Average Interest Rates 8.32% $-- 8.32%
==== === ====
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest at September 30, 1999 and 1998 consisted of the
following:
1999 1998
---- ----
(In Thousands)
Loans $458 $427
Mortgage-Backed Securities 127 145
Investments and Other 282 319
---- ----
Totals $867 $891
==== ====
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment as of September 30, 1999 and 1998 was comprised
of:
Land $ 347 $ 347
Buildings and Improvements 1,984 1,981
Furniture and Equipment 620 606
------- -------
2,951 2,934
Accumulated Depreciation (1,417) (1,309)
------- -------
Premises and Equipment, Net $ 1,534 $ 1,625
======= =======
NOTE 9 - DEPOSITS
A breakdown of deposits by interest rates and types as of September 30,
1999 and 1998 follows:
1999 1998
---- ----
Balances by Interest Rate Amount Percent Amount Percent
------------------------- ------ ------- ------ -------
(Dollars In Thousands)
Passbooks (1999 - 2.75%, 1998 - 2.75%) $13,082 16.02% $12,654 15.9%
Money Market Deposit Accounts
(1999 - 2.50%, 1998 - 2.75%) 9,638 11.81 9,953 12.3
Now Accounts (1999 - 2.00%,
1998 - 2.25%) 5,187 6.35 4,021 5.0
Christmas Club
(Non-Interest Bearing) 60 .07 64 .1
Certificates of Deposit:
3.00% - 4.00% 42 .05 42 --
4.01% - 5.00% 30,781 37.70 5,913 7.4
5.01% - 6.00% 17,454 21.37 37,111 46.7
6.01% - 7.00% 5,410 6.63 7,248 9.1
7.01% - 8.00% -- -- 2,478 3.5
------- ------- ------- -------
Totals $81,654 100.0% $79,484 100.0%
======= ======= ======= =======
For NOW accounts and money market accounts, bonus interest rates are
paid on balances over $2,500 of .25%.
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 9 - DEPOSITS (CONTINUED)
The scheduled maturities of certificate accounts are as follows:
Years Ended September 30,
-------------------------
2000 2001 2002 2003 Total
---- ---- ---- ---- -----
(In Thousands)
3.00% and under $ -- $ -- $ 40 $ 2 $ 42
4.01%-4.50% 6,780 -- -- -- 6,780
4.51%-5.00% 18,412 5,074 515 -- 24,001
5.01%-5.50% 987 1,748 1,892 2,134 6,761
5.51%-6.00% 5,569 2,354 2,272 498 10,693
6.01%-6.50% 1,875 2,811 724 -- 5,410
------- ------- ------- ------- -------
Totals $33,623 $11,987 $5,443 $2,634 $53,687
======= ======= ======= ======= =======
The total of deposit accounts with a balance of $100,000 or more was
approximately $7,913,000 and $4,751,000 at September 30, 1999 and 1998,
respectively. Deposits in excess of $100,000 are not totally insured.
Savings deposit customers are primarily Northern Kentucky area
individuals and businesses.
Interest expense on deposits is summarized as follows:
Years Ended September 30,
-------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Passbook Savings Accounts $ 359 $ 392 $ 402
Money Market Deposit Accounts 274 403 378
Certificates of Deposit 2,297 3,296 3,548
Now Accounts 105 100 98
------ ------ ------
Interest Expense on Deposits $3,665 $4,191 $4,426
====== ====== ======
NOTE 10 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
At September 30, 1999, the Bank had outstanding FHLB advances of
$1,000,000. The Bank had no outstanding FHLB advances at September 30,
1998. The FHLB advances were 90-day advances, which carry an adjustable
interest rate. The advances were collateralized by the Bank's first
mortgage loans.
NOTE 11 - RETIREMENT PLANS
The Bank maintains a 401(k) retirement plan for the benefit of all its
employees. Employees can contribute up to fifteen percent (15%) of
their compensation to the plan. The Bank matches one-half of the
employees' contributions up to a maximum employer match of three
percent (3%) of compensation. By its nature, the plan is fully funded.
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 11 - RETIREMENT PLANS (CONTINUED)
The Bank participates in a non-contributory multi-employer defined
benefit retirement plan covering substantially all employees.
