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As filed with the Securities and Exchange Commission on December 17, 1997
Registration No. ______________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
COLUMBIA FINANCIAL OF KENTUCKY, INC.
(Exact name of registrant as specified in its charter)
Ohio 6036 Applied For
_______________________________ ____________________________ ________________
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer
incorporation or organization) Classification Code Number) identification
number)
2497 DIXIE HIGHWAY
FT. MITCHELL, KENTUCKY 41017-3085
(606) 331-2419
_____________________________________________________________
(Address, including Zip Code, and telephone number, including
area code, of registrant's principal executive offices)
ROBERT V. LYNCH
COLUMBIA FINANCIAL OF KENTUCKY, INC.
2497 DIXIE HIGHWAY
FT. MITCHELL, KENTUCKY 41017-3085
(606) 331-2419
_________________________________________________________
(Name, address, including Zip Code, and telephone number,
including area code, of agent for service)
With copies to:
Cynthia A. Shafer
Vorys, Sater, Seymour and Pease
Atrium Two, 221 East Fourth Street
Cincinnati, Ohio 45202
(513) 723-4000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: [x]
CALCULATION OF REGISTRATION FEE
______________________________________________________________________________
Title of each class Proposed maximum Proposed maximum
of securities to be Amount to offering price aggregate Amount of
registered be registered per share offering price(1) registration fee
_____________________________________________________________________________________________
Common shares,
without par value 2,671,450 shares $10.00 $26,714,500 $8,096.00
=============================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CROSS REFERENCE SHEET
Showing the location in the Prospectus of the Items of Form S-1
Form S-1 Item and Caption Prospectus Heading
- ------------------------- ------------------
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Cover Page, Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... PROSPECTUS SUMMARY; RISK FACTORS
4. Use of Proceeds............................ USE OF PROCEEDS
5. Determination of Offering Price............ Cover Page; THE CONVERSION - Pricing and
Number of Common Shares to be Sold
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Not Applicable
8. Plans of Distribution...................... Cover Page; THE CONVERSION - General;
- Subscription Offering;
- Community Offering; and
- Plan of Distribution
9. Description of Securities to be Registered. DESCRIPTION OF AUTHORIZED SHARES
10. Interest of Named Experts and Counsel...... Not Applicable
11. Information with Respect to the Registrant
(a) Description of Business............... COLUMBIA FINANCIAL OF KENTUCKY, INC.;
COLUMBIA FEDERAL SAVINGS BANK; THE
BUSINESS OF COLUMBIA FEDERAL
(b) Description of Property............... THE BUSINESS OF COLUMBIA FEDERAL -
Properties
(c) Legal Proceedings..................... THE BUSINESS OF COLUMBIA FEDERAL - Legal
Proceedings
(d) Market Price and Dividends............ Cover Page; MARKET FOR COMMON SHARES;
DIVIDEND POLICY
(e) Financial Statements.................. Index to Financial Statements
(f) Selected Financial Data............... SELECTED CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA
(g) Supplementary Financial Information... Not Applicable
(h) Management's Discussion and Analysis MANAGEMENT'S DISCUSSION AND ANALYSIS OF
of Financial Condition and Results of FINANCIAL CONDITION AND RESULTS OF
Operations............................. OPERATIONS
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(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.............................. Not Applicable
(j) Directors and Executive Officers....... MANAGEMENT OF CFKY;
MANAGEMENT OF COLUMBIA FEDERAL
(k) Executive Compensation................. MANAGEMENT OF COLUMBIA FEDERAL -
Compensation; Employee Stock Ownership
Plan; Stock Option Plan; Recognition and
Retention Plan and Trust; Retirement
Benefit Plans; and Employment and
Severance Agreements
(l) Security Ownership of Certain
Beneficial Owners and Management....... THE CONVERSION - Shares to be Purchased
by Management Pursuant to Subscription
Rights
(m) Certain Relationships and Related
Transactions.......................... MANAGEMENT OF COLUMBIA FEDERAL -
Certain Transactions with Columbia Federal
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liability.................................. Not Applicable
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PROSPECTUS
COLUMBIA FINANCIAL OF KENTUCKY, INC.
(PROPOSED HOLDING COMPANY FOR COLUMBIA FEDERAL SAVINGS BANK)
UP TO 2,323,000 COMMON SHARES
$10.00 PURCHASE PRICE PER SHARE
Columbia Financial of Kentucky, Inc., an Ohio corporation ("CFKY"), is
hereby offering for sale up to 2,323,000 common shares, without par value (the
"Common Shares"), in connection with its acquisition of all of the capital stock
to be issued by Columbia Federal Savings Bank ("Columbia Federal"), upon the
conversion of Columbia Federal from a federal mutual savings bank to a federal
stock savings bank (the "Conversion"). The consummation of the Conversion and
the sale of the Common Shares are subject to the approval of Columbia Federal's
Amended Plan of Conversion (the "Plan") and the adoption of the Federal Stock
Charter of Columbia Federal at a Special Meeting of the members of Columbia
Federal to be held at ___ _.m., Eastern Time, on _________, 1998, at
_____________________________________ (the "Special Meeting").
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION OF THE DEPARTMENT OF THE TREASURY (THE "OTS"), THE FEDERAL
DEPOSIT INSURANCE CORPORATION (THE "FDIC"), OR THE SECURITIES COMMISSION OF
ANY STATE, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Based on an independent appraisal of the pro forma market value of
Columbia Federal, as converted, as of November 28, 1997, the aggregate
purchase price of the Common Shares offered in connection with the Conversion
ranges from a minimum of $17,170,000 to a maximum of $23,230,000 (the
"Valuation Range"), resulting in a range of 1,717,000 to 2,323,000 Common
Shares at $10.00 per share. Applicable regulations permit CFKY to offer
additional Common Shares in an amount not to exceed 15% above the maximum of
the Valuation Range, which would permit the issuance of up to 2,671,450
Common Shares with an aggregate purchase price of $26,714,500. The actual
number of Common Shares sold in connection with the Conversion will be based
upon the final valuation of Columbia Federal, as determined by the
independent appraiser upon the completion of this offering.
In accordance with the Plan, Common Shares are offered hereby in a
subscription offering to (a) each account holder who, as of September 30,
1996 (the "Eligibility Record Date"), had deposit accounts with deposit
balances, in the aggregate, of $50 or more (a "Qualifying Deposit") with
Columbia Federal; (b) the Columbia Financial of Kentucky, Inc., Employee
Stock Ownership Plan (the "ESOP"); (c) each account holder who as of December
31, 1997 (the "Supplemental Eligibility Record Date"), had a Qualifying
Deposit at Columbia Federal; and (d) each account holder and certain
borrowers as of _____________, 1998 (the "Subscription Offering"). All
subscription rights to purchase Common Shares in the Subscription Offering
are nontransferable and will expire at ___ _.m., Eastern Time, on ______,
1998 (the "Subscription Expiration Date"), unless extended. PERSONS FOUND TO
BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE SUBJECT TO FORFEITURE OF SUCH
RIGHTS AND POSSIBLE FURTHER PENALTIES IMPOSED BY THE OTS. See "THE
CONVERSION - Subscription Offering."
THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY.
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES CERTAIN
RISKS. FOR A DISCUSSION OF CERTAIN RISKS AND OTHER FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES, SEE "RISK FACTORS"
BEGINNING AT PAGE __ OF THIS PROSPECTUS.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER
AT ______________.
=======================================================================================
Estimated Underwriting
Purchase Commissions Estimated Net
Price And Other Expenses(1) Proceeds
- ---------------------------------------------------------------------------------------
Per share Minimum $10 $0.36 $9.64
Per share Mid-Point $10 $0.33 $9.67
Per share Maximum $10 $0.30 $9.70
Per share Maximum, as adjusted (2) $10 $0.28 $9.72
Total Minimum $17,170,000 $620,000 $16,550,000
Total Mid-point $20,200,000 $658,000 $19,542,000
Total Maximum $23,230,000 $695,000 $22,535,000
Total Maximum, as adjusted (2) $26,714,500 $737,000 $25,977,500
=======================================================================================
(1) Consists of estimated printing, postage, legal, accounting, filing fee,
appraisal and miscellaneous costs to Columbia Federal and CFKY in
connection with the Conversion, as well as estimated fees, sales
commissions and reimbursable expenses to be paid to Charles Webb &
Company, a division of Keefe, Bruyette & Woods, Inc., which has been
engaged by Columbia Federal to consult, advise and assist in the sale of
the Common Shares on a best effort basis. Actual Conversion expenses
may be more or less than estimated amounts. See "THE CONVERSION - Plan
of Distribution."
(2) Gives effect to the increase in the number of Common Shares sold in
connection with the Conversion of up to 15% above the maximum of the
Valuation Range. Such shares may be offered without the resolicitation
of persons who subscribe for Common Shares. See "THE CONVERSION -
Pricing and Number of Common Shares to be Sold."
The date of this Prospectus is _____, 1998.
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
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To the extent that all of the Common Shares are not subscribed for in
the Subscription Offering, the remaining shares are hereby concurrently being
offered to the general public in a direct community offering in which
preference will be given to natural persons who reside in either Boone County
or Kenton County, Kentucky (the "Community Offering"). See "THE CONVERSION -
Community Offering." The Community Offering may end at any time after orders
for at least 2,323,000 Common Shares have been received, but in no event
later than 45 days after the Subscription Expiration Date or ________, 1998,
unless extended by CFKY and Columbia Federal with the approval of the OTS, if
necessary. In accordance with the Plan, the Subscription Offering and the
Community Offering may not be extended beyond ________, 2000. See "THE
CONVERSION - Subscription Offering; - Community Offering; and - Plan of
Distribution."
Columbia Federal has engaged Charles Webb & Company, a division of
Keefe, Bruyette & Woods, Inc. ("Webb"), to consult, advise and assist in the
sale of the Common Shares on a best efforts basis in the Subscription
Offering and the Community Offering (together, the "Offering"). See "THE
CONVERSION - Plan of Distribution."
The Plan and federal regulations limit the number of Common Shares which
may be purchased by various categories of persons, including the limitation
that no person may purchase fewer than 25 shares, nor more than 15,000 of the
Common Shares sold in connection with the Conversion. Such limitation does
not apply to the ESOP. In addition, no person together with such person's
Associates (hereinafter defined) and persons Acting in Concert (hereinafter
defined) with such person, may purchase more than 30,000 of the Common Shares
sold in connection with the Conversion. SUBJECT TO APPLICABLE OTS
REGULATIONS, THE LIMITATIONS SET FORTH IN THE PLAN MAY BE CHANGED AT ANY TIME
IN THE SOLE DISCRETION OF THE BOARD OF DIRECTORS OF CFKY AND COLUMBIA
FEDERAL. See "THE CONVERSION - Limitations on Purchases of Common Shares."
Common Shares may be subscribed for in the Subscription Offering or
ordered in the Community Offering only by returning the accompanying Stock
Order Form and Certification Form (the "Order Form"), along with full payment
of the purchase price per share for all shares for which subscription is made
or order is submitted, no later than ___ _.m., Eastern Time, ______, 1998.
See "THE CONVERSION - Use of Order Forms." Payment may be made in cash or by
check or money order and will be held in a segregated account at Columbia
Federal, insured by the FDIC up to the applicable limit and earning interest
at Columbia Federal's passbook rate, currently ____ annual percentage yield,
from the date of receipt until the completion of the Conversion. Payment may
also be made by authorized withdrawal from an existing Columbia Federal
savings account, the amount in which will continue to earn interest until
completion of the Conversion at the rate normally in effect from time to time
for such account. Neither payments made in cash or by check or money order,
nor payments made by authorized withdrawal from an account at Columbia
Federal will be available during the Subscription Offering and the Community
Offering. See "THE CONVERSION - Payment for Common Shares."
AN EXECUTED ORDER FORM, ONCE RECEIVED BY CFKY, MAY NOT BE MODIFIED,
AMENDED OR RESCINDED WITHOUT THE CONSENT OF CFKY, UNLESS (I) THE COMMUNITY
OFFERING IS NOT COMPLETED WITHIN 45 DAYS AFTER THE SUBSCRIPTION EXPIRATION
DATE, OR (II) THE FINAL VALUATION OF COLUMBIA FEDERAL, AS CONVERTED, IS LESS
THAN $17,170,000 OR MORE THAN $26,714,500. IF EITHER OF THOSE EVENTS OCCURS,
PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE OFFERING WILL RECEIVE
WRITTEN NOTICE THAT, UNTIL A DATE SPECIFIED IN THE NOTICE, THEY HAVE A RIGHT
TO AFFIRM, INCREASE, DECREASE OR RESCIND THEIR SUBSCRIPTIONS. ANY PERSON WHO
DOES NOT AFFIRMATIVELY ELECT TO CONTINUE HIS SUBSCRIPTION OR ELECTS TO
RESCIND HIS SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS FUNDS
PROMPTLY REFUNDED WITH INTEREST. ANY PERSON WHO ELECTS TO DECREASE HIS
SUBSCRIPTION DURING ANY SUCH EXTENSION WILL HAVE THE APPROPRIATE PORTION OF
HIS FUNDS PROMPTLY REFUNDED WITH INTEREST. IN ADDITION, IF THE MAXIMUM
PURCHASE LIMITATION IS INCREASED TO MORE THAN 15,000 COMMON SHARES, PERSONS
WHO HAVE SUBSCRIBED FOR 15,000 COMMON SHARES WILL BE GIVEN THE OPPORTUNITY TO
INCREASE THEIR SUBSCRIPTIONS.
CFKY has received approval to have the Common Shares quoted on the
Nasdaq National Market ("Nasdaq") under the symbol ["CFKY"], subject to
certain conditions which CFKY and Columbia Federal believe will be satisfied,
although no assurance can be provided that the conditions will be met. The
aggregate offering price for the Common Shares is based upon an independent
appraisal of Columbia Federal performed by Keller & Company, Inc. ("Keller").
The appraisal is not a recommendation as to the advisability of purchasing
Common Shares. See "THE CONVERSION - Pricing and Number of Common Shares to
be Sold." No assurance can be given that persons purchasing Common Shares
will thereafter be able to sell such shares at a price at or above the
offering price. See "RISK FACTORS - Limited Market for the Common Shares."
There is presently no market for the Common Shares.
THE CONVERSION OF COLUMBIA FEDERAL FROM A MUTUAL SAVINGS BANK TO A
PERMANENT CAPITAL STOCK SAVINGS BANK IS CONTINGENT UPON (I) THE APPROVAL OF
THE PLAN AND THE ADOPTION OF THE FEDERAL STOCK CHARTER AND FEDERAL STOCK
BYLAWS BY COLUMBIA FEDERAL'S VOTING MEMBERS, (II) THE SALE OF THE REQUISITE
NUMBER OF COMMON SHARES, AND (III) THE SATISFACTION OR WAIVER OF CERTAIN
OTHER CONDITIONS. SEE "THE CONVERSION."
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COLUMBIA FEDERAL SAVINGS BANK
FT. MITCHELL, KENTUCKY
[Map of the region of Southeastern Indiana, Southwestern Ohio and Northern
Kentucky (the "Tri-State") with an outline of each county, indicating the
location of Cincinnati, and below the map of the Tri-State is an
enlargement of Boone County and Kenton County, Kentucky, showing the
location of Covington, Ft. Mitchell, Crescent Springs, Erlanger & Florence
within those counties.]
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PROSPECTUS SUMMARY
The following information is not complete and is qualified in its entirety
by the detailed information and the financial statements and accompanying notes
appearing elsewhere in this Prospectus.
COLUMBIA FINANCIAL OF KENTUCKY, INC.
CFKY was incorporated under Ohio law in October 1997 at the direction of
Columbia Federal for the purpose of purchasing all of the capital stock of
Columbia Federal to be issued in connection with the Conversion. CFKY has not
conducted and will not conduct any business before the completion of the
Conversion other than business related to the Conversion. Upon the
consummation of the Conversion, CFKY will be a unitary savings and loan holding
company, the principal assets of which initially will be the capital stock of
Columbia Federal, a loan to the ESOP and the investments made with 50% of the
net proceeds retained from the sale of CFKY shares in connection with the
Conversion. See "USE OF PROCEEDS."
The main office of CFKY is located at 2497 Dixie Highway, Ft. Mitchell,
Kentucky, 41017-3085, and its telephone number is (606) 331-2419.
COLUMBIA FEDERAL SAVINGS BANK
Columbia Federal is a mutual savings bank which has served Northern
Kentucky since 1884. Organized in 1884 under Kentucky law as Columbia Building
Association, Columbia Federal converted to a federally chartered savings and
loan association in 1934, at which time the name Columbia Federal Savings and
Loan Association of Covington was adopted. Star Federal Savings and Loan
Association ("Star Federal") was merged into Columbia Federal in 1970 and
American Federal Savings and Loan ("American") was merged into Columbia Federal
in 1981, with the combined entities retaining Columbia Federal's name.
Columbia Federal became a federal savings bank in 1995, adopting at that time
the name Columbia Federal Savings Bank.
As a federal savings bank, Columbia Federal is subject to supervision and
regulation by the OTS and the FDIC and is a member of the Federal Home Loan
Bank (the "FHLB") of Cincinnati. The deposits of Columbia Federal are insured
up to applicable limits by the FDIC in the Savings Association Insurance Fund
(the "SAIF"). See "REGULATION." At September 30, 1997, $53.6 million, or
approximately 83.8% of Columbia Federal's loan portfolio, consisted of loans
secured by first mortgages on one- to four-family homes, virtually all of which
were located within Boone County and Kenton County, Kentucky. See "THE
BUSINESS OF COLUMBIA FEDERAL - Lending Activities -- One- to Four-Family
Residential Real Estate Loans."
Columbia Federal conducts business from its main office located in Ft.
Mitchell, Kentucky, and four branch offices located in Covington, Crescent
Springs, Erlanger and Florence, Kentucky. Columbia Federal's primary market
area consists of Boone County and Kenton County, Kentucky. The main office of
Columbia Federal is located at 2497 Dixie Highway, Ft. Mitchell, Kentucky
41017-3085, and its telephone number is (606) 331-2419.
THE CONVERSION
On October 9, 1997, the Board of Directors of Columbia Federal unanimously
approved the Plan. The OTS approved the Plan, subject to the approval of the
Plan by Columbia Federal's voting members at a special meeting to be held at
___ _.m., Eastern Time, on ________, 1998, at ____________________________
____________________________________________. The Plan provides for the
conversion of Columbia Federal from a federal mutual savings bank to a
federal stock savings bank. Columbia Federal has operated as an independent
community oriented savings association since 1884. It is the intention of
Columbia Federal to continue to operate as an independent community oriented
savings association after the Conversion.
THE SUBSCRIPTION AND COMMUNITY OFFERINGS
The Plan provides for the formation of CFKY for the purpose of acquiring
all of the capital stock to be issued by Columbia Federal in the Conversion.
Pursuant to the Plan, Common Shares are hereby offered at a price of $10.00 per
share to (a) depositors of Columbia Federal with Qualifying Deposits as of
September 30, 1996 ("Eligible Account Holders"), (b) the ESOP, (c) depositors
of Columbia Federal with Qualifying Deposits as of December 31, 1997, the
Supplemental Eligibility Record Date ("Supplemental Eligible Account Holders"),
and (d) account holders of Columbia Federal having savings deposits
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of record on ____________ (the "Voting Record Date") and borrowers of record on
the Voting Record Date whose loans were in existence on December 16, 1995 (such
depositors and borrowers as of ___________, collectively, the "Voting
Members"). See "THE CONVERSION - Subscription Offering." Common Shares not
subscribed for in the Subscription Offering are hereby being concurrently
offered to those members of the general public receiving this Prospectus in the
Community Offering in which preference will be given to natural persons who
reside in either Boone County or Kenton County, Kentucky. See "THE CONVERSION
- - Community Offering."
The Plan authorizes the Board of Directors of CFKY and Columbia Federal to
establish limits on the number of Common Shares that may be purchased by
various categories of persons. The Plan also permits the Board of Directors of
CFKY and Columbia Federal, subject to any required regulatory approval and the
requirements of applicable laws and regulations, to increase or decrease such
purchase limitations in their sole discretion. The Boards of Directors have
established the limitation that, generally, an Eligible Account Holder, a
Supplemental Eligible Account Holder, or a Voting Member, together with any
Associate or persons Acting in Concert, may purchase in the Subscription
Offering a number of Common Shares equal to the greater of (i) 15,000 Common
Shares or (ii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of Common Shares to be sold in
connection with the Conversion by a fraction, the numerator of which is the
amount of such Eligible Account Holder's or Supplemental Eligible Account
Holder's Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all Eligible Account Holders or Supplemental Eligible
Account Holders, as the case may be. A person participating solely in the
Community Offering, together with any Associates or persons Acting in Concert,
may purchase a maximum of 15,000 Common Shares. Such limitation does not apply
to the ESOP, which intends to purchase 8% of the Common Shares sold in
connection with the Conversion. The ESOP may purchase Common Shares if shares
remain available after satisfying the subscriptions of Eligible Account Holders
up to $23,230,000, the maximum of the Valuation Range. If Common Shares in
excess of the maximum of the Valuation Range are sold, the ESOP will have the
first right to purchase such excess Common Shares. If the ESOP is unable to
purchase all or part of the Common Shares for which it subscribes, the ESOP may
purchase Common Shares in the open market or may purchase authorized but
unissued Common Shares from CFKY. If the ESOP purchases authorized but
unissued Common Shares from CFKY, such purchases would have a dilutive effect
on the interest of CFKY's shareholders.
No person together with his or her Associates and other persons Acting in
Concert with him or her may purchase more than 30,000 Common Shares. Subject
to applicable regulations, the purchase limitation may be increased or
decreased after the commencement of the Offering in the sole discretion of the
Boards of Directors. See "THE CONVERSION - Limitations on Purchases of Common
Shares" and "RESTRICTIONS ON ACQUISITION OF COLUMBIA FEDERAL AND CFKY AND
RELATED ANTI-TAKEOVER PROVISIONS." The sale of Common Shares will be subject
to the approval of the Plan by the voting members of Columbia Federal at the
Special Meeting, to the sale of the requisite number of Common Shares and to
certain other conditions. See "THE CONVERSION - Subscription Offering; -
Community Offering; and - Pricing and Number of Common Shares to be Sold."
Columbia Federal has retained Webb to consult, advise and assist in the
sale of the Common Shares in the Subscription Offering and in the Community
Offering. For its services, Webb will receive a commission equal to 1.50% of
the aggregate purchase price paid for shares sold to residents of Boone County
and Kenton County, Kentucky, 1.25% of the aggregate purchase price of Common
Shares sold to residents of counties contiguous to Boone County or Kenton
County, Kentucky, and 0.75% of the aggregate purchase price of Common Shares
sold to persons not residents of Boone County or Kenton County, Kentucky, or
counties contiguous thereto. No commission will be paid on Common Shares
purchased by Columbia Federal's directors, officers and employees, and their
immediate family members, and the ESOP. In the event that Columbia Federal
requests Webb to obtain the assistance of other broker-dealers to sell Common
Shares in the Community Offering, Webb will be paid a commission of 5.5% of the
aggregate purchase price of Common Shares sold by such broker-dealers, from
which such broker-dealers will be paid, instead of the commission based upon
the residence of the purchasers. A management fee of $25,000 has already been
paid to Webb, and such amount will be deducted from the commission. Columbia
Federal will reimburse Webb for legal fees in an amount not to exceed $35,000.
See "THE CONVERSION - Plan of Distribution."
The Subscription Offering will terminate at ____ _.m., Eastern Time, on
_____, 1998. The Community Offering may be terminated at any time after orders
for at least 2,323,000 shares have been received, but in no event later than
______, 1998, unless extended. If the Community Offering extends beyond 45
days after the Subscription Expiration Date, persons who have subscribed for or
ordered Common Shares in the Subscription Offering or in the Community Offering
will receive a notice that, until a date specified in the notice, they have the
right to affirm, increase, decrease or rescind their subscriptions or orders
for Common Shares. Any person who does not affirmatively elect to continue his
subscription or order or elects to rescind his subscription or order during
such time will have all of his funds promptly refunded with interest. Any
person who elects to decrease his subscription or order will have the
appropriate portion of his funds promptly refunded with interest.
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9
The directors and executive officers of CFKY and Columbia Federal and their
Associates intend to purchase an aggregate of 200,500 Common Shares in
connection with the Conversion, which would constitute 9.9% of the Common Shares
sold assuming the sale of 2,020,000 Common Shares in connection with the
Conversion. The aggregate number of Common Shares proposed to be purchased by
the directors, the executive officers and the ESOP is 362,100, which would
constitute 17.9% of the Common Shares sold assuming the sale of 2,020,000 Common
Shares in connection with the Conversion. See "THE CONVERSION -- Shares to be
Purchased by Management Pursuant to Subscription Rights."
Federal regulations prohibit any person from transferring or entering into
any agreement or understanding before the completion of the Conversion to
transfer the ownership of the subscription rights issued in the Conversion or
the shares to be issued upon the exercise of such subscription rights. Persons
attempting to violate such provision may lose their rights to purchase Common
Shares in the Conversion and may be subject to penalties imposed by the OTS.
Each person exercising subscription rights will be required to certify that a
purchase of Common Shares is solely for the subscriber's own account and that
there is no agreement or understanding regarding the sale or transfer of such
Common Shares.
PRICING OF THE COMMON SHARES
Keller, an independent firm experienced in valuing thrift institutions,
has prepared a valuation of the estimated pro forma market value of Columbia
Federal, as converted. Keller's valuation of the estimated pro forma market
value of Columbia Federal, as converted, is $20,200,000 as of November 28, 1997
(the "Pro Forma Value"). CFKY will issue the Common Shares at a fixed price of
$10.00 per share and, by dividing the price per share into the Pro Forma Value,
will determine the number of shares to be issued. Applicable regulations
require, however, that Columbia Federal establish a range of 15% above and
below the Pro Forma Value to allow for fluctuations in the aggregate value of
the Common Shares due to changes in the market for thrift shares and other
factors from the time of the commencement of the Subscription Offering until
the completion of the offering of the Common Shares. Based on the Pro Forma
Value of Columbia Federal as of November 28, 1997, the Valuation Range is
$17,170,000 to $23,230,000, resulting in the offer of between 1,717,000 and
2,323,000 Common Shares at a purchase price of $10.00 per share.
The actual number of Common Shares sold in connection with the Conversion
will be determined upon the completion of the Subscription Offering and the
Community Offering, if any, and will be based upon the final valuation of
Columbia Federal, as converted. The final valuation will be determined by
Keller at the time of the closing of this Offering. If the final valuation is
within the Valuation Range, or does not exceed the maximum of the Valuation
Range by more than 15%, the number of Common Shares to be issued in connection
with the Conversion will not be less than 1,717,000 or more than 2,671,450. If
the final valuation is not between the minimum of the Valuation Range and 15%
above the maximum of the Valuation Range, subscribers will be given the
opportunity to affirm, increase, decrease or rescind their subscriptions. See
"THE CONVERSION - Pricing and Number of Common Shares to be Sold."
USE OF PROCEEDS
CFKY will retain 50% of the net proceeds from the sale of the Common
Shares, or $9,771,000 at the mid-point of the Valuation Range, including the
value of a promissory note from the ESOP which CFKY intends to accept in
exchange for the issuance of Common Shares to the ESOP. Such proceeds will be
used to fund the Columbia Financial of Kentucky, Inc., Recognition and
Retention Plan (the "RRP") after approval of the RRP by the shareholders of
CFKY and will be invested in short-term and intermediate-term government
securities. The remainder of the net proceeds received from the sale of the
Common Shares, $9,771,000 at the mid-point of the Valuation Range, will be
invested by CFKY in the capital stock to be issued by Columbia Federal to CFKY
as a result of the Conversion. Such investment will increase the regulatory
capital of Columbia Federal and will permit Columbia Federal to expand its
lending and investment activities and to enhance customer services.
Enhancements of customer services may include the origination of additional
types of loans including commercial loans and additional types of consumer
loans, such as home equity loans. Columbia Federal anticipates that such net
proceeds initially will be invested in mortgage-backed securities. Eventually,
however, Columbia Federal will attempt to use such net proceeds to originate
loans. Although CFKY and Columbia Federal could use the increase in capital to
acquire other financial institutions or for CFKY to purchase its own
outstanding shares, CFKY and Columbia Federal have no current plans to do so.
See "USE OF PROCEEDS."
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OFFICER AND DIRECTOR BENEFITS
In connection with the Conversion, CFKY will establish the ESOP. Common
Shares will be purchased by the ESOP in the Conversion with a loan from CFKY.
The ESOP intends to repay the loan with discretionary contributions made by
Columbia Federal to the ESOP. As the loan is repaid, the Common Shares held by
the ESOP will be allocated to the accounts of employees of Columbia Federal and
CFKY, including executive officers. See "MANAGEMENT OF COLUMBIA FEDERAL -
Employee Stock Ownership Plan."
The Boards of Directors of CFKY and Columbia Federal also intend to adopt
and present to the shareholders for approval at a meeting of the shareholders
of CFKY, to be held at least six months after the consummation of the
Conversion, the RRP and the Columbia Financial of Kentucky, Inc., 1998 Stock
Option and Incentive Plan (the "Stock Option Plan"). If the RRP is approved at
such meeting, CFKY will form a trust (the "RRP Trust") to which CFKY will
contribute sufficient amounts for the purchase by the RRP Trust of an
unspecified number of CFKY common shares equal to up to 4% of the number of
Common Shares sold in the Conversion. Such CFKY common shares may be purchased
after shareholder approval of the RRP in the open market or from the authorized
but unissued common shares of CFKY, and will be awarded at no cost to the
recipient by a committee of CFKY's Board of Directors to the officers and
directors of CFKY and Columbia Federal for services rendered to Columbia
Federal. See "MANAGEMENT OF COLUMBIA FEDERAL - Stock Option Plan; and -
Recognition and Retention Plan and Trust."
If the Stock Option Plan is approved at a meeting of shareholders
following the Conversion, directors, officers and employees of CFKY and
Columbia Federal will be granted options to purchase, in the aggregate, a
number of Common Shares equal to up to 10% of the Common Shares sold in the
Conversion. The exercise price for options granted will equal the market price
for the Common Shares on the date of the grant. The grant of such options, in
combination with purchases of Common Shares by such officers and directors and
certain anti-takeover provisions in the Articles of Incorporation and Code of
Regulations of CFKY and the Amended Charter of Columbia Federal, may facilitate
the perpetuation of current management and discourage proxy contests and
takeover attempts. See "RESTRICTIONS ON ACQUISITIONS OF COLUMBIA FEDERAL AND
CFKY AND RELATED ANTI-TAKEOVER PROVISIONS."
Assuming the sale of 2,020,000 Common Shares in connection with the
Conversion, the purchase by directors and executive officers of 200,500 of the
Common Shares in the Conversion, the purchase by the RRP of a number of Common
Shares equal to 4% of the Common Shares sold in the Conversion, the exercise by
directors and executive officers of all options authorized pursuant to the
Stock Option Plan and the control by directors and executive officers of the 8%
of the Common Shares purchased by the ESOP in the Conversion, directors and
executive officers could own or control up to 29% of the outstanding common
shares of CFKY. See "RISK FACTORS-Anti-Takeover Provisions Which May
Discourage Sales of Common Shares for Premium Prices and Controlling Influence
of Management."
Columbia Federal also intends to execute an employment agreement with
Robert V. Lynch, the President of Columbia Federal, and severance agreements
with five other executive officers of Columbia Federal, all to be effective
upon the closing of the Conversion. See "MANAGEMENT OF COLUMBIA FEDERAL -
Employment and Severance Agreements."
MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The aggregate
offering price for the Common Shares is based upon an independent appraisal of
Columbia Federal. The appraisal is not a recommendation as to the advisability
of purchasing Common Shares. See "THE CONVERSION - Pricing and Number of
Common Shares to be Sold." No assurance can be given that persons purchasing
Common Shares will thereafter be able to sell such shares at a price at or
above the offering price.
CFKY has received approval to have the Common Shares quoted on Nasdaq
under the symbol ["CFKY"] upon the closing of the Conversion, subject to
certain conditions which CFKY and Columbia Federal believe will be satisfied,
although no assurance can be provided that the conditions will be met. In
connection with such approval, Webb has informed Columbia Federal that Keefe,
Bruyette & Woods, Inc. ("KBWI"), intends to make a market in the Common Shares.
No assurance can be given, however, that an active or liquid market for the
Common Shares will develop after the completion of the Conversion or, if such a
market does develop, that such market will continue. Investors should
consider, therefore, the potentially illiquid and long-term nature of an
investment in the Common Shares. See "RISK FACTORS - Limited Market for the
Common Shares."
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DIVIDEND POLICY
The declaration and payment of dividends by CFKY will be subject to the
discretion of the Board of Directors of CFKY and will be based on the earnings
and financial condition of CFKY and general economic conditions. Other than
the earnings on the investment of proceeds retained by CFKY, the only source of
income of CFKY will be dividends periodically declared and paid by the Board of
Directors of Columbia Federal on the common stock of Columbia Federal held by
CFKY. The payment of dividends by Columbia Federal to CFKY will be subject to
various regulatory restrictions. On a pro forma basis, as of September 30,
1997, assuming (i) receipt by Columbia Federal of $9.8 million of net
conversion proceeds, (ii) the investment of such net proceeds in assets having
a risk weighting of 20% and (iii) the establishment of a Liquidation Account
(hereinafter defined) in the amount of $13.1 million (the regulatory capital of
Columbia Federal at September 30, 1997), Columbia Federal would have $9.7
million available for the payment of dividends to CFKY. In an effort to manage
the capital of CFKY, the Board of Directors of CFKY may determine that the
payment of a regular or a special cash dividend or both may be prudent. No
assurance can be given, however, that any dividend will be declared, what the
amount will be or whether such dividends, if declared, will continue in the
future. See "DIVIDEND POLICY."
INVESTMENT RISKS
Special attention should be given to the matters discussed under "RISK
FACTORS."
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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding Columbia
Federal at the dates and for the periods indicated. The financial information
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere herein.
At September 30,
SELECTED FINANCIAL CONDITION ---------------------------------------------------------------------
AND OTHER DATA: 1997 1996 1995 1994 1993
-------- --------- ---------- ---------- ----------
(Dollars in thousands)
Total amount of:
Assets $104,006 $108,098 $108,376 $106,099 $107,739
Cash and amounts due from banks 612 549 543 568 612
Interest-bearing deposits in banks 6,215 2,498 6,304 2,202 6,621
Investment securities held to maturity 13,069 13,995 12,493 13,495 12,428
Investment securities available for sale 1,003 1,002 988 - -
Mortgage-backed securities 17,862 18,751 16,800 16,744 18,264
Loans receivable, net 61,578 67,741 68,270 70,288 67,026
FHLB stock, at cost 1,260 1,174 1,095 1,026 974
Deposits 90,195 94,657 95,806 93,807 97,278
Retained earnings - substantially
restricted 13,090 12,537 12,149 11,333 10,068
Number of offices (1) 5 5 5 5 5
Year ended September 30,
--------------------------------------------------------------------
SUMMARY OF EARNINGS: 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
Interest income $7,996 $8,198 $7,943 $7,939 $8,355
Interest expense 4,451 4,578 4,446 3,853 4,370
------ ------ ------ ------ ------
Net interest income 3,545 3,620 3,497 4,086 3,985
Provision for losses on loans 113 8 13 34 47
------ ------ ------ ------ ------
Net interest income after provision for
losses on loans 3,432 3,612 3,484 4,052 3,938
Non-interest income 88 96 92 108 174
Non-interest expense 2,667 3,120 (2) 2,371 2,272 2,190
------ ------ ------ ------ ------
Income before federal income tax expense 853 588 1,205 1,888 1,922
Federal income tax expense 300 200 389 623 593
------ ------ ------ ------ ------
Net income $553 $388 $ 816 $1,265 $1,329
====== ====== ====== ====== ======
(Footnotes on next page)
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At or for the year ended September 30,
------------------------------------------------
SELECTED FINANCIAL RATIOS: 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Performance ratios:
Return on average assets (3) 0.53% 0.36% 0.77% 1.17% 1.23%
Return on average equity (4) 4.30 3.10 6.92 11.78 14.12
Interest rate spread (5) 2.97 2.94 2.93 3.53 3.45
Net interest margin (6) 3.46 3.41 3.38 3.87 3.76
Non-interest expense to average total assets 2.53 2.87 2.24 2.15 2.07
Capital ratios:
Average equity to average assets 12.22 11.50 11.15 9.96 8.70
Equity to assets at end of period 12.59 11.60 11.21 10.68 9.34
Asset quality ratios and other data:
Nonperforming loans to total net loans at end
of period 0.98 0.26 - 0.71 0.39
Nonperforming assets to total assets at end of
period 0.58 0.16 0.03 0.56 0.46
Allowance for losses on loans to total net loans
at end of period 0.49 0.28 0.28 0.27 0.28
Allowance for losses on loans to nonperforming
loans at end of period 49.92 106.78 - 38.03 72.97
Net charge-offs to average loans - 0.01 0.02 0.05 0.07
____________
(1) All offices are full-service except that loan applications are accepted
only at the main office.
(2) Includes a non-recurring pre-tax expense of $592,000 for a special
one-time assessment to recapitalize the SAIF. See "REGULATION - FDIC
Regulations -- Deposit Insurance."
(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.
