FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-23935
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COLUMBIA FINANCIAL OF KENTUCKY, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 61-1319175
- ------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
2497 Dixie Highway
Ft. Mitchell, Kentucky 41017-3085
- --------------------------------------- ------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (606) 331-2419
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X*] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of July 31, 1998, the
latest practicable date, 2,671,450 common shares of the registrant, no par
value, were issued and outstanding.
* Prior to April 15, 1998, the Registrant conducted no business except the
offering of its common shares and preparation to acquire Columbia Federal
Savings Bank.
INDEX
COLUMBIA FINANCIAL OF KENTUCKY, INC.
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II - OTHER INFORMATION 12
SIGNATURES 14
Columbia Financial of Kentucky, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30 Sept. 30
1998 1997
-------- --------
(Dollars In Thousands)
<S> <C> <C>
ASSETS
Cash and due from Banks $ 595 $ 612
Interest Bearing Deposits in Other Banks 10,910 6,215
--------------------
Total Cash and Cash Equivalents 11,505 6,827
Investment Securities
Held to Maturity, At Cost (Market Value of $20,155 and $13,068
at June 30, 1998 and September 30, 1997) 20,026 13,069
Available-for-Sale, At Market Value - 1,003
Mortgage-Backed Securities, At Cost (Market Value of $21,663 and
$17,893 at June 30, 1998 and September 30, 1997) 21,511 17,862
Loans Receivable, Net 62,073 61,578
Real Estate Owned - -
Interest Receivable 741 712
Premises and Equipment, Net 1,634 1,595
Federal Home Loan Bank Stock, At Cost 1,329 1,260
Deferred Federal Income Tax Asset 19 -
Federal Income Tax - Refund Receivable - 13
Other Assets 130 87
--------------------
Total Assets $118,968 $104,006
====================
LIABILITIES AND EQUITY
Liabilities
Deposits $ 80,807 $ 90,195
Advances from Borrowers for Taxes and Insurance 373 460
Accrued Federal Income Tax Liability 79 -
Deferred Federal Income Tax Liability 162 162
Other Liabilities 83 98
--------------------
Total Liabilities 81,504 90,915
--------------------
Equity
Preferred Stock (1,000,000 Shares, No Par Value, Authorized, No
Shares Issued or Outstanding) - -
Common Stock (6,000,000 Shares, No Par Value, Authorized, 2,671,450
Issued and Outstanding) - -
Additional Paid in Capital 25,971
Retained Earnings - Substantially Restricted 13,535 13,090
Shares Acquired by Employee Stock Ownership Plan (ESOP) (2,042) -
Unrealized Gain on Available-for-Sale Securities, Net of Related
Taxes - 1
--------------------
Total Equity 37,464 13,091
--------------------
Total Liabilities and Equity $118,968 $104,006
====================
</TABLE>
Columbia Financial of Kentucky, Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income (Dollars in Thousands)
Loans $ 1,362 $ 1,487 $ 4,046 $ 4,436
Mortgage-Backed Securities 336 270 913 854
Investments 265 213 758 641
Interest-Bearing Deposits 263 46 397 117
----------------------------------------
Total Interest Income 2,226 2,016 6,114 6,048
----------------------------------------
Interest Expense
Deposits 1,057 1,100 3,258 3,319
FHLB Advances - 7 - 25
----------------------------------------
Total Interest Expense 1,057 1,107 3,258 3,344
----------------------------------------
Net Interest Income 1,169 909 2,856 2,704
Provision for Losses on Loans - 2 74 2
----------------------------------------
Net Interest Income After Provision for
Losses on Loans 1,169 907 2,782 2,702
----------------------------------------
Non-Interest Income 25 21 81 66
----------------------------------------
Non-Interest Expense
Salaries and Employee Benefits 550 433 1,382 1,261
Occupancy Expense of Premises 72 61 200 179
Federal Deposit Insurance Premiums 14 15 42 74
Data Processing Services 27 28 86 86
Advertising 23 24 89 78
Other 144 93 392 325
----------------------------------------
Total Non-Interest Expense 830 654 2,191 2,003
----------------------------------------
Income Before Federal Income Tax Expense 364 274 672 765
Federal Income Tax Expense 125 93 228 260