Eligibility for this plan includes one year of service, age 21 and
working 1,000 hours. Due to the nature of this multi-employer plan,
separate accumulated benefit and net assets available for benefits is
unavailable for the Bank's portion. The plan is funded through annuity
contracts.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an ESOP for its employees. As part of the
Conversion, the ESOP borrowed funds from the Company. The loan was
equal to 100% of the aggregate purchase price of the Company's shares
acquired by the ESOP. The loan to the ESOP is being repaid principally
from the Bank's contributions to the ESOP over a period of eleven
years, and the collateral for the loan is the common shares purchased
by the ESOP. The interest rate for the ESOP loan is a fixed rate of
9.5%. The Company may, in any plan year, make additional discretionary
contributions for the benefit of the plan participants in either cash
or shares, which may be acquired through the purchase of outstanding
shares in the market or from individual shareholders, upon the original
issuance of additional shares by the Company or upon the sale of
treasury shares by the Company.
Such purchases, if made, would be funded through dividends or other
capital distributions paid by the Company on shares held by the ESOP.
The timing, amount and manner of future contributions to the ESOP will
be affected by various factors, including prevailing regulatory
policies, the requirements of applicable laws and regulations and
market conditions.
Shares purchased by the ESOP with the proceeds of the loan are held in
a suspense account and released on a pro rata basis as debt service
payments are made. Discretionary contributions to the ESOP and shares
released from the suspense account are allocated among participants on
the basis of compensation. Participants are 100% vested in their right
to receive their account balances within the ESOP.
Accounting principles requires that any third party borrowing by the
ESOP be reflected as a liability on the Company's consolidated
statements of financial condition. Since the ESOP borrowed from the
Company, such obligation is not treated as a liability, but is excluded
from shareholders' equity. If the ESOP purchases newly issued shares
from the Company, total shareholders' equity would neither increase nor
decrease, but per share shareholders' equity and per share net earnings
would decrease as the newly issued shares are allocated to the ESOP
participants.
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
The ESOP is subject to the requirements of the Employee Retirement
Income Security Act of 1974, as amended (ERISA), and the regulations of
the IRS and the Department of Labor.
The fair value of the 204,519 and 193,661 unearned ESOP shares at
September 30, 1999 and 1998 was approximately $2,710,000 and
$2,541,000, respectively. Shares committed to be released during 1999
and 1998 were 36,573 and 20,055, respectively. Shares allocated during
1999 and 1998 were 36,573 and 20,055, respectively.
Employee and employer contributions to the 401(k) plan and retirement
plan expense were as follows:
Years Ended September 30,
-------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
401(k) Plan
Employee Contributions $ 66 $ 68 $82
Employer Contributions 33 31 30
Multi-Employer Defined
Benefit Retirement Plan 81 87 75
ESOP 403 263 --
NOTE 13 - RETAINED EARNINGS
Through 1996, the Bank was allowed a special bad debt deduction for
federal income tax purposes limited to a certain percentage of
otherwise taxable income. This deduction was subject to certain
limitations based on aggregate loans and savings account balances. If
the amounts that qualify for this deduction are later used for purposes
other than for bad debt losses, they will be subject to federal income
tax at the then current corporate rate.
Retained earnings include approximately $3.1 million for which federal
income tax has not been provided.
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 14 - INCOME TAXES
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. The principal source of temporary
differences are depreciation methods, allowance for loan losses,
different methods of recognizing income on loan closing fees, accrued
expense, and nontaxable stock dividends. The net deferred tax asset
(liability) includes the following components:
1999 1998
---- ----
(In Thousands)
Deferred Tax Assets
Deferred Loan Fees $ -- $ 21
Net Operating Loss (Company) 164 46
Accrued RRP 20 --
Allowance for Loan Losses 102 102
--- ---
Total Deferred Tax Asset 286 169
--- ---
Deferred Tax Liabilities
Book Value of Federal Home Loan
Bank Stock Over Tax Basis 250 240
Special Tax Bad Debt Deduction 58 80
Depreciation 23 21
--- ---
Total Deferred Tax Liabilities 331 341
--- ---
Net Deferred Asset (Liability) $(45) $(172)
=== ===
No valuation allowance has been provided for deferred tax assets
because management expects to be able to benefit from these temporary
deductible differences.