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RISK FACTORS
Investment in the Common Shares involves certain risks. Before investing,
prospective purchasers should consider carefully the following matters:
LOW RETURN ON ASSETS AND LOW RETURN ON EQUITY
During the fiscal years ended September 30, 1997, 1996 and 1995, the
return on assets of Columbia equaled .53%, .36% and .77%, respectively. During
the same periods, the return on equity of Columbia equaled 4.30%, 3.10% and
6.92%, respectively. The low return on assets and equity of Columbia Federal
may be attributed to a variety of factors. In 1996, for example, non-interest
expense increased by $749,000 due primarily to the $592,000 one-time SAIF
recapitalization assessment. Moreover, Columbia Federal increased the
provision for losses on loans in fiscal year 1997 by $105,000 over the
provision in fiscal year 1996. Both the 1996 SAIF assessment and the 1997
provision for losses on loans had a material impact on the return on equity and
assets of Columbia Federal. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
In addition, Columbia Federal did not originate sufficient loans to
replace existing loans which matured or were refinanced elsewhere during fiscal
years 1997, 1996 and 1995. While loan originations have increased from $6.8
million in fiscal 1995 to $10.2 million in fiscal 1996 and $11.7 million in
fiscal 1997, the balance of net loans receivable has declined from $68.3
million in fiscal 1995 to $67.7 million in fiscal 1996 and $61.6 million in
fiscal 1997. In June through August 1997, four multifamily and nonresidential
real estate loans with balances totaling $7.1 million were repaid. Funds from
loan repayments that could not immediately be used to originate loans were
invested in lower yielding investments, thus reducing Columbia Federal's return
on assets and return on equity. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
To continue the increase in loan originations, Columbia Federal has
recently hired a new loan officer and has pursued a plan to increase the
awareness of realtors and others involved in the residential real estate
business in Kenton and Boone Counties of Columbia Federal's products and
services. Columbia Federal is also considering originating new types of loans,
including home equity loans and commercial loans. In view of the highly
competitive market for residential mortgage loans, however, there can be no
assurance that such plan will materially increase new loan originations in the
near or long term. Moreover, even if loan originations are increased, there
can be no assurance that such increase will positively affect the return on
equity or assets of Columbia Federal.
REDUCTION IN RETURN ON EQUITY DUE TO PROCEEDS OF OFFERING
The significant proceeds from the sale of the Common Shares in the
Conversion will reduce further the return on equity of CFKY on a consolidated
basis until the Conversion proceeds are effectively invested. See "Low Return
on Assets and Low Return on Equity." At September 30, 1997, the pro forma
return on equity at the minimum, mid-point, maximum and maximum, as adjusted,
of the Valuation Range, would be 3.23%, 3.16%, 3.09% and 3.03%, respectively.
See "PRO FORMA DATA" for the pro forma net earnings and the pro forma
shareholders' equity at the different levels of the Valuation Range. Although
a low return on equity is not unusual for recently converted, well-capitalized
thrifts, CFKY's return on equity after the Conversion may adversely affect the
market price of the Common Shares.
While both CFKY and Columbia Federal intend to invest the proceeds from
the sale of Common Shares in various ways, the overall objective of CFKY and
Columbia Federal is to increase the return on equity of Columbia Federal in the
future. However, the historic difficulty of Columbia Federal in investing
available funds in higher yield mortgage loans may be increased upon the
receipt of the proceeds from the Offering. To the extent that CFKY and
Columbia Federal do not invest the proceeds from the sale of Common Shares in
higher yielding mortgage loans, the return on equity of Columbia Federal will
remain at lower levels, as a result of which an investment in the Common Shares
will be adversely affected.
COMPETITION IN MARKET AREA
Columbia Federal faces strong competition for deposits and loans from
commercial banks, other savings associations, credit unions and mortgage
banking companies. In addition, competing financial institutions exist in
surrounding communities located in Columbia Federal's market area. Columbia
Federal is at a competitive disadvantage due to its small size, which results
in limited marketing capability and restricted ability to take advantage of
technological advancements. Columbia Federal's market share in Boone County
and Kenton County was 53% of thrift deposits and 4.4% of all financial
institution deposits at
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June 30, 1996. Such competition will negatively affect the ability of Columbia
Federal to grow and to increase its return on assets and return on equity.
INTEREST RATE RISK
Columbia Federal'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. Like most thrift
institutions, the interest income and interest expense of Columbia Federal
change as the interest rates on mortgages, securities and other assets and on
deposits and other liabilities change. Interest rates may change because of
general economic conditions, the policies of various regulatory authorities and
other factors beyond Columbia Federal's control. The interest rates on
specific assets and liabilities of Columbia Federal 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.
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. 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.
Columbia Federal's portfolio value is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. At September 30, 1997, 80.7% of Columbia
Federal's net loans receivable balance was comprised of fixed-rate loans. In
addition, 79.3% of Columbia Federal's mortgage-backed securities balance at
September 30, 1997, had maturities of more than ten years after such date, and
40.1% of the mortgage-backed securities portfolio consisted of pools of
fixed-rate loans.
In addition, although Columbia Federal originates its mortgage loans in
accordance with secondary market guidelines, many of such loans may not be sold
readily in order to decrease interest rate risk because the loans are secured
by non-owner occupied or two- to four-family property.
If interest rates rise from the recent historically low levels, Columbia
Federal's net interest income will be negatively affected. Moreover, rising
interest rates may negatively affect Columbia Federal's earnings due to
diminished loan demand. A negative effect on interest income and earnings will
adversely affect the value of an investment in the Common Shares.
DILUTIVE EFFECT AND INCREASED EXPENSE OF THE ESOP, THE STOCK OPTION PLAN AND
THE RRP.
In connection with the Conversion, CFKY has established the ESOP which
intends to use a loan from CFKY to purchase 8% of the Common Shares issued in
connection with the Conversion. All full-time employees of CFKY and Columbia
Federal who meet certain age and years of service criteria will be eligible to
participate in the ESOP.
Statement of Position ("SOP") No. 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," published by the American Institute of
Certified Public Accountants (the "AICPA"), requires an employer to record
compensation expense in an amount equal to the fair value of shares committed
to be released to employees from an employee stock ownership plan. See "PRO
FORMA DATA" for pro forma information regarding the effects of SOP 93-6 on net
earnings and shareholders' equity. If the Common Shares acquired by the ESOP
appreciate in value over time, CFKY may incur increased compensation expense
relating to the ESOP, which would adversely affect CFKY's net earnings.
The shares acquired by the ESOP in the Conversion will be purchased with
the proceeds of a loan from CFKY to the ESOP. The ESOP loan will be repaid
through cash contributions to the ESOP from Columbia Federal and the use of
dividends paid on the Common Shares, if any. Columbia Federal currently
anticipates that the ESOP loan will be repaid over a period of 11 years. The
amount of cash or other assets that can be contributed to the ESOP each year is
limited by certain Internal Revenue Service ("IRS") regulations. Columbia
Federal intends to make the maximum contribution to the ESOP permitted by such
regulations, which could result in repayment of the ESOP loan in fewer than 11
years. A shorter repayment period could result in increased compensation
expense during the years in which payments are made on the ESOP loan which
would adversely impact CFKY's earnings.
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The ESOP may purchase Common Shares on the open market or may purchase
authorized but unissued shares from CFKY. If the ESOP purchases authorized but
unissued shares from CFKY, such purchases would have a dilutive effect on the
interests of CFKY's shareholders.
Following the consummation of the Conversion, CFKY intends to adopt the
Stock Option Plan and the RRP. CFKY expects to contribute sufficient funds to
the RRP to enable it to purchase common shares of CFKY in an amount equal to
four percent of the Common Shares sold in connection with the Conversion. The
shares issued to participants under the RRP could be newly issued shares or
shares purchased in the market. In the event the shares issued under the RRP
consist of newly issued common shares, the interests of existing shareholders
will be diluted. Shares issued pursuant to the exercise of options under the
Stock Option Plan will be authorized but unissued shares, unless CFKY has
treasury shares at the time of exercise and elects to use the treasury shares.
At the mid-point of the estimated Valuation Range, if all shares under the
ESOP, the Stock Option Plan and the RRP were newly issued, the interests of
shareholders will be diluted by 18.03%. Equity per share and earnings per
share will also be negatively affected. See "PRO FORMA DATA" and MANAGEMENT OF
COLUMBIA FEDERAL - Employee Stock Ownership Plan; - Stock Option Plan; -
Recognition and Retention Plan and Trust."
LIMITED MARKET FOR THE COMMON SHARES
There is presently no market for the Common Shares. The aggregate
offering price for the Common Shares is based upon an independent appraisal of
Columbia Federal. The appraisal is not a recommendation as to the advisability
of purchasing Common Shares. See "THE CONVERSION - Pricing and Number of
Common Shares to be Sold." No assurance can be given that persons purchasing
Common Shares will thereafter be able to sell such shares at a price at or
above the purchase price paid in the Offering.
CFKY has received approval to have the Common Shares quoted on Nasdaq
under the symbol ["CFKY"] upon the closing of the Conversion, subject to
certain conditions which CFKY and Columbia Federal believe will be satisfied,
although no assurance can be provided that the conditions will be met. In
connection with such approval, Webb has informed Columbia Federal that KBWI
intends to make a market in the Common Shares. No assurance can be given,
however, that an active or liquid market for the Common Shares will develop
after the completion of the Conversion or, if such a market does develop, that
it will continue. Investors should consider, therefore, the potentially
illiquid and long-term nature of an investment in the Common Shares.
LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT COLUMBIA FEDERAL'S
EARNINGS AND OPERATIONS
Columbia Federal is subject to extensive regulation by the OTS and 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 will also be 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 CFKY 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. See "REGULATION."
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance each for members of the Bank Insurance Fund (the "BIF") and
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 its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both BIF
and SAIF members. Under such system, assessments may vary depending upon 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.
Legislation to recapitalize the SAIF and to eliminate a significant
premium disparity between the BIF 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 and loan charter has been eliminated.
Columbia Federal cannot predict the impact of such a merger on Columbia
Federal's net earnings and capital.
Congress is considering legislation to eliminate the federal savings and
loan 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
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17
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.
ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE SALES OF COMMON SHARES FOR
PREMIUM PRICES AND CONTROLLING INFLUENCE OF MANAGEMENT
The Articles of Incorporation and Code of Regulations of CFKY and the
Amended Charter of Columbia Federal contain certain provisions that could deter
or prohibit non-negotiated changes in the control of CFKY and Columbia Federal.
Such provisions include a restriction on the acquisition of more than 10% of
the outstanding shares of CFKY by any person during the five-year period
following the effective date of the Conversion, the ability to issue preferred
shares and additional common shares and a 75% voting requirement for certain
transactions, including mergers and acquisitions of a majority of the
outstanding equity securities of CFKY. See "DESCRIPTION OF AUTHORIZED SHARES"
and "RESTRICTIONS ON ACQUISITION OF COLUMBIA FEDERAL AND CFKY AND RELATED
ANTI-TAKEOVER PROVISIONS."
Officers and directors of CFKY are expected to purchase approximately 9.9%
of the shares issued in connection with the Conversion at the mid-point of the
Valuation Range. In addition, the ESOP intends to purchase 8% of the shares
issued in connection with the Conversion. The ESOP trustee must vote shares
allocated under the ESOP as directed by the participants to whom the shares are
allocated and vote unallocated shares in its sole discretion in the best
interest of the participants. The RRP may acquire Common Shares in the open
market or acquire authorized but unissued common shares from CFKY following
approval of the RRP by the shareholders of CFKY at a meeting of the
shareholders in an amount equal to up to 4% of the Common Shares issued in
connection with the Conversion. The RRP trustees, who are expected to be two
directors of CFKY, will vote shares awarded but not distributed under the RRP
in their discretion. Additionally, options to purchase a number of Common
Shares equal to up to 10% of the Common Shares sold in the Conversion may be
granted to directors, officers and employees of CFKY and Columbia Federal
pursuant to the Stock Option Plan.
In view of the various provisions of the Articles of Incorporation and the
stock benefit plans of CFKY and Columbia Federal, the aggregate ownership by
the ESOP, the RRP and the directors and officers of CFKY and Columbia Federal
may have the effect of facilitating the perpetuation of current management and
discouraging proxy contests and takeover attempts. Thus, officers and
directors, who are anticipated to be allocated or awarded shares under such
plans, will have a significant influence over the vote on such a transaction
and may be able to defeat such a proposal. The Boards of Directors of CFKY and
Columbia Federal believe that such provisions will be in the best interests of
shareholders by encouraging prospective acquirers to negotiate a proposed
acquisition with the directors. Such provisions could, however, adversely
affect the market value of the Common Shares or deprive shareholders of the
opportunity to sell their shares for premium prices.
Federal and Ohio law also restrict the acquisition of control of CFKY and
Columbia Federal. Any or all of these provisions may facilitate the
perpetuation of current management and discourage proxy contests or takeover
attempts not first negotiated with the Board of Directors. See "RESTRICTIONS
ON ACQUISITION OF COLUMBIA FEDERAL AND CFKY AND RELATED ANTI-TAKEOVER
PROVISIONS."
Regulations of the OTS also restrict the ability of any person to acquire
the beneficial ownership of more than 10% of any class of voting equity
security of Columbia Federal or CFKY without the prior written approval of or
lack of objection by the OTS. Such restrictions could restrict the use of
revocable proxies. See "RESTRICTIONS ON ACQUISITION OF COLUMBIA FEDERAL AND
CFKY AND RELATED ANTI-TAKEOVER PROVISIONS."
RISK OF DELAYED OFFERING
CFKY and Columbia Federal expect to complete the Conversion by March 31,
1998. It is possible, however, that adverse market, economic or other factors
could delay the completion of the Conversion. If the Community Offering is
extended beyond ________, 1998, each subscriber will be given a notice of such
delay and the right to affirm, increase, decrease or rescind his subscription.
In such event, any person who does not affirmatively elect to continue his
subscription or elects to rescind his subscription will have all of his funds
promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest. If the Community Offering is
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extended, the cost of the Conversion could increase and the valuation of
Columbia Federal could change. Extensions of the Community Offering will not
extend past _______, 2000.
DILUTIVE EFFECT OF INCREASE IN VALUATION RANGE
The number of Common Shares to be sold in the Conversion may be as much as
15% greater than the maximum of the Valuation Range due to changes in market,
financial and regulatory circumstances following the commencement of the
Offering. An increase in the number of Common Shares sold will decrease net
earnings per share and shareholders' equity per share on a pro forma basis.
See "CAPITALIZATION" and "PRO FORMA DATA."
POSSIBLE TAX LIABILITY RELATED TO SUBSCRIPTION RIGHTS
As part of the Conversion, subscription rights have been granted to (i)
Eligible Account Holders, (ii) the ESOP, (iii) Supplemental Eligible Account
Holders and (iv) Voting Members. Columbia Federal has received an opinion from
Keller to the effect that the subscription rights to be received by Eligible
Account Holders and other eligible subscribers do not have any value because
they are acquired by the recipients without cost, are non-transferable and of
short duration and afford the recipients a right only to purchase Common Shares
at a price equal to their estimated fair market value, the same price as the
purchase price for unsubscribed Common Shares.
Notwithstanding the opinion from Keller, if the subscription rights are
subsequently found to have a fair market value, income may be recognized by the
recipients of the subscription rights (in certain cases, whether or not the
rights are exercised) and CFKY and/or Columbia Federal may be taxed on the
distribution of such subscription rights. In this regard, the subscription
rights may be taxed partially or entirely at ordinary income tax rates.
COLUMBIA FINANCIAL OF KENTUCKY, INC.
CFKY was incorporated under Ohio law in October 1997 at the direction of
Columbia Federal for the purpose of serving as a holding company for Columbia
Federal. CFKY has not conducted and will not conduct any business other than
business related to the Conversion prior to the completion of the Conversion.
CFKY has received approval of the OTS to acquire the capital stock to be issued
by Columbia Federal in the Conversion. Upon the consummation of the
Conversion, CFKY will be a unitary savings and loan holding company, and its
principal assets initially will be the capital stock of Columbia Federal and
the investments made with the proceeds retained by CFKY from the sale of Common
Shares. See "USE OF PROCEEDS." As a savings and loan holding company, CFKY
will be required to register with, and will be subject to examination and
supervision by, the OTS. See "REGULATION - OTS Regulations -- Holding Company
Regulation." The types of business activities in which a unitary savings and
loan holding company may engage are virtually unrestricted. See, however,
"RISK FACTORS - Legislation and Regulation Which May Adversely Affect Columbia
Federal's Earnings and Operations."
COLUMBIA FEDERAL SAVINGS BANK
Columbia Federal is a mutual savings bank which has served Northern
Kentucky since 1884. Organized under Kentucky law as Columbia Building
Association, Columbia Federal converted to a federally chartered savings and
loan association in 1934, at which time the name Columbia Federal Savings and
Loan Association of Covington was adopted. Columbia Federal became a federal
savings bank in 1995, at which time the name Columbia Federal Savings Bank was
adopted. As a savings bank chartered under the laws of the United States,
Columbia Federal is subject to supervision and regulation by the OTS and the
FDIC and is a member of the FHLB of Cincinnati. The deposits of Columbia
Federal are insured up to applicable limits by the FDIC in the SAIF. See
"REGULATION."
Columbia Federal is principally engaged in the business of making
permanent first mortgage loans secured by one- to four-family residential real
estate located within Boone County and Kenton County, Kentucky, and investing
in U.S. Government agency obligations, interest-bearing deposits in other
financial institutions and mortgage-backed and related securities. Columbia
Federal also makes construction loans and loans secured by multifamily real
estate (over four units) and nonresidential real estate. Loan funds are
obtained primarily from savings deposits and loan repayments. See "THE
BUSINESS OF COLUMBIA FEDERAL - Lending Activities; and - Investment
Activities."
-12-
19
Interest on loans, mortgage-backed and related securities and investments
is Columbia Federal's primary source of income. The principal expense of
Columbia Federal is interest paid on deposit accounts. Operating results are
dependent to a significant degree on the net interest income of Columbia
Federal, which is the difference between interest earned on loans,
mortgage-backed and related securities and other investments and interest paid
on deposits. Like most thrift institutions, Columbia Federal's interest income
and interest expense are significantly affected by general economic conditions
and by the policies of various regulatory authorities. See "RISK FACTORS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF COLUMBIA FEDERAL."
Columbia Federal conducts business from its main office located in Ft.
Mitchell, Kentucky, and four branch offices located in Boone County and Kenton
County, Kentucky. Columbia Federal's primary market area consists of Boone
County and Kenton County, Kentucky. See "THE BUSINESS OF COLUMBIA FEDERAL -
General."
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from the
sale of the Common Shares in connection with the Conversion based on the
Valuation Range:
15% above
Minimum Mid-point Maximum Maximum
----------- ----------- ----------- -----------
Gross proceeds $17,170,000 $20,200,000 $23,230,000 $26,714,500
Less estimated expenses 620,000 658,000 695,000 737,000
----------- ----------- ----------- -----------
Total net proceeds $16,550,000 $19,542,000 $22,535,000 $25,977,500
The expenses are estimated assuming that (a) all of the indicated number of
Common Shares are sold in the Subscription Offering; (b) the directors,
officers and their associates purchase 200,500 shares; (c) the ESOP purchases
8% of the Common Shares sold; and (d) 60% of the Common Shares are sold to
residents of Boone County or Kenton County, Kentucky, 20% of the Common Shares
are sold to residents of counties contiguous to either Boone County or Kenton
County, Kentucky, and 20% of the Common Shares are sold to persons not
residents of Boone County or Kenton County, Kentucky, or any county contiguous
to either of such counties. Actual expenses may be more or less than
estimated. See "THE CONVERSION - Plan of Distribution."
CFKY will retain 50% of the net proceeds from the sale of the Common
Shares, or $9,771,000 at the mid-point of the Valuation Range, including the
value of a promissory note from the ESOP, which CFKY intends to accept in
exchange for the issuance of Common Shares to the ESOP. Such proceeds will be
used to fund the RRP and, initially, will be invested in short-term and
intermediate-term government securities. The remainder of the net proceeds
received from the sale of the Common Shares, $9,771,000 at the mid-point of the
Valuation Range, will be invested by CFKY in the capital stock to be issued by
Columbia Federal to CFKY as a result of the Conversion. Such investment will
increase the regulatory capital of Columbia Federal and will permit Columbia
Federal to expand its lending and investment activities and to enhance customer
services. Enhanced customer services may include the origination of additional
types of loans, including commercial loans and additional types of consumer
loans, such as home equity loans.
Columbia Federal anticipates that such net proceeds initially will be
invested in mortgage-backed securities. Eventually, however, Columbia Federal
will attempt to use the net proceeds to originate loans. Such use will be
consistent with Columbia Federal's effort to improve its interest rate risk
position as well as increase its income. See "THE BUSINESS OF COLUMBIA FEDERAL
- - General."
Although CFKY and Columbia Federal could use the increase in capital to
acquire other financial institutions or for CFKY to repurchase its own
outstanding shares, CFKY and Columbia Federal have no current plans or
agreements, written or oral, and are not negotiating, to acquire any other
institution and have no current plans for CFKY to repurchase any of its shares.
-13-
20
MARKET FOR COMMON SHARES
There is presently no market for the Common Shares. The aggregate
offering price for the Common Shares is based upon an independent appraisal of
Columbia Federal. The appraisal is not a recommendation as to the advisability
of purchasing Common Shares. See "THE CONVERSION - Pricing and Number of
Common Shares to be Sold." No assurance can be given that persons purchasing
Common Shares will thereafter be able to sell such shares at a price at or
above the offering price.
CFKY has received approval to have the Common Shares quoted on Nasdaq
under the symbol ["CFKY"] upon the closing of the Conversion, subject to
certain conditions which CFKY and Columbia Federal believe will be satisfied,
although no assurance can be provided that the conditions will be met. In
connection with such approval, Webb has informed Columbia Federal that KBWI
intends to make a market in the Common Shares, although it is under no
obligation to do so. No assurance can be given, however, that an active or
liquid market for the Common Shares will develop after the completion of the
Conversion or, if such a market does develop, that such market will continue.
Investors should consider, therefore, the potentially illiquid and long-term
nature of an investment in the Common Shares. See "RISK FACTORS - Limited
Market for the Common Shares."
DIVIDEND POLICY
The declaration and payment of dividends by CFKY will be subject to the
discretion of the Board of Directors of CFKY and will be based on the earnings
and financial condition of CFKY and general economic conditions. If the Board
of Directors of CFKY determines in the exercise of its discretion that the net
income, capital, and consolidated financial condition of CFKY and the general
economy justify the declaration and payment of dividends by CFKY, the Board of
Directors of CFKY may authorize the payment of dividends on the Common Shares,
subject to the limitation under Ohio law that a corporation may pay dividends
only out of surplus. There can be no assurance that dividends will be declared
and paid on the Common Shares or, if declared and paid, that such dividends
will continue to be paid in the future. In addition, pursuant to a requirement
of the OTS, CFKY will not take any action that would further the payment of a
tax-free return of capital to its shareholders during the first year following
the completion of the Conversion.
Other than earnings on the investment of the proceeds retained by CFKY,
the only source of income of CFKY will be dividends periodically declared and
paid by the Board of Directors of Columbia Federal on the common stock of
Columbia Federal held by CFKY. The declaration and payment of dividends by
Columbia Federal to CFKY will be subject to the discretion of the Board of
Directors of Columbia Federal, to the earnings and financial condition of
Columbia Federal, to general economic conditions and to federal restrictions on
the payment of dividends by thrift institutions. Under regulations of the OTS
applicable to converted associations, Columbia Federal will not be permitted to
pay a cash dividend on its capital stock after the Conversion if its regulatory
capital would, as a result of the payment of such dividend, be reduced below
the amount required for the Liquidation Account or the applicable regulatory
capital requirement prescribed by the OTS. See "THE CONVERSION - Principal
Effects of the Conversion -- Liquidation Account" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources." Columbia Federal may not pay a dividend unless such
dividend also complies with a regulation of the OTS limiting capital
distributions by savings associations. Capital distributions, for purposes of
such regulation, include, without limitation, payments of cash dividends,
repurchases and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association. See "REGULATION - Office of Thrift Supervision -- Limitations on
Capital Distributions."
-14-
21
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical and pro forma regulatory
capital of Columbia Federal at September 30, 1997, based on the receipt of
proceeds for the number of Common Shares indicated, less estimated expenses of
$620,000, $658,000, $695,000, $737,000 at the minimum, mid-point, maximum and
maximum, as adjusted, of the Valuation Range, assuming all of such shares are
sold in the Subscription Offering.
Historical at
September 30, 1997 (1)
------------------------
Amount Percent
----------- -----------
(Dollars in thousands)
Capital under generally
accepted accounting
principles, before
adjustments (2)(3) $13,091 12.59%
======= =====
Current tangible
capital (2)(3):
Capital level $13,090 12.59%
Requirement 1,560 1.50
------- -----
Excess $11,530 11.09%
======= =====
Current core
capital (2)(3):
Capital level $13,090 12.59%
Requirement 3,120 3.00
------- -----
Excess $ 9,970 9.59%
======= =====
Current risk-based
capital (4):
Capital level $13,390 30.37%
Requirement 3,527 8.00
------- -----
Excess $ 9,863 22.37%
======= =====
Pro forma capital at September 30, 1997, assuming the sale of
--------------------------------------------------------------------------------------
1,717,000 2,020,000 2,323,000 2,671,450
Common Shares Common Shares Common Shares Common Shares
(offering price of (offering price of (offering price of (offering price of
$10 per share) $10 per share) $10 per share) $10 per share)
-------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- --------- --------- --------
(Dollars in thousands)
Capital under generally
accepted accounting
principles, before
adjustments (2)(3) $21,366 19.03% $22,862 20.09% $24,359 21.13% $26,080 22.29%
======= ===== ======= ===== ======= ===== ======= =====
Current tangible
capital (2)(3):
Capital level $21,365 19.03% $22,861 20.09% $24,358 21.13% $26,079 22.29%
Requirement 1,684 1.50 1,707 1.50 1,730 1.50 1,755 1.50
------- ----- ------- ----- ------- ----- ------- -----
Excess $19,681 17.53% $21,154 18.59% $22,628 19.63% $24,324 20.79%
======= ===== ======= ===== ======= ===== ======= =====
Current core
capital (2)(3):
Capital level $21,365 19.03% $22,861 20.09% $24,358 21.13% $26,079 22.29%
Requirement 3,368 3.00 3,413 3.00 3,459 3.00 3,510 3.00
------- ----- ------- ----- ------- ----- ------- -----
Excess $17,997 16.03% $19,448 17.09% $20,899 18.13% $22,569 19.29%
======= ===== ======= ===== ======= ===== ======= =====
Current risk-based
capital (4):
Capital level $21,665 47.36% $23,161 50.30% $24,658 53.21% $26,379 56.50%
Requirement 3,660 8.00 3,683 8.00 3,708 8.00 3,735 8.00
------- ----- ------- ----- ------- ----- ------- -----
Excess $18,005 39.36% $19,478 42.30% $20,950 45.21% $22,644 48.50%
======= ===== ======= ===== ======= ===== ======= =====
____________
(1) See Note 18 of the Notes to the Financial Statements.
(2) Pro forma amounts assume Columbia Federal will receive 50% of the net
conversion proceeds before reduction for the ESOP loan. Also reflects a
deduction from capital for unearned ESOP shares equal to 8% of the shares
offered and unearned RRP shares equal to 4% of the shares offered.
(3) Historical tangible and core capital percentages are based on adjusted
total assets of $104.0 million. Pro forma tangible and core capital
percentages are based on adjusted total assets of $112.3 million, $113.8
million, $115.3 million, and $117.0 million, which assumes the receipt by
Columbia Federal of net proceeds from the sale of Common Shares of $8.3
million, $9.8 million, $11.3 million and $13.0 million, respectively. The
OTS has proposed a new regulation which would increase the core capital
requirement to between 4% and 5% of adjusted total assets, with the
specific requirement to be determined on a case-by-case basis. See
"REGULATION - OTS Regulations -- Regulatory Capital Requirements."
(4) Historical risk-based capital percentages are based on risk-weighted
assets of $44.1 million. Pro forma risk-based capital percentages are
based on risk-weighted assets of $45.7 million, $46.0 million, $46.3
million and $46.7 million, and assumes the net proceeds will be invested
in mortgage-backed securities having a risk weighting of 20%.
-15-
22
CAPITALIZATION
Set forth below is the capitalization of Columbia Federal as of September
30, 1997, and the consolidated pro forma capitalization of CFKY, as adjusted
to give effect to the sale of Common Shares based on the Valuation Range and
estimated expenses. A change in the number of Common Shares sold in the
Conversion would materially affect such pro forma capitalization. See "USE OF
PROCEEDS" and "THE CONVERSION - Pricing and Number of Common Shares to be
Sold."
Pro forma capitalization of CFKY
at September 30, 1997, assuming the sale of:
--------------------------------------------------------------
1,717,000 2,020,000 2,323,000 2,671,450
Historical Common Common Common Common
capitalization Shares Shares Shares Shares
of Columbia Federal (Offering (Offering (Offering (Offering
at September 30, price of price of price of price of
1997 $10 per share) $10 per share) $10 per share) $10 per share)
------------------- -------------- -------------- -------------- --------------
(In thousands)
Deposits(1) $90,195 $90,195 $90,195 $90,195 $90,195
Borrowings - - - - -
Capital and retained earnings:
Preferred Shares, no par value per
share: authorized - 1,000,000
shares, assumed outstanding - none - - - - -
Common Shares, no par value per
share: authorized - 6,000,000
shares; assumed outstanding - as
shown (2) - - - - -
Additional paid-in capital - 16,550 19,542 22,535 25,978
Less Common Shares acquired by the
ESOP (3) - (1,374) (1,616) (1,858) (2,137)
Less Common Shares acquired by the
RRP (4) - (687) (808) (929) (1,069)
Retained earnings, net,
substantially restricted (5) 13,090 13,090 13,090 13,090 13,090
Unrealized gain on securities
available for sale, net 1 1 1 1 1
------- ------- ------- ------- -------
Total capital and retained earnings $13,091 $27,580 $30,209 $32,839 $35,863
======= ======= ======= ======= =======
____________
(1) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Shares in the Conversion. Any such
withdrawals will reduce pro forma deposits by the amount of such
withdrawals.
(2) The number of Common Shares to be issued will be determined on the basis
of the final valuation of Columbia Federal. See "THE CONVERSION - Pricing
and Number of Common Shares to be Sold." Common Shares assumed
outstanding does not reflect the issuance of any Common Shares that may be
reserved for issuance under the Stock Option Plan. See "MANAGEMENT OF
COLUMBIA FEDERAL - Stock Benefit Plans -- Stock Option Plan." Reflects
receipt of the proceeds from the sale of the Common Shares, net of
estimated expenses. Estimated expenses include estimated sales
commissions payable to Webb. Such sales commissions have been computed
based on the following assumptions: (i) 200,500 Common Shares sold in the
Offering will be purchased by directors, officers and employees of
Columbia Federal and the members of their immediate families; (ii) 8% of
the Common Shares sold in the Offering will be purchased by the ESOP; and
(iii) the remaining 1,657,900 Common Shares sold in connection with the
Conversion will be purchased in the Subscription Offering with sales
commissions of 1.50%, 1.25% and 0.75% on 60%, 20% and 20%, respectively,
of the aggregate dollar amount paid for such Common Shares.
(3) Assumes that 8% of the Common Shares sold in connection with the
Conversion will be acquired by the ESOP with funds borrowed by the ESOP
from CFKY for a term of 11 years at a rate of 9.5%. The ESOP loan will be
secured solely by the Common Shares purchased by the ESOP. Columbia
Federal has agreed, however, to use its best efforts to fund the ESOP
based on future earnings, which best efforts funding will reduce Columbia
Federal's total capital and retained earnings, as reflected in the table.
If the ESOP is unable to purchase all or part of the Common Shares for
which it subscribes, the ESOP may purchase Common Shares on the open
market or may purchase authorized but unissued shares of CFKY. If the
ESOP purchases authorized but unissued shares from CFKY, such purchases
would have a dilutive effect of approximately 7.41% on the voting
interests of CFKY's shareholders. See "MANAGEMENT OF COLUMBIA FEDERAL -
Employee Stock Ownership Plan" and "RISK FACTORS - Dilutive Effect and
Negative Effect on Earnings of Purchases by the ESOP and the RRP."
(4) Assumes that 4% of the Common Shares will be acquired in the open market
by the RRP after the Conversion at a price of $10.00 per share. There can
be no assurance that the RRP will be implemented, that a sufficient number
of shares will be available for purchase by the RRP or that shares could
be purchased at a price of $10.00. A higher price per share, assuming the
purchase of the entire 4% of the shares, would reduce pro forma
shareholders' equity. The RRP may purchase shares in the open market or
may purchase authorized but unissued shares from CFKY. If authorized but
unissued shares are purchased, the voting interests of existing
shareholders would be diluted approximately 3.85%. See "MANAGEMENT OF
COLUMBIA FEDERAL - Recognition and Retention Plan and Trust."
(5) Retained earnings include restricted and unrestricted retained earnings
and unrealized gain on securities designated as available for sale. See
"THE CONVERSION - Principal Effects of the Conversion -- Liquidation
Account" for information concerning the liquidation account to be
established in connection with the Conversion and "TAXATION - Federal
Taxation" for information concerning restricted retained earnings for
federal tax purposes.
-16-
23
PRO FORMA DATA
Set forth below are the pro forma consolidated net earnings of CFKY for
the year ended September 30, 1997, and the pro forma shareholders' equity of
CFKY at such dates, along with the related pro forma per share amounts, giving
effect to the sale of the Common Shares in connection with the Conversion. The
computations are based on the assumed issuance of 1,717,000 Common Shares
(minimum point of the Valuation Range), 2,020,000 Common Shares (mid-point of
the Valuation Range), 2,323,000 Common Shares (maximum point of the Valuation
Range) and 2,671,450 Common Shares (15% above the maximum point of the
Valuation Range). See "THE CONVERSION - Pricing and Number of Common Shares to
be Sold." The pro forma data is based on the following assumptions: (i) the
sale of the Common Shares occurred at the beginning of the periods and yielded
the net proceeds indicated; (ii) such net proceeds were invested by CFKY and
Columbia Federal at the beginning of the specified period at 5.35%; (iii) no
withdrawals from existing deposit accounts were made to purchase the Common
Shares; (iv) CFKY will accept a promissory note from the ESOP in exchange for
the issuance of Common Shares; and (v) a portion of the cash proceeds retained
by CFKY will be used to fund the RRP and, pending such investment, be invested
in short-term and intermediate-term government securities. The assumed return
is based upon the yield for one year United States Treasury bills at November
28, 1997, because management intends to invest the initial cash proceeds in
government securities and mortgage-backed securities. In calculating pro forma
net earnings, a statutory federal income tax rate of 34% has been assumed for
the period, resulting in an after tax yield of 3.53%. In the opinion of
management, the assumed after-tax yield does not differ materially from the
estimated after-tax yield which will be obtained on the initial investment of
the cash proceeds in government securities and mortgage-backed securities and
is viewed as being more relevant in the current low interest rate environment
than the use of an arithmetic average of the fiscal year 1997 weighted average
yield on interest-earning assets and weighted average rates paid on deposits
during such period. Management also believes that utilization of savings
withdrawals to fund stock purchases would not have a material impact on the pro
forma data presented.
NO ASSURANCE CAN BE PROVIDED THAT THE YIELDS OR RESULTS SET FORTH IN THE
PRO FORMA DATA WILL BE ACHIEVED ON INVESTMENT OF THE CONVERSION PROCEEDS.
MOREOVER, THE PRO FORMA NET EARNINGS AMOUNTS DERIVED FROM THE ASSUMPTIONS SET
FORTH HEREIN SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL RESULTS OF
OPERATIONS OF CFKY THAT WOULD HAVE BEEN ATTAINED FOR ANY PERIOD IF THE
CONVERSION HAD BEEN ACTUALLY CONSUMMATED AT THE BEGINNING OF SUCH PERIOD.
FURTHER, THE RATIO OF SHARE OFFERING PRICE TO THE PRO FORMA BOOK VALUE IS NOT
REPRESENTATIVE OF ANY POTENTIAL PRICE APPRECIATION ON THE COMMON SHARES. NO
EFFECT HAS BEEN GIVEN IN THE PRO FORMA SHAREHOLDERS' EQUITY FOR ANY ASSUMED
EARNINGS ON THE NET PROCEEDS OF THE CONVERSION.
-17-
24
At and for the year ended September 30, 1997, assuming the sale of:
------------------------------------------------------------------------------
1,717,000 2,020,000 2,323,000 2,671,450
Common Shares Common Shares Common Shares Common Shares
(Offering price of (Offering price of (Offering price of (Offering price of
$10.00 per share) $10.00 per share) $10.00 per share) $10.00 per share)
------------------ ------------------ ------------------ ------------------
(Dollars in thousands, except per share amounts)
Gross proceeds $17,170 $20,200 $23,230 $26,715
Estimated expenses 620 658 695 737
------- ------- ------- -------
Estimated net proceeds $16,550 $19,542 $22,535 $25,978
------- ------- ------- -------
Less Common Shares acquired by the RRP (1) (687) (808) (929) (1,069)
Less Common Shares acquired by the ESOP (2) (1,374) (1,616) (1,858) (2,137)
------- ------- ------- -------
Net cash proceeds $14,489 $17,118 $19,748 $22,772
======= ======= ======= =======
Net earnings:
Historical $ 553 $ 553 $ 553 $ 553
Pro forma income on net proceeds 512 604 697 804
Pro forma adjustment for the RRP (1) (91) (107) (123) (141)
Pro forma adjustment for the ESOP (2) (82) (97) (111) (128)
------- ------- ------- -------
Pro forma net earnings $ 892 $ 953 $ 1,016 $ 1,088
======= ======= ======= =======
Earnings per share:
Historical $ 0.35 $ 0.30 $ 0.26 $ 0.22
Pro forma income on net proceeds 0.32 0.32 0.32 0.33
Pro forma adjustment for the RRP (1) (0.05) (0.05) (0.05) (0.05)
Pro forma adjustment for the ESOP (2) (0.06) (0.06) (0.06) (0.06)
------- ------- ------- -------
Pro forma earnings per share (3)(4) $ 0.56 $ 0.51 $ 0.47 $ 0.44
======= ======= ======= =======
Offering price as a multiple of pro forma
earnings per share 17.76 19.53 21.31 22.65
Shareholders' equity: (5)
Historical $13,091 $13,091 $13,091 $13,091
Estimated net proceeds from the sale of
Common Shares 16,550 19,542 22,535 25,978
Less unearned RRP shares (1) (687) (808) (929) (1,069)
Less unearned ESOP shares (2) (1,374) (1,616) (1,858) (2,137)
------- ------- -------
Pro forma shareholders' equity $27,580 $30,209 $32,839 $35,863
======= ======= ======= =======
Per share shareholders' equity:
Historical $ 7.62 $ 6.48 $ 5.64 $ 4.90
Estimated net proceeds 9.64 9.67 9.70 9.72
Less unearned RRP shares (1) (0.40) (0.40) (0.40) (0.40)
Less unearned ESOP shares (2) (0.80) (0.80) (0.80) (0.80)
------- ------- ------- -------
Pro forma shareholders' equity per
share (3) $ 16.06 $ 14.95 $ 14.14 $ 13.42
======= ======= ======= =======
Ratio of offering price to pro forma
shareholders' equity per share 62.27% 66.89% 70.72% 74.52%
____________
(Footnotes on next page)
-18-
25
(1) Assumes that 4% of the Common Shares sold in connection with the
Conversion will be purchased by the RRP after the Conversion at a price of
$10.00 per share and that one-fifth of the purchase price of the RRP
shares will be expensed in each of the first five years after the
Conversion. If the RRP is implemented in the first year after the
completion of the Conversion, it will be subject to various OTS
requirements, including the requirement that the RRP be approved by the
shareholders of CFKY. There can be no assurance that the RRP will be
approved by the shareholders, that a sufficient number of shares will be
available for purchase by the RRP or that the shares could be purchased at
$10.00 per share. A higher per share price, assuming the purchase of the
entire 4% of the shares, would reduce pro forma net earnings and pro forma
shareholders' equity. If an insufficient number of shares is available in
the open market to fund the RRP at the desired level, CFKY may issue
additional authorized shares. The issuance of authorized but unissued
shares in an amount equal to 4% of the Common Shares issued in the
Conversion would result in a 3.85% dilution in existing shareholders'
voting interests. See "MANAGEMENT OF COLUMBIA FEDERAL - Recognition and
Retention Plan and Trust."