----------------------------------------
Net Income $ 239 $ 181 $ 444 $ 505
========================================
Earnings Per Share
Basic $ 0.10 N/A N/A N/A
=======
Diluted $ 0.10 N/A N/A N/A
=======
</TABLE>
Columbia Financial of Kentucky, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------
1998 1997
-------- ---------
(Dollars In Thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 444 $ 505
Reconciliation of Net Income with Cash Flows from Operations
Depreciation 91 58
Provision for Losses on Loans 74 2
FHLB Stock Dividends (69) (63)
Deferred Federal Income Tax (19) 215
Changes In Interest Receivable (29) 79
Other Assets 10 48
Federal Income Tax Receivable / Liability 92 35
Other Liabilities (15) (584)
--------------------
Net Cash Provided by Operating Activities 579 295
--------------------
Cash Flows From Investing Activities
Investment Securities
Purchased (16,542) (2,502)
Matured 10,587 4,502
Mortgage-Backed Securities
Purchased (4,990) -
Principal Collected 1,341 1,536
Loan Originations and Repayments, Net (495) 3,706
Purchases of Property and Equipment (130) (330)
--------------------
Net Cash (Used) Provided by Investing Activities (10,229) 6,912
--------------------
Cash Flows From Financing Activities
Advances from Borrowers for Taxes and Insurance (87) 127
Change in Deposits (9,388) (4,760)
Proceeds from Offering 23,803 -
--------------------
Net Cash (Used) Provided by Financing Activities 14,328 (4,633)
Change in Cash and Cash Equivalents 4,678 2,574
--------------------
Beginning Balance, Cash and Cash Equivalents 6,827 3,047
--------------------
Ending Balance, Cash and Cash Equivalents $ 11,505 $ 5,621
====================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLUMBIA FINANCIAL OF KENTUCKY, INC.
For the three-and nine-month periods ended
June 30, 1998 and 1997
1. Basis of Presentation
- ---------------------------
The accompanying unaudited financial statements were prepared in
accordance with instructions for Form 10-QSB, and, therefore, do not include
information or footnotes necessary for complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Accordingly, these financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto of Columbia Federal Savings Bank for the year ended September 30, 1997.
However, in the opinion of management, all adjustments (consisting of only
normal recurring accruals) which are necessary for fair presentation of the
consolidated financial statements have been included. The results of operations
for the three-month and nine-month periods ended June 30, 1998 and 1997 are not
necessarily indicative of the results that may be expected for an entire fiscal
year.
The accompanying consolidated financial statements include the accounts
of Columbia Financial of Kentucky, Inc. ("CFKY") and Columbia Federal Savings
Bank ("Columbia Federal"). All significant intercompany items have been
eliminated.
2. Impact of Recent Accounting Standards
- -------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131, which is effective for fiscal years beginning after December 15,
1997, requires operating segments of a company be segregated to provide a
better understanding of performance and a better assessment of its future cash
flows. Generally, financial information is required to be reported on the bases
that it is used internally for evaluating segment performance and deciding how
to allocate resources to segments. Management does not believe that the
adoption of SFAS No. 131 will have a material impact on the disclosure
requirements of CFKY.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements and requires that an
enterprise (a) classify items of other comprehensive income by their nature in
a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. Under
existing accounting standards, other comprehensive income shall be classified
separately into foreign currency items, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and equity
securities. The provisions of SFAS No. 130 are effective for fiscal years
beginning after December 15, 1997. Management does not believe the adoption of
SFAS No. 130 will have a material impact on the disclosure requirements of
CFKY.
In December 1996, the FASB issued SFAS No. 126, which amends SFAS No.