A reconciliation of income tax expense at the statutory rate (34% for
all periods) to income tax expense at the Company's effective rate is
as follows:
1999 1998 1997
---- ---- ----
(Dollars In Thousands)
Computed Tax at the Expected
Statutory Rate $509 $ 382 $290
Nondeductible Expenses -- 1 2
Other Differences -- (3) 8
---- ---- ----
$509 $380 $300
==== ==== ====
Effective Rate 34% 34% 35%
==== ==== ====
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 14 - INCOME TAXES (CONTINUED)
The components of income tax expense at September 30 are summarized as
follows:
1999 1998 1997
---- ---- ----
(In Thousands)
Current Tax Expense $ 636 $370 $ 72
Deferred Tax (Benefit) Expense (127) 10 228
----- ---- ----
Income Tax Expense $ 509 $380 $300
===== ==== ====
During the Company's 1997 tax year, a new tax law required the Bank to
recapture, over a six year period, approximately $300,000 of bad debt
deductions taken between 1988 and 1996. This new tax law did not have a
significant effect on the Company's financial statements.
NOTE 15 - STOCK COMPENSATION PLANS
On July 15, 1999, the Company adopted the Columbia Financial of
Kentucky, Inc. Recognition and Retention Plan ("RRP") and awarded
106,438 shares of stock to various employees. These awards vest ratably
over a five-year period commencing in July 2000. A provision of $53,000
was charged to expense in the fourth quarter of the year ended
September 30, 1999.
Also, on July 15, 1999 the Company adopted the Columbia Financial of
Kentucky, Inc. 1999 Stock Option and Incentive Plan (the "Plan")
providing for 266,095 shares of the Company to be reserved for issuance
upon the exercise of options at the fair value at the date of the
grant. During the year, options have been granted for 252,600 shares to
directors, executive officers and certain employees at the fair value
of $11.00 per share. As of September 30, 1999, none of the stock
options granted have been exercised.
SFAS No. 123 "Accounting for Stock-Based Compensation" contains a
fair-value based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue to account for
stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25. "Accounting for Stock Issued
to Employees". Entities that continue to account for stock options
using APB Opinion No. 25, are required to make pro forma disclosures of
net earnings and earnings per share, as if the fair-value based method
of accounting defined in SFAS No. 123 had been applied.
The Company utilized APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Company's Plan
been determined based on the fair value at the grant dates for awards
under the Plan consistent with the accounting method utilized in SFAS
No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated as follows:
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 15 - STOCK COMPENSATION PLANS (CONTINUED)
1999
-------------------------
As Reported Pro Forma
----------- ---------
(In Thousands except share data)
Net Income $989 $741
===== =====
Earnings Per Share
Basic $0.40 $0.30
===== =====
Diluted $0.40 $0.30
===== =====
The fair value of each option grant is estimated on the date of the
grant using the following assumptions: dividend yield of 2.00%,
expected volatility of 10%, a risk-free interest rate of 5.5% and
expected lives of ten years.
NOTE 16 - RELATED PARTY TRANSACTIONS
The Bank has mortgage loans outstanding with various officers,
directors and employees and their relatives. The activity on these
loans is shown below:
1999 1998
---- ----
(In Thousands)
Balance at Beginning of Year $ 1,078 $ 909
New Loans Made 396 219
Payment of Principal (144) (50)
------- -------
Balance at End of Year $ 1,330 $ 1,078
======= =======
During 1997, the Bank adopted a policy that loans are granted to
officers and employees on their primary residence at interest rates
that are discounted by 1% from the Bank's normal lending rate. The rate
is only in effect while the person is affiliated with the Bank. Also,
this policy allows officers and employees to finance investment
property at rates and costs available to the general public. All of
these loans require board approval and will be repaid with regular
monthly payments in the ordinary course of business.
The Bank had deposits from various officers and directors totaling
approximately $1,317,000 and $1,248,000 as of September 30, 1999 and
1998, respectively.
NOTE 17 - INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage loans to
individuals on residential properties. At September 30, 1999, the
Bank's assets consisted of significant amounts of mortgages which
earned interest at fixed interest rates. Those assets were funded
primarily with short-term liabilities which have interest rates that
vary with market rates over time.