(2) Assumes that 8% of the Common Shares sold in connection with the
Conversion will be purchased by the ESOP and that the funds used to
acquire such shares will be borrowed by the ESOP from CFKY with repayment
thereof secured solely by the Common Shares purchased by the ESOP.
Columbia Federal has agreed, however, to use its best efforts to fund the
ESOP based on future earnings, which best efforts funding will reduce the
income on the equity raised in connection with the Conversion, as
reflected in the table. Assumes the level amortization of the ESOP loan
over an eleven-year period with assumed tax benefits of 34%. See
"MANAGEMENT OF COLUMBIA FEDERAL - Employee Stock Ownership Plan." The
Board of Directors may elect to issue the ESOP shares from authorized but
unissued shares. The issuance of authorized but unissued shares to the
ESOP would have the effect of diluting the voting interest of existing
shareholders by 7.41%.
(3) No effect has been given to shares reserved for issuance upon the
exercise of options pursuant to the Stock Option Plan. See "MANAGEMENT OF
COLUMBIA FEDERAL - Stock Option Plan."
(4) In accordance with SOP 93-6 of the American Institute of Certified Public
Accountants ("SOP 93-6"), which requires that only those ESOP shares that
are committed to be released to the accounts of recipients be counted as
outstanding shares, per share amounts are based upon a number of shares
outstanding of 1,583,761, 1,863,248, 2,142,735, 2,464,145 at the minimum,
mid-point, maximum and 15% above the maximum of the Valuation Range,
respectively. The table reflects the ESOP cost at the $10.00 per share
offering price of the Common Shares in the Conversion, which may be more
or less than the fair value at which the shares are ultimately allocated.
(5) The effect of the Liquidation Account is not included in these
computations. For additional information concerning the Liquidation
Account, see "THE CONVERSION - Principal Effects of the Conversion --
Liquidation Account." The amounts shown do not reflect the federal income
tax consequences of the potential restoration of the bad debt reserves to
income for tax purposes, which would be required in the event of
liquidation. See "TAXATION - Federal Taxation."
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26
SUMMARY STATEMENTS OF INCOME
The following Summary Statements of Income set forth information
concerning Columbia Federal for the periods indicated:
Year ended September 30,
----------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Interest income:
Loans $5,802 $5,869 $6,014
Mortgage-backed securities 1,143 1,214 981
Investments and deposits 051 1,115 948
------ ------ ------
Total interest income 7,996 8,198 7,943
------ ------ ------
Interest expense:
Deposits 4,426 4,578 4,383
FHLB advances 25 - 63
------ ------ ------
Total interest expense 4,451 4,578 4,446
------ ------ ------
Net interest income 3,545 3,620 3,497
Provision for losses on loans 113 8 13
------ ------ ------
Net interest income after provision for loan
losses 3,432 3,612 3,484
------ ------ ------
Non-interest income 88 96 92
------ ------ ------
Non-interest expense 2,667 3,120 2,371
------ ------ ------
Income before federal income tax expense 853 588 1,205
Federal income tax expense 300 200 389
------ ------ ------
Net income $ 553 $ 388 $ 816
====== ====== ======
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27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Columbia Federal is primarily engaged in the business of attracting
savings deposits from the general public and investing such funds in mortgage
loans secured by one- to four-family residential real estate located primarily
in Kenton and Boone Counties, Kentucky. Columbia Federal also originates loans
secured by multifamily real estate (over four units), nonresidential real
estate and unimproved land, home improvement loans, and loans secured by
deposits. In recent years, Columbia Federal has made significant investments
in U.S. Government agency obligations as loan repayments have exceeded loan
originations.
Columbia Federal's profitability is primarily dependent upon its net
interest income, which is the difference between interest income on Columbia
Federal's loan, investment and mortgage-backed securities ("MBSs") portfolios
and interest paid on deposits and borrowed funds. Net interest income is
directly affected by the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on such
amounts. Columbia Federal's profitability is also affected by its provision for
losses on loans and the level of non-interest income and non-interest expense.
Non-interest income consists primarily of service charges. Non-interest
expense includes salaries and employee benefits, occupancy of premises, federal
deposit insurance premiums, data processing services, advertising and other.
The operating results of Columbia Federal are also affected by general
economic conditions, the monetary and fiscal policies of federal agencies and
the regulatory policies of agencies that regulate financial institutions.
Columbia Federal's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demand for real estate loans and other types of loans, which
is in turn affected by the interest rates at which such loans are made, general
economic conditions and the availability of funds for lending activities.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1996, TO SEPTEMBER 30, 1997
Columbia Federal's total assets at September 30, 1997, were approximately
$104.0 million, a $4.1 million, or 3.8%, decrease from $108.1 million at
September 30, 1996. The decrease resulted primarily from a decrease in
mortgage loans. Although loan originations increased, loans were repaid more
rapidly than loans were originated.
Liquid assets (cash and cash equivalents and investment securities
available for sale) totaled $7.8 million at September 30, 1997, an increase of
$3.8 million over the total at September 30, 1996. This increase resulted
primarily from repayments on loans and mortgage-backed securities that Columbia
Federal was unable to immediately invest in loans during the fiscal year.
Loans receivable totaled $61.6 million at September 30, 1997, a decrease
of $6.1 million, or 9.0%, from $67.7 million at September 30, 1996. This
decrease resulted primarily from principal repayments of $18.9 million, which
exceeded loan originations of $11.7 million. Loan repayments included four
multifamily and nonresidential mortgage loans with total balances of $7.1
million.
Deposits totaled $90.2 million at September 30, 1997, a decrease of
approximately $4.5 million, or 4.7%, from the total at September 30, 1996.
Such decrease was a result of a determination by management not to offer highly
competitive rates on deposits in light of the declining balance of loans
receivable. NOW, money market and passbook savings accounts decreased in
aggregate by approximately $2.5 million, or 7.8%, and certificates of deposit
decreased by $2.0 million, or 3.2%, during fiscal year ended September 30,
1997. At September 30, 1997, certificates of deposits that will mature within
one year accounted for 37.0% of Columbia Federal's assets.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL. Columbia Federal's net income for the year ended September 30,
1997, was $553,000, an increase of approximately $165,000, or 42.5%, from the
$388,000 in net income recorded for the year ended September 30, 1996. The
increase in earnings resulted primarily from a one-time deposit insurance
assessment of $592,000 in 1996, which was partially offset by a $202,000
reduction in interest income. Net income for the year ended September 30,
1996, would have been $779,000 if the one-time assessment had not reduced it.
-21-
28
NET INTEREST INCOME. Total interest income was $8.0 million for the year
ended September 30, 1997, a $202,000, or 2.5%, decrease from the comparable 1996
period. Interest income on loans totaled $5.8 million in 1997, a decrease of
$67,000, or 1.1%, from 1996. The decrease resulted primarily from the decline
of $864,000 in average balances outstanding due to the repayment of loans more
rapidly than loans were originated. See "Changes in Financial Condition from
September 30, 1996, to September 30, 1997." Interest income on investment
securities and interest-bearing deposits totaled $1.1 million in 1997, a
decrease of $64,000, or 5.7%, from 1996. The decrease resulted primarily from
the decline of $1.7 million in average balances outstanding to $18.3 million at
September 30, 1997. Interest income on mortgage-backed securities decreased by
$71,000, or 5.8%, during fiscal 1997, as compared to 1996, as a result of a
decline of $1.2 million in the average balance outstanding.
Interest expense on deposits totaled $4.4 million for the year ended
September 30, 1997, a decrease of $152,000, or 3.3%, from the comparable 1996
period. This decrease was due primarily to a $4.1 million decrease in the
average balances outstanding, coupled with a 6 basis point (100 basis points
equals 1%) increase in the average cost of deposits, from 4.78% in the 1996
period to 4.84% in the 1997 period.
As a result of the foregoing changes in interest income and interest
expense, net interest income declined by $75,000, or 2.1%, for the year ended
September 30, 1997, compared to fiscal 1996. The interest rate spread
increased by 3 basis points, from 2.94% in 1996 to 2.97% in 1997, while the net
interest margin increased by 5 basis points, from 3.41% in 1996 to 3.46% in
1997.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans for the
year ended September 30, 1997, was $113,000 compared to $8,000 for the year
ended September 30, 1996. The allowance for losses on loans was increased in
fiscal year 1997 due, in part, to an increase in nonperforming loans.
Nonperforming loans totaled $601,000 at September 30, 1997, and $177,000 at
September 30, 1996. Columbia Federal's allowance for losses on loans totaled
$300,000 at September 30, 1997, an increase of $111,000 over the balance at
September 30, 1996. The increase is primarily due to delinquencies by one
individual with eighteen loans. These loans were brought current in October
1997. The allowance represented .49% and .28% of total loans at September 30,
1997 and 1996, respectively. See "THE BUSINESS OF COLUMBIA FEDERAL -
Delinquent Loans, Non-Performing Assets and Classified Assets." Historically,
management has emphasized Columbia Federal's loss experience over other factors
in establishing provisions for losses on loans. During the year ended
September 30, 1997, management determined that other factors should also be
considered in determining reasonably estimable loan losses. Among the many
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 and occupancy rates, interest rates and other conditions that may
affect a borrower's ability to comply with repayment terms. The amount of the
provision for losses on loans for the year ended September 30, 1997, was
determined to be necessary by management to bring the reserve to a level
considered to be appropriate based on these additional factors. The $105,000
increase in the provision for losses on loans equaled approximately 25% of the
increase in the amount of loans delinquent more than 90 days, which were in the
process of collection. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review Columbia
Federal's allowance for losses on loans. Such agencies may require Columbia
Federal to provide additions to the allowance based upon judgments 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
Columbia Federal'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 loan losses in the
future.
NON-INTEREST INCOME. Non-interest income, primarily service fees from NOW
accounts, safe-deposit box rental receipts and fees on the sale of money orders
and traveler's checks, totaled $88,000 for the year ended September 30, 1997, a
decrease of $8,000, or 8.3%, from the 1996 amount.
NON-INTEREST EXPENSE. Non-interest expense totaled $2.7 million for the
year ended September 30, 1997, a decrease of $453,000, or 14.5%, under the 1996
fiscal year amount. The decrease resulted primarily from a $721,000, or 89.1%,
decrease in federal deposit insurance premiums, which was partially offset by a
$222,000, or 15.2%, increase in salaries and employee benefits, a $14,000, or
6.1%, increase in occupancy expense and a $27,000, or 6.6%, increase in other
expenses. The decrease in federal deposit insurance premiums was primarily
attributable to the one-time SAIF recapitalization assessment of approximately
$592,000 in 1996 and the decrease in premiums in 1997. The increase in
salaries and employee benefits resulted primarily from normal merit increases,
bonuses and the addition of a loan officer. Non-interest expense can be
expected to increase after the Conversion due to the expense associated with
the ESOP and the
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29
RRP, as well as the increased costs associated with the SEC reporting
requirements and other expenses for a public company. See "RISK FACTORS -
Dilutive Effect and Negative Effect on Earnings of Purchases by the ESOP and
the RRP."
FEDERAL INCOME TAX EXPENSE. The provision for federal income taxes was
$300,000 for the year ended September 30, 1997, an increase of $100,000, or
50.0%, from the provision recorded in fiscal 1996. The increase resulted
primarily from a $265,000, or 45.1%, increase in earnings before taxes. The
effective tax rates were 35.2% and 34.0% for the years ended September 30, 1997
and 1996, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL. Net income for the year ended September 30, 1996, was $388,000,
a decrease of $428,000, or 52.5%, from the $816,000 in net income recorded in
1995. The decrease in net income resulted primarily from a $132,000 increase
in interest expense and a $749,000 increase in non-interest expense due
primarily to the $592,000 one-time SAIF recapitalization assessment, which were
partially offset by an increase of $255,000 in interest income and a decrease
of $189,000 in the provision for federal income taxes.
NET INTEREST INCOME. Total interest income was $8.2 million for the year
ended September 30, 1996, an increase of $255,000, or 3.2%, over fiscal year
1995. Interest income on loans totaled $5.9 million, a decrease of $145,000,
or 2.4%, from the 1995 total. This decrease resulted primarily from a decrease
of $2.2 million in the average balance outstanding as loans were repaid faster
than loans were originated, which was partially offset by an increase in the
average yield of 6 basis points, to 8.60% in fiscal year 1996. Interest income
on mortgage-backed securities increased by $233,000, or 23.8%, from the 1995
amount, due to a $2.8 million increase in the average balance outstanding,
coupled with a 28 basis point increase in yield, from 6.51% to 6.79% in 1996.
Interest income on investment securities and interest-bearing deposits
increased by $167,000, or 17.6%, over 1995. This increase resulted primarily
from an increase of $2.0 million in the average balance outstanding, coupled
with an increase in the average yield of 30 basis points.
Interest expense on deposits increased for the year ended September 30,
1996, by $195,000, or 4.4%, to a total of $4.6 million, compared to $4.4
million in 1995. The increase resulted primarily from a $3.1 million increase
in the average balance outstanding, coupled with a 5 basis point increase in
the average cost of deposits, from 4.73% in 1995 to 4.78% in 1996. The
increase in rates paid on Columbia Federal's deposits generally reflect the
increase in interest rates in the overall economy during 1996.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased during 1996 by $123,000, or 3.5%, to a
total of $3.6 million. The interest rate spread and net interest margin
remained virtually unchanged between fiscal years 1995 and 1996.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans
decreased by $5,000 for the year ended September 30, 1996, compared to fiscal
1995.
NON-INTEREST INCOME. Non-interest income, primarily service fees from NOW
accounts, totaled $96,000 for the year ended September 30, 1996, an increase of
$4,000, or 4.3%, from the 1995 amount.
NON-INTEREST EXPENSE. Non-interest expense was $3.1 million for the year
ended September 30, 1996, an increase of $749,000, or 31.6%, over the amount
recorded for 1995. The increase resulted primarily from a $596,000, or 279.8%,
increase in federal insurance premiums, an $86,000, or 6.3%, increase in
salaries and employee benefits, a $22,000, or 10.7%, increase in occupancy
expense and a $45,000, or 76.3%, increase in advertising expenses. The
increase in federal insurance premiums was due to the one-time SAIF
recapitalization assessment. The increase in salaries and employee benefits
resulted primarily from an increase in staffing levels and normal merit
increases. The increase in occupancy and equipment expense resulted generally
from increases in the cost of equipment maintenance contracts and repairs and
maintenance expenses. The increase in advertising expenses resulted from
expenses incurred in conjunction with the change of Columbia Federal's name,
coupled with expenses incurred in conjunction with the opening of a new branch
office building.
FEDERAL INCOME TAX EXPENSE. The provision for federal income taxes
totaled $200,000 for the year ended September 30, 1996, a decrease of $189,000,
or 48.6%, from the 1995 amount. The decrease resulted primarily from a
$617,000, or 51.2%, decrease in income before federal income taxes. The
effective tax rates were 34.0% and 32.3% for the years ended September 30, 1996
and 1995, respectively.
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The following table presents certain information relating to Columbia
Federal's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of customer deposits for the
periods indicated. Such yields and costs are derived by dividing annual income
or expense by the average monthly balance of interest-earning assets or customer
deposits, respectively, for the years presented. Average balances are derived
from monthly balances, net of the allowance for losses on loans.
Year ended September 30,
-----------------------------------------------------------------------
1997 1996
---------------------------------- -----------------------------------
Average Interest Average Interest
balance earned/paid Yield/rate balance earned/paid Yield/rate
--------- ----------- ---------- ---------- ----------- ----------
(Dollars in thousands)
Interest earning assets
Interest bearing deposits $ 3,755 $ 197 5.25% $ 4,494 $ 239 5.32%
Investment securities (1) 14,508 854 5.89 15,498 876 5.65
Mortgage-backed securities 16,723 1,143 6.83 17,884 1,214 6.79
Loans receivable, net 67,405 5,802 8.61 68,269 5,869 8.60
-------- ------ ------ -------- ------ ------
Total interest earning assets 102,391 7,996 7.81 106,145 8,198 7.72
Non-interest earning assets
Cash and amounts due from depository institutions 601 590
Premises and equipment, net 1,566 1,033
Other nonearning assets 769 870
-------- --------
2,936 2,493
Total assets $105,327 $108,638
======== ========
Interest-bearing liabilities
NOW accounts $ 4,068 100 2.46 $ 4,375 109 2.49
Money market accounts 12,512 383 3.06 14,438 453 3.14
Passbook savings accounts 13,361 403 3.02 13,423 412 3.07
Certificates of deposit 61,646 3,540 5.74 63,483 3,604 5.68
-------- --------
Total deposits 91,587 95,719
FHLB advances 417 25 6.00 - - -
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 92,004 4,451 4.84 95,719 4,578 4.78
Non-interest bearing liabilities 448 422
-------- --------
Total liabilities 92,452 96,141
Retained earnings 12,875 12,497
-------- --------
Total liabilities and retained earnings $105,327 $108,638
======== ========
Net interest income; interest rate spread $3,545 2.97% $3,620 2.94%
====== ====== ====== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 3.46% 3.41%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 111.29% 110.89%
====== ======
Amortized loan fees included in interest income $ 191 $ 186
====== ======
Year ended September 30,
--------------------------------
1995
--------------------------------
Average Interest
balance earned/paid Yield/rate
------- ----------- ----------
(Dollars in thousands)
Interest earning assets
Interest bearing deposits $ 3,427 $ 171 4.99%
Investment securities (1) 14,543 777 5.34
Mortgage-backed securities 15,060 981 6.51
Loans receivable, net 70,433 6,014 8.54
-------- ------ ------
Total interest earning assets 103,463 7,943 7.68
Non-interest earning assets
Cash and amounts due from depository institutions 568
Premises and equipment, net 770
Other nonearning assets 991
--------
2,329
Total assets $105,792
========
Interest-bearing liabilities
NOW accounts $ 4,032 117 2.90
Money market accounts 17,125 600 3.50
Passbook savings accounts 13,578 467 3.44
Certificates of deposit 57,858 3,199 5.53
--------
Total deposits 92,593
FHLB advances 1,083 63 5.82
-------- ------ ------
Total interest-bearing liabilities 93,676 4,446 4.75
Non-interest bearing liabilities 319
--------
Total liabilities 93,995
Retained earnings 11,797
--------
Total liabilities and retained earnings $105,792
========
Net interest income; interest rate spread $3,497 2.93%
====== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 3.38%
======
Average interest-earning assets to average
interest-bearing liabilities 110.45%
======
Amortized loan fees included in interest income $ 152
======
____________
(1) Includes dividends on FHLB stock.
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The following table sets forth, for the periods and at the date indicated,
the weighted average yields earned on Columbia Federal's interest-earning
assets, the weighted average interest rates paid on interest-bearing
liabilities, the interest rate spread and the net interest margin on
interest-earning assets. Such yields and costs are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for the
periods presented.
Year ended September 30,
At September 30, ----------------------------
1997 1997 1996 1995
---------------- -------- -------- --------
Weighted average yield on loan portfolio 8.23% 8.61 8.60 8.54
Weighted average yield on mortgage-backed securities 6.81 6.83 6.79 6.51
Weighted average yield on investment securities 5.73 5.89 5.65 5.34
Weighted average yield on interest-bearing deposits 5.36 5.25 5.32 4.99
Weighted average yield on all interest-earning assets 7.44 7.81 7.72 7.68
Weighted average interest rate on deposits 4.94 4.83 4.78 4.73
Weighted average interest rate on FHLB advances - 6.00 - 5.82
Weighted average interest rate paid on all
interest-bearing liabilities 4.94 4.84 4.78 4.75
Interest rate spread (spread between weighted
average interest rate on all interest-bearing assets
and all interest-bearing liabilities) 2.50 2.97 2.94 2.93
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.06 3.46 3.41 3.38
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected Columbia Federal's interest income and expense during
the years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume) and (iii)
total changes in rate and volume. The combined effects of changes in both
volume and rate, which cannot be separately identified, have been allocated
proportionately to the change due to volume and the change due to rate:
Year ended September 30,
------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
-------------------------------------- --------------------------------------
Increase Increase Total Increase Increase Total
(decrease) (decrease) increase (decrease) (decrease) increase
due to rate due to volume (decrease) due to rate due to volume (decrease)
----------- ------------- ---------- ----------- ------------- ----------
(In thousands)
Interest income attributable to:
Interest-bearing deposits $ (3) $ (39) $ (42) $ 15 $ 53 $ 68
Investment securities 34 (56) (22) 48 51 99
Mortgage-backed securities 8 (79) (71) 49 184 233
Loans receivable 7 (74) (67) 40 (185) (145)
---- ----- ----- ---- ----- -----
Total interest income 46 (248) (202) 152 103 255
---- ----- ----- ---- ----- -----
Interest expense attributable to:
NOW accounts (1) (8) (9) (18) 10 (8)
Money market accounts (10) (60) (70) (53) (94) (147)
Passbook savings accounts (7) (2) (9) (50) (5) (55)
Certificates of deposit 40 (104) (64) 94 311 405
FHLB Advances - 25 25 - (63) (63)
---- ----- ----- ---- ----- -----
Total interest expense 22 (149) (127) (27) 159 132
---- ----- ----- ---- ----- -----
Increase (decrease) in net
interest income $ 24 $ (99) $ (75) $179 $ (56) $ 123
==== ===== ===== ==== ===== =====
ASSET AND LIABILITY MANAGEMENT
Columbia Federal, like other financial institutions, is subject to
interest rate risk to the extent that its interest-earning assets reprice
differently than its interest-bearing liabilities. As part of its effort to
monitor and manage interest rate risk, Columbia Federal uses the Net Portfolio
Value ("NPV") methodology recently adopted by the OTS as part of its capital
-25-
32
regulations. Although the implementation of such regulation has been delayed
and Columbia Federal is not subject to the NPV regulation because the
regulation does not apply to institutions with less than $300 million in assets
and risk-based capital in excess of 12%, the application of the NPV methodology
may illustrate Columbia Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash
flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in
market interest rates and a 200 basis point decrease in market interest rates
are considered. If the NPV would decrease more than 2% of the present value of
the institution's assets with either an increase or a decrease in market rates,
the institution must deduct 50% of the amount of the decrease in excess of such
2% in the calculation of the institution's risk-based capital. See "Liquidity
and Capital Resources."
At September 30, 1997, 2% of the present value of Columbia Federal's
assets was approximately $2.1 million. Because the interest rate risk of a 200
basis point increase in market interest rates (which was greater than the
interest rate risk of a 200 basis point decrease) was $3.3 million at September
30, 1997, had the regulation applied, Columbia Federal would have been required
to deduct approximately $600,000 (50% of the approximate $1.2 million
difference) from its capital in determining whether Columbia Federal met its
risk-based capital requirement. Regardless of such reduction, however,
Columbia Federal's risk-based capital at September 30, 1997, would still have
exceeded the regulatory requirement by $9.3 million.
Presented below, as of September 30, 1997 is an analysis of Columbia
Federal's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts of 100 basis points in market interest rates.
The table also contains the policy limits set by the Board of Directors of
Columbia Federal as the maximum change in NPV that the Board of Directors deems
advisable in the event of various changes in interest rates. Such limits have
been established with consideration of the dollar impact of various rate
changes and Columbia Federal's strong capital position.
As illustrated in the table, Columbia Federal's NPV is more sensitive to
rising rates than declining rates. Such difference in sensitivity occurs
principally because, as rates rise, borrowers do not prepay fixed-rate loans as
quickly as they do when interest rates are declining. As a result, in a rising
interest rate environment, the amount of interest Columbia Federal would
receive on its loans would increase relatively slowly as loans are slowly
prepaid and new loans at higher rates are made. Moreover, the interest
Columbia Federal would pay on its deposits would increase rapidly because
Columbia Federal's deposits generally have shorter periods to repricing.
Assumptions used in calculating the amounts in this table are OTS assumptions.
At September 30, 1997
---------------------------
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
- ----------------------- ----------- -------- --------
(In thousands)
+400 (60)% $(7,137) (43)%
+300 (45) (5,232) (32)
+200 (30) (3,322) (20)
+100 (15) (1,498) (9)
-
-100 (15) 838 5
-200 (30) 1,333 8
-300 (45) 2,109 13
-400 (60) 3,260 20
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
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33
If interest rates rise from the recent historically low levels, Columbia
Federal's net interest income will be negatively affected. Moreover, rising
interest rates may negatively affect Columbia Federal's earnings due to
diminished loan demand. Although Columbia Federal originates loans in
accordance with secondary market guidelines in order to be able to sell loans if
necessary for interest rate risk management, many of the loans are not readily
saleable because they are secured by non-owner occupied real estate. Moreover
the sale of loans would further reduce net income as the proceeds from the sale
would be directed into lower yielding investments.
To the extent that proceeds from the conversion are invested in
adjustable-rate mortgage-backed securities, Columbia Federal may reduce its
exposure to interest rate risk.
LIQUIDITY AND CAPITAL RESOURCES. Columbia Federal's liquidity, primarily
represented by cash equivalents, is a result of its operating, investing and
financing activities. These activities are summarized below for the periods
presented.
Year Ended September 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(In thousands)
Net income $ 553 $ 388 $ 816
Adjustments to reconcile net income to net cash
from operating activities (20) 423 70
------- ------- ------
Net cash provided by operating activities 533 811 886
Net cash provided by (used in) investing activities 7,512 (3,424) 1,766
Net cash provided by (used in) financing activities (4,265) (1,186) 1,423
------- ------- ------
Net change in cash and cash equivalents 3,780 (3,799) 4,075
------- ------- ------
Cash and cash equivalents at beginning of period 3,047 6,846 2,771
------- ------- ------
Cash and cash equivalents at end of period $ 6,827 $ 3,047 $6,846
======= ======= ======
Columbia Federal's principal sources of funds are deposits, loan and
mortgage-backed securities repayments, maturities of securities and other funds
provided by operations. Columbia Federal also has the ability to sell certain
investments held available for sale and borrow from the FHLB of Cincinnati.
While scheduled loan repayments and maturing investments are relatively
predictable, deposit flows and early loan and mortgage-backed security
prepayments are more influenced by interest rates, general economic conditions
and competition. Columbia Federal maintains investments in liquid assets based
upon management's assessment of (i) the need for funds, (ii) expected deposit
flows, (iii) the yields available on short-term liquid assets and (iv) the
objectives of the asset/liability management program.
At September 30, 1997, OTS regulations required Columbia Federal to
maintain an average daily balance of investments in United States Treasury,
federal agency obligations and other investments having maturities of five
years or less in an amount equal to 5% of the sum of Columbia Federal's average
daily balance of net withdrawable deposit accounts and borrowings payable in
one year or less. The liquidity requirement, which may be changed from time to
time by the OTS to reflect changing economic conditions, is intended to provide
a source of relatively liquid funds upon which Columbia Federal may rely if
necessary to fund deposit withdrawals or other short-term funding needs. At
September 30, 1997, Columbia Federal's regulatory liquidity ratio was 23.5%.
At such date, Columbia Federal had commitments to originate loans totaling
$474,000 and no commitments to purchase or sell loans. At September 30, 1997,
certificates of deposit maturing within one year totaled $38.5 million.
Effective November 24, 1997, the OTS reduced the liquidity requirement to 4%.
Columbia Federal considers its liquidity and capital reserves sufficient to
meet its outstanding short- and long-term needs. See Note 18 of the Notes to
the Financial Statements.
Columbia Federal is required by applicable law and regulations to meet
certain minimum capital standards. Such capital standards include a tangible
capital requirement, a core capital requirement or leverage ratio and a
risk-based capital requirement. See "REGULATION - OTS Regulations --
Regulatory Capital Requirements." Columbia Federal exceeded all of its capital
requirements at September 30, 1997, 1996 and 1995.
The tangible capital requirement requires savings associations to maintain
"tangible capital" of not less than 1.5% of the association's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus
any intangible assets.
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"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of the association's total
assets. The OTS has proposed to increase such requirement to 4% to 5%, except
for those associations with the highest examination rating and acceptable levels
of risk. See "REGULATION - OTS Regulations -- Regulatory Capital Requirements."
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Columbia Federal includes a general allowance for losses
on loans of $300,000 at September 30, 1997.
The following table summarizes Columbia Federal's regulatory capital
requirements and actual capital (see Note _ of the Notes to the Financial
Statements for a reconciliation of capital under GAAP and regulatory capital
amounts) at September 30, 1997.
Excess of actual
capital over current
Actual capital Current requirement requirement
---------------- ---------------------- ---------------------- Applicable
Amount Percent Amount Percent Amount Percent asset total
------- ------- ---------- ---------- ---------- ---------- -----------
(Dollars in thousands)
Tangible Capital $13,090 12.59% $1,560 1.5% $11,530 11.09% $104,006
Core Capital 13,090 12.59 3,120 3.0 9,970 9.59 104,006
Risk-based Capital 13,390 30.37 3,527 8.0 9,863 22.37 44,089
For information concerning regulatory capital on a pro forma basis after
the Conversion, see "REGULATORY CAPITAL COMPLIANCE."
At September 30, 1997, Columbia Federal had no material commitments for
capital expenditures.
YEAR 2000 ISSUES
Columbia Federal has conducted a review of its computer systems to
identify any year 2000 adverse consequences resulting from computer programs
being written using two digits rather than four to define the applicable year.
Any of Columbia Federal's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
problem could result in a major system failure or miscalculations. Columbia
Federal believes that, with certain modifications, which are not expected to
require material expense, the year 2000 issue will not result in significant
operational problems for Columbia Federal's computer systems. If such
modifications are not completed timely, however, or if Columbia Federal fails
to identify all computer systems affected by the year 2000 problem, Columbia
Federal's operations and financial condition may be negatively affected.
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
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In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS") by
entities with publicly held common stock or potential common stock. SFAS No. 128
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share." Basic
EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 supersedes APB Opinion
No. 15 and is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Management does not believe the
adoption of SFAS No. 128 will have a material impact on the disclosure
requirements of CFKY.
In February 1997, the FASB issued SFAS No. 129, which incorporates the
disclosure requirements of APB Opinion No. 15, and makes them applicable to all
public and nonpublic entities that have issued securities addressed by SFAS No.
129. APB Opinion No. 15 requires disclosure of descriptive information about
securities that is not necessarily related to the computation of EPS. SFAS No.
129 continues the previous requirements to disclose certain information about
an entity's capital structure found in APB Opinions No. 19, "Omnibus Opinion -
1966," and No. 15, and SFAS No. 47, "Disclosure of Long-Term Obligations," for
entities that were subject to the requirements of those standards. SFAS No.
129 eliminates the exemption of nonpublic entities from certain disclosure
requirements of APB Opinion No. 15 as provided by SFAS No. 21, "Suspension of
the Reporting of Earnings per Share, and Segment Information by Nonpublic
Enterprises." SFAS No. 129 supersedes specific disclosure requirements of APB
Opinions Nos. 10 and 15 and SFAS No. 47 and consolidates them in SFAS No. 129
for ease of retrieval and for greater visibility to nonpublic entities. SFAS
No. 129 is effective for financial statements for periods ending after December
15, 1997. Columbia Federal has not previously issued any common shares and
SFAS No. 129 will be adopted by CFKY in the initial period after December 15,
1997. Management believes the adoption of SFAS No. 129 will not have a
material impact on the disclosure requirements of CFKY.
In December 1996, the FASB issued SFAS No. 126, which amends SFAS No. 107,
"Disclosures 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 will not
impact 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 a 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. Effective January 1,1997, SFAS No. 125
superseded SFAS No. 122, which is discussed above. Management does not believe
the adoption of SFAS No. 125 will have a material impact on the disclosure
requirements of CFKY.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes included herein have been prepared in
accordance with GAAP. GAAP requires Columbia Federal to measure financial
position and operating results in terms of historical dollars, and changes in
the relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in
the inflation rate. While interest rates are greatly influenced by changes in
the inflation rate,
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they do not change at the same rate or in the same magnitude as the inflation
rate. Rather, interest rate volatility is based on changes in the expected
rate of inflation, as well as on changes in monetary and fiscal policies.
THE BUSINESS OF COLUMBIA FEDERAL
GENERAL
Columbia Federal is principally engaged in the business of making
permanent first and second mortgage loans secured by one- to four-family
residential real estate located in Columbia Federal's primary lending area and
investing in U.S. Government and agency obligations, interest-bearing deposits
in other financial institutions and mortgage-backed securities. Columbia
Federal also originates loans for the construction of residential real estate
and loans secured by multifamily real estate (over four units) and
nonresidential real estate. The origination of consumer loans, including loans
secured by deposits and home improvement loans, constitutes a small portion of
Columbia Federal's lending activities. Loan funds are obtained primarily from
deposits, which are insured up to applicable limits by the FDIC, and loan and
mortgage-backed and related securities repayments.
MARKET AREA
Columbia Federal conducts business from its main office located in Ft.
Mitchell, Kentucky, a branch office in each of the municipalities of Covington,
Crescent Springs and Erlanger, which are located in Kenton County, Kentucky,
and a branch office in Florence, which is located in Boone County, Kentucky.
Columbia Federal's primary market area consists of Boone County and Kenton
County, Kentucky.
The economic base of Columbia Federal's primary market area is comprised
primarily of wholesale and retail industries with some manufacturing
industries. Unemployment rates in the market area historically have been lower
than both state and national unemployment rates. For the nine months ended
September 30, 1997, the combined unemployment rate for Boone and Kenton
Counties was 3.6% compared to 5.0% for the Commonwealth of Kentucky and 4.7%
nationally. The population of Boone and Kenton Counties increased by 9.5%
between 1990 and 1996, compared to a 5.7% increase for the Commonwealth of
Kentucky and a 6.7% increase nationally. Per capita and median household
income in Boone and Kenton Counties were $15,364 and $36,301, respectively,
compared to per capita and median household income of $12,744 and $25,703,
respectively, for the Commonwealth of Kentucky and $16,738 and $34,530,
respectively, for the United States.
LENDING ACTIVITIES
GENERAL. Columbia Federal's primary lending activity is the origination
of conventional mortgage loans secured by one- to four-family homes located in
Columbia Federal's primary lending area. Loans for the construction of one- to
four-family homes and mortgage loans on multifamily properties containing five
units or more and nonresidential properties are also offered by Columbia
Federal. Except for Title I home improvement loans which are insured by the
Federal Housing Administration ("FHA"), Columbia Federal does not originate
loans insured by the FHA or loans guaranteed by the Veterans Administration.
In addition to mortgage lending, Columbia Federal makes consumer loans secured
by deposits and home improvement loans. Columbia Federal originates its loans
in accordance with traditional secondary market guidelines, but has not sold
any loans during the past five years.
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LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Columbia Federal's loan portfolio
at the dates indicated:
At September 30,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(Dollars in thousands)
Residential real estate loans:
One- to four-family residential $53,584 83.80% $52,691 75.92% $53,552 75.92% $54,297 74.39% $54,123 78.12%
Multifamily residential 5,487 8.58 8,769 12.64 8,918 12.64 8,973 12.29 6,793 9.80
Nonresidential real estate loans 1,711 2.68 6,011 8.66 5,630 7.98 6,434 8.82 5,467 7.89
Construction loans 3,117 4.87 1,878 2.71 2,405 3.41 3,235 4.43 2,818 4.07
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans 63,899 99.92 69,349 99.93 70,505 99.95 72,939 99.93 69,201 99.88
Consumer loans:
Loans on deposits 42 0.07 42 0.06 22 0.03 35 0.05 61 0.09
Home improvement loans 7 0.01 8 0.01 14 0.02 13 0.02 24 0.03
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans 49 0.08 50 0.07 36 0.05 48 0.07 85 0.13
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 63,948 100.00% 69,399 100.00% 70,541 100.00% 72,987 100.00% 69,286 100.00%
====== ====== ====== ====== ======
Less:
Loans in process 1,202 605 1,196 1,589 1,296
Deferred loan fees 868 864 886 921 775
Allowance for loes on loans 300 189 189 189 189
------- ------- ------- ------- -------
Loans receivable, net $61,578 $67,741 $68,270 $70,288 $67,026
======= ======= ======= ======= =======
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LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of September 30, 1997, regarding the dollar amount of loans
maturing in Columbia Federal's portfolio based on their contractual terms to
maturity. Demand loans and loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less.
