<PAGE> 1
File Pursuant
to Rule 424(b)(3)
File Number 333-42523
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 9:00 a..m., Eastern Time, on March 24, 1998, at Columbia
Federal's Florence Branch Office, 7550 Dixie Highway, Florence, Kentucky 41042
(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") at 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 January 31, 1998 (the
"Subscription Offering"). All subscription rights to purchase Common Shares in
the Subscription Offering are nontransferable and will expire at noon, Eastern
Time, on April 3, 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 8 OF THIS PROSPECTUS.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER
AT (606) 525-6403.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Estimated Underwriting
Purchase Commissions Estimated Net
Price And Other Expenses(1) Proceeds
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share Minimum $10.00 $0.36 $9.64
Per share Mid-Point $10.00 $0.33 $9.67
Per share Maximum $10.00 $0.30 $9.70
Per share Maximum, as adjusted (2) $10.00 $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
===================================================================================================================================
</TABLE>
(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 efforts 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 February 11, 1998.
CHARLES WEBB & COMPANY
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
<PAGE> 2
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 May 18, 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 March 24, 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 of the Common 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 noon, Eastern Time, April 3, 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 3.0% 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 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. 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 applied to have the Common Shares quoted on the Nasdaq
National Market System ("Nasdaq National Market"). CFKY and Columbia Federal
believe the conditions for quotation on Nasdaq National Market will be
satisfied, although no assurance can be provided that the conditions will be
met. If CFKY is unable to have its shares quoted on Nasdaq National Market, CFKY
expects its shares to be quoted on the Nasdaq SmallCap Market or the OTC
Bulletin Board Service. 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 the Common 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 a Plan of Conversion, which it amended on December 11,
1997. 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 9:00 a.m., Eastern
Time, on March 24, 1998, at Columbia Federal's Florence Branch Office, 7550
Dixie Highway, Florence, Kentucky 41042. 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, the Eligibility Record Date ("Eligible Account
Holders"), (b) the ESOP, (c) depositors of Columbia Federal with Qualifying
Deposits as of December 31, 1997
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<PAGE> 5
("Supplemental Eligible Account Holders"), and (d) account holders of Columbia
Federal having savings deposits of record on January 31, 1998 (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
January 31, 1998, 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 or a
Supplemental Eligible Account Holder 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 Voting Member may purchase not more than 15,000 Common Shares in the
Subscription Offering. 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 limitations do 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 interests 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. Webb's commission will not exceed 1.5% of the aggregate
purchase price for shares sold in the Subscription Offering. 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 noon, Eastern Time, on
April 3, 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 May
18, 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 or
her subscription or order or elects to rescind his
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<PAGE> 6
or her subscription or order during such time will have all of his or her funds
promptly refunded with interest. Any person who elects to decrease his or her
subscription or order will have the appropriate portion of his or her funds
promptly refunded with interest.
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, the amount of
subscriptions received in the Subscription Offering 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. See "RISK FACTORS -
Reduction in Return on Equity Due to Proceeds of Offering." 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 and, if circumstances permit, to
purchase 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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<PAGE> 7
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 directors, officers
and employees 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 Federal Stock 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 eventually 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 applied to have the Common Shares quoted on Nasdaq National
Market upon the closing of the Conversion. CFKY and Columbia Federal believe the
conditions for quotation on Nasdaq National Market will be satisfied, although
no assurance can be provided that the conditions will be met. In connection with
such application, Webb has informed Columbia Federal that Keefe, Bruyette &
Woods, Inc. ("KBWI"), intends to make a market in the Common Shares. If CFKY is
unable to have its shares quoted on Nasdaq National Market, CFKY expects its
shares to be quoted on the Nasdaq SmallCap Market or the OTC Bulletin Board
Service. 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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<PAGE> 8
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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<PAGE> 9
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
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 financial statements and notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION At September 30,
AND OTHER DATA: ---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ====== ======
</TABLE>
- -----------------------------
(Footnotes on next page)
-6-
<PAGE> 10
<TABLE>
<CAPTION>
At or for the year ended September 30,
--------------------------------------------------------
SELECTED FINANCIAL RATIOS: 1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ----------------------------
(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.
-7-
<PAGE> 11
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 Federal equaled .53%, .36% and .77%, respectively.
During the same periods, the return on equity of Columbia Federal 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 $10.3 million in fiscal 1996 and $11.7 million in
fiscal 1997, the balance of net loans receivable has declined from $68.3 million
at the end of fiscal 1995 to $67.7 million at the end of fiscal 1996 and $61.6
million at the end of 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 yielding 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
-8-
<PAGE> 12
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. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - 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. 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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset and Liability Management."
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. Moreover, 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.
-9-
<PAGE> 13
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, which
will be reflected as compensation expense as the shares are earned by
participants. The shares issued to participants under the RRP could be newly
issued shares or shares purchased in the market. In the event the shares
purchased under the RRP consist of authorized but unissued 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
purchased from authorized but unissued shares, the interests of shareholders
would be diluted by 18.03%. Equity per share and earnings per share would 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 applied to have the Common Shares quoted on Nasdaq National
Market upon the closing of the Conversion. CFKY and Columbia Federal believe the
conditions for quotation on Nasdaq National Market will be satisfied, although
no assurance can be provided that the conditions will be met. One of the
conditions upon which such quotation is subject is the commitment by three
broker-dealers to make a market in the Common Shares. Webb has informed CFKY
that KBWI intends to make a market in the Common Shares, and CFKY believes that
at least two other broker-dealers will commit to make a market in the Common
Shares. If CFKY is unable to have its shares quoted on Nasdaq National Market,
CFKY expects its shares to be quoted on the Nasdaq SmallCap Market or the OTC
Bulletin Board Service. 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 for members of each 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.
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<PAGE> 14
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 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
Federal Stock 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 DELAY IN COMPLETION OF THE OFFERING
CFKY and Columbia Federal expect to complete the Conversion by April
30, 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 May 18, 1998, each subscriber will be given a notice of such
delay and the right to affirm, increase, decrease or rescind
-11-
<PAGE> 15
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 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 March 24, 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
-12-
<PAGE> 16
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."
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:
<TABLE>
<CAPTION>
15% above
Minimum Mid-point Maximum Maximum
------- --------- ------- -------
<S> <C> <C> <C> <C>
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
</TABLE>
The expenses are estimated assuming that (a) all of the indicated number of
Common Shares are sold in the Subscription Offering; (b) the directors and
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 and, if circumstances permit,
to purchase 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;" "RISK FACTORS - Low Return on Assets
and Low Return on Equity; and "- Reduction in Return on Equity Due to Proceeds
of Offering."
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-
<PAGE> 17
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 applied to have the Common Shares quoted on Nasdaq National
Market upon the closing of the Conversion. CFKY and Columbia Federal believe the
conditions for quotation on Nasdaq National Market will be satisfied, although
no assurance can be provided that the conditions will be met. In connection with
such application, 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. If
CFKY is unable to have its shares quoted on Nasdaq National Market, CFKY expects
its shares to be quoted on the Nasdaq SmallCap Market or the OTC Bulletin Board
Service. 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-
<PAGE> 18
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.