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 17 - INTEREST RATE RISK (CONTINUED)
At September 30, 1999, the Bank had interest-earning loans and
interest-bearing deposits as follows:
Effective
Interest Maximum
Amount Rate Terms/Duration
------ ---- --------------
(In millions, except percents)
INTEREST-EARNING LOANS
Fixed Mortgages and Participations $ 64.9 8.19% 30 years
Adjustable Mortgages and Participations 8.4 7.60% 30 years
INTEREST-BEARING LIABILITIES
Deposit Accounts 81.7 4.27% 5 years
NOTE 18 - RECONCILIATION OF NET INCOME AND RETAINED EARNINGS
A reconciliation of net income and retained earnings per these audited
financial statements with reports filed with the Office of Thrift
Supervision (OTS) as of September 30, 1999, 1998 and 1997 is as
follows:
Years Ended September 30,
---------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
NET INCOME
Per OTS Report $ 878 $ 540 $ 553
Audit Adjustments
Accrued Liabilities -- -- --
Net Income from Holding Company
(Adjusted for Consolidating
Items) 111 204 --
------- ------- -------
Net Income Per Statements
of Income $ 989 $ 744 $ 553
======= ======= =======
RETAINED EARNINGS
Per OTS Report $14,508 $13,630 $13,090
Net Retained Earnings of Holding
Company (Adjusted for Con-
solidating Items) (618) 17 --
------- ------- -------
Retained Earnings Per
Balance Sheets $13,890 $13,647 $13,090
======= ======= =======
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NOTE 19 - REGULATORY CAPITAL REQUIREMENTS
Banks are required to maintain capital at least sufficient to meet
three separate requirements: (i) tangible capital equal to 1.5% of
adjusted total assets, (ii) core capital equal to an amount generally
between 4% and 5% of adjusted total assets, depending on the bank's
examination rating and overall risk, and (iii) risk-based capital equal
to 8.0% of risk-weighted assets.
Any bank that is not in compliance with the capital standards may have
growth restrictions placed on it by the OTS. Additionally, the OTS has
discretion to treat the failure of any Bank to maintain capital at or
above the minimum required level as an "unsafe and unsound practice"
subject to a number of enforcement actions.
At September 30, 1999 information with respect to the Bank's capital
ratios is summarized as follows:
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(Dollars In Thousands)
Capital under Generally Accepted
Accounting Principles $27,249 $27,249 $27,249
Capital Reconciling Items:
General Valuation Allowance -- -- 300
------- ------- -------
Regulatory Capital 27,249 27,249 27,549
Less Minimum Capital Requirements 4,560 4,560 3,981
------- ------- -------
Capital in Excess of
Minimum Requirements $22,689 $22,689 $23,568
======= ======= =======
Regulatory Capital as a Percentage
of Applicable Total Assets 23.9% 23.9% 55.4%
Less Minimum Capital as a Percentage
of Applicable Total Assets 1.5% 4.0% 8.0%
------- ------- -------
Regulatory Capital as a Percentage of
Applicable Total Assets in Excess
of Requirements 22.4% 19.9% 47.4%
======= ======= =======
The Bank's management believes that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the
foreseeable future. However, events beyond the control of the Bank,
such as increased interest rates or a downturn in the economy in areas
where the Bank has most of its loans, could adversely affect future
earnings and, consequently, the ability of the Bank to meet its future
minimum capital requirements.
35
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 19 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
Under the "prompt corrective action" regulations of the OTS, a savings
bank that has not received the highest possible examination rating may
become subject to corrective action if its core capital is less than 4%
of its adjusted total assets.
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial
condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments. SFAS
No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Bank.
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
Investment Securities and Mortgage-Backed Securities: Fair values for
these securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and
commercial and industrial loans) are estimated using discounted cash
flow analysis, based on interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Loan
fair value estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of accrued
interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest- bearing checking accounts and passbook accounts) are, by
definition, equal to amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits.
The carrying amount of accrued interest payable approximates fair
value.