Due during the year ending
September 30, Due 4-5 Due 6-10 Due 11-20 Due more than
--------------------------------- years after years after years after 20 years after
1998 1999 2000 9/30/97 9/30/97 9/30/97 9/30/97 Total
------ ------ ------ --------- --------- --------- --------- -------
(In thousands)
FIXED-RATE LOANS
Residential real estate loans:
One- to four-family (first
mortgage) $ 16 $29 $111 $ 830 $ 6,438 $22,766 $13,690 $43,880
Home equity (second mortgage) - - 2 11 5 31 - 49
Multifamily - - 13 78 297 2,775 154 3,317
Nonresidential real estate
loans - - - 39 134 965 79 1,217
Construction loans 3,117 - - - - - - 3,117
------ --- ---- ------ ------- ------- ------- -------
Total real estate loans 3,133 29 126 958 6,874 26,537 13,923 51,580
Consumer loans:
Loans on deposits 42 - - - - - - 42
Other consumer loans - - 2 - 5 - - 7
------ --- ---- ------ ------- ------- ------- -------
Total consumer loans 42 - 2 - 5 - - 49
------ --- ---- ------ ------- ------- ------- -------
Total fixed-rate loans 3,175 29 128 958 6,879 26,537 13,923 51,629
ADJUSTABLE-RATE LOANS
Residential real estate loans:
One- to four-family (first
mortgage) $ - $19 $ 56 $ 126 $ 853 $ 4,505 $ 3,967 $ 9,526
Home equity (second mortgage) - 9 3 8 109 - - 129
Multifamily - - 18 - 909 694 549 2,170
Nonresidential real estate
loans - - 13 33 131 229 88 494
Construction loans - - - - - - - -
------ --- ---- ------ ------- ------- ------- -------
Total real estate loans - 28 90 167 2,002 5,428 4,604 12,319
Consumer loans:
Loans on deposits - - - - - - - -
Other consumer loans - - - - - - - -
------ --- ---- ------ ------- ------- ------- -------
Total consumer loans - - - - - - - -
Total adjustable-rate loans - 28 90 1,67 2,002 5,428 4,604 12,319
------ --- ---- ------ ------- ------- ------- -------
Total loans $3,175 $57 $218 $1,125 $ 8,881 $31,965 $18,527 $63,948
====== === ==== ====== ======= ======= ======= =======
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Columbia Federal has been the origination of permanent conventional
loans secured by one- to four-family residences, primarily single-family
residences, located within Columbia Federal's primary market area. Each of
such loans is secured by a mortgage on the underlying real estate and
improvements thereon, if any. Of the total outstanding balance of one- to
four-family mortgage loans at September 30, 1997, approximately $20.3 million
was secured by non-owner occupied properties and $53,000 was secured by
single-family unimproved lots. Loans secured by non-owner-occupied properties
are considered to carry greater risk of loss because the borrower typically
depends upon income generated by the property to cover operating expenses and
debt service. The profitability of a property can be affected by economic
conditions, governmental policies and other factors beyond the control of the
borrower.
OTS regulations limit the amount that Columbia Federal may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations, Columbia
Federal makes fixed-rate first mortgage loans on single-family or duplex, owner
occupied residences in amounts up to 80% of the value of the real estate and
improvements (the "Loan-to-Value Ratio" or "LTV"). Fixed-rate residential real
estate loans are offered by Columbia Federal for terms of up to 25 years, or 30
years for first-time homebuyers.
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Columbia Federal commenced the origination of adjustable-rate mortgage
loans ("ARMs") in 1982. ARMs are offered by Columbia Federal on single-family
residences, two- to four-family properties and non-owner occupied one- to
four-family properties, in amounts up to 90% LTV for terms of up to 25 years
and with various alternative features. Columbia Federal requires private
mortgage insurance ("PMI") for the amount of fixed-rate loans and ARM loans in
excess of 85% of the value of the real estate securing such loans. The
interest rate adjustment periods on the ARMs are either one year or three
years. The interest rate adjustments on ARMs presently originated by Columbia
Federal are tied to changes in the monthly average yield on the one- and
three-year U.S. Treasury constant maturities index, respectively. Rate
adjustments are computed by adding a stated margin, usually a minimum of 2.5%,
to the index. The maximum allowable adjustment for one-year adjustment periods
is usually 1.5% with a maximum adjustment of 6% over the term of the loan. The
maximum allowable adjustment for three-year adjustment periods is usually 2%
with a maximum adjustment of 5% over the term of the loan. The initial rate is
dependent, in part, on how often the rate can be adjusted.
Columbia Federal offers ARMs secured by single-family unimproved lots.
Such loans are made for five-year terms, with an LTV of up to 80% on properties
of up to five acres, and require proof, including an affidavit, that the owner
intends to build on the lot during the term of the loan. Interest rates for
ARMs secured by two- to four-family, non-owner-occupied or unimproved property
are between 0.50% and 1.00% higher than the interest rates for ARMs secured by
single-family, owner-occupied properties. Columbia Federal originates ARMs
which have initial interest rates lower than the sum of the index plus the
margin. Such loans are subject to increased risk of delinquency or default due
to increasing monthly payments as the interest rates on such loans increase to
the fully-indexed level, although such increase is considered in Columbia
Federal's underwriting of any such loans.
The aggregate amount of Columbia Federal's one- to four-family residential
real estate loans equaled approximately $53.6 million at September 30, 1997,
and represented 83.8% of loans at such date. Of such amount, approximately
18.0% were ARMs. The largest individual loan balance on a one- to four-family
loan at such date was $368,000. At such date, loans secured by one- to
four-family residential real estate with outstanding balances of $601,000, or
1.1% of its one- to four-family residential real estate loan balance, were more
than 90 days delinquent. See "Delinquent Loans, Non-performing Assets and
Classified Assets."
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one-
to four-family properties, Columbia Federal makes loans secured by multifamily
properties containing over four units. Such loans are made with fixed or
adjustable interest rates, a maximum LTV of 75% and a maximum term of 25 years.
Multifamily lending is generally considered to involve a higher degree of
risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic
conditions, government policies and other factors beyond the control of the
borrower. Columbia Federal attempts to reduce the risk associated with
multifamily lending by evaluating the credit-worthiness of the borrower and the
projected income from the project and by obtaining personal guarantees on loans
made to corporations and partnerships. Columbia Federal currently requests
financial statements annually to enable Columbia Federal to monitor the loans
and requires annual financial statements for larger multifamily loans.
At September 30, 1997, loans secured by multifamily properties totaled
approximately $5.5 million, or 8.6% of total loans, all of which were secured
by property located within Columbia Federal's primary market area, and all of
which were performing in accordance with their terms. The largest property
securing such a loan is an apartment complex. The balance of multi-family
loans decreased between September 30, 1996, and September 30, 1997, due to the
repayment of two large multi-family loans in fiscal year 1997. At September
30, 1997, approximately $3.3 million or 5.2% of total loans, were fixed-rate
multifamily loans.
CONSTRUCTION LOANS. Columbia Federal makes loans for the construction of
residential and nonresidential real estate. Such loans are structured as
permanent loans with fixed rates or adjustable rates of interest and for terms
of up to 30 years. All of the construction loans originated by Columbia
Federal have been made to borrowers who intended to occupy the
newly-constructed real estate or to developers who had a purchaser for the
property at the time the loan was made. Approximately 65% of the construction
loan balance at September 30, 1997, was secured by property owned by
developers. All construction loans are written as permanent loans but require
the payment of only interest until the construction is completed. Construction
is required to be completed within one year.
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40
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties because such
loans are more difficult to evaluate and monitor. Loan funds are advanced upon
the security of the project under construction, which is more difficult to
value before the completion of construction. Moreover, because of the
uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the LTV and the total loan funds required to
complete a project. In the event a default on a construction loan occurs and
foreclosure follows, Columbia Federal must take control of the project and
attempt either to arrange for completion of construction or dispose of the
unfinished project. Columbia Federal attempts to reduce such risks on loans to
developers by requiring personal guarantees and reviewing current personal
financial statements and tax returns and other projects undertaken by the
developers.
At September 30, 1997, $3.1 million, or approximately 4.9% of Columbia
Federal's total loans, consisted of construction loans. All of Columbia
Federal's construction loans are secured by property located within Columbia
Federal's primary market area, and the economy of such lending area has been
relatively stable or growing. At September 30, 1997, all of such loans were
performing in accordance with their terms.
NONRESIDENTIAL REAL ESTATE LOANS. Columbia Federal also makes loans
secured by nonresidential real estate located in Northern Kentucky, including
retail stores, warehouses, churches, motels, restaurants and a self-storage
facility. Such loans generally are originated with terms of up to 20 years and
may have fixed or adjustable rates. Such loans have a maximum LTV of 75%.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger
loan amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Columbia Federal has endeavored to reduce
such risk by evaluating the credit history and past performance of the
borrower, the location of the real estate, the quality of the management
constructing and operating the property, the debt service ratio, the quality
and characteristics of the income stream generated by the property and
appraisals supporting the property's valuation. Columbia Federal also requires
personal guarantees on such loans.
At September 30, 1997, Columbia Federal had a total of $1.7 million
invested in nonresidential real estate loans, all of which were secured by
property located within Northern Kentucky. Such loans comprised approximately
2.7% of Columbia Federal's total loans at such date. At such date, Columbia
Federal had no delinquent nonresidential real estate loans. See "Delinquent
Loans, Non-performing Assets and Classified Assets."
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its tangible capital. At September
30, 1997, Columbia Federal's nonresidential mortgage loans totaled 13.1% of
Columbia Federal's tangible capital.
CONSUMER LOANS. Columbia Federal makes loans secured by deposits and a
limited number of home improvement loans not secured by mortgages. Home
improvement loans are made only at fixed rates of interest for terms of up to
five years. Loans secured by deposits are made with adjustable rates that vary
with the interest paid on the deposit and have a margin of three percent over
the interest rate being paid on the deposit. See "RISK FACTORS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
Consumer loans may entail greater credit risk than do residential mortgage
loans. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse economic conditions. Although
Columbia Federal has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase.
At September 30, 1997, Columbia Federal had approximately $49,000, or less
than one percent of its total loans, invested in consumer loans, and none of
such loans were more than 90 days delinquent or nonaccruing. See "Delinquent
Loans, Non-performing Assets and Classified Assets."
COMMERCIAL LOANS. Although Columbia Federal is considering offering
commercial loans, Columbia Federal does not currently issue any letters of
credit or originate or purchase any loans for commercial, business or
agricultural purposes, other than loans secured by real estate.
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LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including continuing business with depositors, borrowers and
real estate developers, periodic newspaper advertisements, solicitations by
Columbia Federal's lending staff and walk-in customers. Columbia Federal does
not use third-party brokers or originators.
Loan applications for permanent mortgage loans are taken by loan
personnel. Columbia Federal obtains a credit report concerning the
credit-worthiness of the borrower. Columbia Federal limits the ratio of
mortgage loan payments to the borrower's income to 28% and the ratio of the
borrower's total debt payments to income to 36%. An appraisal of the fair
market value of the real estate on which Columbia Federal will be granted a
mortgage to secure the loan is usually prepared by an employee of Columbia
Federal. As part of the appraisal and prior to foreclosure on any delinquent
loan, a visual inspection is performed to identify obvious environmental
concerns. If the visual inspection or the history of the property provides
reason to believe an environmental problem might exist, Columbia Federal will
conduct further investigations, which may include a Phase I Environmental Site
Assessment by an approved environmental consultant.
For multifamily and nonresidential mortgage loans, a personal guarantee of
the borrower's obligation to repay the loan is required. Columbia Federal also
obtains the borrower's financial statement, tax returns and information with
respect to prior projects completed by the borrower. Upon the completion of
the appraisal and the receipt of information on the borrower, the application
for a loan is submitted to the Loan Committee, comprised of certain management
officials, for approval or rejection if the loan amount does not exceed
$250,000. If the loan amount exceeds $250,000, or if the application does not
conform in all respects with Columbia Federal's underwriting guidelines, the
application is accepted or rejected by the Board of Directors.
If a mortgage loan application is approved, Columbia Federal does not
require title insurance but does obtain an attorney's opinion of title.
Borrowers are required to carry satisfactory fire and casualty insurance and
flood insurance, if applicable, and to name Columbia Federal as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs.
Columbia Federal also evaluates the feasibility of the proposed construction
project and the experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Columbia Federal's loans provide that the entire balance of the loan is
due upon sale of the property securing the loan, and Columbia Federal generally
enforces such due-on-sale provisions. Columbia Federal's adjustable-rate loans
carry no prepayment penalties, but fixed-rate loans carry a 2% prepayment
penalty if the property is refinanced with another lender within five years of
the loan's origination.
LOAN ORIGINATIONS, PURCHASES AND SALES. Columbia Federal originated only
fixed-rate loans until 1982. Columbia Federal has not generally sold loans,
although Columbia Federal does originate its loans in accordance with secondary
market guidelines. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Asset and Liability Management."
Columbia Federal has occasionally purchased loans and participated in loans
originated by other institutions but had only one participation during the
three years ended September 30, 1997, and such participation was paid in full
in fiscal year 1997. For a discussion of Columbia Federal's strategy for loan
originations, see "THE BUSINESS OF COLUMBIA FEDERAL - General."
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42
The following table presents Columbia Federal's mortgage loan origination
and purchase activity for the periods indicated:
Year ended September 30,
------------------------------
1997 1996 1995
-------- ---------- --------
(In thousands)
Loan originations:
One- to four-family residential $ 7,493 $ 6,925 $ 3,802
Multifamily residential 684 553 358
Nonresidential 232 125 49
Construction 3,170 2,584 2,544
Consumer 80 70 32
------- ------- -------
Total loans originated 11,659 10,257 6,785
Loan purchases - 160(2) -
------- ------- -------
Total loans originated and purchased 11,659 10,417 6,785
Principal repayments 18,904 12,818 11,213
------- ------- -------
Loan originations, net (7,245) (2,401) (4,428)
Increase (decrease) due to other items, net (1) 1,082 1,872 2,410
------- ------- -------
Net increase (decrease) in net loan portfolio $(6,163) $ (529) $(2,018)
======= ======= =======
____________
(1) Consists of unearned and deferred fees, costs and the allowance for loan
losses.
(2) Consisted of one- to four-family residential loans purchased from the
Federal Home Loan Mortgage Corporation ("FHLMC").
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital under the regulatory capital requirements plus any
additional loan reserve not included in total capital. A savings association
may lend to one borrower an additional amount not to exceed 10% of total
capital plus additional reserves if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In addition, the regulations
require that loans to certain related or affiliated borrowers be aggregated for
purposes of such limits. An exception to these limits permits loans to one
borrower of up to $500,000 "for any purpose."
Based on such limits, Columbia Federal was able to lend approximately $2.0
million to one borrower at September 30, 1997. The largest amount Columbia
Federal had outstanding to one borrower at September 30, 1997, was $1.3
million, owed on several loans. Such loans were one- to four-family real
estate, nonresidential real estate and construction loans. All of such loans
were current at September 30, 1997.
DELINQUENT LOANS, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Columbia Federal attempts
to cause the delinquency to be cured by contacting the borrower. In most
cases, delinquencies are cured promptly.
When a loan is nineteen days delinquent, the borrower is assessed a late
penalty. When a loan is thirty days delinquent, Columbia Federal sends the
borrower a delinquency notice. Depending upon the circumstances, Columbia
Federal may also inspect the property and inform the borrower of the
availability of credit counseling from Columbia Federal and counseling
agencies. After a loan is delinquent for 45 to 60 days, an attorney
representing Columbia Federal will send the borrower a notice advising the
borrower of Columbia Federal's intention to foreclose on the property in thirty
days. Columbia Federal may, depending upon the circumstances, arrange
appropriate alternative payment arrangements. A decision as to whether and
when to initiate foreclosure proceedings is based on such factors as the amount
of the outstanding loan in relation to the original indebtedness, the extent of
the delinquency and the borrower's ability and willingness to cooperate in
curing delinquencies. If a foreclosure occurs, the real estate is sold at
public sale and may be purchased by Columbia Federal.
Real estate acquired by Columbia Federal as a result of foreclosure
proceedings is classified as real estate owned ("REO") until it is sold. When
property is so acquired, or deemed to have been acquired, it is initially
recorded by Columbia
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Federal at the lower of cost or fair value of the real estate, less estimated
costs to sell. Any reduction in fair value is reflected in a valuation
allowance account established by a charge to income. Costs incurred to carry
other real estate are charged to expense. Columbia Federal had no REO at
September 30, 1997.
Columbia Federal does not place a loan on nonaccrual status until
foreclosure has occurred, although it does write it down to fair market value.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
At September 30,
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- -------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ --------- -------- ------ --------- -------- ------ ------- --------
(Dollars in thousands)
Loans delinquent for (1):
30 - 59 days 15 $ 549 .86 23 $ 792 1.14 22 $668 .95
60 - 89 days 10 591 .92 2 132 .19 - - -
90 days and over 23 601(2) .94 4 177 .26 - - -
-- ------ ---- -- ------ ---- -- ---- ---
Total delinquent loans 48 $1,741(3) 2.72 29 $1,101(4) 1.59 22 $668(5) .95
-- ====== ==== == ====== ==== == ==== ===
____________
(1) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
(2) Of such amount, $473,000 was due from one borrower with 18 loans, which
were all brought current in October 1997.
(3) Of such amount, $1,651,000 is secured by one- to four-family residential
real estate, and $90,000 is secured by multifamily residential real
estate.
(4) All such amount is secured by one- to four-family residential real
estate.
(5) Of such amount, $559,000 is secured by one- to four-family residential
real estate, and $109,000 is secured by multifamily residential real
estate.
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44
The following table sets forth information with respect to Columbia
Federal's loans which are 90 days or more past due and other non-performing
assets at the dates indicated. At such dates, Columbia Federal had no
non-accruing loans.
At September 30,
---------------------------------------
1997 1996 1995 1994 1993
------ ------- ------ ------ ------
(Dollars in thousands)
Accruing loans greater than 90 days
delinquent:
Real estate:
Residential $ 601 $ 177 $ - $ 286 $ 259
Nonresidential - - - 211 -
Consumer - - - - -
----- ------ ----- ----- -----
Total nonperforming loans 601 177 - 497 259
Real estate owned - - 32 101 239
----- ------ ----- ----- -----
Total nonperforming assets $ 601 $ 177 $ 32 $ 598 $ 498
===== ====== ===== ===== =====
Total nonperforming loans as a
percentage of total net loans 0.98% 0.26% - 0.71% 0.39%
===== ====== ===== ===== =====
Total nonperforming assets as a
percentage of total assets 0.58% 0.16% 0.03% 0.56% 0.46%
===== ====== ===== ===== =====
Allowance for losses on loans as a
percentage of nonperforming loans 49.92% 106.78% N/M(1) 38.03% 72.97%
===== ====== ===== ===== =====
____________
(1) Not meaningful as there were no nonperforming loans at September 30, 1995.
During the periods shown, Columbia Federal had no restructured loans
within the meaning of SFAS No. 15, as amended by SFAS No. 114. There are no
loans which are not currently classified as nonaccrual, more than 90 days past
due or restructured but which may be so classified in the near future because
management has concerns as to the ability of the borrowers to comply with
repayment terms.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. "Doubtful"
assets have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable
and (ii) there is a high possibility of loss. An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving
management's close attention.
Generally, Columbia Federal classifies as "substandard" all loans that are
delinquent more than 90 days, unless management believes the delinquency status
is short-term due to unusual circumstances. Loans delinquent fewer than 90
days may also be classified if the loans have the characteristics described
above rendering classification appropriate.
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45
The aggregate amount of Columbia Federal's classified assets at the dates
indicated were as follows:
September 30,
---------------------------
1997 1996 1995
----- ----- -----
(In thousands)
Classified assets:
Substandard $972 $178 $32
Doubtful - - -
Loss - - -
---- ---- ---
Total classified assets $972 $178 $32
==== ==== ===
Federal examiners are authorized to classify an association's assets. If
an association does not agree with an examiner's classification of an asset, it
may appeal this determination to the Regional Director of the OTS. Columbia
Federal had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Columbia Federal establish prudent general
allowances for loan losses for any loan classified as substandard or doubtful.
If an asset, or portion thereof, is classified as loss, the association must
either establish specific allowances for losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount.
ALLOWANCE FOR LOSSES ON LOANS. Columbia Federal maintains an allowance
for loan losses based upon a number of relevant factors, including, but not
limited to, the nature of the portfolio, credit concentrations, an analysis of
specific loans in the portfolio, known and inherent risks in the portfolio, the
estimated value of the underlying collateral, the assessment of general trends
in relevant real estate markets, and current and prospective economic
conditions, including property values, employment and occupancy rates, interest
rates and other conditions that may affect a borrower's ability to comply with
repayment terms.
The single largest component of Columbia Federal's loan portfolio consists
of one- to four-family residential real estate loans. Substantially all of
these loans are secured by residential real estate and require a down payment
of 20% of the lower of the sales price or appraised value of the real estate.
In addition, these loans are secured by property in Columbia Federal's lending
area of Boone County and Kenton County, Kentucky. Columbia Federal's practice
of making loans only in its local market area and requiring a 20% down payment
have contributed to a low historical charge-off history.
In addition to one- to four-family residential real estate loans, Columbia
Federal makes multifamily residential real estate, nonresidential real estate
and construction loans. These real estate loans are secured by property in
Columbia Federal's lending area and also require the borrower to provide a down
payment. Columbia Federal has not had any charge-offs from these other real
estate loan categories in the last 10 years. See "Delinquent Loans,
Non-performing Assets and Classified Assets."
A small portion of Columbia Federal's total loans consists of consumer
loans. Columbia Federal has recorded no charge-offs on consumer loans during
the last five years.
The allowance for loan losses is reviewed quarterly by the Board of
Directors. While the Board of Directors believes that it uses the best
information available to determine the allowance for 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.
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46
The following table sets forth an analysis of Columbia Federal's allowance
for loan losses for the periods indicated.
For the year ended September 30,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- --------- --------- ---------
(Dollars in thousands)
Total net loans outstanding $61,578 $67,741 $68,270 $70,288 $67,026
------- ------- ------- ------- -------
Average loans outstanding 67,405 68,269 70,433 69,611 68,740
------- ------- ------- ------- -------
Allowance for loan losses
Balance at beginning of period 189 189 189 189 189
------- ------- ------- ------- -------
Charge-offs
Real estate:
Residential 2 8 13 34 47
Nonresidential - - - - -
Consumer - - - - -
Recoveries
Real estate:
Residential - - - - -
Nonresidential - - - - -
Consumer - - - - -
------- ------- ------- ------- -------
Net charge-offs 2 8 13 34 47
Provision for losses on loans 113 8 13 34 47
------- ------- ------- ------- -------
Balance at end of period $ 300 $ 189 $ 189 $ 189 $ 189
======= ======== ======== ======== ========
Ratio of allowance for losses
on loans as a percent of
total loans outstanding 0.49% 0.28% 0.28 0.27% 0.28%
==== ==== ==== ==== ====
Ratio of net charge-offs
(recoveries) to average net
loans outstanding during the
period - 0.01% 0.02% 0.05% 0.07%
==== ==== ==== ==== ====
During the past five years, the allowance for loan losses was unallocated
among the various types of loans made by Columbia Federal.
MORTGAGE-BACKED SECURITIES
Columbia Federal maintains a significant portfolio of mortgage-backed
securities in the form of FHLMC, FNMA and GNMA participation certificates.
Mortgage-backed securities generally entitle Columbia Federal to receive a
portion of the cash flows from an identified pool of mortgages. FHLMC, FNMA
and GNMA securities are each guaranteed by their respective agencies as to
principal and interest.
The FHLMC is a corporation chartered by the U.S. Government and guarantees
the timely payment of interest and the ultimate return of principal on
participation certificates. The FNMA is a corporation chartered by the U.S.
Congress and guarantees the timely payment of principal and interest on FNMA
securities. Although FHLMC and FNMA securities are not backed by the full faith
and credit of the U.S. Government, these securities are generally considered
among the highest quality investments with minimal credit risk. The GNMA is a
government agency. GNMA securities are backed by Federal Housing
Authority-insured and Veterans Administration-guaranteed loans. The timely
payment of principal and interest on GNMA securities is guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government.
Mortgage-backed securities generally yield less than individual loans
originated by Columbia Federal. In addition, a high rate of prepayment of the
underlying loans could have a material negative effect on the yield on the
securities, which are purchased at a premium over their original principal
amounts. Mortgage-backed securities present less credit risk than loans
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47
originated by Columbia Federal and held in its portfolio, and Columbia Federal
has purchased some adjustable-rate mortgage-backed securities as part of its
effort to reduce its interest rate risk. If interest rates rise in general,
including the interest paid by Columbia Federal on its liabilities, the
interest rates on the loans backing the mortgage-backed securities will also
adjust upward. At September 30, 1997, $10.8 million of Columbia Federal's
mortgage-backed securities had adjustable rates. See "RISK FACTORS - Interest
Rate Risk" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF COLUMBIA FEDERAL - Asset and Liability Management."
The following table sets forth the carrying value and market value of
Columbia Federal's mortgage-backed securities at the dates indicated. All of
such securities are designated as held to maturity.
At September 30,
----------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- -------- --------
(In thousands)
FNMA certificates $ 9,297 $ 9,208 $ 9,229 $ 9,023 $ 9,290 $ 8,515
GNMA certificates 5,048 5,136 4,536 4,570 3,858 3,914
FHLMC certificates 3,517 3,549 4,986 4,992 3,652 3,681
------- ------- ------- ------- ------- -------
Total mortgage-backed
and related securities $17,862 $17,893 $18,751 $18,585 $16,800 $16,110
======= ======= ======= ======= ======= =======
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48
The following table sets forth information regarding scheduled
maturities, amortized costs, market value and weighted average yields of
Columbia Federal's mortgage-backed securities at September 30, 1997.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or
prepay obligations with or without prepayment penalties. The following
table does not take into consideration the effects of scheduled repayments
or the effects of possible prepayments.
At September 30, 1997
--------------------------------------------------------------------------
One year or less After one to five years After five to ten years
------------------ -------------------------- --------------------------
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
-------- -------- ------------ ------------ ------------ ------------
(Dollars in thousands)
FNMA certificates $ - $ - $ - - $1,752 6.34%
GNMA certificates - - 1 5.50 74 8.00
FHLMC certificates - - 1,229 7.65 639 8.02
------ ------ ------ ---- ------ ----
Total $ - $ - $1,230 7.65% $2,465 6.83%
====== ====== ====== ==== ====== ====
At September 30, 1997
-----------------------------------------------
Total mortgage-backed
After ten years portfolio
------------------ ---------------------------
Carrying Average Carrying Market Average
value yield value value yield
-------- -------- -------- -------- -------
(Dollars in thousands)
FNMA certificates $ 7,545 6.51% $ 9,297 $ 9,208 6.48%
GNMA certificates 4,973 6.76 5,048 5,136 6.78
FHLMC certificates 1,649 7.77 3,517 3,549 7.77
------- ---- ------- ------- ----
Total $14,167 6.74% $17,862 $17,893 6.82%
======= ==== ======= ======= ====
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49
INVESTMENT ACTIVITIES
OTS regulations require that Columbia Federal maintain a minimum amount of
liquid assets, which may be invested in U. S. Treasury obligations, securities
of various federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. Columbia Federal is also permitted to make
investments in certain commercial paper, corporate debt securities rated in one
of the four highest rating categories by one or more nationally recognized
statistical rating organizations, and mutual funds, as well as other
investments permitted by federal regulations. See "REGULATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
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50
The following table sets forth the composition of Columbia Federal's
investment securities at the dates indicated:
At September 30,
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- --------------------------------- -------------------------------
Carrying % of Market % of Carrying % of Market % of Carrying % of Market % of
value Total value Total value Total value Total value Total value Total
-------- ----- ------- ----- -------- ----- ------- ----- -------- ----- ------- -----
(Dollars in thousands)
U.S. government and
federal agency securities $14,072 92% $14,071 92% $14,997 93% $14,951 93% $13,481 92% $13,089 92%
FHLB stock 1,260 8 1,260 8 1,174 7 1,174 7% 1,095 8% 1,095 8%
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Total investment securities $15,332 100% $15,331 100% $16,171 100% $16,125 100% $14,576 100% $14,184 100%
======= === ======= === ======= === ======= === ======= === ======= ===
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51
The following tables set forth the contractual maturities, carrying
values, market values and average yields for Columbia Federal's investment
securities at September 30, 1997.
At September 30, 1997
-----------------------------------------------------------------------------------------------------------
One year or less After one to five years After five to ten years After ten years
----------------------- ------------------------------ -------------------------- ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average
value yield value yield value yield value yield
-------------- ------- -------------- -------------- ------------ ------------ ------------- -------
(Dollars in thousands)
U.S. Government and
federal agency
securities $6,503 5.45% $5,997 5.87% - - $1,572 6.50%
FHLB stock (1) 1,260 7.06% - - - - - -
------ ------ --- ------
Total $7,763 % $5,997 % $- % $1,572 %
====== ------ ====== ---- === --- ====== ----
At September 30, 1997
--------------------------------------------------------
Weighted Weighted
average life Carrying Market average
in years value value yield
------------------ ----------- ----------- --------
(Dollars in thousands)
U.S. Government and
federal agency
securities 3 $14,072 $14,071 5.73%
FHLB stock N/A 1,260 1,260 7.06%(1)
----------- ----------- ---------
Total $15,332 $15,331
=========== ===========
____________
(1) The FHLB stock has no stated maturity. Columbia Federal is required by
regulation to maintain an investment in FHLB stock. The yield indicated
is the actual yield during fiscal 1997; there is not stated yield.
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of Columbia
Federal's funds for use in lending and other investment activities. In
addition to deposits, Columbia Federal derives funds from FHLB advances,
interest payments and principal repayments on loans and mortgage-backed
securities, service charges and gains on the sale of assets. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Loan payments are a relatively stable source of funds, while deposit inflows
and outflows fluctuate more in response to general interest rates and money
market conditions.
DEPOSITS. Deposits are attracted principally from within Columbia
Federal's primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, money market accounts, passbook
savings accounts and term certificate accounts. At September 30, 1997, $16.2
million of Columbia Federal's deposits were individual retirement accounts
("IRAs"). Interest rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established periodically by the
management of Columbia Federal based on Columbia Federal's liquidity
requirements, growth goals and interest rates paid by competitors. Columbia
Federal does not use brokers to attract deposits.
At September 30, 1997, Columbia Federal's certificates of deposit totaled
$61.1 million, or 67.7% of total deposits. Of such amount, approximately $38.5
million in certificates of deposit mature within one year. Based on past
experience and Columbia Federal's prevailing pricing strategies, management
believes that a substantial percentage of such certificates will renew with
Columbia Federal at maturity. If there is a significant deviation from
historical experience, Columbia Federal can utilize borrowings from the FHLB as
an alternative to this source of funds.
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52
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Columbia Federal at the dates
indicated:
At September 30,
-----------------------------------------------------------
1997 1996 1995
------------------ ------------------- ------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
Transaction accounts:
- ---------------------
NOW accounts (1) $ 3,952 4.38% $ 4,339 4.58% $ 4,267 4.45%
Money market accounts (2) 11,919 13.21 13,641 14.41 15,624 16.31
Club Accounts 66 0.07 73 0.08 77 0.08
Passbook savings account (3) 13,167 14.60 13,519 14.28 13,478 14.07
------- ------ ------- ------ ------- ------
Total transaction accounts 29,104 32.26 31,572 33.35 33,446 34.91
Certificates of deposit:
- ------------------------
2.01 - 4.00% 42 0.05 42 0.04 50 0.05
4.01 - 6.00% 31,457 34.88 54,925 58.03 30,274 31.60
6.01 - 8.00% 29,592 32.81 8,118 8.58 32,036 33.44
------- ------ ------- ------ ------- ------
Total certificates of
deposit 61,091 67.74 63,085 66.65 62,360 65.09
------- ------ ------- ------ ------- ------
Total deposits (4) $90,195 100.00% $94,657 100.00% $95,806 100.00%
======= ====== ======= ====== ======= ======
____________
(1) Columbia Federal's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At September 30,
1997, 1996 and 1995, the weighted average rates on NOW accounts were
2.46%, 2.49% and 2.90%, respectively.
(2) Columbia Federal's weighted average interest rate paid on money market
accounts fluctuates with the general movement of interest rates. At
September 30, 1997, 1996 and 1995, the weighted average rates on money
market accounts were 3.06%, 3.14% and 3.50%, respectively.
(3) Columbia Federal's weighted average rate on passbook savings accounts
fluctuates with the general movement of interest rates. The weighted
average interest rate on passbook accounts was 3.02%, 3.07% and 3.44% at
September 30, 1997, 1996 and 1995, respectively.
(4) IRAs are included in the various certificates of deposit balances. IRAs
totaled $16.2 million, $16.5 million and $15.9 million as of September 30,
1997, 1996 and 1995, respectively.
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53
The following table shows rate and maturity information for Columbia
Federal's certificates of deposit as of September 30, 1997:
Amount Due
---------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
- ---- --------- ------------ ---------- --------- ---------
(In thousands)
2.01 - 4.00% $ 40 $2 $ - $ - $ 42
4.01 - 6.00% 22,982 5,484 2,991 - 31,457
6.01 - 8.00% 15,455 9,165 2,081 2,891 29,592
------- ------- ------ ------ -------
Total $38,477 $14,651 $5,072 $2,891 $61,091
======= ======= ====== ====== =======
The following table presents the amount of Columbia Federal's certificates
of deposit of $100,000 or more by the time remaining until maturity as of
September 30, 1997:
Average
Amount interest rate
------ -------------
(In thousands)
In quarter ended
December 31, 1997 $ 507 5.77%
March 31, 1998 820 5.91
June 30, 1998 271 6.05
September 30, 1998 500 5.78
After September 30, 1998 1,613 6.34
------ ----
Total time deposits $100,000 or greater $3,711 6.06%
====== ====
The following table sets forth Columbia Federal's deposit account balance
activity for the periods indicated:
Year ended September 30,
---------------------------------
1997 1996 1995
---------- ---------- ---------
(Dollars in thousands)
Beginning balance $ 94,657 $ 95,806 $ 93,807
Deposits 59,497 60,704 66,213
Withdrawals (67,647) (65,719) (67,956)
-------- -------- --------
Net increases (decreases) before interest
credited (8,150) (5,015) 1,743
Interest credited 3,688 3,866 3,742
-------- -------- --------
Ending balance $ 90,195 $ 94,657 $ 95,806
======== ======== ========
Net increase (decrease) $ (4,462) $ (1,149) $ 1,999
Percent increase (decrease) (4.71)% (1.20)% 2.13%
BORROWINGS. The FHLB System functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions.
See "REGULATION - Federal Home Loan Banks." As a member in good standing of
the FHLB of Cincinnati, Columbia Federal is authorized to apply for advances
from the FHLB of Cincinnati, provided certain standards of creditworthiness
have been met. Under current regulations, an association must meet certain
qualifications to be
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54
eligible for FHLB advances. The extent to which an association is eligible for
such advances will depend upon whether it meets the Qualified Thrift Lender
Test (the "QTL Test"). See "REGULATION - OTS Regulations -- Qualified Thrift
Lender Test." If an association meets the QTL Test, it will be eligible for
100% of the advances it would otherwise be eligible to receive. If an
association does not meet the QTL Test, it will be eligible for such advances
only to the extent it holds specified QTL Test assets. At September 30, 1997,
Columbia Federal was in compliance with the QTL Test.
Columbia Federal obtained advances from the FHLB of Cincinnati as set
forth in the following table:
At September 30,
----------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
Average balance outstanding $ 417 $- $1,083
Maximum amount outstanding at any month end
during the period 1,000 - 2,750
Balance outstanding at end of period - - -
Weighted average interest rate during the period 6.00 - 5.82
Weighted average interest rate at end of period - - -
COMPETITION
Columbia Federal competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, Columbia Federal competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. Columbia Federal
competes for loan originations primarily through the interest rates and loan
fees offered and through the efficiency and quality of services provided.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable. Seven savings
associations, twelve banks and seven credit unions have offices in Boone and
Kenton Counties. At June 30, 1996, Columbia Federal had approximately 4.4% of
all financial institution deposits in Boone and Kenton Counties and 14.5% of
all financial institution deposits in Ft. Mitchell, Kentucky. Quantitative
information regarding deposits and competing institutions is reported in The
Branches of Kentucky, compiled by Sheshunoff Information Services, Inc.
The size of financial institutions competing with Columbia Federal is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon
Columbia Federal.
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PROPERTIES
The following table sets forth certain information at September 30, 1997,
regarding the properties on which the main office and the branch offices of
Columbia Federal are located:
Owned Date Square Net
Location or leased acquired footage book value(1) Deposits
- -------- --------- -------- ------- ------------- --------
(In thousands)
Main Office:
2497 Dixie Highway
Ft. Mitchell, Kentucky
41017-3085 Owned 1957 8,536 $231 $34,200
Branch Offices:
Pike Street and Lee Street
Covington, Kentucky 41011 Owned 1937 4,520 141 18,324
612 Buttermilk Pike
Crescent Springs, Kentucky 41017 Owned 1981 1,848 134 10,240
3522 Dixie Highway
Erlanger, Kentucky 41018 Owned 1981 2,392 52 18,550
7550 Dixie Highway
Florence, Kentucky 41042 Owned 1996 3,025 748 8,881
(1) At September 30, 1997, Columbia Federal's office premises and equipment
had a total net book value of $1.6 million. For additional information
regarding Columbia Federal's office premises and equipment, see Note 8 of
Notes to the Financial Statements.
PERSONNEL
As of September 30, 1997, Columbia Federal had 38 full-time employees.
Columbia Federal believes that relations with its employees are good. Columbia
Federal offers health and life insurance benefits, a 401(k) plan and a defined
benefit pension plan. None of the employees of Columbia Federal are
represented by a collective bargaining unit.
LEGAL PROCEEDINGS
Columbia Federal is not presently involved in any legal proceedings of a
material nature. From time to time, Columbia Federal is a party to legal
proceedings incidental to its business to enforce its security interest in
collateral pledged to secure loans made by Columbia Federal.
MANAGEMENT OF CFKY
The Board of Directors of CFKY consists of seven members divided into two
classes. Each of the directors of CFKY is also a director of Columbia Federal.
The terms of Messrs. Mistler and Tobergte and Ms. Zembrodt expire in 1999, and
the terms of Messrs. Bluemlein, Kelly, Layne and Lynch expire in 2000.
The following persons are officers of CFKY: Kenneth R. Kelly, Chairman of
the Board; Robert V. Lynch, President; Carol S. Margrave, Secretary; Edward
Schwartz, Vice President; and Abijah Adams, Treasurer. After the consummation
of the Conversion, CFKY intends to have quarterly meetings of the Board of
Directors. CFKY does not currently pay directors' fees.
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MANAGEMENT OF COLUMBIA FEDERAL
DIRECTORS AND EXECUTIVE OFFICERS
The Charter of Columbia Federal provides for a Board of Directors
consisting of not less than five nor more than 15 directors, such number to be
fixed or changed in the Bylaws or by the members. The Board of Directors
currently consists of seven directors divided into three classes. One class of
directors is elected each year. Each director serves for a three-year term.