<TABLE>
<CAPTION>
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
Historical at (offering price of (offering price of (offering price of (offering price of
September 30, 1997 (1) $10.00 per share) $10.00 per share) $10.00 per share) $10.00 per share)
--------------------- ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under
generally
accepted accounting
principles, before
adjustments (2)(3) $13,091 12.59% $19,306 17.52% $20,438 18.35% $21,571 18.71% $22,874 19.55%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Current tangible
capital (2)(3):
Capital level $13,090 12.59% $19,305 17.51% $20,437 18.35% $21,570 18.71% $22,873 19.55%
Requirement 1,560 1.50 1,653 1.50 1,670 1.50 1,729 1.50 1,755 1.50
-------- ------ -------- ------ --------- ------ --------- ------ -------- ------
Excess $11,530 11.09% $17,652 16.01% $18,767 16.85% $19,841 17.21% $21,118 18.05%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Current core
capital (2)(3):
Capital level $13,090 12.59% $19,305 17.51% $20,437 18.35% $21,570 18.71% $22,873 19.55%
Requirement 3,120 3.00 3,307 3.00 3,341 3.00 3,458 3.00 3,510 3.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Excess $ 9,970 9.59% $15,998 14.51% $17,096 15.35% $18,112 15.71% $19,363 16.55%
======== ====== ======= ===== ======= ===== ======= ===== ======= =====
Current risk-based
capital (4):
Capital level $13,390 30.37% $19,605 38.97% $20,737 40.32% $21,870 41.60% $23,173 43.01%
Requirement 3,527 8.00 4,025 8.00 4,115 8.00 4,206 8.00 4,310 8.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Excess $ 9,863 22.37% $15,580 30.97% $16,622 32.32% $17,664 33.60% $18,863 35.01%
======== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- -----------------------------------
(1) See Note 19 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 $110.2 million,
$111.4 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 $6.2 million, $7.3 million, $8.5 million and $9.8 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 $50.3 million, $51.4 million, $52.6
million and $53.9 million, and assumes the net proceeds will be
invested in mortgage-backed securities having a risk weighting of 20%.
-15-
<PAGE> 19
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."
<TABLE>
<CAPTION>
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 $10.00 per share) $10.00 per share) $10.00 per share) $10.00 per share)
------------------- ----------------- ----------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
</TABLE>
- ----------------------------------
(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 Increased Expense of the ESOP, the Stock Option Plan 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 3.85%. See
"MANAGEMENT OF COLUMBIA FEDERAL - Recognition and Retention Plan and
Trust."
(5) Retained earnings include restricted and unrestricted retained
earnings. 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-
<PAGE> 20
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 period 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-
<PAGE> 21
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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 income:
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 income $ 892 $ 953 $ 1,016 $ 1,088
======== ======== ======== ========
Income 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 net income per share (3)(4) $ 0.56 $ 0.51 $ 0.47 $ 0.44
======== ======== ======== ========
Offering price as a multiple of pro
forma net income per share 17.76x 19.53x 21.31x 22.65x
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 $ 16.06 $ 14.95 $ 14.14 $ 13.42
======== ======== ======== ========
share (3)
Ratio of offering price to pro forma
shareholders' equity per share 62.27% 66.89% 70.72% 74.52%
</TABLE>
- --------------------------
(Footnotes on next page)
-18-
<PAGE> 22
(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 published by the AICPA, 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."
-19-
<PAGE> 23
SUMMARY STATEMENTS OF INCOME
The following Summary Statements of Income set forth information
concerning Columbia Federal for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans $5,802 $5,869 $6,014
Mortgage-backed securities 1,143 1,214 981
Investments and deposits 1,051 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 losses
on loans 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
====== ====== ======
</TABLE>
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<PAGE> 24
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 invest immediately 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. Money market accounts, passbook savings accounts and negotiable
order of withdrawal ("NOW") accounts decreased in the aggregate by approximately
$2.5 million, or 7.8%, and certificates of deposit decreased by $2.0 million, or
3.2%, during the fiscal year ended September 30, 1997. At September 30, 1997,
certificates of deposit 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 income 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 in fiscal year 1997. Net income for the year ended
September 30, 1996, would have been $779,000 if the one-time assessment had not
been assessed.
-21-
<PAGE> 25
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 for
the year ended 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, Nonperforming 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 losses on
loans. 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 losses on loans 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%, from the 1996
fiscal year amount. The decrease resulted primarily from a $721,000, or
-22-
<PAGE> 26
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 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 Increased Expense of the ESOP, the Stock Option
Plan 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. Management determined that the reduction in the amount of the provision
for losses on loans for the year ended September 30, 1996, was reasonable based
primarily upon Columbia Federal's favorable loan loss experience in such year.
Historically, management has emphasized Columbia Federal's loss experience over
other factors in establishing provisions for losses on loans.
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 deposit 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 deposit 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
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<PAGE> 27
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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<PAGE> 28
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 and FHLB
advances for the periods indicated. Such yields and costs are derived by
dividing annual income or expense by the average monthly balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
years presented. Average balances are derived from monthly balances, net of the
allowance for losses on loans.
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------------
Average Interest Average Interest
balance earned/paid Yield/rate balance earned/paid Yield/rate
------- ----------- ---------- ------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
======= =======
<CAPTION>
--------------------------------------
1995
------------------------------------
Average Interest
balance earned/paid Yield/rate
------- ----------- ----------
<S> <C> <C> <C>
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
=======
</TABLE>
- ------------------------------
(1) Includes dividends on FHLB stock.
-25-
<PAGE> 29
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.
<TABLE>
<CAPTION>
Year ended September 30,
At September 30, --------------------------------------
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
=== ===== ===== ==== ==== ====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
QUANTITATIVE ASPECTS OF MARKET RISK. Columbia Federal does not maintain
a trading account for any class of financial instrument. Further, it is not
currently subject to foreign currency is exchange rate risk or commodity price
risk. The stock in the FHLB of Cincinnati does not have equity price risk
because it is issued only to members and is redeemable
-26-
<PAGE> 30
for its $100 par value. The following table illustrates quantitative sensitivity
to interest rate risk for financial instruments other than cash and cash
equivalents, FHLB stock and demand deposit accounts for Columbia Federal as of
September 30, 1997.
