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VORYS, SATER, SEYMOUR AND PEASE
221 East Fourth Street, Suite 2100
Atrium II
P.O. Box 0236
Cincinnati, OH 45201-0236
(513) 723-4000
(513) 723-4056 (Fax)
December 16, 1997
Board of Directors
Columbia Financial of Kentucky, Inc.
2497 Dixie Highway
Ft. Mitchell, Kentucky 41017-3085
and
Board of Directors
Columbia Federal Savings Bank
2497 Dixie Highway
Ft. Mitchell, Kentucky 41017-3085
Re: Conversion from a Federal Mutual Savings Bank to a Federal
Permanent Capital Stock Savings Bank - Federal and Tax Matters
Dear Directors:
You have requested our opinion regarding certain federal
income tax consequences resulting from the proposed conversion (the
"Conversion") of Columbia Federal Savings Bank (the "Bank"), from a mutual
savings bank to a permanent capital stock savings bank (the "Stock Bank")
chartered under the laws of the United States and the simultaneous acquisition
by Columbia Financial of Kentucky, Inc., an Ohio corporation (the "Holding
Company"), of all of the capital stock to be issued by the Stock Bank upon the
Conversion.
We have reviewed the Plan of Conversion adopted by the Bank's
Board of Directors on October 9, 1997, and amended on December 11, 1997 (the
"Plan"), the Application for Conversion on Form AC (the "Application") to be
filed with the Office of Thrift Supervision (the "OTS"), the Summary Proxy
Statement, the Prospectus and other solicitation materials included in the
Application, and we have examined such other legal and factual matters as we
have considered appropriate. Unless otherwise indicated, defined terms in this
letter have the same meaning as in the Plan and the Prospectus.
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Board of Directors
December 16, 1997
Page 2
We have not requested on your behalf nor have we received any
rulings from the Internal Revenue Service ("IRS") in connection with the
Conversion or the attendant federal income tax consequences.
FACTS
A. The Bank
The Bank is a mutual savings bank which has served Northern
Kentucky since 1884. Organized in 1884 under Kentucky law as Columbia Building
Association, the Bank later 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 the Bank in 1970 and American Federal Savings
and Loan ("American") was merged into the Bank in 1981, with the combined
entities retaining the Bank's name. The Bank became a federal savings bank in
1995, adopting the name Columbia Federal Savings Bank.
As a federal savings bank, the Bank is subject to supervision
and regulation by the OTS and the Federal Deposit Insurance Corporation (the
"FDIC") and is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati.
The deposits of the Bank are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC.
The Bank is principally engaged in the business of making
permanent first and second mortgage loans secured by one- to four-family
residential real estate located within the Bank's primary lending area and
investing in U.S. Government and agency obligations, interest-bearing deposits
in other financial institutions and mortgage-backed securities. The Bank 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 part of the lending activity of
the Bank. 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.
The Bank conducts business from its main office located at
2497 Dixie Highway, Ft. Mitchell, Kentucky 41017-3085, at branch offices in each
of the municipalities of Covington, Crescent Springs and Erlanger, which are
located in Kenton County, Kentucky, and at a branch office in Florence, which is
located in Boone County, Kentucky. The Bank's primary market area consists of
Boone County and Kenton County, Kentucky.
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Board of Directors
December 16, 1997
Page 3
B. The Holding Company
The Holding Company was incorporated under Ohio law in October
1997 at the direction of the Bank for the purpose of purchasing all of the
capital stock of the Stock Bank to be issued in connection with the Conversion.
The Holding Company has not conducted and will not conduct any business other
than business related to the Conversion prior to the completion of the
Conversion. The Holding Company is applying to the OTS for approval to acquire
the capital stock to be issued by the Stock Bank in the Conversion. Upon the
consummation of the Conversion, the Holding Company will be a unitary savings
and loan holding company, and its principal assets initially will be the capital
stock of the Stock Bank, a loan to the Columbia Financial of Kentucky, Inc.,
Employee Stock Ownership Plan (the "ESOP") and the investments made with the
remainder of the 50% of the net proceeds retained from the sale of Holding
Company shares in connection with the Conversion. As a savings and loan holding
company, the Holding Company will be required to register with, and be subject
to, examination and supervision by the OTS.