107, "Disclosure About Fair Value of Financial Instruments," to make the
disclosures about fair value of financial instruments prescribed in SFAS No.
107 optional for nonpublic entities with total assets less than $100 million on
the date of the financial statement. SFAS No. 126 also requires that the entity
has not held or issued any derivative financial instruments, as defined in SFAS
No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments," other than loan commitments, during the reporting
periods. Management believes the adoption of SFAS No. 126 has not impacted the
disclosure requirements of CFKY based on Columbia Federal's compliance with
SFAS No. 107 disclosure requirements in prior periods.
In June 1996, the FASB issued SFAS No. 125, which is effective, on a
prospective basis, for fiscal years beginning after December 31, 1996. SFAS No.
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on consistent
application of financial-components approach that focuses on control. SFAS No.
125 extends the "available for sale" and "trading" approach of SFAS No. 115 to
non-security financial assets that can be contractually prepaid or otherwise
settled in such a way that the holder of the asset would not recover
substantially all of its recorded investment. In addition, SFAS No. 125 amends
SFAS No. 115 to prevent a security from being classified as held-to-maturity if
the security can be prepaid or settled in such a manner that the holder of the
security would not recover substantially all of its recorded investment. The
extension of the SFAS No. 115 approach to certain non-security financial assets
and the amendment to SFAS No. 115 are effective for financial assets held on or
acquired after January 1, 1997. The adoption of SFAS No. 125 did not have a
material impact on the disclosure requirements of CFKY.
3. Consummation of the Conversion to a Stock Savings Bank
- ---------------------------------------------------------------
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, CFKY, 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 CFKY's common
shares in an amount equal to the pro forma market value of Columbia Federal
after giving effect to the conversion. A subscription offering of the shares of
CFKY to Columbia Federal's members and to an employee stock benefit plan was
conducted.
The conversion was completed on April 15, 1998 and resulted in the
issuance of 2,671,450 common shares of CFKY which, after consideration of
offering expenses totaling approximately $775,000 and 213,716 shares allocated
to the Columbia Federal of Kentucky, Inc. Employee Stock Ownership Plan (the
"ESOP"), resulted in net proceeds of $23.8 million.
At the time of conversion, Columbia Federal 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 Columbia Federal after
the conversion. 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. Columbia Federal may not pay
dividends that would reduce shareholders' equity below the required liquidation
account balance.
Under OTS regulations, limitations have been imposed on all "capital
distributions", including cash dividends by savings institutions. The
regulation establishes a three-tiered system of restrictions, with the greatest
flexibility afforded to thrifts that are both well capitalized and given
favorable qualitative examination ratings by the OTS.
4. Pending Legislative Changes
- ---------------------------------
Legislation to recapitalize the Savings Association Insurance Fund (the
"SAIF") of the Federal Deposit Insurance Corporation (the "FDIC") and to
eliminate a significant premium disparity between the Bank Insurance Fund (the
"BIF") of the FDIC and the SAIF effective September 30, 1996, provides for the
merger of the BIF and the SAIF effective January 1, 1999, assuming that the
federal savings association charter has been eliminated.
Congress is considering legislation to eliminate the federal savings
association charter and the separate regulation of federal thrifts, including
federal savings banks. Pursuant to such legislation, Congress may develop a
common charter for all financial institutions, eliminate the OTS and regulate
Columbia Federal under federal law as a bank or require Columbia Federal to
change its charter, which would likely change the type of activities in which
Columbia Federal may engage and would probably subject Columbia Federal to more
regulation by the FDIC. In addition, CFKY may become subject to different
holding company regulations, including separate capital requirements and
limitations on activities. Although CFKY cannot predict whether or when
Congress may actually pass legislation regarding CFKY's and Columbia Federal's
regulatory requirements or charter, it is not anticipated that the current
activities of CFKY or Columbia Federal will be materially affected by such
legislation.