The Board of Directors met 13 times during the fiscal year ended September 30,
1997, for regular and special meetings. No director attended fewer than 75% of
the aggregate of such meetings and all meetings of the committees of which such
director was a member.
The following table presents certain information with respect to the
present directors and executive officers of Columbia Federal:
Date of Term
Name Age(1) Position with Columbia Federal service expires
- ---- ------ ------------------------------ ------- -------
J. Robert Bluemlein 79 Director 1970 1999
Kenneth R. Kelly 76 Director, Chairman of the Board 1965 2000
John C. Layne 48 Director 1995 1998
Robert V. Lynch 52 Director, President, CEO 1971 1999
Daniel T. Mistler 55 Director 1997 2000
Fred A. Tobergte, Sr. 79 Director 1981 1999
Geraldine Zembrodt 53 Director 1993 1998
Mary Jane Lucas 61 Senior Vice President 1971 -
George Raybourne 44 Vice President 1972 -
Edward Schwartz 48 Vice President 1972 -
Harold E. Taylor 56 Vice President 1996
Abijah Adams 52 Controller 1978 -
Carol S. Margrave 42 Secretary, Treasurer 1979 -
____________
(1) At September 30, 1997.
Mr. Bluemlein retired in 1983 after serving as Vice President of Columbia
Federal from 1970 to 1983. Prior to becoming Vice President and Director of
Columbia Federal, Mr. Bluemlein was Executive Vice President of Star Federal.
Mr. Kelly has been Chairman of the Board of Columbia Federal since 1983.
He has served as President and co-owner of Kelly Brothers Lumber Co., a lumber
and building supply store in Covington, Kentucky, since its founding in 1947.
Mr. Layne has been a partner in Rafalske & Layne, LLP, Certified Public
Accountants, which has its offices in Cincinnati, Ohio, since 1982.
Mr. Lynch has been employed by Columbia Federal since 1971, served as
Treasurer from 1974 to 1977, has served as President and Chief Executive
Officer since 1977 and has been a director since 1978.
Mr. Mistler is an attorney who joined Deters, Benzinger & LaVelle, PSC, a
law firm located in Covington, Kentucky, in 1984 and now serves on its Board of
Directors and manages its residential real estate department.
Mr. Tobergte served the Kentucky Department of Transportation for twenty
years, where he held various positions, including that of Enforcement Officer,
prior to his retirement in 1981.
Ms. Zembrodt has co-owned and operated The Village Gallerie, an art and
framing gallery located in Ft. Wright, Kentucky, since May 1995. Ms. Zembrodt
previously co-owned and operated The Sample Shop, a gift shop then located in
Ft. Wright, Kentucky, from 1982 to May 1994.
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Ms. Lucas has served Columbia Federal since 1971, having served as
Secretary and Treasurer from 1979 until 1993, when she became Vice President.
Ms. Lucas became Columbia Federal's Senior Vice President in 1994 and heads
Columbia Federal's Loan Department.
Mr. Raybourne has been employed by Columbia Federal since 1972, serving as
Assistant Vice President from 1979 to 1993, when he became Vice President. Mr.
Raybourne is responsible for property appraisals, which he performs, and
property management.
Mr. Schwartz has been employed by Columbia Federal since 1972, serving as
Assistant Vice President until 1994, when he became Vice President. Mr.
Schwartz is responsible for IRA's and mortgage servicing.
Mr. Taylor joined Columbia Federal in July 1996 as Vice President in
charge of lending. Prior to joining Columbia Federal, Mr. Taylor was employed
by Lexington Federal Savings Bank in Lexington, Kentucky, serving as its Vice
President and Loan Department Manager since 1991.
Mr. Adams joined Columbia Federal as Accountant in 1978 and became
Controller in 1987.
Ms. Margrave has been employed by Columbia Federal since 1979, serving as
Branch Manager from 1983 to 1992 and Assistant Secretary from 1992 to 1993,
when she became Secretary and Treasurer.
COMMITTEES OF DIRECTORS
The Board of Directors of Columbia Federal has an Audit Committee. The
Audit Committee recommends audit firms to the full Board of Directors and
reviews and approves the annual independent audit report. The members of the
Audit Committee are Messrs. Bluemlein, Kelly and Tobergte. During fiscal year
1997, the Audit Committee met four times.
The full Board of Directors periodically serves as a compensation
committee to determine compensation for executive officers. The Board of
Directors did not meet in such a capacity in fiscal 1997.
Columbia Federal does not have a nominating committee.
COMPENSATION
Each director of Columbia Federal, except for the Chairman of the Board,
receives a retainer fee of $1,025 per month for service as a director of
Columbia Federal. Each director also receives $100 per Audit Committee meeting
attended. The Chairman of the Board receives a monthly fee of $1,260. During
fiscal year 1997, Columbia Federal paid a total of $86,465 in directors'
compensation.
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The following table presents certain information regarding the cash
compensation received by the President and Chief Executive Officer of Columbia
Federal. No other executive officer of Columbia Federal received compensation
exceeding $100,000 during the fiscal year ended September 30, 1997.
SUMMARY COMPENSATION TABLE
Name and Annual Compensation
Principal ------------------------- All Other
Position Year Salary ($)(1) Bonus ($) Compensation
- --------------------------------------------------------------------------
Robert V. Lynch, 1997 $133,800(2) $7,075 $3,799(4)
President and Chief
Executive Officer 1996 117,442(3) 2,075 3,168(4)
- ------------
(1) Does not include amounts attributable to other miscellaneous benefits
received by executive officers. The cost to Columbia Federal of providing
such benefits to Mr. Lynch was less than 10% of his cash compensation
(2) Includes a salary of $121,650 and directors' fees of $12,150.
(3) Includes a salary of $105,842 and directors' fees of $11,600.
(4) Consists of Columbia Federal's contribution to Mr. Lynch's 401(k) defined
contribution plan account.
EMPLOYEE STOCK OWNERSHIP PLAN
CFKY has established the ESOP for the benefit of employees of CFKY and
Columbia Federal age 21 or older who have completed at least one year of
full-time service with CFKY or Columbia Federal. The establishment of the ESOP
and the purchase by the ESOP of the Common Shares of CFKY are subject to the
receipt of a favorable determination letter on the qualified status of the ESOP
under applicable provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), from the Commissioner of Internal Revenue ("Commissioner"). CFKY
will submit to the Commissioner an application for a favorable determination
letter on the qualified status of the ESOP. Although no assurances can be
given, CFKY expects that the ESOP will receive a favorable determination letter
from the Commissioner.
CFKY intends to accept a promissory note from the ESOP in payment for 8%
of the Common Shares sold in connection with the Conversion. The loan will be
secured by the shares purchased with the loan proceeds and will be repaid by
the ESOP with funds from Columbia Federal's discretionary contributions to the
ESOP and earnings on ESOP assets. Shares purchased with such loan proceeds
will be held in a suspense account for allocation among participants as the
loan is repaid. As payments are made and the shares are released from the
suspense account, such shares will be validly issued, fully paid and
non-assessable.
Contributions to the ESOP and shares released from the suspense account
will be allocated pro rata to participants on the basis of compensation.
Except for participants who retire, become disabled, or die during the plan
year, all other participants must have completed at least 1,000 hours of
service and be employed on the last day of the plan year in order to receive an
allocation. Benefits are immediately fully vested. Benefits may be paid
either in CFKY Common Shares or in cash. Benefits may be payable upon
retirement, death, disability or separation from service. Benefits payable
under the ESOP cannot be estimated. Pursuant to SOP 93-6, the fair market
value of ESOP shares allocated during a period are expensed during the period.
A committee appointed by the Board of Directors of CFKY will administer
the ESOP. The Common Shares and other ESOP funds will be held and invested by
a trustee (the "ESOP Trustee"). The ESOP Committee may instruct the ESOP
Trustee regarding investments of funds contributed to the ESOP. The ESOP
Trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Shares for which employees do not
give instructions and unallocated shares will be voted by the ESOP Trustee in
its sole discretion.
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From time to time, the ESOP may purchase additional Common Shares of CFKY
through purchases in the market or directly from CFKY. No such purchases are
currently contemplated. If the ESOP purchases newly issued shares from CFKY,
such purchases would have a dilutive effect on the interests of CFKY's
shareholders.
STOCK OPTION PLAN
The Board of Directors of CFKY expects to adopt the Stock Option Plan,
subject to the approval by the shareholders of CFKY. A number of Common Shares
equal to 10% of the Common Shares to be issued in connection with the
Conversion is expected to be reserved for issuance by CFKY upon the exercise of
options to be granted to certain directors, officers and employees of Columbia
Federal and CFKY from time to time under the Stock Option Plan. The purposes
of the Stock Option Plan include retaining and providing incentives to the
directors, officers and employees of CFKY and Columbia Federal by facilitating
their purchase of a stock interest in CFKY.
Options granted to the officers and employees under the Stock Option Plan
may be "incentive stock options" within the meaning of Section 422 of the Code
(an "ISO"). Options granted under the Stock Option Plan to directors who are
not full-time employees of CFKY or Columbia Federal will not qualify under the
Code and thus will not be incentive stock options ("non-qualified stock
options"). Although any eligible director, officer or employee of Columbia
Federal and CFKY may receive non-qualified stock options, Columbia Federal
anticipates that the non-employee directors of Columbia Federal and CFKY will
receive non-qualified stock options, and other eligible participants will
receive incentive stock options.
The option exercise price of each option granted under the Stock Option
Plan will be determined by the committee of directors appointed to administer
the Stock Option Plan at the time of the grant, with the exception that the
exercise price for an option must not be less than 100% of the fair market
value of the shares on the date of the grant. No stock option will be
exercisable after the expiration of ten years from the date that it is granted,
except that in the case of an ISO granted to an employee who owns more than 10%
of CFKY's outstanding Common Shares at the time an ISO is granted under the
Stock Option Plan, the exercise price of such an ISO may not be less than 110%
of the fair market value of the shares on the date of the grant, and the ISO
shall not be exercisable after the expiration of five years from the date it is
granted. Options will become first exercisable to the extent of no more than
one fifth per year.
An option cannot be transferred or assigned other than by will or in
accordance with the laws of descent and distribution. "Termination for cause,"
as defined in the Stock Option Plan, will result in the annulment of any
outstanding options.
CFKY will receive no monetary consideration for the granting of options
under the Stock Option Plan. Upon the exercise of options, CFKY will receive
payment of cash, CFKY Common Shares or a combination of cash and Common Shares
from option recipients in exchange for shares issued.
The Stock Option Plan will be administered by a committee of directors
composed of at least three directors of CFKY (the "Committee"). The Committee
may grant options under the Stock Option Plan at such times as the committee
members deem most beneficial to Columbia Federal and CFKY on the basis of the
individual participant's position, duties and responsibilities, the value of
his or her services to Columbia Federal and CFKY and any other factors deemed
relevant. A grant of options under the Stock Option Plan is expected to occur
on the date of approval of the Stock Option Plan by the shareholders of CFKY.
The members of the Committee have not yet been appointed, and specific grants
have not been proposed. The directors of CFKY intend, however, to make such
grants in accordance with OTS regulations which provide that no individual may
receive options to purchase more than 25% of the shares which may be the
subject of options pursuant to the Stock Option Plan, and directors who are not
employees of CFKY or Columbia Federal may not receive options to purchase more
than 5% of such shares individually or 30% in the aggregate.
Pursuant to OTS regulations, the Stock Option Plan may not be approved by
the shareholders of CFKY until at least six months after the Conversion is
completed. It is expected that options will be granted immediately after the
shareholders approve the Stock Option Plan.
RECOGNITION AND RETENTION PLAN AND TRUST
The Board of Directors of CFKY intends to adopt the RRP, subject to
approval of the shareholders of CFKY as a means of providing directors and
certain key employees of Columbia Federal with an ownership interest in CFKY in
a manner designed
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to compensate such directors and key employees for services to Columbia
Federal. CFKY expects to contribute sufficient funds to enable the RRP to
purchase Common Shares in the open market or to purchase authorized but
unissued shares from CFKY in an amount equal to up to 4% of the Common Shares
sold in connection with the Conversion. Assuming the sale of 2,020,000 shares
in connection with the Conversion, 80,800 shares would be purchased by the RRP.
The purchase of authorized but unissued shares would have a dilutive effect on
the interests of CFKY's shareholders. See "CAPITALIZATION" and "PRO FORMA
DATA." While no specific awards have yet been proposed, the directors of
Columbia Federal intend to make such awards in accordance with OTS regulations
which provide that no individual may receive more than 25% of the shares
awarded pursuant to the RRP, and directors who are not employees of CFKY or
Columbia Federal may not receive more than 5% of such shares individually or
30% in the aggregate.
Until shares awarded are earned by the participant, such shares will be
forfeited in the event that the employment of the employee is terminated for
cause. One-fifth of such shares will be earned and nonforfeitable on each of
the first five anniversaries of the date of the awards. In the event of the
death or disability of a participant, however, the participant's shares will be
deemed to be earned and nonforfeitable upon such date. A committee to be
appointed by the Board of Directors of Columbia Federal will administer the RRP
and determine the number of shares to be awarded to eligible participants. Two
directors of Columbia Federal are expected to serve as the trustees of the RRP
Trust. Each participant will be entitled to the benefit of any dividends or
other distributions paid on shares awarded but not yet earned, but such
unearned shares will be voted by the trustees in their discretion.
Compensation expense in the amount of the fair market value of the Common
Shares at the date of the award to the employee will be recognized as the
shares are earned. In the event of a termination of a participant's employment
following a change in control of Columbia Federal or CFKY, all shares awarded
to such participant in the RRP become earned and nonforfeitable.
The RRP must be approved by the shareholders of CFKY. Pursuant to OTS
regulations, the shareholders may not approve the RRP until six months after
the completion of the Conversion. It is expected that the RRP will purchase
shares of CFKY and that awards will be made immediately after shareholder
approval of the RRP.
RETIREMENT BENEFIT PLANS
Columbia Federal provides a 401(k) defined contribution plan (the "401(k)
Plan") and a defined benefit pension plan (the "Pension Plan") for all
employees who have completed one year of service with Columbia Federal and have
attained age 21.
Pursuant to the 401(k) Plan, a participant may elect to contribute up to
15% of the participant's annual compensation on a tax-deferred basis. Columbia
Federal contributes an amount equal to 50% of a participant's contribution, up
to the first 3% of the participant's salary. The matching percentage is
subject to change in the discretion of Columbia Federal's Board of Directors.
All participants are fully vested.
The normal Pension Plan retirement benefit payable upon retirement at or
after age 65 is the product of (a) 1% times (b) years of service times (c)
average annual salary for the five consecutive years of highest salary.
Employees become 100% vested in the Pension Plan after five years of service.
Participants are automatically 100% vested at 65 years of age regardless of
years of service. The Pension Plan also includes provisions for early
retirement, disability retirement and a death benefit. The compensation
covered by the Pension Plan includes the sum of (a) the employee's total
taxable compensation and (b) any pre-tax contributions to the 401(k) Plan less
(c) the amount of any compensation deferred from a prior year.
During the fiscal year ended September 30, 1997, Columbia Federal
contributed $75,000 to the Pension Plan. The estimated annual benefit payable
upon retirement at normal retirement age to Mr. Lynch is $29,400 per year.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Columbia Federal intends to enter into an employment agreement with Robert
V. Lynch (the "Employment Agreement"). Columbia Federal currently has no
employment agreements with any of its officers. The Employment Agreement,
which will become effective upon completion of the Conversion, provides for a
term of three years and a salary and performance review by the Board of
Directors not less often than annually, as well as inclusion of the employee in
any formally established employee benefit, bonus, pension and profit-sharing
plans for which senior management personnel are eligible. The Employment
Agreement also provides for vacation and sick leave.
The Employment Agreement is terminable by Columbia Federal at any time.
In the event of termination by Columbia Federal for "just cause," as defined in
the Employment Agreement, Mr. Lynch will have no right to receive any
compensation or
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other benefits for any period after such termination. In the event of
termination by Columbia Federal other than for just cause, at the end of the
term of the Employment Agreement or in connection with a "change of control,"
as defined in the Employment Agreement, Mr. Lynch will be entitled to a
continuation of salary payments for a period of time equal to the term of the
Employment Agreement and a continuation of benefits substantially equal to
those being provided at the date of termination of employment until the
earliest to occur of the end of the term of the Employment Agreement or the
date the employee becomes employed full-time by another employer.
The Employment Agreement also contains provisions with respect to the
occurrence of a "change of control" within six months after or within one year
before (1) the termination of employment of Mr. Lynch for any reason other than
just cause, retirement or termination at the end of the term of the agreement,
(2) a change in the capacity or circumstances in which he is employed or (3) a
material reduction in his responsibilities, authority, compensation or other
benefits provided under the Employment Agreement without his written consent.
In the event of any such occurrence, Mr. Lynch will be entitled to payment of
an amount equal to three times the greater of his annual salary set forth in
the Employment Agreement or the annual salary payable to Mr. Lynch as a result
of any annual salary review. In addition, Mr. Lynch would be entitled to
continued coverage under all benefit plans until the earliest of the end of the
term of the Employment Agreement or the date on which he is included in another
employer's benefit plans as a full-time employee. The maximum he may receive,
however, is limited to an amount which will not result in the imposition of a
penalty tax pursuant to Section 280G(b)(3) of the Code or exceed limitations
imposed by the OTS. "Control," as defined in the Employment Agreement,
generally refers to the acquisition by any person or entity of the ownership or
power to vote 25% or more of the voting stock of Columbia Federal or CFKY, the
control of the election of a majority of Columbia Federal's or CFKY's directors
or the exercise of a controlling influence over the management or policies of
Columbia Federal or CFKY.
The aggregate payment that would have been made to Mr. Lynch assuming his
termination at September 30, 1997, following a change of control, would have
been approximately $286,596.
Columbia Federal also intends to enter into severance agreements with five
other executive officers of Columbia Federal. Such severance agreements will
contain provisions for payments upon a change of control as are contained in
Mr. Lynch's employment agreement. The aggregate payment that would have been
made under such severance agreements assuming the termination of all five of
such officers at September 30, 1997, assuming such a change of control, would
have been approximately $727,998.
CERTAIN TRANSACTIONS WITH COLUMBIA FEDERAL
Columbia Federal makes loans to directors who are not full-time employees
of Columbia Federal in the ordinary course of business and on the same terms
and conditions, including interest rates and collateral, as those of comparable
loans to other persons. On February 13, 1997, Columbia Federal adopted a
policy whereby Columbia Federal will make first mortgage loans to its full-time
employees, including directors and officers who are full-time employees,
without closing costs and at an interest rate that is one percent less than the
interest rate charged for comparable loans to other persons, subject to the
following conditions: (i) the employee must sign an agreement that the
interest rate will be increased by one percent should the employee's employment
with Columbia Federal terminate for any reason; (ii) the employee must
reimburse Columbia Federal for any related out-of-pocket expenses that are paid
to a third party; (iii) the loan must be for the employee's personal
single-family residence; (iv) the loan must satisfy all of Columbia Federal's
normal underwriting criteria; (v) each employee may only have one outstanding
loan on favorable terms at any one time; and, (vi) Columbia Federal's Board of
Directors must approve the loan.
The following table sets forth certain information regarding loans, made
on terms more favorable that those offered to the public, to executive officers
of Columbia Federal whose indebtedness to Columbia Federal exceeded $60,000 at
any time since October 1, 1995:
Largest balance Balance at
Loan origination during 2 years September 30,
Name Position date Collateral ended 9/30/97 1997
- ----------------- -------------------- ---------------- ------------------ ------------------ -------------
George Raybourne Vice President 7/1/97 Personal Residence $128,000 $127,822
Carol S. Margrave Secretary, Treasurer 5/9/97 Personal Residence 92,000 91,637
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Loans made to directors and executive officers of Columbia Federal and their
related interests in amounts of at least $60,000 and made on the same terms and
conditions, including interest rates and collateral, as those of comparable
loans to other persons totaled $70,323 at September 30, 1997. None of the
outstanding loans to directors and executive officers involve more than the
normal risk of collectibility or present other unfavorable features, and all
are current in their payments.
REGULATION
GENERAL
As a savings association organized under the laws of the United States,
Columbia Federal is subject to regulatory oversight by the OTS. Because
Columbia Federal's deposits are insured by the FDIC, Columbia Federal is also
subject to examination and regulation by the FDIC. Columbia Federal must file
periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by the OTS to determine
whether Columbia Federal is in compliance with various regulatory requirements
and is operating in a safe and sound manner. Columbia Federal is a member of
the FHLB of Cincinnati.
CFKY will be a savings and loan holding company within the meaning of the
Home Owners Loan Act, as amended (the "HOLA"). Consequently, CFKY will be
subject to regulation, examination and oversight by the OTS as the holding
company of Columbia Federal and will be required to submit periodic reports to
the OTS. Because CFKY is a corporation organized under Ohio law, CFKY is also
subject to the provisions of the Ohio Revised Code applicable to corporations
generally.
Congress is considering legislation to eliminate the federal savings
association charter and the separate federal regulation of savings
associations. The Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and Columbia
Federal may be regulated under federal law as a bank or be required to change
its charter. Such change in regulation or charter would likely change the
range 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. At this time, CFKY cannot predict whether or when
Congress may actually pass legislation regarding CFKY's and Columbia Federal's
regulatory requirements or charter. Although such legislation may change or
limit the activities in which either CFKY or Columbia Federal may engage, it is
not anticipated that the current activities of CFKY or Columbia Federal will be
materially affected by such changes or limitations.
OTS REGULATIONS
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations the
deposits of which are insured by the FDIC in the SAIF and all federally
chartered savings institutions. The OTS issues regulations governing the
operation of savings associations, regularly examines such institutions and
imposes assessments on savings associations based on their asset size to cover
the costs of this supervision and examination. It also promulgates regulations
that prescribe the permissible investments and activities of federally
chartered savings associations, including the type of lending that such
associations may engage in and the investments in real estate, subsidiaries and
securities they may make. The OTS also may initiate enforcement actions
against savings associations and certain persons affiliated with them for
violations of laws or regulations or for engaging in unsafe or unsound
practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending laws.
These laws govern, among other things, truth-in-lending disclosure, equal
credit opportunity, fair credit reporting and community reinvestment. Failure
to abide by federal laws and regulations governing community reinvestment could
limit the ability of an association to open a new branch or engage in a merger
transaction. Community reinvestment regulations evaluate how well and to what
extent an institution lends and invests in its designated service area, with
particular emphasis on low-to-moderate income areas and borrowers. Columbia
Federal has received a "Satisfactory" examination rating under those
regulations.
REGULATORY CAPITAL REQUIREMENTS. Columbia Federal is required by OTS
regulations to meet certain minimum capital requirements. These requirements
call for tangible capital of 1.5% of adjusted total assets, core capital (which
for
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Columbia Federal is equal to tangible capital) of 3% of adjusted total assets,
and risk-based capital (which for Columbia Federal consists of core capital and
general valuation allowances) equal to 8% of risk-weighted assets. Assets and
certain off balance sheet items are weighted at percentage levels ranging from
0% to 100% depending on their relative risk.
The OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4%
to 5%, depending on the association's examination rating and overall risk.
Columbia Federal does not anticipate that it will be adversely affected if the
core capital requirement regulation is amended as proposed. Columbia Federal's
core capital ratio at September 30, 1997, was 12.59% and will increase to
17.96% on a pro forma basis at September 30, 1997, assuming the receipt of
approximately $19.5 million in net proceeds from the sale of the Common Shares
at the mid-point of the Valuation Range and the investment of 50% of the net
proceeds by CFKY in Columbia Federal. For information concerning Columbia
Federal's capital, see "REGULATORY CAPITAL COMPLIANCE."
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component, and Columbia Federal currently qualifies for such exemption.
Pending implementation of the interest rate risk component, the OTS has the
authority to impose a higher individualized capital requirement on any savings
association it deems to have excess interest rate risk. The OTS also may
adjust the risk-based capital requirement on an individualized basis to take
into account risks due to concentrations of credit and non-traditional
activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. In addition, the OTS can downgrade an
association's designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or, after notice
and an opportunity for hearing, if the institution is deemed to be in an unsafe
or unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institution must be
placed in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. Columbia Federal's
capital at September 30, 1997, met the standards for a well-capitalized
association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control
of the institution if, after such distribution or payment, the institution
would be undercapitalized. In addition, each company controlling an
undercapitalized institution must guarantee that the institution will comply
with the terms of an OTS-approved capital plan until the institution has been
adequately capitalized on an average during each of four consecutive calendar
quarters and must provide adequate assurances of performance. The aggregate
liability pursuant to such guarantee is limited to the lesser of (a) an amount
equal to 5% of the institution's total assets at the time the institution
became undercapitalized or (b) the amount which is necessary to bring the
institution into compliance with all capital standards applicable to such
institution at the time the institution fails to comply with its capital
restoration plan.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends,
repurchases and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association.
For purposes of the capital distribution regulations, each institution is
categorized into one of three tiers. The first rating category is Tier 1,
consisting of associations that, before and after the proposed capital
distribution, meet their fully phased-in capital requirement. Associations in
this category may make capital distributions during any calendar year equal to
the greater of (i) 100% of its net income, current year-to-date, plus 50% of
the amount by which the lesser of the association's tangible, core or
risk-based capital exceeds its fully phased-in capital requirement for such
capital component, as measured at the beginning of the calendar year, or (ii)
the amount authorized for a Tier 2 association. The second category, Tier 2,
consists of associations
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that, before and after the proposed capital distribution, meet their current
minimum, but not fully phased-in capital requirement. Associations in this
category may make capital distributions up to 75% of their net income over the
most recent four quarters. Tier 3 associations do not meet their current
minimum capital requirement and must obtain OTS approval of any capital
distribution. A Tier 1 association deemed to be in need of more than normal
supervision by the OTS may be treated as a Tier 2 or a Tier 3 association.
Columbia Federal meets the requirements for a Tier 1 association and has
not been notified of any need for more than normal supervision. Columbia
Federal will be prohibited from declaring or paying any dividends or from
purchasing any of its stock if, as a result of such dividend or such purchase,
Columbia Federal's net worth would be reduced below the amount required to be
maintained for the liquidation account established in connection with the
conversion. As a subsidiary of CFKY, Columbia Federal will also be required to
give the OTS 30 days' notice prior to declaring any dividend on its common
shares. The OTS may object to the dividend during that 30-day period based on
safety and soundness concerns. Moreover, the OTS may prohibit any capital
distribution otherwise permitted by regulation if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
In December 1994, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, an association not owned by a
holding company and having an examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if it remains adequately capitalized,
as described above, after the distribution is made. Any other association
seeking to make a capital distribution that would not cause the association to
fall below the capital levels to qualify as adequately capitalized or better
would have to provide notice to the OTS. Except under limited circumstances
and with OTS approval, no capital distribution would be permitted if it caused
the association to become undercapitalized.
LIQUIDITY. OTS regulations require that each savings association maintain
an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet
these liquidity requirements. The eligible liquidity of Columbia Federal, as
computed under current regulations, at September 30, 1997, was approximately
$21.1 million, or 23.5%, and exceeded the then applicable 5% liquidity
requirement by approximately $16.6 million, or 18.5%. Effective November 24,
1997, the liquidity requirement was reduced to 4%. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Liquidity and Capital Resources."
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL Test. Prior to September 30, 1996, the QTL Test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally
related to domestic residential real estate and manufactured housing and
include stock issued by any FHLB, the FHLMC or the FNMA. Under this test 65%
of an institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business, and 20% of liquid assets) must
consist of QTI on a monthly average basis in 9 out of every 12 months.
Congress created a second QTL Test, effective September 30, 1996, pursuant to
which a savings association may also qualify as a QTL thrift if at least 60% of
the institution's assets (on a tax basis) consist of specified assets
(generally loans secured by residential real estate or deposits, educational
loans, cash, and certain governmental obligations). The OTS may grant
exceptions to the QTL Test under certain circumstances. If a savings
association fails to meet the QTL Test, the association and its holding company
become subject to certain operating and regulatory restrictions. A savings
association that fails to meet the QTL Test will not be eligible for new FHLB
advances. At September 30, 1997, Columbia Federal met the QTL Test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount that
a savings association may lend to one borrower to an amount equal to 15% of the
savings association's total capital under the regulatory capital requirements
plus any additional loan reserve not included in total capital. A savings
association may loan to one borrower an additional amount not to exceed 10% of
total capital plus additional reserves if the additional loan amount is fully
secured by certain forms of "readily marketable collateral." Real estate is
not considered "readily marketable collateral." Certain types of loans are not
subject to these limits. In applying these limits, loans to certain borrowers
may be aggregated. Notwithstanding the specified limits, an association may
lend to one borrower up to $500,000 "for any purpose." See "THE BUSINESS OF
COLUMBIA FEDERAL - Lending Activities -- Loan Originations, Purchases and
Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform
to the lending limits on loans to one borrower and the total of such loans
cannot exceed the association's total regulatory capital plus additional loan
reserves (or 200% of such capital amount for qualifying institutions with less
than $100 million in assets). Most loans to directors, executive officers and
principal shareholders must be approved in
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advance by a majority of the "disinterested" members of the board of directors
of the association with any "interested" director not participating. All loans
to directors, executive officers and principal shareholders must be made on
terms substantially the same as offered in comparable transactions to the
general public or as offered to all employees in a company-wide benefit
program. Loans to executive officers are subject to additional limitations.
Columbia Federal was in compliance with such restrictions at September 30,
1997. See "MANAGEMENT OF COLUMBIA FEDERAL - Certain Transactions with Columbia
Federal."
Savings associations must comply with Sections 23A and 23B of the Federal
Reserve Act (the "FRA") pertaining to transactions with affiliates. An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. After
the Conversion, CFKY will be an affiliate of Columbia Federal. Generally,
Sections 23A and 23B of the FRA (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, (ii) limit the aggregate of all such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus, and (iii) require
that all such transactions be on terms substantially the same, or at least as
favorable to the institution, as those provided in transactions with a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions. In addition to the limits in Sections 23A and 23B, a savings
association may not make any loan or other extension of credit to an affiliate
unless the affiliate is engaged only in activities permissible for a bank
holding company and may not purchase or invest in securities of any affiliate
except shares of a subsidiary. Columbia Federal was in compliance with these
requirements and restrictions at September 30, 1997.
HOLDING COMPANY REGULATION. Upon consummation of the Conversion, CFKY
will be a savings and loan holding company within the meaning of the Home
Owners' Loan Act (the "HOLA"). As such, CFKY will register with the OTS and
will be subject to OTS regulations, examination, supervision and reporting
requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
The Board of Directors presently intends to operate CFKY as a unitary
savings and loan holding company. There are generally no restrictions on the
activities of a unitary savings and loan holding company, and such companies
are the only financial institution holding companies which may engage in
commercial, securities and insurance activities without limitation. Congress
is considering legislation which may limit CFKY's ability to engage in such
activities and CFKY cannot predict if and in what form these proposals might
become law. However, such limits would not impact CFKY's initial activity of
holding stock of Columbia Federal. The broad latitude to engage in activities
under current law can be restricted, however, if the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association. The OTS
may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the foregoing rules as to permissible
business activities of a unitary savings and loan holding company, if the
savings association subsidiary of a holding company fails to meet the QTL
Tests, then such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies. At September 30, 1997,
Columbia Federal met the QTL Tests. See "Qualified Thrift Lender Test."
If CFKY were to acquire control of another savings institution other than
through a merger or other business combination with Columbia Federal, CFKY
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings association meets the QTL Test,
the activities of CFKY and any of its subsidiaries (other than Columbia Federal
or other subsidiary savings associations) would thereafter be subject to
further restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof which is not a savings
institution shall commence, or shall continue after becoming a multiple savings
and loan holding company or subsidiary thereof, any business activity other
than (i) furnishing or performing management services for a subsidiary savings
institution, (ii) conducting an insurance agency or escrow
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business, (iii) holding, managing or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by federal
regulation as of March 5, 1987, to be engaged in by multiple holding companies,
or (vii) those activities authorized by the FRB as permissible for bank holding
companies, unless the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the OTS prior to being engaged in by a multiple
holding company.
The OTS may also approve an acquisition resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only, if the multiple savings and loan holding company
involved controls a savings association which operated a home or branch office
in the state of the association to be acquired as of March 5, 1987, or if the
laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions. Bank holding companies have had more expansive authority to make
interstate acquisitions than savings and loan holding companies since August
1995.
FDIC REGULATIONS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of federally insured banks and
thrifts and safeguards the safety and soundness of the banking and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations.
The FDIC is required to maintain designated levels of reserves in each fund.
Columbia Federal is a member of the SAIF and its deposit accounts are insured
by the FDIC up to the prescribed limits. The FDIC has examination authority
over all insured depository institutions, including Columbia Federal, and has
authority to initiate enforcement actions against federally insured savings
associations if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both
SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effective in mid-1995.
Federal legislation, which was effective September 30, 1996, provided for the
recapitalization of the SAIF by means of a special assessment of $.657 per $100
of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. Certain banks holding SAIF deposits are required to
pay the same special assessment on 80% of deposits at March 31, 1995. In
addition, the cost of prior thrift failures, which had previously been paid
only by SAIF members, will also be paid by BIF members. As a result, BIF
assessments for healthy banks in 1997 were $.013 per $100 in deposits, and SAIF
assessments for healthy institutions in 1997 were $.064 per $100 in deposits.
These rates are not expected to change in 1998.
Columbia Federal is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. Columbia Federal had $90.0
million in SAIF-insured deposits at March 31, 1995. Columbia Federal paid a
special assessment of $592,000 in November 1996, which was accounted for and
recorded as of September 30, 1996. This assessment was tax-deductible but
reduced earnings for the year ended September 30, 1996.
The FDIC has examination authority over all insured depository
institutions, including Columbia Federal, and has authority to initiate
enforcement actions against federally insured savings associations if the FDIC
does not believe the OTS has taken appropriate action to safeguard safety and
soundness and the deposit insurance fund.
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FRB REGULATIONS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $47.8
million (subject to an exemption of $4.7 million), and of 10% of net
transaction accounts in excess of $47.8 million. At September 30, 1997,
Columbia Federal was in compliance with its reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. See
"THE BUSINESS OF COLUMBIA FEDERAL - Deposits and Borrowings." Columbia Federal
is a member of the FHLB of Cincinnati and must maintain an investment in the
capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1%
of the aggregate outstanding principal amount of Columbia Federal's residential
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, and 5% of its advances from the FHLB. Columbia Federal
is in compliance with this requirement with an investment in stock of the FHLB
of Cincinnati of $1,260,000 at September 30, 1997.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities
representing a whole interest in such loans; securities issued, insured or
guaranteed by the U.S. Government or an agency thereof; deposits in any FHLB;
or other real estate related collateral (up to 30% of the member association's
capital) acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers. All long-term advances by each FHLB must be made only
to provide funds for residential housing finance.
TAXATION
FEDERAL TAXATION
CFKY and Columbia Federal are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, CFKY and Columbia Federal may be subject to an alternative minimum
tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on
"alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum tax is imposed to
the extent it exceeds the corporation's regular income tax. Payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. However, the Taxpayer Relief Act of 1997 repealed the
alternative minimum tax for certain "small corporations" for tax years
beginning after December 31, 1997. A corporation initially qualifies as a
small corporation if it had average gross receipts of $5,000,000 or less for
the three tax years ending with its first tax year beginning after December 31,
1996. Once a corporation is recognized as a small corporation, it will
continue to be exempt from the alternative minimum tax for as long as its
average gross receipts for the prior three-year period does not exceed
$7,500,000. In determining if a corporation meets this requirement, the first
year that it achieved small corporation status is not taken into consideration.
Columbia Federal's average gross receipts for the three tax years ending
on September 30, 1997, is $8.0, and as a result, Columbia Federal does not
qualify as a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions, including Columbia Federal, were allowed deductions for
bad debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions could compute deductions for bad debts using
either the specific charge off method of Section 166 of the Code, or one of the
two reserve methods of Section
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593 of the Code. The reserve methods under Section 593 of the Code permitted a
thrift institution annually to elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions,
or (ii) the "experience" method that also was available to small banks. Under
the "percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the
greater of (i) an amount based on its actual average experience for losses in
the current and five preceding taxable years, or (ii) an amount necessary to
restore the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method. For tax years 1995, 1994 and 1993,
Columbia Federal used the percentage of taxable income method because such
method provided a higher bad debt deduction than the experience method.
The Small Business Act eliminated the percentage of taxable income reserve
method of accounting for bad debts by thrift institutions, effective for
taxable years beginning after 1995. Thrift institutions that would be treated
as small banks are allowed to utilize the experience method applicable to such
institutions, while thrift institutions that are treated as large banks are
required to use only the specific charge off method.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Section 481(a) of the Code requires certain amounts
to be recaptured with respect to such change. Generally, the amounts to be
recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will
be taken into account ratably over a six-taxable year period, beginning with
the first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that becomes
a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real
estate) and its reserve for losses on nonqualifying loans (all other types of
loans) as of the close of its last taxable year beginning before January 1,
1996, over (ii) the balances of such reserves as of the close of its last
taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves").
In the case of a thrift institution that becomes a small bank, the amount of
the institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before January
1, 1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less then its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is
a loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential real and church property and certain mobile homes), but only to the
extent that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act which require recapture in
the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (excess to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated
earnings and profits; second, out of the pre-1988 reserves; and third, out of
such other accounts as may be proper. To the extent a distribution by Columbia
Federal to CFKY is deemed paid out of its pre-1988 reserves under these rules,
the pre-1988 reserves would be reduced and Columbia Federal's gross income for
tax purposes would be increased by the amount which, when reduced by the income
tax, if any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the pre-1988 reserves. As of September
30, 1997, Columbia Federal's pre-1988 reserves for tax purposes totaled
approximately $800,000. Columbia Federal believes it had approximately $3.1
million of accumulated earnings and profits for tax purposes as of September
30, 1997, which would be available for dividend distributions, provided
regulatory restrictions applicable to the payment of dividends are met. See
"REGULATION - Office of Thrift Supervision -- Limitations on Capital
Distributions." No representation can be made as to whether Columbia Federal
will have current or accumulated earnings and profits in subsequent years.