<TABLE>
<CAPTION>
Due during the year ending Due more
-------------------------- Due 4-5 Due 6- Due 11-20 than 20
September 30, Years 10 Years Years Years
------------- After After After After
1998 1999 2000 9/30/97 9/30/97 9/30/97 9/30/97 Total
---- ---- ---- ------- ------- ------- ------- -----
(Dollars in thousands )
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
------
Fixed-rate loans
Amount $ 3,175 $ 29 $ 128 $ 958 $6,879 $26,537 $ 13,923 $51,629
Average interest rate 8.20% 8.90% 8.99% 8.98% 8.87% 8.26% 8.16% 8.33%
Adjustable-rate loans
Amount $ - $ 28 $ 90 $ 167 $2,002 $ 5,428 $ 4,604 $12,319
Average interest rate - 8.59% 8.66% 7.71% 7.65% 7.81% 8.01% 7.86%
Investment securities
Amount $ 6,503 $ 2,996 $ - $3,000 $ - $ - $ 1,573 $14,072
Average interest rate 5.39% 5.48% - 6.33% - - 6.50% 5.73%
Mortgage-backed securities
Amount $ - $ 1 $ - $1,229 $2,465 $14,167 $ - $17,862
Average interest rate - 5.50% - 7.65% 6.83% 6.74% - 6.82%
Liabilities
-----------
Time deposits
Amount $38,477 $14,651 $5,072 $2,891 $ - $ - $ - $61,091
Average interest rate 5.75% 6.26% 5.96% 6.25% - - - 5.91%
</TABLE>
QUALITATIVE ASPECTS OF MARKET RISK. One of Columbia Federal's principal
financial objectives is to achieve long-term profitability while reducing its
exposure to fluctuations in interest rates. Columbia Federal has sought to
reduce exposure of its earnings to changes in market interest rates by managing
asset and liability maturities and interest rates through the origination of
adjustable-rate loans, the purchase of adjustable-rate mortgage-backed
securities and the offering of more competitive rates on longer term deposits.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If Columbia Federal's
assets mature or reprice more quickly or to a greater extent than its
liabilities, Columbia Federal's net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If Columbia Federal's assets mature or
reprice more slowly or to a lesser extent than its liabilities, Columbia
Federal's net portfolio value and net interest income would tend to decrease
during periods of rising interest rates but increase during periods of falling
interest rates.
Columbia Federal's Board of Directors utilizes an interest rate risk
management policy, which is designed to promote long-term profitability while
managing interest-rate risk, to monitor asset and liability management and, in
conjunction with management, reviews issues concerning asset and liability
policies, strategies and Columbia Federal's current interest rate risk position
on a quarterly basis. Management's principal strategy in managing Columbia
Federal's interest rate risk has been to maintain short- and intermediate-term
assets in the portfolio, including one- and three-year adjustable-rate mortgage
loans. In addition, in managing Columbia Federal's portfolio of investment
securities and mortgage-backed and related securities, management seeks to
purchase securities that have adjustable-rate provisions and that mature on a
basis that approximates, as closely as possible, the estimated maturities of
Columbia Federal's liabilities. Columbia Federal does not engage in hedging
activities.
In addition to shortening the average repricing of its assets, Columbia
Federal has sought to lengthen the average maturity of its liabilities by
adopting a tiered pricing program for its certificates of deposit, which
provides higher rates of interest on its longer term certificates in order to
encourage depositors to invest in certificates with longer maturities.
-27-
<PAGE> 31
There have been no significant changes in Columbia Federal's primary
market risk exposures or methods for managing those exposures since September
30, 1997.
NET PORTFOLIO VALUE. Columbia Federal, like other financial
institutions, is subject to interest rate risk to the extent that its
interest-earning assets reprice differently than its interest-bearing
liabilities. As part of its effort to monitor and manage interest rate risk,
Columbia Federal uses the Net Portfolio Value ("NPV") methodology recently
adopted by the OTS as part of its capital regulations. Although the
implementation of such regulation has been delayed and Columbia Federal is not
subject to the NPV regulation because the regulation does not apply to
institutions with less than $300 million in assets and risk-based capital in
excess of 12%, the application of the NPV methodology may illustrate Columbia
Federal's interest rate risk.
Generally, NPV is the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing and other liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from a theoretical 200 basis point (1 basis point equals
.01%) change in market interest rates. Both a 200 basis point increase in market
interest rates and a 200 basis point decrease in market interest rates are
considered. If the NPV would decrease more than 2% of the present value of the
institution's assets with either an increase or a decrease in market rates, the
institution must deduct 50% of the amount of the decrease in excess of such 2%
in the calculation of the institution's risk-based capital. 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, 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 if
the NPV regulation had applied to Columbia Federal. 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.
<TABLE>
<CAPTION>
At September 30, 1997
-------------------------------
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % Change in NPV in NPV
-------------- -------- ------ ------
(In thousands)
<S> <C> <C> <C>
+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
</TABLE>
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
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<PAGE> 32
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, expected
rates of prepayment on loans and mortgage-backed securities and early withdrawal
levels from certificates of deposit would likely deviate significantly from
those assumed in making the risk calculations.
If interest rates rise from the recent historically low levels,
Columbia Federal's net interest income will be negatively affected. Moreover,
rising interest rates may negatively affect Columbia Federal's earnings due to
diminished loan demand. Although Columbia Federal originates loans in accordance
with secondary market guidelines in order to be able to sell loans if necessary
for interest rate risk management, many of the loans are not readily saleable
because they are secured by non-owner occupied real estate. Moreover the sale of
loans would further reduce net income as the proceeds from the sale would be
directed into lower yielding investments.
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.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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 and liability management program.
At September 30, 1997, OTS regulations required Columbia Federal to
maintain an average daily balance of investments in United States Treasury and
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 19 of the Notes to the Financial
Statements.
During the past five fiscal years, Columbia Federal's deposits have
decreased as management elected not to meet its competition for deposits in
Columbia Federal's market area. Management was concerned that the deposits could
not be
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<PAGE> 33
invested at rates sufficient to enhance profitability and net worth. Such
concern was increased when, in fiscal year 1997, management learned that a $3.4
million loan would be paid in full. Due primarily to the decline in loans
receivable, the declining deposit balance is not expected to have a material
adverse effect on Columbia Federal's liquidity or capital resources.
In the year ended September 30, 1997, Columbia Federal's loans
receivable decreased from $67.7 million to $61.6 million, of which $1.2 million
was attributable to a decrease in residential real estate loans. The decrease in
residential real estate loans is the cumulative result of increased competition
in the market area over the last several years. Columbia Federal has hired an
additional loan and public relations officer and has increased its marketing to
real estate agents to increase residential real estate loan applications.
Management is also considering the origination of additional types of loans,
including commercial loans and additional types of consumer loans, such as home
equity loans. Columbia Federal is also attempting to establish relationships
with loan brokers to purchase mortgage loans of various types.
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.
"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 19 of the Notes to the Financial
Statements for a reconciliation of capital under generally accepted accounting
principles ("GAAP") and regulatory capital amounts) at September 30, 1997.