5. Earnings Per Share
- ------------------------
Basic earnings per share is computed based upon the weighted average
shares outstanding during the period, less shares in the ESOP that are
unallocated and not committed to be released. Weighted average common shares
outstanding, which give effect to 213,716 unallocated ESOP shares, totaled
2,457,734 shares for the three-month period ended June 30, 1998. Diluted
earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares. Presently, CFKY has no
dilutive potential common shares. Weighted-average shares outstanding for
purposes of computing diluted earnings per share totaled 2,457,734 for the
three months ended June 30, 1998. The provisions of SFAS No. 128 "Earnings Per
Share" are not applicable to the three-month and nine-month periods ended June
30, 1997 and nine-month period ended June 30, 1998, as the conversion from
mutual to stock form was completed in April, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COLUMBIA FINANCIAL OF KENTUCKY, INC.
Note Regarding Forward-Looking Statements
-----------------------------------------
In addition to historical information contained herein, this Form 10- QSB
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, Columbia Federal'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 interest rates in
the nation and Columbia Federal's market area generally.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount of allowance for losses on
loans, the adequacy of collateral on nonperforming loans, legislative changes
with respect to the federal thrift charter, the effect of certain accounting
pronouncements and the year 2000. See Exhibit 99 "Safe Harbor Under the Private
Securities Litigation Reform Act of 1995," attached hereto and incorporated
herein by reference.
Discussion of Financial Condition Changes from September 30, 1997 to
June 30, 1998
- --------------------------------------------------------------------
General. CFKY's assets totaled $119.0 million at June 30, 1998, an
increase of $15.0 million, or 14.4%, from $104.0 million at September 30, 1997.
The increase resulted primarily from a $4.7 million increase in cash and cash
equivalents, a $6.9 million increase in held-to-maturity securities and a $3.6
million increase in mortgage-backed securities, partially offset by a $1.0
million decrease in available-for-sale securities. Deposits decreased $9.4
million and advances from borrowers for taxes and insurance decreased $87,000.
The increase in cash, investments and mortgage-backed securities was
primarily a result of funds received in conjunction with CFKY's initial public
stock offering (the "offering"), which was completed on April 15, 1998.
Liquid Assets and Investments. Liquid assets (cash and cash equivalents)
totaled $11.5 million at June 30, 1998, an increase of $4.7 million, or 69%,
from the total at September 30, 1997. This increase resulted primarily from an
increase in funds from the Offering. Proceeds from the Offering were also
invested in mortgage-backed securities.
Loans Receivable. Net loans receivable equaled $62.1 million at June 30,
1998, compared to $61.6 million at September 30, 1997, an 0.8% increase,
attributable to loans being originated more rapidly than loans were being
repaid.
Allowance for Losses on Loans. Columbia Federal's allowance for loan
losses totaled $300,000 at June 30, 1998, and September 30, 1997. The allowance
represented .49% of total loans at June 30, 1998 and September 30, 1997. As of
September 30, 1997, there was $601,000 in nonperforming loans, which was .98%
of total loans at that date. Of such amount, $473,000 was due from one borrower
with 18 loans. As of June 30, 1998, all nonperforming loans had been brought
current.
Although management believes that its allowance for loan losses at June
30, 1998, was adequate based upon the available facts and circumstances, there
can be no assurances that additions to such allowance will not be necessary in
future periods, which could adversely affect CFKY's results of operations.
Deposits. Total deposits decreased by $9.4 million, to $80.8 million, at
June 30, 1998, from $90.2 million at September 30, 1997. This decrease resulted
primarily from depositors withdrawing funds to purchase common shares in the
conversion. At June 30, 1998, certificates of deposit that will mature within
one year accounted for 28.7% 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
retained earnings 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 to 3% of adjusted total assets, while 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 June 30, 1998, Columbia Federal's tangible
and core capital totaled $26.2 million, or 21.8% of adjusted total assets,
which exceeded the minimum requirements of $2.4 million and $4.8 million, by
$23.8 million and $21.4 million, respectively. As of June 30, 1998, Columbia
Federal's risk-based capital was $26.5 million, or 53.5% of risk-weighted
assets, exceeding the minimum requirement by $22.5 million.