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The tax returns of Columbia Federal have been audited or closed without
audit through fiscal year 1993. In the opinion of management, any examination
of open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Columbia Federal.
OHIO TAXATION
Under Ohio law, Columbia Federal would be subject to the special Ohio
corporation franchise tax applicable only to financial institutions if, among
other factors, it has sufficient nexus with Ohio for such tax to be permissible
under the United States Constitution. Columbia Federal believes that presently
it does not have such nexus with Ohio and is not subject to the Ohio tax.
Because it is a corporation organized under Ohio law, CFKY is subject to the
Ohio corporation franchise tax, which, as applied to CFKY, is a tax measured by
both net earnings and net worth. Tax liability is the greater of (i) 5.1% on
the first $50,000 of computed Ohio taxable income and 8.9% of computed Ohio
taxable income in excess of $50,000 or (ii) 0.582% of taxable net worth. Under
these alternative measures of computing tax liability, the states to which a
taxpayer's adjusted total net income and adjusted total net worth are
apportioned or allocated are determined by complex formulas. The minimum tax is
$50 per year.
A special litter tax is also applicable to all corporations, including
CFKY, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Ohio corporation franchise tax law is scheduled to change markedly as a
consequence of legislative reforms enacted July 1, 1997. Tax liability,
however, continues to be measured by both net income and net worth. In general,
tax liability will be the greater of (i) 5.1% on the first $50,000 of computed
Ohio taxable income and 8.5% of computed Ohio taxable income in excess of
$50,000 or (ii) 0.40% of taxable net worth. Under these alternative measures of
computing tax liability, the states to which total net income and total net
worth will be apportioned or allocated will continue to be determined by complex
formulas, but the formulas change. The minimum tax will still be $50 per year
and maximum tax liability as measured by net worth will be limited to $150,000
per year. The special litter taxes remain in effect. Various other changes in
the tax law may affect CFKY.
KENTUCKY TAXATION
The Commonwealth of Kentucky imposes no income or franchise taxes on
savings institutions. However, CFKY (on an unconsolidated basis) must pay a
Kentucky state income tax, as well as a tax on capital. The tax on income is
4.0% for the first $25,000 of taxable income, 5.0% for the next $25,000, 6.0%
for the next $50,000, 7.0% for the next $150,000 and 8.25% for all income over
$250,000. The tax on capital is .0021 times the capital employed.
Columbia Federal is subject to an annual Kentucky ad valorem tax. Assessed
at the beginning of each calendar year, this tax is 0.1% of Columbia Federal's
savings accounts, common stock, capital and retained income with certain
deductions allowed for amounts borrowed by depositors and for securities
guaranteed by the U.S. Government or certain of its agencies. During the year
ended September 31, 1996, the amount of such expense for Columbia Federal was
$95,000.
THE CONVERSION
THE OTS HAS APPROVED THE PLAN, SUBJECT TO THE APPROVAL OF THE PLAN BY THE
MEMBERS OF COLUMBIA FEDERAL ENTITLED TO VOTE ON THE PLAN AND SUBJECT TO THE
SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS. OTS APPROVAL DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN.
GENERAL
On October 9, 1997, the Board of Directors of Columbia Federal unanimously
adopted a Plan of Conversion, which it amended on December 11, 1997, and
recommended that the voting members of Columbia Federal approve the Plan at the
Special Meeting to be held on _______________, 1998. During and upon completion
of the Conversion, Columbia Federal will continue to provide the
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services presently offered to depositors and borrowers, will maintain its
existing offices and will retain its existing management and employees.
Based on the current Valuation Range, between 1,717,000 and 2,323,000
Common Shares are expected to be offered in the Subscription Offering and the
Community Offering. In the Community Offering, preference will be given to
natural persons residing in Boone County and Kenton County, Kentucky, at a
price of $10 per share. Federal regulations require, with certain exceptions,
that shares offered in connection with the Conversion must be sold up to at
least the minimum point of the Valuation Range in order for the Conversion to
become effective. The actual number of shares sold in connection with the
Conversion will be determined based upon the final determination of the pro
forma market value of Columbia Federal at the completion of the Subscription
Offering and the Community Offering. See "Pricing and Number of Common Shares
to be Sold."
The Common Shares will be offered in the Subscription Offering to (1) each
account holder of Columbia Federal who, as of September 30, 1996, had a
Qualifying Deposit ("Eligible Account Holders"), (2) the ESOP, (3) each account
holder of Columbia Federal who, as of December 31, 1997, had a Qualifying
Deposit ("Supplemental Eligible Account Holders"), and (4) each account holder
of Columbia Federal having a savings deposit of record with Columbia Federal on
________ (the "Voting Record Date") and borrowers of record on the Voting
Record Date whose loans were in existence on December 16, 1995 (such depositors
and borrowers as of _________, collectively, the "Voting Members"). Any Common
Shares not subscribed for in the Subscription Offering may be sold to the
general public in the Community Offering in a manner which will seek to achieve
the widest distribution of the Common Shares, but which will give preference to
natural persons residing in either Boone County or Kenton County, Kentucky.
Under OTS regulations, the Community Offering must be completed within 45 days
after completion of the Subscription Offering, unless such period is extended
by Columbia Federal with the approval of the OTS. If the Community Offering is
determined not to be feasible, an occurrence that is not currently anticipated,
the Board of Directors of Columbia Federal will consult with the OTS to
determine an appropriate alternative method of selling unsubscribed Common
Shares. No alternative sales methods are currently planned.
OTS regulations require the completion of the Conversion within 24 months
after the date of the approval of the Plan by the Voting Members of Columbia
Federal. The completion of the Conversion will be subject to market conditions
and other factors beyond Columbia Federal's control. Due to changing economic
and market conditions, no assurance can be given as to the length of time that
will be required to complete the sale of the Common Shares. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of Columbia Federal. In such circumstances, Columbia Federal may also
incur substantial additional printing, legal and accounting expenses in
completing the Conversion. In the event the Conversion is not successfully
completed, Columbia Federal will be required to charge all Conversion expenses
against current earnings.
The following is a summary of the material aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the
Plan, a copy of which may be inspected at each office of Columbia Federal and
at the office of the OTS. The Plan is also filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and copies of the
Registration Statement may be obtained from the SEC. See "ADDITIONAL
INFORMATION."
PRINCIPAL EFFECTS OF THE CONVERSION
VOTING RIGHTS. Deposit holders who are members of Columbia Federal in its
mutual form will have no voting rights in Columbia Federal as converted and
will not participate, therefore, in the election of directors or otherwise
control Columbia Federal's affairs. After the Conversion, voting rights in
Columbia Federal will be vested exclusively in CFKY as the sole shareholder of
Columbia Federal. Voting rights in CFKY will be held exclusively by its
shareholders. Each holder of CFKY's Common Shares will be entitled to one vote
for each Common Share owned on any matter to be considered by CFKY's
shareholders. See "DESCRIPTION OF AUTHORIZED SHARES."
DEPOSIT ACCOUNTS AND LOANS. Savings accounts in Columbia Federal, as
converted, will be equivalent in amount, interest rate and other terms to the
present savings accounts in Columbia Federal, and the existing FDIC insurance
on such deposits will not be affected by the Conversion. The Conversion will
not affect the terms of loan accounts or the rights and obligations of
borrowers under their individual contractual arrangements with Columbia
Federal.
TAX CONSEQUENCES. The consummation of the Conversion is expressly
conditioned on receipt by Columbia Federal of a private letter ruling from the
IRS or an opinion of counsel to the effect that the Conversion will constitute
a tax-free reorganization as defined in Section 368(a) of the Code. Columbia
Federal intends to proceed with the Conversion based upon an opinion rendered
by its special counsel, Vorys, Sater, Seymour and Pease, to the following
effect:
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(1) The Conversion constitutes a reorganization within the meaning of
Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized
by Columbia Federal in its mutual form or in its stock form as a result of
the Conversion. Columbia Federal in its mutual form and Columbia Federal
in its stock form will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by Columbia Federal upon the
receipt of money from CFKY in exchange for the capital stock of Columbia
Federal, as converted;
(3) The assets of Columbia Federal will have the same basis in its
hands immediately after the Conversion as it had in its hands immediately
prior to the Conversion, and the holding period of the assets of Columbia
Federal after the Conversion will include the period during which the
assets were held by Columbia Federal before the Conversion;
(4) No gain or loss will be recognized to the deposit account holders
of Columbia Federal upon the issuance to them, in exchange for their
respective withdrawable deposit accounts in Columbia Federal immediately
prior to the Conversion, of withdrawable deposit accounts in Columbia
Federal immediately after the Conversion, in the same dollar amount as
their withdrawable deposit accounts in Columbia Federal immediately prior
to the Conversion, plus, in the case of Eligible Account Holders and
Supplemental Eligible Account Holders, the interests in the Liquidation
Account of Columbia Federal, as described below;
(5) The basis of the withdrawable deposit accounts in Columbia
Federal held by its deposit account holders immediately after the
Conversion will be the same as the basis of their deposit accounts in
Columbia Federal immediately prior to the Conversion. The basis of the
interests in the Liquidation Account received by the Eligible Account
Holders and Supplemental Eligible Account Holders will be zero. The basis
of the nontransferable subscription rights received by Eligible Account
Holders, Supplemental Eligible Account Holders and Other Eligible Members
(hereinafter defined) will be zero (assuming that at distribution such
rights have no ascertainable fair market value);
(6) No gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Eligible Members upon the
distribution to them of nontransferable subscription rights to purchase
Common Shares (assuming that at distribution such rights have no
ascertainable fair market value), and no taxable income will be realized
by such Eligible Account Holders, Supplemental Eligible Account Holders or
Other Eligible Members as a result of their exercise of such
nontransferable subscription rights;
(7) The basis of the Common Shares purchased by members of Columbia
Federal pursuant to the exercise of subscription rights will be the
purchase price thereof (assuming that such rights have no ascertainable
fair market value and that the purchase price is not less than the fair
market value of the shares on the date of such exercise), and the holding
period of such shares will commence on the date of such exercise. The
basis of the Common Shares purchased other than by the exercise of
subscription rights will be the purchase price thereof (assuming in the
case of the other subscribers that the opportunity to buy in the
Subscription Offering has no ascertainable fair market value), and the
holding period of such shares will commence on the day after the date of
the purchase;
(8) For purposes of Section 381 of the Code, Columbia Federal will be
treated as if there had been no reorganization. The taxable year of
Columbia Federal will not end on the effective date of the Conversion and,
immediately after the Conversion, Columbia Federal in its stock form will
succeed to and take into account the tax attributes of Columbia Federal in
its mutual form immediately prior to the Conversion, including Columbia
Federal's earnings and profits or deficit in earnings and profits;
(9) The bad debt reserves of Columbia Federal in its mutual form
immediately prior to the Conversion will not be required to be restored to
the gross income of Columbia Federal in its stock form as a result of the
Conversion, and immediately after the Conversion such bad debt reserves
will have the same character in the hands of Columbia Federal in its stock
form as they would have had if there had been no Conversion. Columbia
Federal in its stock form will succeed to and take into account the dollar
amounts of those accounts of Columbia Federal in its mutual form which
represent bad debt reserves in respect of which Columbia Federal in its
mutual form has taken a bad debt deduction for taxable years ending on or
before the Conversion; and
(10) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated
earnings and profits of Columbia Federal available for the subsequent
distribution of dividends within
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the meaning of Section 316 of the Code. The creation of the
Liquidation Account on the records of Columbia Federal will have no
effect on its taxable income, deductions for additions to reserves for
bad debts under Section 593 of the Code or distributions to stockholders
under Section 593(e) of the Code.
Columbia Federal has received an opinion from Keller to the effect that
the subscription rights have no ascertainable fair market value because the
rights are received by specified persons at no cost, may not be transferred and
are of short duration. The IRS could challenge the assumption that the
subscription rights have no ascertainable fair market value.
Columbia Federal has also received an opinion from VonLehman & Company
Inc., Ft. Mitchell, Kentucky, to the effect that the tax effects of the
Conversion under Kentucky law are substantially the same as they are under
federal law.
Each Eligible Account Holder, Supplemental Eligible Account Holder and
Other Eligible Member is urged to consult his or her own tax advisor with
respect to the effect of such tax consequences on his or her own particular
facts and circumstances.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
Columbia Federal in its present mutual form, each depositor in Columbia Federal
would receive a pro rata share of any assets of Columbia Federal remaining
after payment of the claims of all creditors, including the claims of all
depositors to the withdrawable value of their savings accounts. A depositor's
pro rata share of such remaining assets would be the same proportion of such
assets as the value of such depositor's savings deposits bears to the total
aggregate value of all savings deposits in Columbia Federal at the time of
liquidation.
In the event of a complete liquidation of Columbia Federal in its stock
form after the Conversion, each savings depositor as of September 30, 1996, and
December 31, 1997, would have a claim of the same general priority as the
claims of all other general creditors of Columbia Federal. Except as described
below, each depositor's claim would be solely in the amount of the balance in
such depositor's savings account plus accrued interest. The depositor would
have no interest in the assets of Columbia Federal above that amount. Such
assets would be distributed to CFKY as the sole shareholder of Columbia
Federal.
For the purpose of granting a limited priority claim to the assets of
Columbia Federal in the event of a complete liquidation thereof to Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
maintain savings accounts at Columbia Federal after the Conversion, Columbia
Federal will, at the time of Conversion, establish the Liquidation Account in
an amount equal to the regulatory capital of Columbia Federal as of the latest
practicable date prior to the Conversion at which such regulatory capital can
be determined. For this purpose, Columbia Federal shall use the regulatory
capital figure no later than that set forth in its latest statement of
financial condition contained in the Prospectus. The Liquidation Account will
not operate to restrict the use or application of any of the regulatory capital
of Columbia Federal.
Each Eligible Account Holder and Supplemental Eligible Account Holder will
have a separate inchoate interest (the "Subaccount") in a portion of the
Liquidation Account for Qualifying Deposits held on the Eligibility Record Date
or the Supplemental Eligibility Record Date, as the case may be.
The balance of each initial Subaccount shall be an amount determined by
multiplying the amount in the Liquidation Account by a fraction, the numerator
of which is the closing balance in the account holder's account as of the close
of business on the Eligibility Record Date or the Supplemental Eligibility
Record Date, as the case may be, and the denominator of which is the total
amount of all Qualifying Deposits of Eligible Account Holders and Supplemental
Eligible Account Holders on the corresponding record date. The balance of each
Subaccount may be decreased but will never be increased. If, at the close of
business on any annual closing date of Columbia Federal subsequent to the
respective record dates the balance in the savings account to which a
Subaccount relates is less than the lesser of (i) the deposit balance in such
savings account at the close of business on any other annual closing date
subsequent to the Eligibility Record Date or Supplemental Eligibility Record
Date or (ii) the amount of the Qualifying Deposit as of the Eligibility Record
Date or the Supplemental Eligibility Record Date, the balance of the Subaccount
for such savings account shall be adjusted proportionately to the reduction in
such savings account balance. In the event of any such downward adjustment,
such Subaccount balance shall not be subsequently increased notwithstanding any
increase in the deposit balance of the related savings account. If any savings
account is closed, its related Subaccount shall be reduced to zero upon such
closing.
In the event of a complete liquidation of the converted Columbia Federal
(and only in such event), each Eligible Account Holder and Supplemental
Eligible Account Holder shall receive from the Liquidation Account a
distribution equal to the current balance in each of such account holder's
Subaccounts before any liquidation distribution may be made to CFKY as the sole
shareholder of Columbia Federal. Any assets remaining after satisfaction of
such liquidation rights and the claims of
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Columbia Federal's creditors would be distributed to CFKY as the sole
shareholder of Columbia Federal. No merger, consolidation, purchase of bulk
assets or similar combination or transaction with another institution, the
deposits of which are insured by the FDIC, will be deemed to be a complete
liquidation for this purpose and, in any such transaction, the Liquidation
Account shall be assumed by the surviving institution.
COMMON SHARES. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE
INSURED BY THE FDIC. For a description of the characteristics of the Common
Shares, see "DESCRIPTION OF AUTHORIZED SHARES."
INTERPRETATION AND AMENDMENT OF THE PLAN
The Boards of Directors of Columbia Federal and CFKY will interpret the
Plan. To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of Columbia Federal and CFKY will be final. The Plan may
be amended by the Boards of Directors of Columbia Federal and CFKY at any time
before completion of the Conversion with the concurrence of the OTS. If
Columbia Federal and CFKY determine upon advice of counsel and after
consultation with the OTS that any such amendment is material, subscribers will
be notified of the amendment and will be provided the opportunity to affirm,
increase, decrease or cancel their subscriptions. Any person who does not
affirmatively elect to continue his subscription or elects to rescind his
subscription before the date specified in the notice will have all of his or
her funds promptly refunded with interest. Any person who elects to decrease
his subscription will have the appropriate portion of his or her funds promptly
refunded with interest.
CONDITIONS AND TERMINATION
The completion of the Conversion requires the approval of the Plan and the
adoption of the Federal Stock Charter and Federal Stock Bylaws by the Voting
Members of Columbia Federal at the Special Meeting and the sale of the
requisite amount of Common Shares within 24 months following the date of such
approval. If these conditions are not satisfied, the Plan will automatically
terminate and Columbia Federal will continue its business in the mutual form of
organization. The Plan may be voluntarily terminated by the Board of Directors
at any time before the Special Meeting and at any time thereafter with the
approval of the OTS.
SUBSCRIPTION OFFERING
THE SUBSCRIPTION OFFERING WILL EXPIRE AT ___ _.M., EASTERN TIME, ON THE
SUBSCRIPTION EXPIRATION DATE. SUBSCRIPTION RIGHTS NOT EXERCISED BEFORE THE
SUBSCRIPTION EXPIRATION DATE WILL BE VOID, WHETHER OR NOT CFKY HAS BEEN ABLE TO
LOCATE EACH PERSON ENTITLED TO SUCH SUBSCRIPTION RIGHTS.
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. Each person subscribing for shares must
represent to CFKY that the subscriber is purchasing such shares for the
subscriber's own account and that the subscriber has no agreement or
understanding with any other person for the sale or transfer of such shares.
The number of Common Shares which a person who has subscription rights may
purchase will be determined, in part, by the total number of Common Shares to
be issued and the availability of such shares for purchase under the preference
categories set forth in the Plan and certain other limitations. See
"Limitations on Purchases of Common Shares." The sale of any Common Shares
pursuant to subscriptions received is contingent upon approval of the Plan by
the Voting Members of Columbia Federal at the Special Meeting.
The preference categories for the allocation of Common Shares, which have
been established by the Plan in accordance with applicable regulations, are as
follows:
Category 1. Eligible Account Holders will receive, without payment,
nontransferable subscription rights to purchase up to the greater of (i)
the number of Common Shares permitted to be purchased in the Community
Offering, (ii) .10% of the total number of Common Shares sold in
connection with the Conversion, or (iii) 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
Common Shares sold in connection with the Conversion by a fraction of
which the numerator is the amount of the Eligible Account Holder's
Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all
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Eligible Account Holders, in each case on the Eligibility Record
Date, subject to the overall purchase limitations set forth in Section 10
of the Plan. See "Limitations on Purchases of Common Shares."
If the exercise of subscription rights in this Category 1 results in
an over-subscription, Common Shares will be allocated among subscribing
Eligible Account Holders in a manner which will, to the extent possible,
make the total allocation of each subscriber equal 100 shares or the
amount subscribed for, whichever is lesser. Any Common Shares remaining
after such allocation has been made will be allocated among the
subscribing Eligible Account Holders whose subscriptions remain unfilled
in the proportion which the amount of their respective Qualifying Deposits
on the Eligibility Record Date bears to the total Qualifying Deposits of
all Eligible Account Holders on such date. No fractional shares will be
issued. The subscription rights of the Eligible Account Holders are
subordinate to the limited priority right of the ESOP set forth in the
following paragraph.
Category 2. The ESOP will receive, without payment, nontransferable
subscription rights to purchase up to 10% of the Common Shares sold in
connection with the Conversion. The subscription rights of the ESOP will be
subordinate to the subscription rights in Category 1, except that if the
final pro forma market value of Columbia Federal exceeds the maximum of the
Valuation Range, the ESOP shall have first priority with respect to the
amount sold in excess of the maximum of the Valuation Range. If the ESOP
is unable to purchase all or part of the Common Shares for which it
subscribes due to an oversubscription in Category 1, the ESOP may purchase
Common Shares on the open market or may purchase authorized but unissued
shares of CFKY. If the ESOP purchases authorized but unissued shares from
CFKY, such purchases would have a dilutive effect on the interests of
CFKY's shareholders.
Category 3. Supplemental Eligible Account Holders will receive,
without payment, non-transferable subscription rights to purchase up to the
greater of (i) the number of Common Shares permitted to be purchased in the
Community Offering, (ii) .10% of the total number of Common Shares sold in
connection with the Conversion, or (iii) 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of
Common Shares sold in connection with the Conversion by a fraction of which
the numerator is the amount of the Supplemental Eligible Account Holder's
Qualifying Deposit and the denominator of which is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders, in each
case on the Supplemental Eligibility Record Date, subject to the overall
purchase limitations set forth in Section 10 of the Plan. See "Limitations
on Purchases of Common Shares."
If the exercise of subscription rights in this Category 3 results in
an over-subscription, Common Shares will be allocated among subscribing
Supplemental Eligible Account Holders in a manner which will, to the extent
possible, make the total allocation of each subscriber equal 100 shares or
the amount subscribed for, whichever is lesser. Any Common Shares
remaining after such allocation has been made will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions
remain unfilled in the proportion which the amount of their respective
Qualifying Deposits on the Supplemental Eligibility Record Date bears to
the total Qualifying Deposits of all Supplemental Eligible Account Holders
on such date. No fractional shares will be issued.
Subscription rights received in this Category 3 will be subordinate to
the subscription rights in Categories 1 and 2.
Category 4. All Voting Members who are not Eligible Account
Holders or Supplemental Eligible Account Holders ("Other Eligible Members")
will receive nontransferable subscription rights to purchase Common Shares
in an amount up to the greater of the number permitted to be purchased in
the Community Offering or .10% of the total number of Common Shares sold in
connection with the Conversion, subject to the overall purchase limitations
set forth in Section 10 of the Plan. See "Limitations on Purchases of
Common Shares." In the event of an oversubscription in this Category 4,
the available shares will be allocated among subscribing Other Eligible
Members on an equitable basis in the same proportion that their respective
subscriptions bear to the total amount of all subscriptions in this
Category 4.
Subscription rights received in this Category 4 will be subordinate to
the subscription rights in Categories 1 through 3.
The Board of Directors may reject any one or more subscriptions if, based
upon the Board of Directors' interpretation of applicable regulations, such
subscriber is not entitled to the shares for which he or she has subscribed or
if the sales of the shares subscribed for would be in violation of any
applicable statutes, regulations or rules.
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CFKY will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons having subscription rights
reside. However, no such person will be offered or receive any Common Shares
under the Plan who resides in a foreign country or in a state of the United
States with respect to which all of the following apply: (i) a small number of
persons otherwise eligible to subscribe for Common Shares under the Plan
resides in such country or state; (ii) under the securities laws of such
country or state, the granting of subscription rights or the offer or sale of
Common Shares to such persons would require CFKY or its officers or directors,
to register as a broker or dealer or to register or otherwise qualify its
securities for sale in such country or state; and (iii) such registration or
qualification would be impracticable for reasons of cost or otherwise.
The term "resident" as used herein with respect to the Subscription
Offering means any person who, on the date of submission of a stock order form,
maintained a bona fide residence within a jurisdiction in which the Common
Shares are being offered for sale. If a person is a business entity, the
person's residence shall be the location of the principal place of business.
If the person is a personal benefit plan, the residence of the beneficiary
shall be the residence of the plan. In the case of all other benefit plans,
the residence of the trustee shall be the residence of the plan. In all cases,
the determination of a subscriber's residency shall be in the sole discretion
of Columbia Federal and CFKY.
COMMUNITY OFFERING
Concurrently with the Subscription Offering, CFKY is hereby offering
Common Shares in the Community Offering, subject to the limitations set forth
below, to the extent such shares remain available based upon the final Pro
Forma Value and after the satisfaction of all orders received in the
Subscription Offering. If subscriptions are received in the Subscription
Offering for at least 2,323,000 Common Shares, Common Shares may not be offered
in the Community Offering. If subscriptions for at least 2,323,000 Common
Shares have not been received by the Subscription Expiration Date, CFKY
anticipates offering Common Shares in the Community Offering to the extent such
shares remain available after the satisfaction of all orders received in the
Subscription Offering. All sales of Common Shares in the Community Offering
will be at the same price per share as the sales of Common Shares in the
Subscription Offering. THE COMMUNITY OFFERING MAY EXPIRE AT ANY TIME WHEN
ORDERS FOR AT LEAST 2,323,000 COMMON SHARES HAVE BEEN RECEIVED, BUT IN NO EVENT
LATER THAN 45 DAYS AFTER THE SUBSCRIPTION EXPIRATION DATE, OR ___, 1998, UNLESS
EXTENDED BY COLUMBIA FEDERAL AND CFKY WITH THE APPROVAL OF THE OTS, IF
NECESSARY. IN ACCORDANCE WITH THE PLAN, THE OFFERING MAY NOT BE EXTENDED
BEYOND ______, 2000.
In the event shares are available in the Community Offering, members of
the general public may purchase up to 15,000 Common Shares. See "Limitations
on Purchases of Common Shares." If an insufficient number of shares is
available to fill all of the orders received in the Community Offering, the
available shares will be allocated in the Community Offering in a manner to be
determined by the Board of Directors of CFKY, subject to the following:
(i) In the Community Offering, preference will be given to natural
persons who reside in either Boone County or Kenton County, Kentucky, the
counties in which the offices of Columbia Federal are located;
(ii) Orders received in the Community Offering will first be filled
up to a maximum of two percent of the total number of Common Shares
offered, with any remaining shares allocated on an equal number of shares
per order basis until all orders have been filled;
(iii) No person, together with any Associate and groups Acting in
Concert, may purchase more than 15,000 Common Shares in the Community
Offering; and
(iv) The right of any person to purchase Common Shares in the
Community Offering is subject to the right of CFKY and Columbia Federal to
accept or reject such purchases in whole or in part.
The term "resident" as used herein with respect to the Community Offering
means any natural person who, on the date of submission of a stock order form,
maintained a bona fide residence within, as appropriate, Boone County or Kenton
County, Kentucky, or a jurisdiction in which the Common Shares are being
offered for sale.
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LIMITATIONS ON PURCHASES OF COMMON SHARES
The Plan provides for certain additional limitations to be placed upon the
purchase of Common Shares. To the extent such shares are available, the
minimum number of shares that may be purchased by any party is 25. No
fractional shares will be issued.
Currently, no person, together with Associates and groups Acting in
Concert, may purchase more than 30,000 Common Shares. Subject to any required
regulatory approval and the requirements of applicable laws and regulations,
but without further approval of the members of Columbia Federal, purchase
limitations may be increased or decreased at the sole discretion of the Boards
of Directors of CFKY and Columbia Federal at any time. If such amount is
increased, persons who subscribed for the maximum amount will be given the
opportunity to increase their subscriptions up to the then applicable limit,
subject to the rights and preferences of any person who has priority
subscription rights. The Boards of Directors of CFKY and Columbia Federal may,
in their sole discretion, increase the maximum purchase limitation referred to
above up to 10% of the Common Shares sold in connection with the Conversion,
provided that orders for shares exceeding 5% of the shares to be issued in the
Conversion shall not exceed, in the aggregate, 10% of the shares to be issued
in the Conversion. In the event that the purchase limitation is decreased
after commencement of the Subscription Offering, the order of any person who
subscribed for the maximum number of Common Shares shall be decreased by the
minimum amount necessary so that such person shall be in compliance with the
then maximum number of shares permitted to be subscribed for by such person.
"Acting in Concert" is defined as "knowing participation in a joint
activity or independent conscious parallel action towards a common goal whether
or not pursuant to an express agreement" or "a combination or pooling of voting
or other interests in the securities of an issuer for a common purpose pursuant
to any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise." Persons shall be presumed to be Acting in
Concert with each other, subject to rebuttal through a filing with the OTS, if:
(i) both are purchasing Common Shares in the Conversion and (a) are certain
executive officers, including the president, chief executive officer, chief
operating officer or vice president, directors, trustees, partners, persons who
perform, or whose nominees or representatives perform, similar policy making
functions at a company (other than Columbia Federal or CFKY), a principal
business unit or subsidiary of a company, a partnership, a joint venture or a
similar organization; (b) are persons who directly or indirectly own or control
10% or more of the stock of a company (other than Columbia Federal or CFKY); or
(c) constituted a group under the beneficial ownership reporting rules under
Section 13 or the proxy rules under Section 14 of the Exchange Act; or (ii) one
person provides credit to the other for the purchase of Common Shares or is
instrumental in obtaining that credit. Companies (other than Columbia Federal
or CFKY), partnerships, joint ventures and similar organizations shall be
presumed to be acting in concert with their executive officers, directors,
trustees, trusts for which they serve as trustee, partners, agents who perform,
or whose nominees or representatives perform, similar policy making functions
and persons who directly or indirectly own or control 10% or more of their
stock if both are purchasing Common Shares in the Conversion. In addition, if
a person is presumed to be Acting in Concert with another person, company or
similar organization, then such person is presumed to Act in Concert with
anyone else who is, or is presumed to be, Acting in Concert with such other
person, company or similar organization.
For purposes of the Plan, (i) the directors of Columbia Federal are not
deemed to be Acting in Concert solely by reason of their membership on the
Board of Directors of Columbia Federal; (ii) an associate of a person (an
"Associate") is (a) any corporation or organization (other than Columbia
Federal) of which such person is an officer, partner or, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities; (b) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity; and (c) any relative or spouse of such person,
or relative of such spouse, who either has the same home as such person or who
is a director or officer of Columbia Federal. Executive officers and directors
of Columbia Federal and their Associates may not purchase, in the aggregate,
more than 33.7% of the total number of Common Shares sold in the Conversion.
Shares acquired by the ESOP will not, pursuant to regulations governing the
Conversion, be aggregated with the shares purchased by the directors, officers
and employees of Columbia Federal.
Purchases of Common Shares are also subject to the change in control
regulations of the OTS. Such regulations restrict direct and indirect
purchases of 10% or more of the stock of any savings association by any person
or group of persons Acting in Concert. See "RESTRICTIONS ON ACQUISITION OF
COLUMBIA FEDERAL AND CFKY AND RELATED ANTI-TAKEOVER PROVISIONS - Federal Law
and Regulation."
After the Conversion, Common Shares, except for shares purchased by
officers and directors of CFKY, will be freely transferable, subject to OTS
regulations. See "Restrictions on Transferability of Common Shares by
Directors and Officers."
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PLAN OF DISTRIBUTION
The offering of the Common Shares is made only pursuant to this
Prospectus, which is available to all eligible subscribers by mail. See
"ADDITIONAL INFORMATION." Additional copies are available at the offices of
Columbia Federal. Sales of Common Shares will be made primarily by registered
representatives affiliated with Webb. CFKY will rely on Rule 3a4-1 under the
Securities Exchange Act of 1934 (the "Exchange Act"), and sales of Common
Shares will be conducted within the requirements of Rule 3a4-1, which will
permit officers, directors and employees of CFKY and Columbia Federal to
participate in the sale of Common Shares, except that officers, directors and
employees will not participate in the sale of Common Shares to residents of any
state in which such persons have not met such state's requirements for
participation. No officer, director or employee of CFKY or Columbia Federal
will be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Shares.
To assist CFKY in marketing the Common Shares, CFKY has retained Webb,
which is a broker-dealer registered with the SEC and a member of the National
Association of Securities Dealers, Inc. (the "NASD"). Webb will consult with
and advise CFKY and assist with the sale of the Common Shares on a best efforts
basis in connection with the Conversion. The services to be rendered by Webb
include assisting CFKY in conducting the Subscription Offering and the
Community Offering and educating Columbia Federal personnel about the
Conversion process. Webb has no obligation to purchase any of the Common
Shares.
For its services, Webb will receive a commission equal to 1.50% of the
aggregate purchase price paid for shares sold to residents of Boone County and
Kenton County, Kentucky; 1.25% of the aggregate purchase price of Common Shares
sold to residents of counties contiguous to Boone County or Kenton County,
Kentucky; and 0.75% of the aggregate purchase price of Common Shares sold to
persons not residents of Boone County or Kenton County, Kentucky, or counties
contiguous thereto. No commission will be paid on shares purchased by Columbia
Federal's directors, executive officers or employees or their immediate family
members or the ESOP. In the event that Columbia Federal requests Webb to
obtain the assistance of other broker-dealers ("Selected Dealers") to sell
Common Shares in the Community Offering, Webb will be paid a commission of 5.5%
of the aggregate purchase price of Common Shares sold by Selected Dealers, from
which the Selected Dealers will be paid, instead of the commission based upon
the residence of the purchasers. A management fee of $25,000 has already been
paid to Webb, and such amount will be deducted from the commission. Columbia
Federal will reimburse Webb for legal fees in an amount not to exceed $35,000.
See "THE CONVERSION - Plan of Distribution."
Columbia Federal has agreed to indemnify Webb against certain claims or
liabilities, including certain liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
EFFECT OF EXTENSION OF COMMUNITY OFFERING
If the Community Offering extends beyond 45 days after the Subscription
Expiration Date, persons who have subscribed for Common Shares in the
Subscription Offering or in the Community Offering will receive a written
notice that until a date specified in the notice, they have the right to
increase, decrease or rescind their subscriptions for Common Shares. Any
person who does not affirmatively elect to continue his subscription or elects
to rescind his subscription during any such extension will have all of his
funds promptly refunded with interest. Any person who elects to decrease his
subscription during any such extension shall have the appropriate portion of
his funds promptly refunded with interest.
USE OF ORDER FORMS
Subscriptions for Common Shares in the Subscription Offering and the
Community Offering may be made only by completing and submitting an Order Form.
Any person who desires to subscribe for Common Shares in the Subscription
Offering must do so by delivering to CFKY at 2497 Dixie Highway, Ft. Mitchell,
Kentucky 41017-3085, or at any of its branches by mail or in person, prior to
___ _.m., Eastern Time, on ______, 1998, a properly executed and completed
original Order Form, together with full payment of the subscription price of
$10.00 for each share for which subscription is made. Photocopies or
telecopies of Order Forms will not be accepted. See "ADDITIONAL INFORMATION."
THE FAILURE TO DELIVER A PROPERLY EXECUTED ORIGINAL ORDER FORM AND FULL PAYMENT
IN A MANNER BY WHICH THEY ARE ACTUALLY RECEIVED BY CFKY NO LATER THAN ___ _.M.
ON THE SUBSCRIPTION EXPIRATION DATE WILL PRECLUDE THE PURCHASE OF COMMON SHARES
IN THE OFFERING.
AN EXECUTED ORDER FORM, ONCE RECEIVED BY CFKY, MAY NOT BE MODIFIED,
AMENDED OR RESCINDED WITHOUT THE CONSENT OF CFKY, UNLESS (I) THE COMMUNITY
OFFERING IS NOT COMPLETED WITHIN 45 DAYS AFTER THE SUBSCRIPTION EXPIRATION
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DATE, OR (II) THE FINAL VALUATION OF COLUMBIA FEDERAL, AS CONVERTED, IS LESS
THAN $17,170,000 OR MORE THAN $26,714,500. IF EITHER OF THOSE EVENTS OCCUR,
PERSONS WHO HAVE SUBSCRIBED FOR COMMON SHARES IN THE SUBSCRIPTION OFFERING OR
IN THE COMMUNITY OFFERING WILL RECEIVE WRITTEN NOTICE THAT UNTIL A DATE
SPECIFIED IN THE NOTICE, THEY HAVE A RIGHT TO AFFIRM, INCREASE, DECREASE OR
RESCIND THEIR SUBSCRIPTIONS. ANY PERSON WHO DOES NOT AFFIRMATIVELY ELECT TO
CONTINUE HIS OR HER SUBSCRIPTION OR ELECTS TO RESCIND HIS OR HER SUBSCRIPTION
DURING ANY SUCH EXTENSION WILL HAVE ALL OF HIS OR HER FUNDS PROMPTLY REFUNDED
WITH INTEREST. ANY PERSON WHO ELECTS TO DECREASE HIS OR HER SUBSCRIPTION
DURING ANY SUCH EXTENSION WILL HAVE THE APPROPRIATE PORTION OF HIS OR HER FUNDS
PROMPTLY REFUNDED WITH INTEREST.
PAYMENT FOR COMMON SHARES
Payment of the subscription price for all Common Shares for which
subscription is made must accompany all completed Order Forms and Forms of
Certification in order for subscriptions to be valid. Payment for Common
Shares may be made (i) in cash, if delivered in person, (ii) by check, bank
draft or money order payable to the order of Columbia Federal, or (iii) by
authorization of withdrawal from savings accounts in Columbia Federal (other
than non-self-directed IRAs). Wire transfers will not be accepted. Columbia
Federal cannot lend money or otherwise extend credit to any person to purchase
Common Shares, other than the ESOP.
Payments made in cash or by check, bank draft or money order will be
placed in a segregated savings account insured by the FDIC up to applicable
limits. Interest will be paid by Columbia Federal on such accounts at Columbia
Federal's passbook rate, currently ______% annual percentage yield, from the
date payment is received until the Conversion is completed or terminated.
Payments made by check will not be deemed to have been received until such
check has cleared for payment.
During the Community Offering, Selected Dealers may only solicit
indications of interest from their customers to place orders with Columbia
Federal as of a certain date (the "Order Date") for the purchase of Common
Shares. When and if Columbia Federal believes that enough indications of
interest and orders have been received to consummate the Conversion, Webb will
request, as of the Order Date, Selected Dealers submit orders to purchase
shares for which Selected Dealers have previously received indications of
interest from the Selected Dealers' customers. The Selected Dealers will send
confirmations of the orders to such customers on the next business day after
the Order Date. The Selected Dealers will debit the accounts of their
customers on the date which will be three business days from the Order Date
(the "Settlement Date"). On the Settlement Date, funds received by Selected
Dealers will be remitted to Columbia Federal. Funds will be returned promptly
in the event the Conversion is not consummated.