<TABLE>
<CAPTION>
Excess of actual
capital over current
Actual capital Current requirement requirement
-------------- ------------------- ----------- Applicable
Amount Percent Amount Percent Amount Percent asset total
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
As with all financial institutions, Columbia Federal's operations
depend almost entirely on computer systems. See "BUSINESS OF COLUMBIA FEDERAL -
Year 2000 Considerations." Columbia Federal is addressing the potential problems
associated with the possibility that the computers which control or operate
Columbia Federal's operating systems, facilities and infrastructure may not be
programmed to read four-digit date codes and, upon arrival of the year 2000, may
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<PAGE> 34
recognize the two-digit code "00" as the year 1900, causing systems to fail to
function or to generate erroneous data. Columbia Federal is working with the
companies that supply or service its computer-operated or -dependent systems to
identify and remedy any year 2000 related problems.
As of the date of this Prospectus, Columbia Federal has not identified
any specific expenses which are reasonably likely to be incurred by Columbia
Federal in connection with this issue and does not expect to incur significant
expense to implement corrective measures. No assurance can be given, however,
that significant expense will not be incurred in future periods. In the event
that Columbia Federal is ultimately required to purchase replacement computer
systems, programs and equipment, or that substantial expense must be incurred to
make Columbia Federal's current systems, programs and equipment year 2000
compliant, Columbia Federal's net income and financial condition could be
adversely affected.
In addition to possible expense related to its own systems, Columbia
Federal could incur losses if loan payments are delayed due to year 2000
problems affecting any of Columbia Federal's significant borrowers or impairing
the payroll systems of large employers in Columbia Federal's primary market
area. Because Columbia Federal's loan portfolio is highly diversified with
regard to individual borrowers and types of businesses and Columbia Federal's
primary market area is not significantly dependent upon one employer or
industry, Columbia Federal does not expect any significant or prolonged
difficulties that will affect net earnings or cash flow. See "THE BUSINESS OF
COLUMBIA FEDERAL - Market Area" and "- Loan Originations, Purchases and Sales."
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131, which is
effective for fiscal years beginning after December 15, 1997, requires operating
segments of a company be segregated to provide a better understanding of
performance and a better assessment of its future cash flows. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Management does not believe that the adoption of SFAS No.
131 will have a material adverse effect on Columbia Federal's financial position
or results of operations
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements and requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. Under
existing accounting standards, other comprehensive income shall be classified
separately into foreign currency items, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and equity
securities. The provisions of SFAS No. 130 are effective for fiscal years
beginning after December 15, 1997. Management does not believe the adoption of
SFAS No. 130 will have a material impact on the disclosure requirements of CFKY.
In 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
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<PAGE> 35
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, 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.
RECENT DEVELOPMENTS
The following tables set forth selected financial condition data for
Columbia Federal at December 31, 1997, and September 30, 1997, and selected
earnings data for Columbia Federal for the three months ended December 31, 1997
and 1996. The results of operations presented below are not necessarily
indicative of the results that may be expected for any other period. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the unaudited
periods have been made. This information should be read in conjunction with the
financial statements and notes thereto included herein.
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<PAGE> 36
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION AND OTHER DATA: At At
December 31, September 30,
1997 1997
----------- -----------
(In thousands)
<S> <C> <C>
Total amount of:
Assets $102,985 $104,006
Cash and cash equivalents (1) 4,126 6,827
Investment securities held to maturity 15,061 13,069
Investment securities available for sale 1,001 1,003
Mortgage-backed securities 17,630 17,862
Real estate owned 48 -
Loans receivable, net 61,361 61,578
FHLB stock, at cost 1,283 1,260
Deposits 89,455 90,195
Retained earnings-substantially
restricted, net 13,142 13,090
</TABLE>
<TABLE>
<CAPTION>
Three months ended
December 31,
--------------------------------
SUMMARY OF EARNINGS: 1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
Interest income $1,932 $2,018
Interest expense 1,098 1,124
------ ------
Net interest income 834 894
Provision for losses on loans 74 -
------- -------
Net interest income after
provision for losses on loans 760 894
Non-interest income 27 28
Non-interest expense 707 741
------- -------
Income before federal income tax expense 80 181
Federal income tax expense 27 62
------- -------
Net income $ 53 $ 119
======= =======
</TABLE>
- --------------------------
(Footnotes on next page)
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<PAGE> 37
<TABLE>
<CAPTION>
At or for the three months ended
December 31,
---------------------------------
SELECTED FINANCIAL RATIOS: (2) 1997 1996
----------- -----------
<S> <C> <C>
Return on assets (3) 0.20% 0.45%
Return on equity (4) 1.58 3.77
Interest rate spread (5) 2.82 2.99
Net interest margin (6) 3.34 3.45
Non-interest expense to average assets (7) 2.75 2.73
Average equity to average assets 12.76 11.86
Equity to assets at period end 12.76 11.87
Nonperforming loans to total loans - 0.22
Nonperforming assets to total assets (8) 0.05 0.14
Allowance for losses on loans to total loans 0.49 0.27
Allowance for losses on loans to
nonperforming loans N/M (9) 124.34
Net charge-offs to average loans 0.12 -
</TABLE>
- ------------------------------------
(1) Includes cash and amounts due from depository institutions and
interest-bearing deposits in other financial institutions.
(2) Ratios are annualized where appropriate.
(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.
(7) Non-interest expense divided by average total assets.
(8) Nonperforming assets consist of nonaccruing loans, accruing loans 90
days or more past due and real estate acquired in foreclosure
proceedings or in lieu thereof. See "THE BUSINESS OF COLUMBIA FEDERAL -
Lending Activities --Delinquent Loans, Nonperforming Assets and
Classified Assets."
(9) Not meaningful as there were no nonperforming loans at such date.
The following table summarizes Columbia Federal's regulatory capital
requirements and actual capital at December 31, 1997:
<TABLE>
<CAPTION>
Excess of actual capital
Actual capital Current requirement over current requirement Applicable
-------------- ------------------- ------------------------ ----------
Amount Percent Amount Percent Amount Percent asset total
------ ------- ------ ------- ------ ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $13,143 12.70% $1,552 1.50% $11,591 11.20% $103,480
Core capital 13,143 12.70 3,104 3.00 10,039 9.70 103,480
Risk-based capital 13,443 30.59 3,516 8.00 9,927 22.59 43,950
</TABLE>
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<PAGE> 38
ANALYSIS OF FINANCIAL CONDITION
GENERAL. Columbia Federal's assets totaled $103.0 million at December
31, 1997, a decrease of $1.0 million, or 1.0%, from $104.0 million at September
30, 1997. Such decrease in assets resulted primarily from a $2.7 million
decrease in cash and cash equivalents, partially offset by a $2.0 million
increase in securities held to maturity.
LOANS RECEIVABLE. Net loans receivable equaled $61.4 million at
December 31, 1997, compared to $61.6 million at September 30, 1997, a 0.3%
decrease attributable to loans being repaid more rapidly than loans were being
originated.