Comparison of Operating Results for the Three-Month Periods Ended
June 30, 1998 and 1997
- -----------------------------------------------------------------
General. CFKY's recorded net income of $239,000 for the three months
ended June 30, 1998, compared to income of $181,000 for the same period in
1997, a $58,000 and 32% increase. The increase resulted primarily from a
$210,000 increase in interest income and a decrease in interest expense of
$50,000. Such changes were offset by a $176,000 increase in non-interest
expenses and a $32,000 increase in income tax expense.
Interest Income. Interest income increased $210,000 for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997. This was
a result of an increase in average balances in interest-earning assets as a
result of funds from the Offering. Yields on interest-earning assets were
relatively constant for the three-month period ended June 30, 1998 and 1997.
Interest Expense. Interest expense decreased $50,000 for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997. This
decrease was the result of a decrease in cost of funds from 4.80% for the three
months ended June 30, 1997 to 4.04% for the three months ended June 30, 1998,
partially offset by an increase in average deposits of $12.8 million from $91.4
million for the three months ended June 30, 1997 to $104.2 for the three months
ended June 30, 1998. Also, interest on FHLB advances decreased $7,000 for the
three months ended June 30, 1998.
Columbia Federal's net interest rate spread was 3.20% for the three
months ended June 30, 1998, compared to 3.08% for the three months ended June
30, 1997.
Non-interest Income and Non-interest Expense. Non-interest income was
$25,000 for the three months ended June 30, 1998, compared to $21,000 for the
same period in 1997, primarily due to an increase in fee income. Non-interest
expense increased $176,000, or 26.9%, to $830,000. The primary reason for this
increase was the increase in salaries and employee benefits from $433,000 for
the three months ended June 30, 1997, to $550,000 for the three months ended
June 30, 1998 as a result of costs associated with CFKY's new ESOP. Also, other
expenses increased $51,000 for the period primarily due to expenses associated
with the operation of a public company.
Comparison of Operating Results for the Nine-Month Periods Ended
June 30, 1998 and 1997
- ----------------------------------------------------------------
General. Columbia Federal recorded net income of $444,000 for the nine
months ended June 30, 1998, compared to income of $505,000 for the same period
in 1997. The decrease resulted primarily from a $390,000 decrease in interest
and fees on loans, a $72,000 increase in provision for loan losses and a
$188,000 increase in non-interest expense. Such changes were offset by an
increase in interest income on mortgage-backed securities, investments and
interest-bearing deposits of $456,000, an $86,000 decrease in interest on
deposits and FHLB advances, a $15,000 increase in non-interest income, and a
$32,000 decrease in income tax expense.
Interest Income. Interest income increased $66,000 for the nine months
ended June 30, 1998 compared to the nine months ended June 30, 1997. This was a
result of an increase in average interest earning assets of $5.1 million from
$103.4 million for the nine months ended June 30, 1997 to $108.5 million for
the nine months ended June 30, 1998. This increase in interest-earning assets
was partially offset by a reduction in yield on earning assets of .28% to 7.52%
for the nine months ended June 30, 1998.
Interest Expense. Interest expense decreased $86,000 for the nine months
ended June 30, 1998 compared to the nine months ended June 30, 1997. This
decrease was primarily due to a decrease in the cost of funds from 4.76% for
the nine months ended June 30, 1997 to 4.57% for the nine months ended June 30,
1998. This decrease was partially offset by an increase in average deposits of
$2.1 million from $93.0 million for the nine months ended June 30, 1997 to
$95.1 million for the nine months ended June 30, 1998.
Columbia Federal's net interest rate spread was 2.95% for the nine months
ended June 30, 1998, compared to 3.04% for the nine months ended June 30, 1997.