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's financial instruments are as
follows:
September 30, 1999
------------------
Carrying Fair
Amount Value
------ -----
(In Thousands)
Financial Assets:
Cash and Cash Equivalents $ 3,441 $ 3,441
Investment Securities 16,999 16,664
Mortgage-backed Securities 19,968 19,610
Loans, Net 69,089 69,251
Financial Liabilities:
Deposits 81,654 81,829
FHLB Advances 1,000 1,000
The carrying amounts in the preceding table are included in the
statement of financial condition under the applicable captions.
NOTE 21 - DEPOSIT INSURANCE
Deposits of the Bank are currently insured by the Savings Association
Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance Fund
("BIF"), the deposit insurance fund that covers most commercial bank
deposits, are statutorily required to be recapitalized to a ratio of
1.25% of insured reserve deposits.
NOTE 22 - EARNINGS PER SHARE
Basic earnings per share amounts for the years ended September 30, 1999
and 1998 are based upon the average outstanding shares of the Company
reduced by the unreleased shares of the ESOP.
The basic average number of shares outstanding was approximately
2,458,000 for the year ended September 30, 1999 and for the period
after conversion through September 30, 1998. The earnings per share for
1998 is for the income earned for the period from the Conversion (April
15, 1998) through September 30, 1998.
The diluted average number of shares outstanding was approximately
2,467,000 for the years ended September 30, 1999 and 1998. The diluted
earnings per share amount is based upon the basic shares outstanding.
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 23 - CORPORATE REORGANIZATION
On October 9, 1997, the Board of Directors of Columbia Federal
unanimously adopted a Plan of Conversion to convert Columbia Federal
from a federal mutual savings bank to a federal stock savings bank with
the concurrent formation of a newly formed holding company. The Company
incorporated under the laws of the State of Ohio. The Conversion was
accomplished through the adoption of a Federal Stock Charter and
Federal Stock Bylaws and the sale of the Company's common shares in an
amount equal to the proforma market value of the Bank after giving
effect to the Conversion. A subscription offering of the shares of the
Company to the Bank's members and to the ESOP was conducted.
The Conversion was completed on April 15, 1998, and resulted in the
issuance of 2,671,450 common shares of the Company which, after
consideration of offering expenses totaling approximately $775,000 and
shares purchased by the ESOP of $2.1 million, resulted in net proceeds
of $23.8 million.
At the time of Conversion, the Bank established a liquidation account
in an amount equal to its regulatory capital as of September 30, 1997.
The liquidation account will be maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank. The
liquidation account will be reduced annually to the extent eligible
depositors have reduced their qualifying deposits. Subsequent increases
in deposits will not restore an eligible account holder's interest in
the liquidation account. In the event of complete liquidation, and only
in such event, each eligible depositor will be entitled to receive a
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held. The
Bank may not pay dividends that would reduce shareholders' equity below
the required liquidation account balance.
Under OTS regulations, limitations have been imposed on all "capital
distributions", including cash dividends by savings institutions. The
regulation establishes a three-tiered system of restrictions, with the
greatest flexibility afforded to thrifts which are both
well-capitalized and given favorable qualitative examination ratings by
the OTS.
Conversion costs reduced the proceeds from the shares sold in
connection with the Conversion.
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 24 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company's quarterly results for the
years ended September 30, 1999 and 1998.
Three Months Ended
-----------------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1999 1999 1999
---- ---- ---- ----
Total Interest Income $2,132 $2,126 $2,085 $2,037
Total Interest Expense 935 929 911 892
- -----------------------------------------------------------------------------------------------
Net Interest Income 1,197 1,197 1,174 1,145
Provision for Losses on Loans -- -- -- 8
Other Income 31 27 27 32
General, Administrative and
Other Expense 800 848 790 886
- -----------------------------------------------------------------------------------------------
Earnings Before Income Taxes 428 376 411 283
Federal Income Taxes 145 128 140 96
- -----------------------------------------------------------------------------------------------
Net Earnings $ 283 $ 248 $ 271 $ 187
===============================================================================================
Earnings Per Share:
Basic $ .11 $ .10 $ .11 $ .08
===============================================================================================
Diluted $ .11 $ .10 $ .11 $ .08
===============================================================================================
December 31, March 31, June 30, September 30,
1997 1998 1998 1998
---- ---- ---- ----
Total Interest Income $1,932 $1,957 $2,226 $2,160
Total Interest Expense 1,098 1,103 1,057 933
- -----------------------------------------------------------------------------------------------
Net Interest Income 834 854 1,169 1,227
Provision for Losses on Loans 74 -- -- --
Other Income 27 29 25 30
General, Administrative and
Other Expense 707 654 830 806
- -----------------------------------------------------------------------------------------------
Earnings Before Income Taxes 80 229 364 451
Federal Income Taxes 27 76 125 152
- -----------------------------------------------------------------------------------------------
Net Earnings $ 53 $ 153 $ 239 $ 299
===============================================================================================
Earnings Per Share:
Basic N/A N/A $ .10 $ .12
===============================================================================================
Diluted N/A N/A $ .10 $ .12
===============================================================================================
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 25 - CONDENSED FINANCIAL STATEMENTS OF COLUMBIA FINANCIAL
OF KENTUCKY, INC.