DEPOSITS. Total deposits decreased by $700,000, to $89.5 million, at
December 31, 1997, from $90.2 million at September 30, 1997. Such decrease in
deposits was due to management's election not to meet its competition for
deposits in view of the actual and anticipated reductions in Columbia Federal's
loans receivable.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
AND 1996
GENERAL. Columbia Federal recorded net income of $53,000 for the three
months ended December 31, 1997, compared to income of $119,000 for the same
period in 1996. The decrease resulted primarily from a $74,000 provision for
losses on loans in 1997 compared to no provision in 1996. There was also an
$86,000 decrease in interest and fees on loans, offset by a $26,000 decrease in
interest on deposits, a $35,000 decrease in income tax expense and a $34,000
decrease in non-interest expense.
INTEREST INCOME. For the three months ended December 31, 1997, net
interest income after provision for losses on loans decreased by $134,000, to
$760,000, compared to the same period in 1996, due to the provision for losses
on loans of $74,000 and a $60,000 decrease in net interest income during the
1997 quarter. Interest income decreased $86,000 from $2.0 million for the three
months ended December 31, 1996, to $1.9 million for the three months ended
December 31, 1997. This decrease was a result of a reduction in yield on earning
assets from 7.80% for the three months ended December 31, 1996, to 7.73% for the
three months ended December 31, 1997, coupled with a decrease in average loans
receivable of $6.8 million from $68.4 million for the three months ended
December 31, 1996, to $61.6 million for the three months ended December 31,
1997. The decrease in yield was due to the repayment before maturity of a large,
higher yielding mortgage loan. The reduction in loans receivable was a result of
decreased loan demand.
Interest expense decreased $26,000 for the three months ended December
31, 1997, compared to the three months ended December 31, 1996. This decrease
was a result of a decrease in average deposits of $3.7 million from $93.2
million for the three months ended December 31, 1996, to $89.5 million for the
three months ended December 31, 1997. The decrease in average deposits was
partially offset by a 10 basis point increase in cost of deposits from 4.81% for
the three months ended December 31, 1996, to 4.91% for the three months ended
December 31, 1997. The increase in cost of deposits was due to increased
competitive pressures.
Columbia Federal's net interest rate spread was 2.82% for the three
months ended December 31, 1997, compared to 2.99% for the three months ended
December 31, 1996.
ALLOWANCE AND PROVISION FOR LOSSES ON LOANS. After review of its
allowance for losses on loans, management decided to record a provision for
losses on loans of $74,000 to return its allowance to $300,000. During the three
months ended December 31, 1997, Columbia Federal incurred losses on five loans
held by two individuals. The balances of these loans totaled $153,000. A
writedown of $74,000 was recorded when these loans were recorded as real estate
owned ("REO"). Three of these properties were sold leaving two properties with a
recorded value of $48,000 at December 31, 1997. Management expects no additional
losses on these properties.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE. Non-interest income was
$27,000 for the three months ended December 31, 1997, compared to $28,000 for
the same period in 1996. Non-interest expense decreased $34,000, or 4.6%, to
$707,000. The primary reason for this decrease was the reduction of deposit
insurance premiums from $56,000 for the three months ended December 31, 1996, to
$14,000 for the three months ended December 31, 1997, a result of the special
SAIF assessment. See "RISK FACTORS - Legislation and Regulation Which May
Adversely Affect Columbia Federal's Earnings and Operations."
NONPERFORMING ASSETS. As of September 30, 1997, there was $601,000 in
nonperforming loans, which was .98% of total loans at that date. Of such amount,
$473,000 was due from one borrower with 18 loans. As of December 31, 1997,
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<PAGE> 39
all nonperforming loans had been brought current. The allowance for losses on
loans as a percent of total loans was .49% as of December 31, 1997, the same as
September 30, 1997. At December 31, 1997, Columbia Federal had $48,000 of REO.
OTHER SIGNIFICANT RATIOS. The ratio of average equity to average assets
increased 90 basis points at December 31, 1997, compared to December 31, 1996.
At December 31, 1997, Columbia Federal's ratio of average assets to average
equity was 12.76%, compared to 11.86% at December 31, 1996.
THE BUSINESS OF COLUMBIA FEDERAL
GENERAL
Columbia Federal is principally engaged in the business of making
permanent first mortgage loans secured by one- to four-family residential real
estate located in Columbia Federal's primary lending area and investing in U.S.
Government and agency obligations, interest-bearing deposits in other financial
institutions and mortgage-backed securities. Columbia Federal also originates
loans for the construction of residential real estate and loans secured by
multifamily real estate (over four units) and nonresidential real estate. The
origination of consumer loans, including loans secured by deposits and home
improvement loans, constitutes a small portion of Columbia Federal's lending
activities. Loan funds are obtained primarily from deposits, which are insured
up to applicable limits by the FDIC, and loan and mortgage-backed and related
securities repayments.
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 to
conform with the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines,
but has not sold any loans during the past five years.
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<PAGE> 40
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Columbia Federal's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
One- to four-family
residential $53,584 83.79% $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 1,203 605 1,196 1,589 1,296
Deferred loan fees 867 864 886 921 775
Allowance for losses on loans 300 189 189 189 189
------- ------- ------- ------- ---------
Loans receivable, net $61,578 $67,741 $68,270 $70,288 $67,026
======= ======= ======= ======= =======
</TABLE>
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<PAGE> 41
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 90 167 2,002 5,428 4,604 12,319
------ --- ---- ------ ------ ------- ------- -------
Total loans $3,175 $57 $218 $1,125 $8,881 $31,965 $18,527 $63,948
====== === ==== ====== ====== ======= ======= =======
</TABLE>
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.
-38-
<PAGE> 42
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, Nonperforming Assets and
Classified Assets."
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one-
to four-family properties, Columbia Federal makes loans secured by multifamily
properties containing over four units. Such loans are made with fixed or
adjustable interest rates, a maximum LTV of 75% and a maximum term of 25 years.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower.
Columbia Federal attempts to reduce the risk associated with multifamily lending
by evaluating the credit-worthiness of the borrower and the projected income
from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. Columbia Federal currently requests financial
statements annually to enable Columbia Federal to monitor the loans and requires
annual financial statements for larger multifamily loans.
At September 30, 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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<PAGE> 43
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, Nonperforming 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, Nonperforming Assets and Classified Assets."
COMMERCIAL LOANS. Although Columbia Federal is considering offering
commercial loans, Columbia Federal does not currently issue any letters of
credit or originate or purchase any loans for commercial, business or
agricultural purposes, other than loans secured by real estate.
-40-
<PAGE> 44
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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<PAGE> 45
The following table presents Columbia Federal's mortgage loan
origination and purchase activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------------
1997 1996 1995
------- --------- -------
(In thousands)
Loan originations:
<S> <C> <C> <C>
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)
======= ========= =======
</TABLE>
- -----------------------------
(1) Consists of unearned and deferred fees, costs and the allowance for
losses on loans.