Allowance and Provision for Loan Losses. After review of its allowance
for loan losses, management decided to record a provision for loan losses of
$74,000 to return its allowance to $300,000. During the nine months ended June
30, 1998, Columbia Federal incurred losses on five loans held by two
individuals. The balances of these loans totaled $153,000. A writedown of
$74,000 was recorded when these loans were recorded as real estate owned. These
properties were sold during the nine months ended June 30, 1998.
Non-interest Income and Non-interest Expense. Non-interest income was
$81,000 for the nine months ended June 30, 1998, compared to $66,000 for the
same period in 1997, primarily due to an increase in fee income. Non-interest
expense increased $188,000, or 9.4%, to $2.2 million. The primary reasons for
this increase were an increase in salaries and employee benefits of $121,000,
an increase in occupancy expense of $21,000, an increase in other expenses of
$67,000 and an increase in advertising expense of $11,000. These increases were
primarily the result of cost associated with Columbia's new ESOP plan, the
relocation of the Florence office, which increased advertising, furniture,
telephone and stationary costs, and to cost associated with the operation of a
public company. This was partially offset by a $32,000 decrease in federal
deposit insurance premiums as a result of the recapitalization of the Savings
Association Insurance Fund.
Year 2000 Issues
- ----------------
As with all financial institutions, Columbia Federal's operations depend
almost entirely on computer systems. Columbia Federal is addressing the
potential problems associated with the possibility that the computers which
control or operate Columbia Federal's operating systems, facilities and
infrastructure may not be programmed to read four-digit date codes and, upon
arrival of year 2000, may recognize the two-digit code "00" as the year 1900,
causing systems to fail to function or generate erroneous data. Columbia
Federal is working with the companies that supply or service its
computer-operated or dependent systems to identify and remedy any year 2000
related problems.
CFKY does not expect to incur significant expense to implement corrective
measures. No assurance can be given, however, that significant expense will not
be incurred in future periods. In the event that Columbia Federal is ultimately
required to purchase replacement computer systems, programs and equipment, or
that substantial expense must be incurred to make Columbia Federal's current
systems, programs and equipment year 2000 compliant, Columbia Federal's net
income and financial condition could be adversely affected.
In addition to possible expense related to its own systems, Columbia
Federal could incur losses if loan payments are delayed due to year 2000
problems affecting any of Columbia Federal's significant borrowers or impairing
the payroll systems of large employers in Columbia Federal's primary market
area. Because Columbia Federal's loan portfolio is highly diversified with
regard to individual borrowers and types of businesses and Columbia Federal's
primary market area is not significantly dependent upon one employer or
industry, Columbia Federal does not expect any significant or prolonged
difficulties that will affect net earnings or cash flow.
PART II
COLUMBIA FINANCIAL OF KENTUCKY, INC.
Item 1. Legal Proceedings
- --------------------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On February 11, 1998, the Securities and Exchange Commission
declared effective a Registration Statement on Form S-1 (File No.
333-42523) registering 2,671,450 common shares of CFKY, no par
value, to be sold for an aggregate price of $26.7 million. The
offering of such shares was completed on April 15, 1998, and all
2,671,450 shares were sold for an aggregate price of $26.7 million.
Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc.
("Webb"), acted as agent in the sale of the shares on a best
efforts basis. The total of $775,000 in expenses of the offering
consisted of $363,000 paid to Webb for its services and expenses
and $412,000 for other expenses. All of such expenses were direct
payments to persons other than directors, officers, associates of
directors or officers or of CFKY, or 10% beneficial owners of CFKY.