The office of the Holding Company is located at 2497 Dixie Highway, Ft.
Mitchell, Kentucky 41017-3085.
C. The Plan of Conversion
On October 9, 1997, and December 11, 1997, the Board of
Directors of the Bank unanimously adopted and amended, respectively, the Plan
and recommended that the voting members of the Bank approve the Plan at a
special meeting of members of the Bank to be held after the Bank receives
approval of the Application from the OTS (the "Special Meeting"). The OTS is
expected to approve the Plan, subject to the approval of the Plan by the Bank's
voting members. Under the Plan, (i) the Bank will be converted from a federal
mutual savings bank to a federal permanent capital stock savings bank, (ii) all
of the capital stock of the Stock Bank, which will be one class of voting common
shares, will be issued to the Holding Company, and (iii) the Holding Company
will offer for sale and issue common shares of the Holding Company (the "Common
Shares") to eligible persons in a subscription offering (the "Subscription
Offering") and to the general public in a community offering (the "Community
Offering").
The aggregate purchase price at which the Common Shares will
be offered and sold pursuant to the Plan will be based upon the estimated pro
forma market value of the Bank, as determined by an independent appraiser.
Keller & Company, Inc. ("Keller"), a firm experienced in valuing thrift
institutions, has prepared an independent appraisal of the pro forma market
value of the Bank. Keller's valuation of the estimated pro forma market value of
the Bank, as converted, is $20,200,000 as of November 28, 1997 (the "Pro Forma
Value"). The Bank will issue the Common Shares at a fixed price of $10 per share
and, by dividing the price per share into the Pro Forma Value, will determine
the number of Common Shares to be issued.
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Board of Directors
December 16, 1997
Page 4
Applicable regulations require, however, that the Bank establish a range of 15%
above and below the Pro Forma Value (the "Valuation Range") 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 offering of the Common Shares.
Based on the Pro Forma Value of the Bank as of November 28, 1997, the Valuation
Range is $17,170,000 to $23,230,000, resulting in the sale of between 1,717,000
and 2,322,000 Common Shares at a purchase price of $10 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 and will be based upon the final valuation of the
Bank, as converted. The final valuation will be determined by Keller at the time
of the closing of the 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, 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 the opportunity to affirm, increase, decrease or rescind their
subscriptions.
D. Liquidation Account
In the event of a complete liquidation of the Bank in its
present mutual form, each depositor in the Bank would receive a pro rata share
of any assets of the Bank 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
the Bank at the time of liquidation.
In the event of a complete liquidation of the Stock Bank after
the Conversion, each savings depositor in the Stock Bank as of the Eligibility
Record Date and the Supplemental Eligibility Record Date would have a claim of
the same general priority as the claims of all other general creditors of the
Stock Bank. 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 the Stock Bank
above that amount. Such assets would be distributed to the Holding Company as
the sole shareholder of the Stock Bank.
For the purpose of granting a limited priority claim to the
assets of the Stock Bank in the event of a complete liquidation thereof to
Eligible Account Holders and Supplemental Eligible Account Holders who continue
to maintain savings accounts at the Stock Bank after the Conversion, the Bank
will, at the time of the Conversion, establish the Liquidation Account in an
amount equal to the regulatory capital of the Bank as of the latest practicable
date prior to the
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Board of Directors
December 16, 1997
Page 5
Conversion at which such regulatory capital can be determined. For this purpose,
the Bank 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 the Stock Bank.
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 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 or
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 the Stock Bank 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 the Supplemental Eligibility Record
Date, as the case may be, or (ii) the amount of the Qualifying Deposit as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as the case
may be, 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 Stock Bank (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 the Holding Company as the sole
shareholder of the Stock Bank. Any assets remaining after satisfaction of such
liquidation rights and the claims of the Stock Bank's creditors would be
distributed to the Holding Company as the sole shareholder of the Stock Bank. No
merger, consolidation, purchase of bulk assets or similar combination or
transaction with another financial 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.