Instructions for authorizing withdrawals from savings accounts are
provided in the Order Form. Once a withdrawal has been authorized, none of the
designated withdrawal amount may be used by a subscriber for any purpose other
than to purchase Common Shares, unless the Conversion is terminated. All sums
authorized for withdrawal will continue to earn interest at the contract rate
for such account or certificate until the completion or termination of the
Conversion. Interest penalties for early withdrawal applicable to certificate
accounts will be waived in the case of withdrawals authorized for the purchase
of Common Shares. If a partial withdrawal from a certificate account results
in a balance less than the applicable minimum balance requirement, the
certificate will be cancelled and the remaining balance will earn interest at
Columbia Federal's passbook rate subsequent to the withdrawal.
Persons who are beneficial owners of IRAs maintained at Columbia Federal
do not personally have subscription rights related to such account. The
account itself, however, may have subscription rights. In order to utilize
funds in an IRA maintained at Columbia Federal, the funds must be transferred
to a self-directed IRA that permits the IRA funds to be invested in stock. The
beneficial owner of the IRA must direct the trustee of the IRA to use funds
from such account to purchase Common Shares in connection with the Conversion.
Persons who are interested in utilizing IRAs at Columbia Federal to subscribe
for Common Shares should contact the Columbia Federal Stock Information Center
at (___) ___-____ for instructions and assistance.
Subscriptions will not be filled by CFKY until subscriptions have been
received in the Subscription Offering and the Community Offering for up to
1,717,000 Common Shares, the minimum point of the Valuation Range. If the
Conversion is terminated, all funds delivered to CFKY for the purchase of
Common Shares will be returned with interest, and all charges to savings
accounts will be rescinded. Subscribers and other purchasers will be notified
by mail, promptly on completion of the sale of the Common Shares, of the number
of shares for which their subscriptions have been accepted. Certificates
representing Common Shares will be delivered promptly thereafter.
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If the ESOP subscribes for Common Shares in the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes but may pay for such Common Shares upon consummation of the
Conversion.
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information regarding the
subscription rights intended to be exercised by the directors and executive
officers of Columbia Federal and their Associates. For purposes of this table,
it has been assumed that 2,020,000 Common Shares will be sold in connection
with the Conversion at $10 per share, that the purchase limitations are not
changed and that a sufficient number of Common Shares will be available to
satisfy the intended purchases by directors and executive officers. See
"Pricing and Number of Common Shares to be Sold."
Percent Aggregate
Total of total purchase
Name shares offering price
- ---- ------- -------- ----------
J. Robert Bluemlein - -% $ -
Kenneth R. Kelly 30,000 1.49 300,000
John C. Layne 10,000 .50 100,000
Daniel T. Mistler 10,000 .50 100,000
Fred A. Tobergte, Sr. 30,000 1.49 300,000
Geraldine Zembrodt 20,000 .99 200,000
Robert V. Lynch 30,000 1.49 300,000
Mary Jane Lucas 5,000 .25 50,000
George Raybourne 2,500 .12 25,000
Edward Schwartz 20,000 .99 200,000
Harold E. Taylor 30,000 1.49 300,000
Abijah Adams 10,000 .50 100,000
Carol S. Margrave 3,000 .15 30,000
------- ---- ----------
200,500 9.93% $2,005,000
All purchases by executive officers and directors of Columbia Federal are
made for investment purposes only and with no intent to resell.
PRICING AND NUMBER OF COMMON SHARES TO BE SOLD
The aggregate offering price of the Common Shares will be based on the pro
forma market value of the shares as determined by an independent appraisal of
Columbia Federal. Keller, a firm which evaluates and appraises financial
institutions, was retained by Columbia Federal to prepare an appraisal of the
estimated pro forma market value of Columbia Federal as converted. Keller will
receive a fee of $17,000 for its appraisal, which amount includes out-of-pocket
expenses.
The appraisal was prepared by Keller in reliance upon the information
contained herein. Keller also considered the following factors, among others:
the present and projected operating results and financial condition of Columbia
Federal and the economic and demographic conditions in Columbia Federal's
existing market area; the quality and depth of Columbia Federal's management
and personnel; certain historical financial and other information relating to
Columbia Federal and a comparative evaluation of the operating and financial
statistics of Columbia Federal with those of other thrift institutions; the
aggregate size of the offering; the impact of the Conversion on Columbia
Federal's regulatory capital and earnings potential; the trading market for
stock of comparable thrift institutions; the effect of Columbia Federal
becoming a subsidiary of CFKY; and general conditions in the markets for such
stocks.
The Pro Forma Value of Columbia Federal, as converted, is $20,200,000 as
of November 28, 1997. CFKY will issue the Common Shares at a fixed price of
$10.00 per share and, by dividing the price per share into the final Pro Forma
Value, determined at the completion of the Conversion, will determine the
number of shares to be issued. Applicable regulations also require, however,
that the appraiser establish the Valuation Range of 15% on either side of the
Pro Forma Value to allow for fluctuations in the aggregate value of the Common
Shares due to changes in the market for thrift shares and other factors from
the time of commencement of the Subscription Offering until the completion of
the Conversion.
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As of September 30, 1997, the Valuation Range was from $17,170,000 to
$23,230,000, which, based upon a per share offering price of $10.00, will
result in the sale of between 1,717,000 and 2,323,000 Common Shares. In the
event that Keller determines at the close of the Conversion that the aggregate
pro forma value of Columbia Federal is higher or lower than the Pro Forma Value
as of November 28, 1997, but is nevertheless within the Valuation Range, or is
not more than 15% above the maximum point of the Valuation Range, CFKY will
make an appropriate adjustment by raising or lowering the total number of
Common Shares sold in the Conversion consistent with the final Pro Form Value.
If, due to changing market conditions, the final valuation is not between the
minimum of the Valuation Range and 15% above the maximum of the Valuation
Range, subscribers will be given a notice of such final valuation and the right
to affirm, increase, decrease or rescind their subscriptions. Any person who
does not affirmatively elect to continue his subscription or elects to rescind
his subscription before the date specified in the notice will have all of his
funds promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest.
THE APPRAISAL BY KELLER IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON SHARES
OR VOTING TO APPROVE THE CONVERSION. IN PREPARING THE VALUATION, KELLER HAS
RELIED UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND
STATISTICAL INFORMATION PROVIDED BY COLUMBIA FEDERAL AND ITS INDEPENDENT
AUDITORS. KELLER DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY COLUMBIA FEDERAL AND ITS INDEPENDENT AUDITORS,
NOR DID KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF COLUMBIA
FEDERAL OR CFKY. THE VALUATION CONSIDERS COLUMBIA FEDERAL ONLY AS A GOING
CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE
OF COLUMBIA FEDERAL. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED
UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT
TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
COMMON SHARES WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES WITHIN THE
ESTIMATED PRICE RANGE.
A copy of the complete appraisal is on file and open for inspection at the
offices of the OTS, 1700 G Street, N.W., Washington, DC 20552, at the Central
Regional Office of the OTS, 111 East Wacker Drive, Chicago, Illinois 60601, and
at each of the offices of Columbia Federal. It has also been filed as an
exhibit to the Registration Statement.
RESTRICTION ON REPURCHASE OF COMMON SHARES
Federal regulations prohibit CFKY from repurchasing any of its capital
stock for three years following the date of completion of the Conversion,
except as part of an open-market stock repurchase program during the second and
third years following the Conversion involving no more than 5% of CFKY's
outstanding capital stock during a twelve-month period or except as such a
repurchase would be otherwise approved by the OTS. In addition, after such a
repurchase, Columbia Federal's regulatory capital must equal or exceed all
regulatory capital requirements. Before commencement of such a program, CFKY
must provide notice to the OTS, and the OTS may disapprove the program if the
OTS determines that it would adversely affect the financial condition of
Columbia Federal or if it determines that there is no valid business purpose
for such repurchase. Such repurchase restrictions would not prohibit the ESOP
or the RRP from purchasing Common Shares during the first year following
Conversion.
RESTRICTIONS ON TRANSFERABILITY OF COMMON SHARES BY DIRECTORS AND OFFICERS
Common Shares purchased by directors or executive officers of CFKY or
their Associates will be subject to the restriction that such shares may not be
sold for a period of one year following completion of the Conversion, except in
the event of the death of the shareholder. The certificates evidencing Common
Shares issued by CFKY to directors, executive officers and their Associates
will bear a legend giving appropriate notice of the restriction imposed upon
the transfer of such Common Shares. In addition, CFKY will give appropriate
instructions to the transfer agent (if any) for CFKY's Common Shares in respect
of the applicable restriction for transfer of any restricted shares. Any
shares issued as a stock dividend, stock split or otherwise in respect of
restricted shares will be subject to the same restrictions.
Subject to certain exceptions, for a period of three years following the
Conversion, no director or officer of CFKY or Columbia Federal, or any of their
Associates, may purchase any common shares of CFKY without the prior written
approval of the OTS, except through a broker-dealer registered with the SEC.
This restriction will not apply, however, to negotiated transactions involving
more than 1% of a class of outstanding common shares of CFKY or shares acquired
by any stock benefit plan of Columbia Federal or CFKY.
The Common Shares, like the stock of most public companies, are subject to
the registration requirements of the Securities Act. Accordingly, the Common
Shares may be offered and sold only in compliance with such registration
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requirements or pursuant to an applicable exemption from registration. Common
Shares received in the Conversion by persons who are not "affiliates" of CFKY
may be resold without registration. Common Shares received by affiliates of
CFKY will be subject to resale restrictions. An "affiliate" of CFKY, for
purposes of Rule 144, is a person who directly, or indirectly through one or
more intermediaries, controls, or is controlled by or is under common control
with, CFKY. Rule 144 generally requires that there be publicly available
certain information concerning CFKY and that sales subject to Rule 144 be made
in routine brokerage transactions or through a market maker. If the conditions
of Rule 144 are satisfied, each affiliate (or group of persons acting in
concert with one or more affiliates) is entitled to sell in the public market,
without registration, in any three-month period, a number of shares which does
not exceed the greater of (i) 1% of the number of outstanding shares of CFKY or
(ii) if the shares are admitted to trading on a national securities exchange or
reported through the automated quotation system of a registered securities
association, the average weekly reported volume of trading during the four
weeks preceding the sale.
RIGHTS OF REVIEW
Any person aggrieved by a final action of the OTS which approves, with or
without conditions, or disapproves the Plan may obtain review of such action by
filing in the Court of Appeals of the United States for the circuit in which
the principal office or residence of such person is located or in the United
States Court of Appeals for the District of Columbia, a written petition
praying that the final action of the OTS be modified, terminated or set aside.
Such petition must be filed within 30 days after the date of mailing of proxy
materials to the Voting Members of Columbia Federal or within 30 days after the
date of publication in the Federal Register of notice of approval of the Plan
by the OTS, whichever is later.
RESTRICTIONS ON ACQUISITION OF COLUMBIA FEDERAL AND CFKY
AND RELATED ANTI-TAKEOVER PROVISIONS
GENERAL
Federal law and regulation, Ohio law, the Articles of Incorporation and
Code of Regulations of CFKY, the Amended Charter of Columbia Federal and
certain employee benefit plans to be adopted by Columbia Federal and CFKY
contain certain provisions which may deter or prohibit a change of control of
Columbia Federal or CFKY. Such provisions are intended to encourage any
acquiror to negotiate the terms of an acquisition with the Board of Directors
of CFKY, thereby reducing the vulnerability of CFKY to takeover attempts and
certain other transactions which have not been negotiated with and approved by
the Board of Directors.
Anti-takeover devices and provisions may have the effect, however, of
discouraging sudden or hostile takeover attempts, even under circumstances in
which shareholders may deem such takeovers to be in their best interests or in
which shareholders may receive a substantial premium for their shares over then
current market prices. As a result, shareholders who might desire to
participate in such a transaction may not have an opportunity to participate
because of such devices and provisions. Moreover, such devices and provisions
may also benefit management by discouraging changes of control in which
incumbent management would be removed from office.
The following is a summary of certain provisions of such laws, regulations
and documents.
FEDERAL LAW AND REGULATION
FEDERAL DEPOSIT INSURANCE ACT. The Federal Deposit Insurance Act (the
"FDIA") provides that no person, acting directly or indirectly or in concert
with one or more persons, may acquire control of any insured savings
association or holding company unless both (i) 60 days' prior written notice
has been given to the OTS and (ii) the OTS has not issued a notice disapproving
the proposed acquisition. Control, for purposes of the FDIA, means the power,
directly or indirectly, to direct the management or policies of an insured
institution or to vote 25% or more of any class of securities of such
institution. This provision of the FDIA is implemented by the OTS in
accordance with the Regulations for Acquisition of Control of an Insured
Institution, 12 C.F.R. Part 574 (the "Control Regulations"). Control, for
purposes of the Control Regulations, exists in situations in which either (a)
the acquiring party has direct or indirect voting control of at least 25% of
the institution's voting shares or controls in any manner the election of a
majority of the directors of such institution or (b) the Director of the OTS
determines that such person exercises a controlling influence over the
management or policies of such institution. In addition, control is presumed
to exist, subject to rebuttal, if the acquiring party (which includes a group
"acting in concert") has voting control of at least 10% of the institution's
voting stock and any of eight control factors specified in the Control
Regulations exists. There are also rebuttable presumptions in the Control
Regulations concerning whether a group "acting in concert" exists, including
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presumed action in concert among members of an "immediate family." The Control
Regulations apply to acquisitions of Common Shares in connection with the
Conversion and to acquisitions after the Conversion.
CHANGE IN CONTROL OF CONVERTED ASSOCIATIONS. A regulation of the OTS
provides that, for a period of three years after the date of the completion of
the Conversion, no person shall, directly or indirectly, offer to acquire or
acquire beneficial ownership of more than 10% of any class of equity security
of Columbia Federal or CFKY without the prior written approval of the OTS. In
addition to the actual ownership of more than 10% of a class of equity
securities, a person is deemed to have acquired beneficial ownership of more
than 10% of the equity securities of CFKY or Columbia Federal if the person
holds any combination of stock and revocable and/or irrevocable proxies of CFKY
under circumstances that give rise to a conclusive control determination or
rebuttable control determination under the OTS' change of control regulations.
Such circumstances include (i) holding any combination of voting shares and
revocable and/or irrevocable proxies representing more than 25% of any class of
voting stock of CFKY enabling the acquirer (a) to elect one-third or more of
the directors, (b) to cause CFKY's or Columbia Federal's shareholders to
approve the acquisition or corporate reorganization of CFKY or Columbia
Federal, or (c) to exert a controlling influence over a material aspect of the
business operations of CFKY or Columbia Federal, and (ii) acquiring any
combination of voting shares and irrevocable proxies representing more than 25%
of any class of voting shares.
Such three-year restriction does not apply (i) to any offer with a view
toward public resale made exclusively to Columbia Federal or CFKY or to any
underwriter or selling group acting on behalf of Columbia Federal or CFKY, (ii)
unless made applicable by the OTS by prior written advice, to any offer or
announcement of an offer which, if consummated, would result in the acquisition
by any person, together with all other acquisitions by any such person of the
same class of securities during the preceding 12-month period, of not more than
1% of the class of securities, or (iii) to any offer to acquire or the
acquisition of beneficial ownership of more than 10% of any class of equity
security of Columbia Federal or CFKY by a corporation whose ownership is or
will be substantially the same as the ownership of Columbia Federal or CFKY if
made more than one year following the date of the Conversion. The foregoing
restriction does not apply to the acquisition of Columbia Federal or CFKY's
capital stock by one or more tax-qualified employee stock benefit plans of CFKY
or Columbia Federal, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of equity security of
Columbia Federal or CFKY. See "Articles of Incorporation of Columbia Federal"
for a discussion of a five-year restriction on direct or indirect beneficial
ownership of 10% of the outstanding common stock of Columbia Federal.
HOLDING COMPANY RESTRICTIONS. Federal law generally prohibits a savings
and loan holding company, without prior approval of the Director of the OTS,
from (i) acquiring control of any other savings association or savings and loan
holding company, (ii) acquiring substantially all of the assets of a savings
association or holding company thereof, or (iii) acquiring or retaining more
than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Acquisitions under the Holding Company Act
are governed by the Control Regulations. See "Federal Deposit Insurance Act."
Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15%
of the previously unissued voting shares of an undercapitalized savings
association for cash without such savings association being deemed to be
controlled by the holding company. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's voting shares may acquire control of any savings institution,
other than a subsidiary institution or any other savings and loan holding
company.
OHIO LAW
MERGER MORATORIUM STATUTE. Ohio has adopted a merger moratorium statute
regulating certain takeover bids affecting certain public corporations with
significant ties to Ohio. The statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an
Ohio corporation and any person who has the right to exercise, alone or with
others, 10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted
only if, prior to the time such person first becomes an Interested Shareholder,
the Board of Directors of the issuing corporation has approved the purchase of
shares that resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) an exception specifically enumerated in the statute is
applicable to the combination, (2) the combination is approved, at a meeting
held for such purpose, by the affirmative vote of the holders of the issuing
public corporation entitling them to exercise at least two-thirds of the voting
power of the issuing public corporation in the election of directors or of such
different proportion as the articles may provide,
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provided the combination is also approved by the affirmative vote of the
holders of at least a majority of the disinterested shares, or (3) the business
combination meets certain statutory criteria designed to ensure that the
issuing public corporation's remaining shareholders receive fair consideration
for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation.
However, the statute still prohibits for twelve months any business combination
that would have been prohibited but for the adoption of such an opt-out
amendment. The statute also provides that it will continue to apply to any
business combination between a person who became an Interested Shareholder
prior to the adoption of such an amendment as if the amendment had not been
adopted. The Articles of Incorporation of CFKY do not opt out of the
protection afforded by Chapter 1704. Therefore, the merger moratorium statute
may apply to CFKY.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code (the
"Control Share Acquisition Statute") requires that, with certain exceptions,
acquisitions of voting securities which would result in the acquiring
shareholder owning 20%, 33 1/3%, or 50% of the outstanding voting securities of
an Ohio corporation (a "Control Share Acquisition") must be approved in advance
by (a) the holders of at least a majority of the outstanding voting shares of
such corporation represented at a meeting at which a quorum is present, and (b)
a majority of the portion of the outstanding voting shares represented at such
a meeting excluding the voting shares owned by the acquiring shareholder, by
certain other persons who acquire or transfer voting shares after public
announcement of the acquisition or by certain officers of the corporation or
directors of the corporation who are employees of the corporation. The Control
Share Acquisition Statute was intended, in part, to protect shareholders of
Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make a
tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information with
the Ohio Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
disclosure to the offerees of all material information concerning the control
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
ARTICLES OF INCORPORATION OF CFKY
RESTRICTION ON ACQUISITION OF MORE THAN 10% OF THE COMMON SHARES. The
Articles of Incorporation of CFKY provide that for five years after the
effective date of the Conversion, no person, except the ESOP, may offer to
acquire or acquire the beneficial ownership of more than 10% of any class of
outstanding equity securities of CFKY. If such a prohibited acquisition
occurs, the securities owned by such person in excess of the 10% limit may not
be voted on any matter submitted to the shareholders of CFKY. The term
"person" is defined as an individual, a group acting in concert, a corporation,
a partnership, an association, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate or any other group
formed for the purpose of acquiring, holding or disposing of the equity
securities of CFKY, but does not include an employee stock ownership plan for
the benefit of the employees of Columbia Federal or CFKY. The term "offer"
includes every offer to buy or otherwise acquire, solicitation of an offer to
sell, tender offer for, or request or invitation for tenders of CFKY's Common
Shares. The ability of management or any other person to solicit revocable
proxies from shareholders will not be restricted by such 10% limit.
ABILITY OF THE BOARD OF DIRECTORS TO ISSUE ADDITIONAL SHARES. The Articles
of Incorporation of CFKY permit the Board of Directors of CFKY to issue
additional common shares and preferred shares. See "DESCRIPTION OF AUTHORIZED
SHARES - General." The ability of the Board of Directors to issue such
additional shares may create impediments to gaining, or otherwise discourage
persons from attempting to gain, control of CFKY.
MATTERS REQUIRING ENLARGED SHAREHOLDER VOTE. Generally, matters requiring
a vote of the shareholders of CFKY may be approved by the holders of a majority
of the voting shares of CFKY. Article Sixth of the Articles of Incorporation
of CFKY provides, however, that, in the event the Board of Directors recommends
against the approval of any of the following matters, the holders of at least
75% of the voting shares of CFKY are required to adopt any such matters.
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(1) A proposed amendment to the Articles of Incorporation of CFKY;
(2) A proposed amendment to the Code of Regulations of CFKY;
(3) A proposal to change the number of directors by action of the
shareholders;
(4) An agreement of merger or consolidation providing
for the proposed merger or consolidation of CFKY with or into
one or more other corporations;
(5) A proposed combination or majority share
acquisition involving the issuance of shares of CFKY and
requiring shareholder approval;
(6) A proposal to sell, exchange, transfer or
otherwise dispose of all, or substantially all, of the assets,
with or without the goodwill of CFKY; or
(7) A proposed dissolution of CFKY.
Officers and directors of CFKY are expected to purchase approximately 9.9%
of the shares issued in connection with the Conversion at the mid-point of the
Valuation Range. In addition, the ESOP intends to purchase 8% of the Common
Shares, and it is anticipated that upon shareholder approval of the RRP, the
RRP will purchase 4% of the outstanding Common Shares. The ESOP trustee must
vote shares allocated under the ESOP as directed by the participants to whom
the shares are allocated and vote unallocated shares in his sole discretion on
mergers, sales of substantially all of CFKY's assets and similar transactions.
The RRP trustees, who are expected to be two directors of CFKY, will vote
shares held by the RRP Trust in their discretion. Thus, officers and directors
will have a significant influence over the vote on such a transaction and may
be able to defeat such a proposal.
ELIMINATION OF CUMULATIVE VOTING. Section 1701.55 of the Ohio Revised
Code provides in substance and effect that shareholders of a for profit
corporation which is not a savings bank and which is incorporated under Ohio
law must initially be granted the right to cumulate votes in the election of
directors. The right to cumulate votes in the election of directors will exist
at a meeting of shareholders if notice in writing is given by any shareholder
to the President, a Vice President or the Secretary of an Ohio corporation, not
less than 48 hours before a meeting at which directors are to be elected, that
the shareholder desires that the voting for the election of directors shall be
cumulative and if an announcement of the giving of such notice is made upon the
convening of such meeting by the Chairman or Secretary or by or on behalf of
the shareholder giving such notice. If cumulative voting is invoked, each
shareholder would have a number of votes equal to the number of directors to be
elected, multiplied by the number of shares owned by him, and would be entitled
to distribute his votes among the candidates as he sees fit.
Section 1701.69 of the Ohio Revised Code provides that an Ohio corporation
may eliminate cumulative voting in the election of directors after the
expiration of 90 days after the date of initial incorporation by filing with
the Ohio Secretary of State an amendment to the articles of incorporation
eliminating cumulative voting. The Articles of Incorporation of CFKY have been
amended to eliminate cumulative voting. The elimination of cumulative voting
may make it more difficult for shareholders to elect as directors persons whose
election is not supported by the Board of Directors.
FEDERAL STOCK CHARTER OF COLUMBIA FEDERAL
For a five-year period following the date of the completion of the
Conversion, no person may, directly or indirectly, acquire or offer to acquire
the beneficial ownership of more than 10% of Columbia Federal's outstanding
common shares. The acquisition of more than 10% of the Common Shares of CFKY
would constitute an indirect acquisition of the common shares of Columbia
Federal and would, therefore, be prohibited by the Federal Stock Charter of
Columbia Federal. The beneficial ownership limitation prohibition does not
apply, however, to purchases of Columbia Federal's common shares by one or more
tax-qualified employee stock benefit plans of Columbia Federal. Any holder of
shares of CFKY or Columbia Federal beneficially owned in violation of such
prohibition will not be entitled to vote on matters submitted to a vote of
shareholders, and such shares shall not be voted by any person or be counted as
voting shares in connection with any matter submitted to shareholders for a
vote. The term "person" includes an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate or any other group
formed for the purpose of acquiring, holding or disposing of the equity
securities of CFKY or Columbia Federal. The term
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"offer" includes every offer to buy or otherwise acquire, solicitation of an
offer to sell, tender offer for, or request or invitation for tenders of CFKY's
Common Shares or Columbia Federal's common shares.
EMPLOYEE BENEFIT PLANS
Adoption of the ESOP may also have an anti-takeover effect. The ESOP may
become the owner of a sufficient percentage of the total outstanding Common
Shares that the decision whether to tender the shares held by the ESOP to a
potential acquirer may prevent a takeover. See "DESCRIPTION OF AUTHORIZED
SHARES" and "MANAGEMENT OF COLUMBIA FEDERAL - Employee Stock Ownership Plan."
DESCRIPTION OF AUTHORIZED SHARES
GENERAL
The Articles of Incorporation of CFKY authorize the issuance of six
million common shares and one million preferred shares. The common shares and
the preferred shares authorized by CFKY's Articles of Incorporation have no par
value. Upon receipt by CFKY of the purchase price therefor and subsequent
issuance thereof, each Common Share will be fully paid and nonassessable. The
Common Shares of CFKY will represent nonwithdrawable capital and will not and
cannot be insured by the FDIC. Each Common Share will have the same relative
rights and will be identical in all respects to every other Common Share.
None of the preferred shares of CFKY will be issued in connection with the
Conversion. The Board of Directors of CFKY is authorized, without shareholder
approval, to issue preferred shares and to fix and state the designations,
preferences or other special rights of such shares and the qualifications,
limitations and restrictions thereof. The preferred shares may rank prior to
the common shares as to dividend rights, liquidation preferences or both. Each
holder of preferred shares will be entitled to one vote for each preferred
share held of record on all matters submitted to a vote of shareholders. The
issuance of preferred shares and any conversion rights which may be specified
by the Board of Directors for the preferred shares could adversely affect the
voting power of holders of the common shares. The Board of Directors has no
present intention to issue any of the preferred shares.
The following is a summary description of the rights of the common shares
of CFKY, including the material express terms of such shares as set forth in
CFKY's Articles of Incorporation.
LIQUIDATION RIGHTS
In the event of the complete liquidation or dissolution of CFKY, the
holders of the Common Shares will be entitled to receive all assets of CFKY
available for distribution, in cash or in kind, after payment or provision for
payment of (i) all debts and liabilities of CFKY, (ii) any accrued dividend
claims, and (iii) any interests in the Liquidation Account.
VOTING RIGHTS
The holders of the Common Shares will possess exclusive voting rights in
CFKY, unless preferred shares are issued. Each holder of Common Shares will be
entitled to one vote for each share held of record on all matters submitted to
a vote of holders of common shares.
Section 1701.55 of the Ohio Revised Code provides in substance and effect
that shareholders of a for profit corporation which is not a savings bank and
which is incorporated under Ohio law must initially be granted the right to
cumulate votes in the election of directors. Section 1701.69 of the Ohio
Revised Code provides that an Ohio corporation may eliminate cumulative voting
in the election of directors after the expiration of 90 days after the date of
initial incorporation by filing with the Ohio Secretary of State an amendment
to the articles of incorporation eliminating cumulative voting. The Articles
of Incorporation of CFKY have been amended to eliminate cumulative voting. See
"RESTRICTIONS ON ACQUISITION OF COLUMBIA FEDERAL AND CFKY AND RELATED
ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of CFKY -- Elimination of
Cumulative Voting."
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DIVIDENDS
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state
statutory and regulatory restrictions. See "DIVIDEND POLICY" and "TAXATION -
Federal Taxation" for a description of restrictions on the payment of cash
dividends.
PREEMPTIVE RIGHTS
After the consummation of the Conversion, no shareholder of CFKY will
have, as a matter of right, the preemptive right to purchase or subscribe for
shares of any class, now or hereafter authorized, or to purchase or subscribe
for securities or other obligations convertible into or exchangeable for such
shares or which by warrants or otherwise entitle the holders thereof to
subscribe for or purchase any such share.
RESTRICTIONS ON ALIENABILITY
See "THE CONVERSION - Restrictions on Repurchase of Common Shares" for a
description of the limitations on the repurchase of stock by CFKY; "THE
CONVERSION - Restrictions on Transferability of Common Shares by Directors and
Officers" for a description of certain restrictions on the transferability of
Common Shares purchased by officers and directors; and "RESTRICTIONS ON
ACQUISITION OF COLUMBIA FEDERAL AND CFKY AND RELATED ANTI-TAKEOVER PROVISIONS"
for information regarding regulatory restrictions on acquiring Common Shares.
REGISTRATION REQUIREMENTS
CFKY will register its common shares with the SEC pursuant to Section
12(g) of the Exchange Act prior to or promptly upon completion of the
Conversion and will not deregister such shares for a period of three years
following the completion of the Conversion. Upon such registration, the proxy
and tender offer rules, insider trading restrictions, annual and periodic
reporting and other requirements of the Exchange Act will apply.
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal tax
consequences of the Conversion will be passed upon for Columbia Federal by
Vorys, Sater, Seymour and Pease, 221 E. Fourth Street, Cincinnati, Ohio 45202.
Kentucky tax consequences of the Conversion will be passed upon for Columbia
Federal by VonLehman & Company Inc., certified public accountants. Certain
legal matters will be passed upon for Webb by its counsel, Breyer & Aguggia,
Suite 470 East, 1300 I Street, N.W., Washington, DC 20005.
EXPERTS
The financial statements of Columbia Federal for the years ended September
30, 1997, 1996 and 1995, included in this Prospectus have been audited by
VonLehman & Company Inc., certified public accountants, as stated in their
report appearing herein and have been so included in reliance upon such report
given upon the authority of that firm as experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
letter to Columbia Federal setting forth its opinion as to the estimated pro
forma market value of Columbia Federal as converted and to the use of its name
and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
CFKY has filed with the SEC a Registration Statement on Form S-1 (File No.
________) under the Securities Act with respect to the Common Shares offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. Such
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information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, DC 20549, and copies may be
obtained from the SEC at prescribed rates. The SEC maintains a World Wide Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file with the SEC,
including CFKY.
Columbia Federal has filed an Application for Approval of Conversion (the
"Application") with the OTS. This document omits certain information contained
in the Application. The Application, the exhibits and the financial statements
that are part thereof may be inspected at the offices of the OTS, 1700 G
Street, N.W., Washington, DC 20552, and the Central Regional Office, 200 W.
Madison Street, Suite 1300, Chicago, Illinois 60606.
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88
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SEPTEMBER 30, 1997
PAGE
Independent Auditors' Report F-2
Financial Statements
Statements of Financial Condition F-3
Statements of Income F-4
Statements of Retained Earnings F-5
Statements of Cash Flows F-6
Notes to the Financial Statements F-7 - F-23
F-1
89
INDEPENDENT AUDITORS' REPORT
Board of Directors
Columbia Federal Savings Bank
Fort Mitchell, Kentucky
We have audited the accompanying statements of financial condition of
Columbia Federal Savings Bank as of September 30, 1997 and 1996 and the
related statements of income, retained earnings, and cash flows for the years
ended September 30, 1997, 1996 and 1995. These financial statements are the
responsibility of the Savings Bank'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 financial statements referred to above present fairly, in
all material respects, the financial position of Columbia Federal Savings
Bank at September 30, 1997 and 1996, and the results of its operations and
its cash flows for the years ended September 30, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
Fort Mitchell, Kentucky
October 30, 1997
F-2
90
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 30,
------------------
1997 1996
--------- --------
(In Thousands)
ASSETS
Cash and due from Banks $ 612 $ 549
Interest Bearing Deposits in Other Banks 6,215 2,498
Total Cash and Cash Equivalents 6,827 3,047
Investment Securities
Held to Maturity, At Cost (Market Value of
$13,068 for 1997 and $13,949 for 1996) 13,069 13,995
Available-for-Sale, At Market Value 1,003 1,002
Mortgage-Backed Securities, At Cost (Market Value of
$17,893 for 1997 and $18,585 for 1996) 17,862 18,751
Loans Receivable, Net 61,578 67,741
Interest Receivable 712 818
Premises and Equipment, Net 1,595 1,329
Federal Home Loan Bank Stock, At Cost 1,260 1,174
Deferred Federal Income Tax Asset - 66
Federal Income Tax - Refund Receivable 13 -
Other Assets 87 175
-------- --------
TOTAL ASSETS $104,006 $108,098
======== ========
LIABILITIES AND EQUITY
LIABILITIES
Deposits $ 90,195 $ 94,657
Advances from Borrowers for Taxes
and Insurance 460 263
Accrued Federal Income Tax Liability - 7
Deferred Federal Income Tax Liability 162 -
Other Liabilities 98 634
-------- --------
TOTAL LIABILITIES 90,915 95,561
-------- --------
EQUITY
Retained Earnings - Substantially Restricted 13,090 12,537
Unrealized Gain on Available-for-Sale Securities,
Net of Related Taxes 1 -
-------- --------
TOTAL EQUITY 13,091 12,537
-------- --------
TOTAL LIABILITIES AND EQUITY $104,006 $108,098
======== ========
See auditors' report and accompanying notes.
F-3
91
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
INTEREST INCOME
Loans $5,802 $5,869 $6,014
Mortgage-Backed Securities 1,143 1,214 981
Investments 854 876 777
Interest-Bearing Deposits 197 239 171
------ ------ ------
Total Interest Income 7,996 8,198 7,943
------ ------ ------
INTEREST EXPENSE
Deposits 4,426 4,578 4,383
FHLB Advances 25 - 63
------ ------ ------
Total Interest Expense 4,451 4,578 4,446
------ ------ ------
NET INTEREST INCOME 3,545 3,620 3,497
------ ------ ------
PROVISION FOR LOSSES ON LOANS 113 8 13
------ ------ ------
Net Interest Income After Provision for
Losses on Loans 3,432 3,612 3,484
------ ------ ------
NON-INTEREST INCOME 88 96 92
------ ------ ------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 1,680 1,458 1,372
Occupancy Expense of Premises 242 228 206
Federal Deposit Insurance Premiums 88 809 213
Data Processing Services 112 109 103
Advertising 106 104 59
Other 439 412 418
------ ------ ------
Total Non-Interest Expense 2,667 3,120 2,371
------ ------ ------
Income Before Federal Income Tax Expense 853 588 1,205
FEDERAL INCOME TAX EXPENSE 300 200 389
------ ------ ------
NET INCOME $ 553 $ 388 $ 816
====== ====== ======
See auditors' report and accompanying notes.
F-4
92
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
STATEMENTS OF RETAINED EARNINGS
Unrealized Gain
on Available-for-
Sale Securities,
Retained Net of Related
Earnings Taxes Total
-------- ----------------- -------
(In Thousands)
BALANCE, SEPTEMBER 30, 1994 $11,333 $ - $11,333
NET INCOME FOR THE YEAR 816 - 816
------- ------- -------
BALANCE, SEPTEMBER 30, 1995 12,149 - 12,149
NET INCOME FOR THE YEAR 388 - 388
------- ------- -------
BALANCE, SEPTEMBER 30, 1996 12,537 - 12,537
------- ------- -------
NET INCOME FOR THE YEAR 553 - 553
UNREALIZED GAIN ON
AVAILABLE-FOR-SALE SECURITIES,
NET OF RELATED TAXES 0 1 1
------- ------- -------
BALANCE, SEPTEMBER 30, 1997 $13,090 $ 1 $13,091
======= ======= =======
See auditors' report and accompanying notes.
F-5
93
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
STATEMENTS OF CASH FLOWS
Years Ended September 30,
---------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 553 $ 388 $ 816
Reconciliation of Net Income with
Cash Flows from Operations
Depreciation 86 54 53
Provision for Losses on Loans 113 8 13
Amortization of Premiums and Discounts 1 (14) (17)
FHLB Stock Dividends (86) (79) (70)
Deferred Federal Income Tax 228 (139) 66
Changes In
Interest Receivable 106 (111) 52
Other Assets 88 19 (81)
Federal Income Tax Receivable / Liability (20) 100 80
Other Liabilities (536) 585 (26)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 533 811 886
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment Securities
Purchased (6,074) (2,501) (974)
Matured 7,000 1,000 1,004
Mortgage-Backed Securities
Purchased (2,377) (5,247) (2,226)
Principal Collected 3,266 3,298 2,170
Loan Originations and Repayments, Net 5,939 529 1,872
Purchase Costs of Real Estate Owned - - (3)
Proceeds from Sale of Real Estate Owned 110 23 206
Purchases of Property and Equipment (352) (526) (283)
------- ------- -------
NET CASH (USED) PROVIDED BY INVESTING
ACTIVITIES 7,512 (3,424) 1,766
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from Borrowers for
Taxes and Insurance 197 (37) (77)
Change in Deposits (4,462) (1,149) 2,000
Payments on Advances From FHLB (2,000) - (6,500)
Proceeds from FHLB Advances 2,000 - 6,000
------- -------- -------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (4,265) (1,186) 1,423
------- ------- -------
CHANGE IN CASH AND CASH EQUIVALENTS 3,780 (3,799) 4,075
BEGINNING BALANCE, CASH AND CASH EQUIVALENTS 3,047 6,846 2,771
------- ------- -------
ENDING BALANCE, CASH AND CASH EQUIVALENTS $ 6,827 $ 3,047 $ 6,846
======= ======= =======
See auditors report and accompany notes.
F-6
94
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Columbia Federal Savings Bank is a federally chartered mutual, FDIC insured
association doing business in the Northern Kentucky area. Their accounting
policies follow those prescribed for savings banks. A summary of these
significant accounting policies are as follows:
USE OF ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the 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.
A substantial portion of the Savings 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 Savings 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.
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 Savings Bank's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Savings 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 Savings Bank'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 Savings
Bank'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 Savings Bank
currently has no investments in this category.
F-7
95
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
SECURITIES HELD TO MATURITY
Bonds, notes and debentures which the Savings Bank 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 Savings Bank, as a member of the Federal Home Loan Bank System, is
required to maintain an investment in capital stock of the Federal Home Loan
Bank of Cincinnati (FHLB). The stock is recorded at cost, which represents
anticipated redemption value.
MORTGAGE-BACKED SECURITIES
These assets are carried at cost, adjusted for amortization of premiums and
accretion of discounts on purchases. They are not adjusted to the lower of
cost or market because management has the intention and ability to hold these
assets until maturity. Premiums and discounts, if any, are amortized to
income using the interest method over the life of the securities.
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Savings Bank 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.