After deducting total expenses, the net proceeds of the offering
equaled $25.9 million, including a promissory note in the amount of
$2.1 received in exchange for shares issued to the CFKY ESOP. Of
such net proceeds, $12.7 million were used to purchase all of the
outstanding common stock of Columbia Federal. Of the proceeds not
used to purchase Columbia Federal stock, $11.1 million was
deposited into interest bearing accounts at Columbia Federal and
another local financial institution. All of such proceeds were paid
directly to persons other than directors, officers, associates of
directors or officers of CFKY or persons beneficially owning 10% or
more of the outstanding common shares of CFKY.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Item 5. Other Information
- --------------------------
Any proposals of shareholders intended to be included in CFKY's
proxy statement and proxy card for the 1999 Annual Meeting of Shareholders
should be sent to CFKY by certified mail and must be received by CFKY no later
than August 21, 1998. In addition, if a shareholder intends to present a
proposal at the 1999 Annual Meeting without including the proposal in the proxy
materials related to that meeting, and if the proposal is not received by
November 6, 1998, then the proxies designated by the Board of Directors of CFKY
for the 1999 Annual Meeting of Shareholders of CFKY may vote in their
discretion on any such proposal any shares for which they have been appointed
proxies without mention of such matter in the proxy statement or on the proxy
card for such meeting.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibit 10.1 - Employment Agreement with Robert V. Lynch
(Incorporated by reference to Registration Statement on
Form S-1, as amended, declared effective by the SEC on
February 11, 1998 (the "S-1", Exhibit 10.3).
Exhibit 10.2 - Form of Severance Agreement for each of Abijah
Adams, Mary Jane Lucas, Carol S. Margrave, George
Raybourne and Edward Schwartz (Incorporated by
reference to the S-1, Exhibit 10.4).
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
SIGNATURES
COLUMBIA FINANCIAL OF KENTUCKY, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998 By: /s/ Robert V. Lynch
--------------------------- --------------------------------
Robert V. Lynch, President and
Chief Executive Officer
Date: August 14, 1998 By: /s/ Abijah Adams
--------------------------- --------------------------------
Abijah Adams, Controller
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 595
<INT-BEARING-DEPOSITS> 10,910
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 41,537
<INVESTMENTS-MARKET> 41,818
<LOANS> 62,073
<ALLOWANCE> 300
<TOTAL-ASSETS> 118,968
<DEPOSITS> 80,807
<SHORT-TERM> 0
<LIABILITIES-OTHER> 83
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 37,464
<TOTAL-LIABILITIES-AND-EQUITY> 118,968
<INTEREST-LOAN> 4,046
<INTEREST-INVEST> 758
<INTEREST-OTHER> 397
<INTEREST-TOTAL> 6,114
<INTEREST-DEPOSIT> 3,258
<INTEREST-EXPENSE> 3,258
<INTEREST-INCOME-NET> 2,856
<LOAN-LOSSES> 74
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,191
<INCOME-PRETAX> 672
<INCOME-PRE-EXTRAORDINARY> 672
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 444
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<YIELD-ACTUAL> 3.51
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 300
<CHARGE-OFFS> 74
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 300
<ALLOWANCE-DOMESTIC> 300
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed in the
statement. Columbia Financial of Kentucky, Inc. ("CFKY") desires to take
advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance and finances
and plans and objectives of management, contained or incorporated by
referencing CFKY's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1998, is forward-looking. In some cases, information regarding
certain important factors that could cause actual results of operations or
outcomes of other events to differ materially from any such forward-looking
statement appears together with such statement. In addition, forward-
looking statements are subject to other risks and uncertainties affecting
the financial institutions industry, including but not limited to, the
following:
Interest Rate Risk
- ------------------
CFKY's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from
loans and investments and interest expense on deposits and borrowings. The
interest income and interest expense of CFKY change as the interest rates
and mortgages, securities and other assets and on deposits and other
liabilities change. Interest rates may change because of general economic
conditions, the policies of various regulatory authorities and other factors
beyond CFKY's control. The interest rates on specific assets and
liabilities of CFKY will change or "reprice" in accordance with the
contractual terms of the asset or liability instrument and in accordance
with customer reaction to general economic trends. In a rising interest
rate environment, loans tend to prepay slowly and new loans at higher rates
increase slowly, while interest paid on deposits increases readily because
the terms to maturity of deposits tend to be shorter than the terms to
maturity or prepayment of loans. Such differences in the adjustment of
interest rates on assets and liabilities may negatively affect CFKY's
income. Moreover, rising interest rates tend to decrease loan demand in
general, negatively affecting CFKY's income.