The following condensed financial statements summarize the consolidated
financial position of Columbia Financial of Kentucky, Inc. as of
September 30, 1999 and 1998 and the results of operations and cash
flows for the year ended September 30, 1999 and from inception (April
15, 1998) until September 30, 1998.
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
September 30,
--------------------
1999 1998
---- ----
ASSETS
ASSETS $ 2,796 $10,192
Cash and Cash Equivalents
Investment Securities
Available for Sale - at Market Value -- 6,091
Investment in Columbia Federal Savings Bank 13,954 13,075
Other Assets 19 19
Deferred Tax Asset 184 46
------- -------
TOTAL ASSETS $16,936 $24,423
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued RRP Expenses $ 53 $ --
SHAREHOLDERS' EQUITY
Common Shares and Additional Paid-In Capital 18,567 26,015
Treasury Shares (262) --
Retained Earnings 221 345
Unearned ESOP (1,643) (1,937)
------- -------
TOTAL SHAREHOLDERS' EQUITY 16,883 24,423
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,936 $24,423
======= =======
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
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NOTE 25 - CONDENSED FINANCIAL STATEMENTS OF COLUMBIA FINANCIAL
OF KENTUCKY, INC. (CONTINUED)
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF INCOME
(IN THOUSANDS)
From Inception,
April 15, 1998
Year Ended Until
September 30, September 30,
------------- -------------
1999 1998
---- ----
REVENUE
Interest Income $ 423 $ 337
Equity in Earnings of Columbia Federal
Savings Bank 878 334
------ ------
Total Revenue 1,301 671
GENERAL AND ADMINISTRATIVE EXPENSES 644 373
------ ------
Net Income Before Income Taxes 657 298
Federal Income Tax Benefit 138 46
------ ------
NET INCOME $ 795 $ 344
====== ======
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 795 $ 344
Reconciliation of Net Income with
Cash Flows from Operations:
Undistributed Earnings of Columbia Federal Savings Bank (879) (334)
Deferred Federal Income Tax (138) (46)
Shares Released to ESOP 403 263
Changes In
Accrued Interest Receivable 15 (15)
Prepaid Assets 2 (3)
Accrued RRD Expenses 53 --
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 251 $ 209
===== =====
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COLUMBIA FINANCIAL OF KENTUCKY, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTE 25 - CONDENSED FINANCIAL STATEMENTS OF COLUMBIA FINANCIAL
OF KENTUCKY, INC. (CONTINUED)
COLUMBIA FINANCIAL OF KENTUCKY, INC.
STATEMENT OF CASH FLOWS (CONT.)
(IN THOUSANDS)
From Inception,
April 15, 1998
Year Ended Until
September 30, September 30,
------------- -------------
1999 1998
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Repayment of Loan to ESOP $ 194 $ 194
Purchase of Investment Securities -- (1,091)
Proceeds from Investment Securities 1,091 --
Investment in Columbia Federal Savings Bank -- (12,741)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES 1,285 (13,638)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds from Issuance of Common Shares -- 23,793
Treasury Shares Purchased
Dividends Paid (8,670) (172)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES (8,932) 23,621
-------- --------
CHANGES IN CASH AND CASH EQUIVALENTS (7,396) 10,192
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,192 --
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,796 $ 10,192
======== ========
42