(2) Consisted of one- to four-family residential loans purchased from the
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, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Columbia Federal attempts
to cause the delinquency to be cured by contacting the borrower. In most cases,
delinquencies are cured promptly.
When a loan is nineteen days delinquent, the borrower is assessed a
late penalty. When a loan is thirty days delinquent, Columbia Federal sends the
borrower a delinquency notice. Depending upon the circumstances, Columbia
Federal may also inspect the property and inform the borrower of the
availability of credit counseling from Columbia Federal and counseling agencies.
After a loan is delinquent for 45 to 60 days, an attorney representing Columbia
Federal will send the borrower a notice advising the borrower of Columbia
Federal's intention to foreclose on the property in thirty days. Columbia
Federal may, depending upon the circumstances, arrange appropriate alternative
payment arrangements. A decision as to whether and when to initiate foreclosure
proceedings is based on such factors as the amount of the outstanding loan in
relation to the original indebtedness, the extent of the delinquency and the
borrower's ability and willingness to cooperate in curing delinquencies. If a
foreclosure occurs, the real estate is sold at public sale and may be purchased
by Columbia Federal.
Real estate acquired by Columbia Federal as a result of foreclosure
proceedings is classified as REO until it is sold. When property is so acquired,
or deemed to have been acquired, it is initially recorded by Columbia Federal at
the lower of cost or fair value of the real estate, less estimated costs to
sell. Any reduction in fair value is reflected in a valuation allowance
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<PAGE> 46
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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for (1):
30 - 59 days 15 $ 549 0.86% 23 $ 792 1.14% 22 $668 0.95%
60 - 89 days 10 591 0.92 2 132 0.19 - - -
90 days and over 23 601(2) 0.94 4 177 0.26 - - -
-- -------- ---- --- ------- ---- ---- -------- -------
Total delinquent loans 48 $1,741(3) 2.72% 29 $1,101(4) 1.59% 22 $668(5) 0.95%
-- ====== ==== == ====== ==== == ==== ====
</TABLE>
----------------------------
(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 of 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.
-43-
<PAGE> 47
The following table sets forth information with respect to Columbia
Federal's loans which are 90 days or more past due and other nonperforming
assets at the dates indicated. At such dates, Columbia Federal had no
non-accruing loans.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----- ------ ------ ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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%
===== ====== ====== ===== =====
</TABLE>
- ------------------------------
(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.
-44-
<PAGE> 48
The aggregate amount of Columbia Federal's classified assets at the
dates indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1997 1996 1995
---- ---- ---
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $972 $178 $32
Doubtful - - -
Loss - - -
---- ---- ---
Total classified assets $972 $178 $32
==== ==== ===
</TABLE>
Federal examiners are authorized to classify an association's assets.
If an association does not agree with an examiner's classification of an asset,
it may appeal this determination to the Regional Director of the OTS. Columbia
Federal had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Columbia Federal establish prudent general
allowances for losses on loans for any loan classified as substandard or
doubtful. If an asset, or portion thereof, is classified as loss, the
association must either establish specific allowances for losses in the amount
of 100% of the portion of the asset classified loss, or charge off such amount.
ALLOWANCE FOR LOSSES ON LOANS. Columbia Federal maintains an allowance
for losses on loans based upon a number of relevant factors, including, but not
limited to, the nature of the portfolio, credit concentrations, an analysis of
specific loans in the portfolio, known and inherent risks in the portfolio, the
estimated value of the underlying collateral, the assessment of general trends
in relevant real estate markets, and current and prospective economic
conditions, including property values, employment and occupancy rates, interest
rates and other conditions that may affect a borrower's ability to comply with
repayment terms.
The single largest component of Columbia Federal's loan portfolio
consists of one- to four-family residential real estate loans. Substantially all
of these loans are secured by residential real estate and require a down payment
of 20% of the lower of the sales price or appraised value of the real estate. In
addition, these loans are secured by property 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,
Nonperforming 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 losses on loans is reviewed quarterly by the Board of
Directors. While the Board of Directors believes that it uses the best
information available to determine the allowance for losses on loans, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected, if circumstances differ substantially from
the assumptions used in making the final determination.
-45-
<PAGE> 49
The following table sets forth an analysis of Columbia Federal's
allowance for losses on loans for the periods indicated.
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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 losses on loans
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%
======= ======= ======= ======= =======
</TABLE>
During the past five years, the allowance for losses on loans was
unallocated among the various types of loans made by Columbia Federal.
MORTGAGE-BACKED SECURITIES
Columbia Federal maintains a significant portfolio of mortgage-backed
securities in the form of 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
-46-
<PAGE> 50
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.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
securities $17,862 $17,893 $18,751 $18,585 $16,800 $16,110
======= ======= ======= ======= ======= =======
</TABLE>
-47-
<PAGE> 51
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.
<TABLE>
<CAPTION>
At September 30, 1997
----------------------------------------------------------------------------------------------------------------
Total mortgage-backed
One year or less After one to five years After five to ten years After ten years portfolio
---------------- ----------------------- ----------------------- --------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
value yield value yield value yield value yield value value yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA certificates $ - -% $ - -% $1,752 6.34% $ 7,545 6.51% $ 9,297 $ 9,208 6.48%
GNMA certificates - - 1 5.50 74 8.00 4,973 6.76 5,048 5,136 6.78
FHLMC certificates - - 1,229 7.65 639 8.02 1,649 7.77 3,517 3,549 7.77
--- --- ------ ---- ------ ---- ------- ---- ------- ------- ----
Total $ - -% $1,230 7.65% $2,465 6.83% $14,167 6.74% $17,862 $17,893 6.83%
=== === ====== ==== ====== ==== ======= ==== ======= ======= ====
</TABLE>
-48-
<PAGE> 52
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."
-49-
<PAGE> 53
The following table sets forth the composition of Columbia Federal's
investment securities at the dates indicated:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal $14,072 92% $14,071 92% $14,997 93% $14,951 93% $13,481 92% $13,089 92%
agency securities
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%
======= === ======= === ======= === ======= === ======= === ======= ===
</TABLE>
-50-
<PAGE> 54
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and $6,503 5.45% $5,997 5.87% - - $1,572 6.50%
federal agency
securities
FHLB stock (1) 1,260 7.06% - - - - -
------ ---- ------ ---- ------ ------ ------ ----
-
Total $7,763 5.71% $5,997 5.87% $ - -% $1,572 6.50%
====== ==== ====== ==== ====== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997
----------------------------------------------------------------
Weighted Weighted
average life Carrying Market average
in years value value yield
-------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government 3 $14,072 $14,071 5.73%
and federal
agency
securities
FHLB stock N/A 1,260 1,260 7.06%(1)
------- -------
Total $15,332 $15,331
======= =======
</TABLE>
- ---------------------------
(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 no 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.
-51-
<PAGE> 55
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:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------ -------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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 accounts (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 61,091 67.74 63,085 66.65 62,360 65.09
-------- ------- -------- ------- -------- -------
deposit
Total deposits (4) $90,195 100.00% $94,657 100.00% $95,806 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- -----------------------------
(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.