Possible Inadequacy of the Allowance for Loan Losses
- ----------------------------------------------------
Columbia Federal Savings Bank ("Columbia Federal") maintains an
allowance for loan losses based upon a number of relevant factors,
including, but not limited to, trends in the level of nonperforming assets
and classified loans, current and anticipated economic conditions in the
primary lending area, past loss experience, possible losses arising from
specific problem assets and changes in the composition of the loan
portfolio. While the Board of Directors of Columbia Federal believes that
it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in material adjustments,
and net earnings could be significantly adversely affected if circumstances
differ substantially from the assumptions used in making the final
determination.
Loans not secured by one-to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one- to four-family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from
the operation of the property, which may be negatively affected by national
and local economic conditions that cause leases not to be renewed or that
negatively affect the operations of a commercial borrower. Construction
loans may also be negatively affected by such economic conditions,
particularly loans made to developers who do not have a buyer for a property
before the loan is made. The risk of default on consumer loans increases
during periods of recession, high unemployment and other adverse economic
conditions. When consumers have trouble paying their bills, they are more
likely to pay mortgage loans than consumer loans, and the collateral
securing such loans, if any, may decrease in value more rapidly than the
outstanding balance of the loan.
Competition
- -----------
Columbia Federal competes for deposits with other savings
associations, commercial banks and credit unions and issuers of commercial
paper and other securities, such as shares in money market mutual funds.
The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, Columbia Federal competes
with other savings associations, commercial banks, consumer finance
companies, credit unions, leasing companies, mortgage companies and other
lenders. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions,
current interest rate levels and other factors that are not readily
predictable. The size of financial institutions competing with Columbia
Federal is likely to increase as a result of changes in statutes and
regulations eliminating various restrictions on interstate and inter-
industry branching and acquisitions. Such increased competition may have an
adverse effect upon CFKY.
Legislation and Regulation that may Adversely Affect CFKY's Earnings
- --------------------------------------------------------------------
Columbia Federal is subject to extensive regulation by the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the
"FDIC") and is periodically examined by such regulatory agencies to test
compliance with various regulatory requirements. As a savings and loan
holding company, CFKY is also subject to regulation and examination by the
OTS. Such supervision and regulation of Columbia Federal and CFKY are
intended primarily for the protection of depositors and not for the
maximization of shareholder value and may affect the ability of the company
to engage in various business activities. The assessments, filing fees and
other costs associated with reports, examinations and other regulatory
matters are significant and may have an adverse effect on CFKY's net
earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance Fund (the "BIF") and
the Savings Association Insurance Fund (the "SAIF"). The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to the target level within a reasonable time
and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members.
Under such system, assessments may vary depending on the risk the
institution poses to its deposit insurance fund. Such risk level is
determined by reference to the institution's capital level and the FDIC's
level of supervisory concern about the institution.
Congress recently enacted a plan to recapitalize the SAIF. The
recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings associations under
federal law. Congress is considering legislation to eliminate the federal
thrift charter and the separate federal regulation of savings and loan
associations. As a result, Columbia Federal may have to convert to a
different financial institution charter or might be regulated under federal
law as a bank. If Columbia Federal becomes a bank or is regulated as a
bank, it would become subject to the more restrictive holding company
requirements, including activity limits and capital requirements similar to
those imposed on Columbia Federal. CFKY cannot predict the impact of the
conversion of Columbia Federal to, or regulation of Columbia Federal as, a
bank until any legislation requiring such change is enacted.