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Board of Directors
December 16, 1997
Page 6
E. Issuance of Shares
1. Subscription Offering.
Nontransferable subscription rights to purchase Common Shares
will be 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 the Holding Company that he or she is purchasing such shares for
his or her own account and that he or she 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. The sale of any Common Shares pursuant to subscriptions received is
contingent upon approval of the Plan by the voting members of the Bank 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 a
number of Common Shares up to the greater of (i) the number of 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, the numerator of which 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
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.
If the exercise of subscription rights in Category 1 results
in an over-subscription, the Common Shares available for purchase will
be allocated among the 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 unsatisfied in the proportion which the amount of
their respective Qualifying Deposits on the Eligibility Record Date
bears to the total of the Qualifying Deposits of all subscribing
Eligible Account Holders on such date. No fractional shares will be
issued in connection
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Board of Directors
December 16, 1997
Page 7
with the Conversion. The subscription rights of the Eligible Account
Holders are subordinate to the limited priority right of the ESOP set
forth in Category 2.
Category 2. The ESOP will receive, without payment,
non-transferable subscription rights to purchase up to 10% of the
Common Shares offered 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 formal market value
of the Bank 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
over-subscription in Category 1, the ESOP may purchase Common Shares on
the open market or may purchase authorized but unissued shares of the
Holding Company. If the ESOP purchases authorized but unissued shares
from the Holding Company, such purchases would have a dilutive effect
on the interests of the Holding Company's shareholders.
Category 3. Supplemental Eligible Account Holders will
receive, without payment, nontransferable subscription rights to
purchase a number of Common Shares 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, the numerator of
which 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.
If the exercise of subscription rights in Category 3 results
in an over-subscription, the Common Shares available for purchase will
be allocated among the subscribing Supplemental Eligible Account
Holders in a manner which will, to the extent possible, make the total
allocation of each subscriber 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 amount of
the Qualifying Deposits of all such subscribing Supplemental Eligible
Account Holders on such date. No fractional shares will be issued in
connection with the Conversion.
Subscription rights received in Category 3 will be subordinate
to the subscription rights in Categories 1 and 2.
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Board of Directors
December 16, 1997
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Category 4. All Other Eligible Members will receive, without
payment, nontransferable subscription rights to purchase a number of
Common Shares up to the greater of the amount 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. In the event of an
over-subscription in this Category 4, the Common Shares available for
purchase will be allocated among subscribing Other Eligible Members on
an equitable basis in the same proportion that their respective
subscriptions bear to the total subscriptions of all Other Eligible
Members 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 of the Holding Company may reject any
one or more of the subscriptions if, based upon the Board or Directors'
interpretation of applicable regulations, such subscriber is not entitled to the
Common Shares for which he or she has subscribed or if the sales of the Common
Shares subscribed for would be in violation of any applicable statutes,
regulations or rules.
2. Community Offering.
Concurrently with the Subscription Offering, the Holding
Company may offer Common Shares in the Community Offering, subject to the
limitations set forth below, to the extent such shares remain available 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, the Holding Company 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
shares 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, unless extended by the Stock Bank and the Holding Company with
the approval of the OTS, if necessary. In accordance with the Plan, the Offering
may not be extended beyond two years from the date of approval of the Plan by
the members of the Bank.
In the event shares are available in the Community Offering,
members of the general public may purchase up to 15, 000 Common Shares. If an
insufficient number of shares is available to fill all of the order received in
the Community Offering, the available shares will be allocated in a manner to be
determined by the Board of Directors of the Holding Company, subject to the
following:
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Board of Directors
December 16, 1997
Page 9
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 the Bank 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. In the Community Offering, no person, together with any Associate
and groups Acting in Concert, may purchase more than 15,000 Common
Shares; and
iv. The right of any person to purchase Common Shares in the Community
Offering is subject to the right of the Holding Company and the Bank to
accept or reject such purchases in whole or in part.