-52-
<PAGE> 56
The following table shows rate and maturity information for Columbia
Federal's certificates of deposit as of September 30, 1997:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ====== =======
</TABLE>
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:
<TABLE>
<CAPTION>
Amount Average interest rate
------ ---------------------
(In thousands)
<S> <C> <C>
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%
====== ====
</TABLE>
The following table sets forth Columbia Federal's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
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%
</TABLE>
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
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<PAGE> 57
standards of credit-worthiness have been met. Under current regulations, an
association must meet certain qualifications to be eligible for FHLB advances.
The extent to which an association is eligible for such advances will depend
upon whether it meets the Qualified Thrift Lender Test (the "QTL Test"). 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:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
1997 1996 1995
------ ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
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 6.00% - 5.82%
period
Weighted average interest rate at end of period - - -
</TABLE>
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.
YEAR 2000 CONSIDERATIONS
Columbia Federal's lending and deposit activities are almost completely
dependent upon computer systems which process and record transactions, although
Columbia Federal can effectively operate with manual systems for brief periods
when such systems malfunction or cannot be accessed. Columbia Federal utilizes
the services of a nationally-recognized data processing service bureau which
specializes in data processing for financial institutions. In addition to its
basic operating activities, Columbia Federal's facilities and infrastructure,
such as security systems and communications equipment, are dependent to varying
degrees upon computer systems.
Columbia Federal is aware of the potential problems associated with the
possibility that the computers which control or operate Columbia Federal's
operating systems, facilities and infrastructure may not be set up to read
four-digit date codes and, upon arrival of the year 2000, may recognize the
two-digit code "00" as the year 1900, causing systems to fail to function or to
generate erroneous data. In 1996, Columbia Federal began the process of
identifying any year 2000 related problems that may be experienced by its
computer-operated or -dependent systems. Columbia Federal has contacted the
companies that supply or service Columbia Federal's computer-operated or
- -dependent systems to obtain confirmation that each such system that is material
to the operations of Columbia Federal is either currently year 2000 compliant or
is expected
-54-
<PAGE> 58
to be year 2000 compliant. With respect to systems that cannot presently be
confirmed as year 2000 compliant, Columbia Federal will continue to work with
the appropriate supplier or service to ensure that all such systems will be
rendered compliant in a timely manner, with minimal expense to Columbia Federal
and minimal disruption of Columbia Federal's operations. If compliance is not
certified by the end of 1998 with respect to systems the failure of which would
have a material adverse effect on Columbia Federal's operations, financial
condition or results, Columbia Federal expects to have a sufficient time to
establish a relationship with another supplier that is year 2000 compliant. The
expense of such a change in suppliers is not expected to be material to Columbia
Federal.
In addition to possible expense related to its own systems, Columbia
Federal could incur losses if loan payments are delayed due to year 2000
problems affecting any of Columbia Federal's significant borrowers or impairing
the payroll systems of large employers in Columbia Federal's primary market
area. Because Columbia Federal's loan portfolio is highly diversified with
regard to individual borrowers and types of businesses and Columbia Federal's
primary market area is not significantly dependent upon one employer or
industry, Columbia Federal does not expect any significant or prolonged
difficulties that will affect net earnings or cash flow. See "Market Area" and
"Lending Activities - Loan Originations, Purchases and Sales."
At this time, however, the expense that may be incurred by Columbia
Federal in connection with year 2000 issues cannot be determined. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Year 2000 Issues."
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:
<TABLE>
<CAPTION>
Owned Date Square Net
Location or leased acquired footage book value(1) Deposits
- -------- --------- -------- ------- ------------- --------
(In thousands)
Main Office:
<S> <C> <C> <C> <C> <C>
2497 Dixie Highway
Ft. Mitchell, Kentucky 41017 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
</TABLE>
- -----------------------------
(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.
-55-
<PAGE> 59
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.
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.
-56-
<PAGE> 60
The following table presents certain information with respect to the
present directors and executive officers of Columbia Federal:
<TABLE>
<CAPTION>
Position with Columbia
---------------------- Date of Term
Name Age(1) Federal service expires
- ---- ------ ------- ------- -------
<S> <C> <C> <C> <C>
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 -
</TABLE>
- ------------------------------
(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.
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.
-57-
<PAGE> 61
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 $1,066 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 $1,311. During
fiscal year 1997, Columbia Federal paid a total of $86,465 in directors'
compensation.
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 $100,000 during the fiscal year ended September 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Annual Compensation All Other
Compensation
---------------------------------
Name and Year Salary ($)(1) Bonus ($)
Principal
Position
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
</TABLE>
- -----------------------------
(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.
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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.
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
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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 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.
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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 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
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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: Mary Jane Lucas, George
Raybourne, Edward Schwartz, Abijah Adams and Carol S. Margrave 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 than 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:
<TABLE>
<CAPTION>
Largest balance Balance at
during 2 years September 30,
Name Position Loan origination date Collateral ended 9/30/97 1997
---- -------- --------------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
George Raybourne Vice President 7/1/97 Personal $128,000 $127,822
Residence
Carol S. Margrave Secretary, Treasurer 5/9/97 Personal 92,000 91,637
Residence
</TABLE>
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.
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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 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 18.35% 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
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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 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 that,
before and after the proposed capital distribution, meet their current minimum
capital requirement, but not their fully phased-in capital requirement, as such
requirements are defined by OTS regulations. 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
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may prohibit any capital distribution otherwise permitted by regulation if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
In January 1998, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, an association owned by a holding
company would still be required to provide either a notice or an application to
the OTS, although under certain circumstances a savings association without a
holding company having an examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if it would remain adequately
capitalized after the distribution is made.
LIQUIDITY. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 4% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet 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 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
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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 that may engage in commercial,
securities and insurance activities without limitation. Congress is considering
legislation which may limit CFKY's ability to engage in such activities and CFKY
cannot predict if and in what form these proposals might become law. However,
such limits would not impact CFKY's initial activity of holding stock of
Columbia Federal. The broad latitude to engage in activities under current law
can be restricted, however, if the OTS determines that there is reasonable cause
to believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association. The OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Tests, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At September 30, 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 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,
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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.
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 $1.3 million at September 30, 1997.
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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 million, 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 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
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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 $2.7
million. Columbia Federal believes it had approximately $10.4 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.
The tax returns of Columbia Federal have been audited or closed without
audit through fiscal year 1993. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Columbia Federal.
OHIO TAXATION
Under Ohio law, Columbia Federal would be subject to the special Ohio
corporation franchise tax applicable only to financial institutions if, among
other factors, it has sufficient nexus with Ohio for such tax to be permissible
under the United States Constitution. Columbia Federal believes that presently
it does not have such nexus with Ohio and is not subject to the Ohio tax.