F-8
96
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the 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 potential 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 Savings Bank). The Savings Bank 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 Savings Bank
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
Savings Bank investment in impaired nonresidential and multifamily
residential real estate loans, such loans are generally collateral
dependent and, as a result, are carried as a practical expedient at the
lower of cost or fair value. Collateral dependent loans which are more than
ninety days delinquent are considered to constitute more than a minimum
delay in repayment and are evaluated for impairment under SFAS No. 114 at
that time.
At September 30, 1997 and 1996, the Savings Bank had no loans that would be
defined as impaired under SFAS No. 114.
F-9
97
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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 Savings Bank's control. It is the opinion of management,
however, that adequate provisions have been made for losses on loans and
real estate.
PREMISES AND EQUIPMENT
The cost of property 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 property and
equipment is 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 property 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.
ADVERTISING
Advertising costs are expensed as incurred.
RECLASSIFICATIONS
Certain amounts in the prior-year financial statements have been
reclassified for comparative purposes to conform to the current year
financial statements.
F-10
98
COLUMBIA FEDERAL SAVINGS BANK
______________________________________________________________________________
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:
1997 1996 1995
---- ---- ----
(In Thousands)
Interest $4,451 $4,578 $4,446
====== ====== ======
Income Taxes $ 92 $ 239 $ 302
====== ====== ======
The Savings Bank had non-cash investing or financing activities as follows:
Real Estate Acquired Through
Foreclosure of Mortgage Loans $111 $ - $150
==== === ====
Stock Dividends Received $86 $79 $ 70
==== === ====
NOTE 3 - INVESTMENT SECURITIES
Investment securities as of September 30, 1997 and 1996 consist of the
following:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
1997
U.S. Government and Federal Agency
Obligations Held to Maturity $13,069 $ 55 $ (56) $13,068
======= ==== ===== =======
U.S. Government Treasury Bills
Available-for-Sale $ 1,002 $ 1 $ - $ 1,003
======= ==== ===== =======
1996
U.S. Government and Federal Agency
Obligations Held to Maturity $13,995 $114 $(158) $13,949
======= ==== ===== =======
U.S. Government Treasury Bills
Available-for-Sale $ 1,002 $ - $ - $ 1,002
======= ==== ===== =======
The following is a summary of maturities of securities held-to-maturity as
of September 30, 1997:
Amounts maturing in: Cost Market Value
------- ------------
(In Thousands)
One year or less $ 5,500 $ 5,524
After one year through five years 5,996 ,971
After ten years 1,573 1,573
------- -------
Totals $13,069 $13,068
======= =======
F-11
99
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
The following is a summary of maturities of securities available-for-sale
as of September 30, 1997:
Amounts maturing in: Cost Market Value
------ ------------
One year or less $1,002 $1,003
====== ======
The following is a summary of interest earned on investments:
1997 1996 1995
---- ---- ----
(In Thousands)
U.S. Government and Agency Securities $768 $797 $707
Dividends on FHLB Stock 86 79 70
---- ---- ----
$854 $876 $777
==== ==== ====
NOTE 4 - MORTGAGE-BACKED SECURITIES
The balances in mortgage-backed securities as of September 30, 1997 and
1996 was comprised of:
Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
(In Thousands)
1997
Government National Mortgage
Association $5,048 $93 $(5) $5,136
Federal National Mortgage Association 9,297 30 (119) 9,208
Federal Home Loan Mortgage Corporation 3,517 40 (8) 3,549
------- ---- ------ -------
Totals $17,862 $163 $(132) $17,893
======= ==== ====== =======
1996
Government National Mortgage Association $4,536 $52 $(18) $4,570
Federal National Mortgage Association 9,229 32 (238) 9,023
Federal Home Loan Mortgage Corporation 4,986 36 (30) 4,992
------- ---- ------ -------
Totals $18,751 $120 $(286) $18,585
======= ==== ====== =======
F-12
100
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 4 - MORTGAGE-BACKED SECURITIES (CONTINUED)
The following is a summary of maturities of mortgaged-backed securities
held to maturity as of September 30, 1997:
Amounts maturing in: Cost Market Value
------ -------------
(In Thousands)
One year or less $ - $ -
After one year through five years 1,230 1,235
After five years through ten years 2,465 2,447
After ten years 14,167 14,211
------- -------
Totals $17,862 $17,893
======= =======
NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES ON LOANS
The balances in loans receivable as of September 30, 1997 and 1996 was
comprised of:
1997 1996
---- ----
(In Thousands)
Mortgage Loans $63,899 $69,349
Home Improvements Loans 7 8
Loans on Deposits 42 42
------- -------
63,948 69,399
Less Net Deferred Loan Origination Fees (867) (864)
Loans in Process (1,203) (605)
Allowance for Loss on Loans (300) (189)
------- ------
Loans Receivable, Net $61,578 $67,741
======= =======
A summary of activity in the allowance for loan losses for September 30,
1997, 1996 and 1995 is as follows:
1997 1996 1995
---- ---- ----
(In Thousands)
Balance at Beginning of the Year $189 $189 $189
Additions to Allowance 113 8 13
Charge Offs During the Year (2) (8) (13)
---- ---- ----
Balance at End of the Year $300 $189 $189
==== ==== ====
The Savings Bank had no loans on non-accrual status as of September 30,
1997 and 1996.
F-13
101
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 6 - LOAN COMMITMENTS
As of September 30, 1997, the Savings Bank had fixed and adjustable rate
loan commitments as follows:
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
First Mortgage Loans
on One-to-Four Family
Residential Property $399 $75 $474
==== === ====
Weighted Average Interest Rates 8.11% 5.5% 7.78%
==== === ====
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest at September 30, 1997 and 1996 consisted of the following:
1997 1996
---- ----
(In Thousands)
Loans $440 $478
Mortgage-Backed Securities 124 140
Investments and Other 147 200
---- ----
Totals $712 $818
==== ====
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1997 and 1996 was comprised of:
1997 1996
---- ----
(In Thousands)
Land $ 347 $ 347
Buildings and Improvements 1,879 1,690
Furniture and Equipment 574 504
------- -------
2,800 2,541
Accumulated Depreciation (1,205) (1,212)
------- -------
Property and Equipment, Net $ 1,595 $ 1,329
======= =======
F-14
102
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 9 - DEPOSITS
A breakdown of deposits by interest rates and types as of September 30,
1997 and 1996 follows:
1997 1996
---------------- ----------------
Balances by Interest Rate Amount Percent Amount Percent
------------------------- ------- ------- ------- -------
(In Thousands)
Passbooks (1997 - 3.00%,
1996 - 3.00%) $13,167 14.6% $13,519 14.3%
Money Market Deposit Accounts
(1997 - 2.75%, 1996 - 3.04%) 11,919 13.2 13,641 14.4
Now Accounts (1997 - 2.25%,
1996 - 2.40%) 3,952 4.4 4,339 4.6
Christmas Club
(Non-Interest Bearing) 66 .1 73 .1
Certificates of Deposit:
3.00% - 4.00% 42 - 42 -
4.01% - 5.00% - - 23,551 25.0
5.01% - 6.00% 31,457 34.9 31,374 33.1
6.01% - 7.00% 26,579 29.5 7,898 8.3
7.01% - 8.00% 3,013 3.3 220 .2
------- ----- ------- -----
Totals $90,195 100.0% $94,657 100.0%
======= ===== ======= =====
For NOW accounts and money market accounts, bonus interest rates are paid
on balances over $2,500 of .15% and .25%, respectively.
The scheduled maturities of certificate accounts are as follows:
Years Ended September 30,
------------------------------------------------
1998 1999 2000 2001 Total
---- ---- ---- ---- -----
(In Thousands)
3.00% and under $ 40 $ 2 $ - $ - $ 42
5.01%-5.50% 18,742 182 - - 18,924
5.51%-6.00% 4,239 5,302 2,991 - 12,532
6.01%-6.50% 12,231 5,997 2,081 23,200
6.51%-7.00% 2,722 658 - - 3,380
7.01%-7.50% 503 2,281 - - 2,784
7.51% - 8.00% - 229 - - 229
------- ------- ------ ------- -------
Totals $38,477 $14,651 $5,072 $ 2,891 $61,091
======= ======= ====== ======= =======
The total deposit accounts with a balance of $100,000 or more was
$5,113,000 and $4,732,000 at September 30, 1997 and 1996, respectively.
Savings deposit customers are primarily Northern Kentucky area individuals
and businesses.
F-15
103
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 9 - DEPOSITS (CONTINUED)
Interest expense on deposits is summarized as follows:
Years Ended September 30,
------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Passbook Savings Accounts $ 402 $ 411 $ 465
Money Market Deposit Accounts 378 446 664
Certificates of Deposit 3,548 3,613 3,138
Now Accounts 98 108 116
------ ------ ------
Interest Expense on Deposits $4,426 $4,578 $4,383
====== ====== ======
NOTE 10 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
The Savings Bank had no outstanding FHLB advances at September 30, 1997 and
1996. The Savings Bank did have outstanding advances during 1997 to meet
current liquidity needs. The FHLB advances were 90 day advances which
carry an adjustable interest rate. The advances were collateralized by the
Savings Bank's first mortgage loans.
NOTE 11 - RETIREMENT PLAN
The Savings 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 Savings Bank matches one-half of the
employees' contributions up to a maximum employer match of three percent
(3%) of compensation. By its nature, the plan is fully funded.
The Savings Bank participates in a non-contributory multi-employer defined
benefit retirement plan covering substantially all employees. Accumulated
benefit and net assets available for benefits is unavailable for the
Savings Bank's portion. The plan is funded through annuity contracts.
Employee and employer contributions to the 401(k) plan and retirement plan
expense were as follows:
Years Ended September 30,
------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
401(k) Plan
Employee Contributions $82 $72 $67
Employer Contributions $30 $27 $27
Multi-Employer Defined
Benefit Retirement Plan $75 $89 $79
F-16
104
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 12 - RETAINED EARNINGS
Through 1996, the Savings 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.
NOTE 13 - 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) include the
following components:
1997 1996
---- ----
(In Thousands)
Deferred Federal Income Tax Liability $(328) $(262)
Deferred Federal Income Tax Assets 166 328
----- -----
Total Deferred Federal Income
Tax (Liability) Asset $(162) $ 66
===== =====
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 to income tax
expense at the Savings Bank's effective rate is as follows:
1997 1996 1995
---- ---- ----
(In Thousands)
Computed Tax at the Expected
Statutory Rate $290 $200 $410
Nondeductible Expenses 2 1 1
Other Differences 8 (1) (22)
---- ---- ----
$300 $200 $389
==== ==== ====
F-17
105
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 13 - INCOME TAXES (CONTINUED)
The components of income tax expense at September 30 are summarized as
follows:
1997 1996 1995
---- ---- ----
(In Thousands)
Current Tax Expense $ 72 $339 $323
Deferred Tax (Benefit) Expense 228 (139) 66
---- ---- ----
Income Tax Expense $300 $200 $389
==== ==== ====
For the Savings Bank's 1997 tax year, a new tax law will require the
Savings Bank to recapture, over a six year period, approximately $300,000
of bad debt deductions taken between 1988 and 1996. This new tax law will
not have a significant effect on the Savings Bank's financial statements.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Savings Bank has mortgage loans outstanding with various officers,
directors, employees and their relatives. The activity on these loans is
shown below:
(In Thousands)
Balance at September 30, 1996 $799
New Loans Made 363
Payment of Principal (253)
----
Balance At September 30, 1997 $909
====
During 1997, the Savings Bank adopted a policy that loans are granted to
officers and employees on their primary residence at interest rates which
are discounted by 1% from the Savings Bank's normal lending rate. The rate
is only in effect while the person is affiliated with the Savings 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 Savings Bank had deposits from various officers and directors totaling
$1,464,000 and $1,232,000 as of September 30, 1997 and 1996, respectively.
NOTE 15 - LEASES
The Savings Bank leased facilities for one of its branches. The lease
expired on November 30, 1996.
The total lease expense for the years ended September 30, 1997, 1996 and
1995 was $8,000, $17,000 and $15,000, respectively.
F-18
106
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 16 - INTEREST RATE RISK
The Savings Bank is engaged principally in providing first mortgage loans
to individuals on residential properties. At September 30, 1997, the
Savings Bank's assets consist 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 which vary
with market rates over time.
At September 30, 1997, the Savings 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 $51.3 8.33% 30 Years
Adjustable Mortgages and Participations $12.6 7.86% 30 Years
INTEREST BEARING LIABILITIES
Deposit Accounts $90.2 4.94% 5 Years
NOTE 17 - 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 as of September 30, 1997, 1996 and 1995 is as follows:
Years Ended September 30,
-----------------------------------
1997 1996 1995
------- --------- -------
(In Thousands)
Net Income
Per Office of Thrift
Supervision Report $ 553 $ 409 $ 795
Audit Adjustments
Accrued Liabilities - (21) 21
------- ------- -------
Net Income Per Statements
of Income $ 553 $ 388 $ 816
======= ======= =======
Retained Earnings
Per Office of Thrift
Supervision Report $13,090 $12,537 $12,128
Audit Adjustments
Accrued Liabilities - - 21
------- ------- -------
Retained Earnings Per
Balance Sheets $13,090 $12,537 $12,149
======= ======= =======
F-19
107
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
Savings 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 3.0% of adjusted total assets, and
(iii) risk-based capital equal to 8.0% of risk-weighted assets. The OTS
has proposed to amend the core capital requirement to a range of 4% to 5%
of adjusted total assets, depending on the examination rating and overall
risk. The Savings Bank's management does not anticipate any adverse
financial effect of the core capital requirement regulation is amended as
proposed.
Any savings 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 savings 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, 1997 information with respect to the Savings Bank's
capital ratios is summarized as follows:
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
(In Thousands)
Capital under Generally Accepted
Accounting Principles
Additional Capital Items: $13,090 $13,090 $13,090
General Valuation Allowances - - 300
------- ------- -------
Regulatory Capital 13,090 13,090 13,390
Less Minimum Capital Requirements 1,560 3,120 3,527
Capital in Excess of
Minimum Requirements $11,530 $ 9,970 $ 9,863
======= ======= =======
Regulatory Capital as a Percentage
of Applicable Total Assets 12.59% 12.59% 30.37%
Less Minimum Capital as a Percentage
of Applicable Total Assets 1.50% 3.00% 8.00%
Regulatory Capital as a Percentage of
Applicable Total Assets in Excess
of Requirements 11.09% 9.59% 22.37%
The Savings Bank's management believes that, under the current regulations,
the Savings Bank will continue to meet its minimum capital requirements in
the foreseeable future. However, events beyond the control of the Savings
Bank, such as increased interest rates or a downturn in the economy in
areas where the Savings Bank has most of its loans, could adversely affect
future earnings and, consequently, the ability of the Savings Bank to meet
its future minimum capital requirements.
F-20
108
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 19 - 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 Savings Bank.
The following methods and assumptions were used by the Savings 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.
F-21
109
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Savings Bank's financial instruments are
as follows:
September 30, 1997
---------------------
Amount Value
------- -----
(In Thousands)
Financial Assets:
Cash and Cash Equivalents $ 6,827 $ 6,827
Investment Securities 14,072 14,071
Mortgage-backed Securities 17,862 17,893
Loans, Net 61,578 64,261
Financial Liabilities:
Deposits 90,195 90,299
The carrying amounts in the preceding table are included in the statement
of financial condition under the applicable captions.
NOTE 20 - DEPOSIT INSURANCE
Deposits of the Savings 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.
On September 30, 1996 a law was passed to recapitalize the SAIF with a one-
time assessment of SAIF-insured institutions of 65.7c. for every $100 of
assessable deposits. The assessment to the Savings Bank was $591,600.
This assessment was accrued in the year ended September 30, 1996 and was
paid in November, 1996.
Congress is considering legislation that would merge the SAIF and BIF on
January 1, 1999. The proposed legislation currently provides for the
elimination of the thrift charter or separate thrift regulation under
Federal law prior to the merger of the deposit insurance funds. The
Savings Bank would then be regulated as a bank under Federal law and
subject to the more restrictive activity limits imposed on national banks.
F-22
110
COLUMBIA FEDERAL SAVINGS BANK
_______________________________________________________________________________
NOTE 21 - CORPORATE REORGANIZATION (UNAUDITED)
On October 9, 1997, the Board of Directors of the Savings Bank unanimously
adopted a Plan of Conversion (Plan) to convert from a federally chartered
mutual savings bank to a federally chartered capital stock savings bank.
The Plan, which includes the formation of a holding company, is subject to
regulatory approval and approval by the members of the Savings Bank. The
conversion is expected to be accomplished through amendment of the Savings
Bank's Charter and the sale of the holding company's common shares. A
subscription offering of the holding company's shares will be offered
initially to eligible account holders, the holding company's employee stock
ownership plan, supplemental eligible account holders and certain other
members. Any common shares not sold in the subscription offering will be
offered to the general public with preference given to residents of Boone
County or Kenton County, Kentucky.
At the time of conversion, the Savings Bank will establish a liquidation
account in an amount equal to its regulatory capital as reflected in the
latest statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible depositors who continue to maintain their accounts at the Savings
Bank after conversion. The liquidation account will be reduced annually to
the extent the eligible depositors have reduced their qualifying deposits.
In the event of a complete liquidation, 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 Savings Bank may not declare or pay a cash
dividend on its common shares or repurchase any of its common shares if
after the payment of such dividend or the repurchase of such shares, the
Savings Bank's stockholders' equity would be reduced below the amount
required for the liquidation account or the Savings Bank's regulatory
capital would fail to satisfy applicable regulatory capital requirements.
Conversion costs will be deferred and will reduce the proceeds form the
shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. As of September 30, 1997, the Savings
Bank had incurred approximately $3,000 of conversion costs.
F-23
111
No person has been authorized to give any information or to make any
representations other than as contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized by CFKY. This Prospectus does not constitute an offer to sell,
or the solicitation of an offer to buy, any security, other than the Common
Shares offered hereby, to any person in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom delivery of
this Prospectus would be unlawful. Neither the delivery of this Prospectus nor
any sale hereunder shall, under any circumstances, create any implication that
the information contained herein is correct as to any time subsequent to the
date hereof.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY......................... 1
SELECTED CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA................. 6
RISK FACTORS............................... 8
COLUMBIA FINANCIAL OF KENTUCKY, INC........ 12
COLUMBIA FEDERAL SAVINGS BANK.............. 12
USE OF PROCEEDS............................ 13
MARKET FOR COMMON SHARES................... 14
DIVIDEND POLICY............................ 14
REGULATORY CAPITAL COMPLIANCE.............. 15
CAPITALIZATION............................. 16
PRO FORMA DATA............................. 17
SUMMARY STATEMENTS OF INCOME............... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.............................. 21
ASSET AND LIABILITY MANAGEMENT............. 25
THE BUSINESS OF COLUMBIA FEDERAL........... 30
MANAGEMENT OF CFKY......................... 49
MANAGEMENT OF COLUMBIA FEDERAL............. 50
REGULATION................................. 56
TAXATION................................... 61
THE CONVERSION............................. 63
RESTRICTIONS ON ACQUISITION OF
COLUMBIA FEDERAL AND CFKY AND
RELATED ANTI-TAKEOVER PROVISIONS........... 75
DESCRIPTION OF AUTHORIZED SHARES........... 79
REGISTRATION REQUIREMENTS.................. 80
LEGAL MATTERS.............................. 80
EXPERTS.................................... 80
ADDITIONAL INFORMATION..................... 80
FINANCIAL STATEMENTS....................... F-1
Until the later of ___ or 25 days after commencement of the Offering, all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This obligation is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Up to 2,323,000 Common Shares
COLUMBIA FINANCIAL OF KENTUCKY, INC.
(Holding Company for Columbia Federal
Savings Bank)
____________
PROSPECTUS
____________
CHARLES WEBB & COMPANY, A
DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
___________, 1998
112
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
* Legal Fees and Expenses $177,000
* Printing, EDGAR Formatting, Postage and Mailing 79,049
Appraisal Fees and Expenses 17,000
* Accounting Fees and Expenses 40,000
* Blue Sky Filing Fees and Expenses 10,000
Federal Filing Fees 16,496
NASD Filing Fees 3,171
Conversion Agent Fees 9,500
* Other Expenses 20,257
** Underwriting Fees and Expenses 285,527
--------
Total estimated expenses $658,000
========
____________
* Estimated.
** Columbia Federal and CFKY have retained Charles Webb & Company, a division
of Keefe, Bruyette & Woods, Inc. ("Webb"), to assist in the marketing of
the Common Shares. Webb will consult with and advise Columbia Federal and
CFKY and assist with the sale of the Common Shares in connection with the
Conversion on a best efforts basis. The services to be rendered by Webb
include assisting CFKY in conducting the Subscription Offering and the
Community Offering and educating Columbia Federal personnel about the
Conversion process.
For its services, Webb will receive a commission equal to 1.50% of the
aggregate purchase price paid for shares sold to residents of Boone County
or Kenton County, Kentucky; 1.25% of the aggregate purchase price of Common
Shares sold to residents of counties contiguous to Boone County or Kenton
County, Kentucky; and 0.75% of the aggregate purchase price of Common
Shares sold to persons not residents of Boone County or Kenton County,
Kentucky, or counties contiguous thereto. No commission will be paid on
amounts paid by Columbia Federal's directors, executive officers or
employees and their immediate family members and the ESOP. In the event
that Columbia Federal requests Webb to obtain the assistance of other
broker-dealers to sell Common Shares in the Community Offering, Webb will
be paid a commission of 5.5% of the aggregate purchase price of Common
Shares sold by such broker-dealers, from which such broker-dealers will be
paid, instead of the commission based upon the residence of the purchasers.
Sales commissions payable to Webb have been computed based upon the
following assumptions: (i) 2,020,000 Common Shares will be sold in
connection with the Conversion; (ii) 200,500 of such Common Shares will be
purchased by directors, officers and employees of Columbia Federal and the
members of their immediate families, (iii) eight percent of such Common
Shares will be purchased by the ESOP; and (iv) the remaining 1,657,900
Common Shares sold in connection with the Conversion will be purchased with
sales commissions of 1.50%, 1.25% and 0.75% on 60%, 20% and 20%,
respectively, of the aggregate dollar amount paid for such Common Shares.
A management fee of $25,000 has already been paid to Webb and such amount
will be deducted from the commission. Columbia Federal will reimburse Webb
for all reasonable out-of-pocket expenses, including legal fees, not to
exceed $35,000.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS OF COLUMBIA FEDERAL.
(A) FEDERAL REGULATIONS
As a federal savings and loan association, Columbia Federal is subject to
federal regulations which provide that any person against whom any action, suit
or other judicial or administrative proceeding, or threatened proceeding,
whether civil, criminal, or otherwise, including any appeal or other proceeding
for review (an
113
"Action"), is brought by reason of the fact that such person is or was a
director, officer or employee of Columbia Federal shall be indemnified by
Columbia Federal for the following:
(i) Reasonable costs and expenses, including reasonable attorney's fees
actually paid or incurred by such person in connection with proceedings related
to the defense or settlement of an Action:
(ii) Any amount for which such person becomes liable by reason of any
judgment in an Action; and
(iii) Reasonable costs and expenses, including reasonable attorney's fees,
actually paid or incurred in any Action to enforce his rights under this
section if the person attains a final judgment in favor of such person in such
Action.
Such indemnification shall be made to such officer, director or employee
only if the following requirements are met:
(i) Columbia Federal shall make the indemnification in connection with any
Action which results in a final judgment on the merits in favor of such
director, officer or employee; and
(ii) Columbia Federal shall make the indemnification in case of (A)
settlement of any Action, (B) final judgment against such director, officer or
employee, or (C) final judgment in favor of such director, officer or employee
other than on the merits, only if a majority of the directors of Columbia
Federal determines that such director, officer or employee was acting in good
faith within what he or she reasonably believed under the circumstances was the
scope of his or her employment or authority and for a purpose which he or she
reasonably believed under the circumstances was in the best interest of
Columbia Federal or its stockholders.
Columbia Federal may authorize payment of reasonable costs and expenses,
including reasonable attorney's fees arising from the defense or settlement of
any Action, to any director, officer or employee if a majority of the directors
of Columbia Federal conclude that such person may become entitled to
indemnification. The directors of Columbia Federal may impose conditions on
such payment, and, before making an advance payment, Columbia Federal shall
obtain an agreement from such person that Columbia Federal will be repaid if
the person on whose behalf payment is made is later determined not to be
entitled to such indemnification.
Columbia Federal currently maintains a directors' and officers' liability
policy with CNA Insurance Companies providing for insurance of directors and
officers for liability incurred in connection with performance of their duties
as directors and officers. Such policy does not, however, provide insurance
for losses resulting from willful or criminal misconduct.
(B) CFKY'S CODE OF REGULATIONS
Article Five of CFKY's Code of Regulations provides for the
indemnification of officers and directors as follows:
Section 5.01. Indemnification. The corporation shall indemnify any
officer or director of the corporation who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, any action threatened or instituted by or in
the right of the corporation), by reason of the fact that he is or was a
director, officer, employee, agent or volunteer of the corporation, or is or
was serving at the request of the corporation as a director, trustee, officer,
employee, member, manager, agent or volunteer of another corporation (domestic
or foreign, nonprofit or for profit), limited liability company, partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if his act
or omission giving rise to any claim for indemnification under this Section
5.01 was not occasioned by his intent to cause injury to the corporation or by
his reckless disregard for the best interests of the corporation, and in
respect of any criminal action or proceeding, he had no
114
reasonable cause to believe his conduct was unlawful. It shall be presumed
that no act or omission of a person claiming indemnification under this Section
5.01 that gives rise to such claim was occasioned by an intent to cause injury
to the corporation or by a reckless disregard for the best interests of the
corporation and, in respect of any criminal matter, that such person had no
reasonable cause to believe his conduct was unlawful; the presumption recited
in this Section 5.01 can be rebutted only by clear and convincing evidence, and
the termination of any action, suit or proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, rebut such presumption.
Section 5.02. Court-Approved Indemnification. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding:
(A) the corporation shall not indemnify any officer or director of the
corporation who was a party to any completed action or suit instituted by or in
the right of the corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee, agent or volunteer of
the corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, member, manager, agent or volunteer of
another corporation (domestic or foreign, nonprofit or for profit), limited
liability company, partnership, joint venture, trust or other enterprise, in
respect of any claim, issue or matter asserted in such action or suit as to
which he shall have been adjudged to be liable for an act or omission
occasioned by his deliberate intent to cause injury to the corporation or by
his reckless disregard for the best interests of the corporation, unless and
only to the extent that the Court of Common Pleas of Hamilton County, Ohio, or
the court in which such action or suit was brought shall determine upon
application that, despite such adjudication of liability, and in view of all
the circumstances of the case, he is fairly and reasonably entitled to such
indemnity as such Court of Common Pleas or such other court shall deem proper;
and
(B) the corporation shall promptly make any such unpaid indemnification as
is determined by a court to be proper as contemplated by this Section 5.02.
Section 5.03. Indemnification for Expenses. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding, to the extent that an
officer or director of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
5.01, or in defense of any claim, issue or matter therein, he shall be promptly
indemnified by the corporation against expenses (including, without limitation,
attorneys' fees, filing fees, court reporters' fees and transcript costs)
actually and reasonably incurred by him in connection therewith.
Section 5.04. Determination Required. Any indemnification required under
Section 5.01 and not precluded under Section 5.02 shall be made by the
corporation only upon a determination that such indemnification is proper in
the circumstances because the officer or director has met the applicable
standard of conduct set forth in Section 5.01. Such determination may be made
only (A) by a majority vote of a quorum consisting of directors of the
corporation who were not and are not parties to, or threatened with, any such
action, suit or proceeding, or (B) if such a quorum is not obtainable or if a
majority of a quorum of disinterested directors so directs, in a written
opinion by independent legal counsel other than an attorney, or a firm having
associated with it an attorney, who has been retained by or who has performed
services for the corporation, or any person to be indemnified, within the past
five years, or (C) by the shareholders, or (D) by the Court of Common Pleas of
Hamilton County, Ohio, or (if the corporation is a party thereto) the court in
which such action, suit or proceeding was brought, if any; any such
determination may be made by a court under division (D) of this Section 5.04 at
any time including, without limitation, any time before, during or after the
time when any such determination may be requested of, be under consideration by
or have been denied or disregarded by the disinterested directors under
division (A) or by independent legal counsel under division (B) or by the
shareholders under division (C) of this Section 5.04; and no failure for any
reason to make any such determination, and no decision for any reason to deny
any such determination, by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by the shareholders under
division (C) of this Section 5.04 shall be evidence in rebuttal of the
presumption recited in Section 5.01. Any determination made by the
disinterested directors under division (A) or by independent legal counsel
under division (B) of this Section 5.04 to make indemnification in respect of
any claim, issue or matter asserted in an action or suit threatened or brought
by or in the right of the corporation shall be promptly communicated to the
person who threatened or brought such action or suit, and within ten (10) days
after
115
receipt of such notification such person shall have the right to petition the
Court of Common Pleas of Hamilton County, Ohio, or the court in which such
action or suit was brought, if any, to review the reasonableness of such
determination.
Section 5.05. Advances for Expenses. The provisions of Section
1701.13(E)(5)(a) of the Ohio Revised Code do not apply to the corporation.
Expenses (including, without limitation, attorneys' fees, filing fees, court
reporters' fees and transcript costs) incurred in defending any action, suit or
proceeding referred to in Section 5.01 shall be paid by the corporation in
advance of the final disposition of such action, suit or proceeding to or on
behalf of the officer or director promptly as such expenses are incurred by
him, but only if such officer or director shall first agree, in writing, to
repay all amounts so paid in respect of any claim, issue or other matter
asserted in such action, suit or proceeding in defense of which he shall not
have been successful on the merits or otherwise if it is proved by clear and
convincing evidence in a court of competent jurisdiction that, in respect of
any such claim, issue or other matter, his relevant action or failure to act
was occasioned by his deliberate intent to cause injury to the corporation or
his reckless disregard for the best interests of the corporation, unless, and
only to the extent that, the Court of Common Pleas of Hamilton County, Ohio, or
the court in which such action or suit was brought shall determine upon
application that, despite such determination, and in view of all of the
circumstances, he is fairly and reasonably entitled to all or part of such
indemnification.
Section 5.06. Article Five Not Exclusive. The indemnification provided
by this Article Five shall not be exclusive of, and shall be in addition to,
any other rights to which any person seeking indemnification may be entitled
under the Articles, the Regulations, any agreement, a vote of disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to
a person who has ceased to be an officer or director of the corporation and
shall inure to the benefit of the heirs, executors, and administrators of such
a person.
Section 5.07. Insurance. The corporation may purchase and maintain
insurance, or furnish similar protection, including but not limited to trust
funds, letters of credit, or self-insurance, for or on behalf of any person who
is or was a director, officer, employee, agent or volunteer of the corporation,
or is or was serving at the request of the corporation as a director, trustee,
officer, employee, member, manager, agent or volunteer of another corporation
(domestic or foreign, nonprofit or for profit), limited liability company,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the obligation
or the power to indemnify him against such liability under the provisions of
this Article Five. Insurance may be purchased from or maintained with a person
in which the corporation has a financial interest.
Section 5.08. Certain Definitions. For purposes of this Article Five,
and as an example and not by way of limitation:
(A) A person claiming indemnification under this Article Five shall be
deemed to have been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 5.01, or in defense of any
claim, issue or other matter therein, if such action, suit or proceeding shall
be terminated as to such person, with or without prejudice, without the entry
of a judgment or order against him, without a conviction of him, without the
imposition of a fine upon him and without his payment or agreement to pay any
amount in settlement thereof (whether or not any such termination is based upon
a judicial or other determination of the lack of merit of the claims made
against him or otherwise results in a vindication of him).
(B) References to an "other enterprise" shall include employee tax benefit
plans; references to a "fine" shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries.
Section 5.09. Venue. Any action, suit or proceeding to determine a claim
for, or for repayment to the corporation of, indemnification under this Article
Five may be maintained by the person claiming such indemnification, or by the
corporation, in the Court of Common Pleas of Hamilton County, Ohio. The
corporation
116
and (by claiming or accepting such indemnification) each such person consent to
the exercise of jurisdiction over its or his person by the Court of Common
Pleas of Hamilton County, Ohio, in any such action, suit or proceeding.
The Board of Directors is authorized, at their discretion, to obtain
policies of insurance insuring the Association against loss caused by the acts
of its directors, officers or employees and insuring its directors, officers or
employees for those expenses which an association may indemnify such director,
officer or employee under the authority of Revised Code Section 1151.151.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of CFKY have been sold by CFKY without registration pursuant
to the Act, except as follows:
Effective October 14, 1997, in connection with the incorporation of CFKY,
100 common shares, without par value, of CFKY (the "Securities") were sold for
an aggregate purchase price of $100 pursuant to Section 4(2) of the Act in a
transaction not involving any public offering. The Securities were sold to
Robert V. Lynch, the President of CFKY, who had access to all material
information about CFKY. The Securities were offered without the use of any
form of general solicitation or advertising. No underwriter was involved in
the transaction, and no commission, discount or other remuneration was paid or
given in connection with the sale of the Securities. Under the terms of the
Subscription Agreement between CFKY and Mr. Lynch, the Securities will be
repurchased by CFKY on the effective date of the Conversion.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The exhibits filed as a part of this Registration Statement are as follows:
1.1 Engagement letter with Charles Webb & Company, a division of Keefe, Bruyette &
Woods, Inc. ("Webb")
*1.2 Agency Agreement with Webb (proposed)
2 Plan of Conversion
3.1 Articles of Incorporation of Columbia Financial of Kentucky, Inc.
3.2 Code of Regulations of Columbia Financial of Kentucky, Inc.
5 Opinion of Vorys, Sater, Seymour and Pease regarding legality of securities
being offered
8.1 Opinion of Vorys, Sater, Seymour and Pease regarding tax matters
8.2 Opinion of VonLehman & Company Inc. regarding tax matters
10.1 Columbia Financial of Kentucky, Inc., 1998 Stock Option and Incentive Plan (proposed)
10.2 Columbia Financial of Kentucky, Inc., Recognition and Retention Plan (proposed)
10.3 Employment Agreement between Columbia Federal Savings Bank and Robert V. Lynch
(proposed)
10.4 Severance Agreement between Columbia Federal Savings Bank and five other executive
officers of Columbia Federal Savings Bank (proposed)
10.5 Tax Allocation Agreement between Columbia Federal Savings Bank and Columbia
Financial of Kentucky, Inc. (proposed)
21 Subsidiaries
23.1 Consent of VonLehman & Company Inc.
23.2 Consent of Keller & Company, Inc.
23.3 Consent of Vorys, Sater, Seymour and Pease
27 Financial Data Schedule
99.1 Summary Proxy Statement
99.2 Order Form and Form of Certification
99.3 Form of Proxy
99.4 Solicitation and Marketing Material
99.5 Appraisal Agreement between Columbia Federal Savings Bank and Keller & Company,
Inc.
99.6 Appraisal Report prepared by Keller & Company, Inc.
_________________________
* To be filed supplementally or by amendment.
117
(B) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 17. UNDERTAKINGS.
(a) The undersigned, CFKY, hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Act;
(ii) To reflect in the
prospectus any facts or events arising after the
effective date of the Registration Statement (or
the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent
a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material
information with respect to the plan of
distribution not previously disclosed in the
Registration Statement or any material change to
such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of CFKY,
pursuant to the foregoing provisions or otherwise, CFKY has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by CFKY of expenses incurred or paid by a director, officer or
controlling person of CFKY in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, CFKY will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, duly authorized to do so, in the City of Ft.
Mitchell, Commonwealth of Kentucky, on December 11, 1997.
By: /s/ Robert V. Lynch
----------------------------------
Robert V. Lynch
President, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed below by the following
persons in the capacities and as of the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Robert V. Lynch President, Chief Executive Officer December 11, 1997
- ------------------- (Principal Executive Officer)
Robert V. Lynch and Director
/s/ Abijah Adams Treasurer
- ---------------- (Principal Financial and Accounting Officer) December 11, 1997
Abijah Adams
/s/ J. Robert Bluemlein
- ----------------------- Director December 11, 1997
J. Robert Bluemlein
/s/ Kenneth R. Kelly
- -------------------- Director December 11, 1997
Kenneth R. Kelly
/s/ John C. Layne
- ----------------- Director December 11, 1997
John C. Layne
/s/ Daniel T. Mistler
- --------------------- Director December 11, 1997
Daniel T. Mistler
/s/ Fred A. Tobergte, Sr.
- ------------------------- Director December 11, 1997
Fred A. Tobergte, Sr.
/s/ Geraldine Zembrodt
- ---------------------- Director December 11, 1997
Geraldine Zembrodt
119
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------
1.1 Engagement letter with Charles Webb & Company, a division of Keefe, Bruyette &
Woods, Inc. ("Webb")
*1.2 Form of Agency Agreement with Webb (proposed)
2 Plan of Conversion
3.1 Articles of Incorporation of Columbia Financial of Kentucky, Inc.
3.2 Code of Regulations of Columbia Financial of Kentucky, Inc.
5 Opinion of Vorys, Sater, Seymour and Pease regarding legality of
securities being offered
8.1 Opinion of Vorys, Sater, Seymour and Pease regarding tax matters
8.2 Opinion of VonLehman & Company Inc. regarding tax matters
10.1 Columbia Financial of Kentucky, Inc. 1998 Stock Option and Incentive
Plan (proposed)
10.2 Columbia Financial of Kentucky, Inc., Recognition and Retention Plan
(proposed)
10.3 Employment Agreement between Columbia Federal Savings Bank and Robert V.
Lynch (proposed)
10.4 Severance Agreement between Columbia Federal Savings Bank and five other
executive officers of Columbia Federal Savings Bank (proposed)
10.5 Tax Allocation Agreement between Columbia Federal Savings Bank and
Columbia Financial of Kentucky, Inc. (proposed)
21 Subsidiaries
23.1 Consent of VonLehman & Company Inc.
23.2 Consent of Keller & Company, Inc.
23.3 Consent of Vorys, Sater, Seymour and Pease
27 Financial Data Schedule
99.1 Summary Proxy Statement
99.2 Order Form and Form of Certification
99.3 Form of Proxy
99.4 Solicitation and Marketing Materials
120
99.5 Appraisal Agreement between Columbia Federal Savings Bank and Keller &
Company, Inc.
99.6 Appraisal Report prepared by Keller & Company, Inc.
* To be filed supplementally or as an amendment