F. Results of Conversion
Deposit holders who are members of the Bank will have no
voting rights in the Stock Bank and will not participate, therefore, in the
election of directors or otherwise control the Stock Bank's affairs. After the
Conversion, voting rights in the Stock Bank will be vested exclusively in the
Holding Company as the sole shareholder of the Stock Bank. Voting rights in the
Holding Company will be held exclusively by its shareholders. Each holder of
Common Shares will be entitled to one vote for each share owned on any matter to
be considered by the shareholders of the Holding Company.
The Conversion will not interrupt the business of the Bank.
During and upon completion of the Conversion, the Stock Bank will continue to
provide the services presently offered to depositors and borrowers, will
maintain its existing offices and will retain its existing management and
employees. All deposit accounts in the Stock Bank will be equivalent in amount,
interest rate and other terms to the present deposit accounts in the Bank, 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 the Bank.
ADDITIONAL REPRESENTATIONS
You have made the following additional representations upon
which we have relied:
(1) The Holding Company and the Bank have no current plan or
intention to redeem or otherwise acquire any of the Common Shares to be issued
in connection with the Conversion.
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Board of Directors
December 16, 1997
Page 10
(2) Immediately following the consummation of the Conversion,
the Stock Bank will possess the same assets and liabilities as the Bank held
immediately prior to the Conversion, plus proceeds from the sale of the Common
Shares to the Holding Company in exchange for approximately 50% of the net
proceeds of the Conversion. Assets used to pay expenses of the Conversion and
all distributions (except for regular, normal interest payments made by the Bank
immediately preceding the Conversion) will in the aggregate constitute less than
one percent of the net assets of the Bank and any such expenses and
distributions will be paid by the Bank and the Holding Company from the proceeds
of the Offering.
(3) Following the Conversion, the Stock Bank will continue to
engage in its business in substantially the same manner as engaged in by the
Bank prior to the Conversion, and it has no plan or intention to sell or
otherwise dispose of any of its assets except in the ordinary course of
business.
(4) The Bank is not under the jurisdiction of a court in any
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Internal Revenue Code of 1986, as amended (the "Code").
(5) The aggregate fair market value of the Qualifying Deposits
held by Eligible Account Holders and Supplemental Eligible Account Holders as of
the close of business on the Eligibility Record Date and the Supplemental
Eligibility Record Date, respectively, will equal or exceed ninety-nine percent
(99%) of the aggregate fair market value of all deposit accounts (including
those accounts with less than $50) in the Bank as of the close of business on
such dates. No Common Shares will be issued directly to or purchased by
depositor-employees at a discount.
(6) No cash or property will be given to Eligible Account
Holders, Supplemental Eligible Account Holders or Other Eligible Members in lieu
of (a) nontransferable subscription rights, or (b) an interest in the
Liquidation Account of the Stock Bank.
(7) The Bank utilizes a reserve for bad debts in accordance
with Section 593 of the Code and, following the Conversion, the Stock Bank shall
likewise utilize a reserve for bad debts in accordance with Section 593 of the
Code.
(8) The Holding Company has no plan or intention to sell or
otherwise dispose of the shares of the Stock Bank purchased by it in the
Conversion.
(9) The Bank's depositors will pay the expenses of the
Conversion solely attributable to them, if any. The Holding Company will pay the
expenses of the transaction and
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Board of Directors
December 16, 1997
Page 11
will not pay any expenses solely attributable to the depositors or to the
Holding Company's shareholders.
(10) No Qualifying Deposits as of the Eligibility Record Date
or the Supplemental Eligibility Record Date will be excluded from participation
in the Liquidation Account.
(11) The fair market value of the withdrawable deposit
accounts plus interests in the Liquidation Account of the Stock Bank to be
constructively received under the Plan will in each instance be equal to the
fair market value of the withdrawable deposit accounts of the Bank surrendered
in exchange therefore. All proprietary rights in the Bank form an integral part
of the withdrawable deposit accounts being surrendered in the exchange.
(12) The Board, as defined in Section 368(a)(3)(D)(iii) of the
Code, has not made the certification described in Section 368(a)(3)(D)(ii), nor
will such certification be made prior to or otherwise in connection with the
Conversion.
STATEMENT OF LAW
In Revenue Ruling 80-105, 1980-1 C.B. 78, the IRS ruled that a
conversion of a federal mutual savings and loan association into a state stock
savings and loan association constituted a tax-free reorganization under Section
368(a)(1)(F) of the Code. Subsequently, the IRS consistently issued private
letter rulings that conversions of savings and loans qualify as tax-free
reorganizations under the Code, with the attendant tax consequences to the
depositors and shareholders that follow from such transactions. Although private
letter rulings may not be relied upon by taxpayers other than those to whom the
ruling is directed, such rulings do indicate the administrative position of the
Service.
OPINION OF COUNSEL
Based upon both our understanding of the facts and your
representations set forth above, and in reliance thereon, we are of the opinion
that for federal income tax purposes:
(1) The Conversion of the Bank from a federal mutual savings
bank to a federal permanent capital stock savings bank constitutes a
reorganization within the meaning of Section 368(a)(1)(F) of the Code, and no
gain or loss will be recognized to the Bank or the Stock Bank as a result of the
Conversion. The Bank and the Stock Bank will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
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Board of Directors
December 16, 1997
Page 12
(2) The assets of the Stock Bank will have the same basis in
its hands immediately after the Conversion as they had in the hands of the Bank
immediately prior to the Conversion, and the holding period of the assets of the
Stock Bank after the Conversion will include the period during which the assets
were held by the Bank before the Conversion.
(3) No gain or loss will be recognized to the deposit account
holders upon the issuance to them, in exchange for their respective withdrawable
deposit accounts in the Bank immediately prior to the Conversion, of
withdrawable deposit accounts in the Stock Bank immediately after the
Conversion, in the same dollar amount as their withdrawable deposit accounts in
the Bank 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 the Stock Bank, as described above.
(4) The basis of the withdrawable deposit accounts in the
Stock Bank held by its deposit account holders immediately after the Conversion
will be the same as the basis of their deposit accounts in the Bank 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 will be zero (assuming that at distribution such rights
have no ascertainable fair market value).
(5) No gain or loss will be recognized to 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 readily
ascertainable fair market value), and no taxable income will be realized by such
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Eligible Members as a result of their exercise of such nontransferable
subscription rights.
(6) The basis of the Common Shares purchased by Eligible
Account Holders, Supplemental Eligible Account Holders and Other Eligible
Members 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 Common Shares will
commence on the date of such exercise. The basis of the Common Shares purchased
in the Community Offering will be the purchase price thereof and the holding
period of such shares will commence on the day after the date of the purchase.
(7) For purposes of Section 381 of the Code, the Bank will be
treated as if there had been no reorganization. The taxable year of the Bank
will not end on the effective date of the Conversion and, immediately after the
Conversion, the Stock Bank will succeed to and
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Board of Directors
December 16, 1997
Page 13
take into account the tax attributes of the Bank immediately prior to the
Conversion, including the Bank's earnings and profits or deficit in earnings and
profits.
(8) The bad debt reserves of the Bank immediately prior to the
Conversion will not be required to be restored to the gross income of the Stock
Bank as a result of the Conversion, and immediately after the Conversion such
bad debt reserves will have the same character in the hands of the Stock Bank
that they would have had if there had been no Conversion. The Stock Bank will
succeed to and take into account the dollar amounts of those accounts of the
Bank which represent bad debt reserves in respect of which the Bank has taken a
bad debt deduction for taxable years ending on or before the Conversion.
(9) Regardless of book entries made for the creation of the
Liquidation Account, the Conversion will not diminish the accumulated earnings
and profits of the Stock Bank available for the subsequent distribution of
dividends within the meaning of Section 316 of the Code. The creation of the
Liquidation Account on the records of the Stock Bank will have no effect on its
taxable income, deductions for additions to reserves for bad debts under Section
593 of the Code or distribution to shareholders under Section 593(e) of the
Code.
Unlike private rulings, an opinion of counsel is not binding
on the IRS, and the IRS could disagree with the conclusions reached in this
opinion. In the event of such disagreement, there can be no assurance that the
IRS would not prevail in a judicial proceeding, although counsel believes that
the positions expressed in its opinion should prevail if the matters are
litigated.
Very truly yours,
Vorys, Sater, Seymour and Pease