Because it is a corporation organized under Ohio law, CFKY is subject to the
Ohio corporation franchise tax, which, as applied to CFKY, is a tax measured by
both net earnings and net worth. The tax liability is the greater of (i) 5.1% on
the first
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$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 30, 1996, the amount of such expense for Columbia Federal was
$95,000.
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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 March 24, 1998. During and upon completion of
the Conversion, Columbia Federal 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.
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
January 31, 1998 (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 January 31, 1998, 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
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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 LLP, to the following
effect:
(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;
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(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 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.
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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 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 NOON, 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
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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 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
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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
over-subscription 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 sale of the shares subscribed for would be in violation of any
applicable statutes, regulations or rules.
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 MAY 18, 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 MARCH 24, 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:
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(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.
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. The
requirement for the minimum number of shares to be purchased cannot, by OTS
regulations, be increased. The Boards of Directors of CFKY and Columbia Federal
cannot envision any circumstances other than changes in applicable law under
which the minimum purchase requirement would be changed. 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. Factors that the Boards
of Directors of CFKY and Columbia Federal may consider in determining whether to
increase or decrease purchase limitations include the final valuation of
Columbia Federal, as converted, as determined by Keller, changes in the market
for thrift shares and general economic conditions. 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. If the purchase limitation is
increased, persons who subscribed for the maximum amount will be given, by
written notice, 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. In the event that purchase limitations are
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
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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."
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.
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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
noon, Eastern Time, on April 3, 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 NOON 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 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 3.00% 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
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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 canceled 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 Stock Information Center at (606) 525-6403
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.
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.
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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."
<TABLE>
<CAPTION>
Percent Aggregate
Total of total purchase
Name shares offering price
<S> <C> <C> <C>
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
</TABLE>
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, 200 W. Madison Street, Suite 1300, Chicago,
Illinois 60606, 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.
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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
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 Federal Stock 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
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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 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
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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, 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.
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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.
(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.
-86-
<PAGE> 90
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 "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.
-87-
<PAGE> 91
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."
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 LLP, 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.
-88-
<PAGE> 92
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. 333-42523) 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 information,
including the Conversion Valuation Appraisal Report, 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.
-89-
<PAGE> 93
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
PAGE
<S> <C>
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 to F-24
</TABLE>
All schedules (other than financial data schedules) are omitted because the
required information is either not applicable or is included in the financial
statements or related notes.
Separate financial statements for Columbia Financial of Kentucky, Inc. (the
"Company") have not been included because the Company will not engage in
material transactions until after the Conversion. The Company, which has been
inactive to date, has no significant assets, liabilities, revenues, expenses or
contingent liabilities.
The Company intends to establish a stock option and incentive plan (the "Stock
Option Plan") after the completion of the Conversion. The Board of Directors of
the Company anticipate that a number of shares equal to 10% of the common shares
sold in the offering will be reserved for issuance to directors, officers, and
employees of the Company and Columbia Federal Savings Bank ("the Savings Bank")
upon exercise of options granted under the Stock Option Plan.
The Company also intends to establish the Recognition and Retention Plan (the
"RRP") after the completion of the Conversion and anticipates that a number
equal to 4% of the common shares sold in the Offering will be purchased by, or
issued to, the RRP. Shares in the RRP will be available for awards to directors,
officers, and employees of the Company and the Savings Bank.
F-1
<PAGE> 94
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 each of
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 each of the years ended September 30,
1997, 1996 and 1995 in conformity with generally accepted accounting
principles.
VonLehman & Company Inc.
Fort Mitchell, Kentucky
October 30, 1997
F-2
<PAGE> 95
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
-------------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
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
-------- --------
COMMITMENTS AND CONTINGENCIES
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
======== ========
</TABLE>
See auditors' report and accompanying notes.
F-3
<PAGE> 96
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
See auditors' report and accompanying notes.
F-4
<PAGE> 97
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
UNREALIZED GAIN
ON AVAILABLE-FOR-
SALE SECURITIES,
RETAINED NET OF RELATED
EARNINGS TAXES TOTAL
----------- -------------------- ----------
(In Thousands)
<S> <C> <C> <C>
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 - 1 1
----------- -------------------- ----------
BALANCE, SEPTEMBER 30, 1997 $ 13,090 $ 1 $ 13,091
=========== ==================== ==========
</TABLE>
See auditors' report and accompanying notes.
F-5
<PAGE> 98
COLUMBIA FEDERAL SAVINGS BANK
FORT MITCHELL, KENTUCKY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
See auditors report and accompany notes
F-6
<PAGE> 99
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:
F-7
<PAGE> 100
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
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.
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 losses on loans, loans in process and deferred loan origination fees.
F-8
<PAGE> 101
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 contractual
lives of the related loans using the interest method. Amortization of
deferred loan fees is discontinued when a loan is placed on a nonaccrual
status.
The allowance for losses on loans is maintained at a level which, in
management's judgment, is adequate to absorb losses inherent in the loan
portpolio. Columbia Federal maintains an allowance for losses on loans based
upon a number of relevant factors, including, but not limited to, the nature
of the portfolio, credit concentrations, an analysis of specific loans in
the portfolio, known and inherent risks in the portfolio, the estimated
value of the underlying collateral, the assessment of general trends in
relevant real estate markets, and current and prospective economic
conditions, including property values, employment and occupancy rates,
interest rates, and other conditions that may affect a borrower's ability to
comply with repayment terms. The allowance is increased by a provision for
losses on loans, 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 losses on loans.
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
<PAGE> 102
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:
<TABLE>
<CAPTION>
<S> <C>
Office Properties 5-40 Years
Equipment 5-10 Years
</TABLE>
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
<PAGE> 103
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Interest $4,451 $4,578 $4,446
===== ===== =====
Income Taxes $ 92 $ 239 $ 302
====== ====== ======
</TABLE>
The Savings Bank had non-cash investing or financing activities as follows:
<TABLE>
<S> <C> <C> <C>
Real Estate Acquired Through
Foreclosure of Mortgage Loans $ 111 $ - $ 150
====== ======== ======
Stock Dividends Received $ 86 $ 79 $ 70
======= ======= ======
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
Investment securities as of September 30, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997 (In Thousands)
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
======= ======= ======= =======
</TABLE>
The following is a summary of maturities of securities held-to-maturity as
of September 30, 1997:
<TABLE>
<CAPTION>
Amortized Estimated
Amounts maturing in: Cost Market Value
(In Thousands)
<S> <C> <C>
One year or less $ 5,500 $ 5,524
After one year through five years 5,996 5,971
After ten years 1,573 1,573
------- -------
Totals $13,069 $13,068
======= =======
</TABLE>
F-11
<PAGE> 104
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
The following is a summary of maturities of securities available-for-sale as
of September 30, 1997:
<TABLE>
<CAPTION>
Amounts maturing in: Cost Market Value
---- ------------
<S> <C> <C>
One year or less $1,002 $1,003
====== ======
</TABLE>
The following is a summary of interest earned on investments:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
U.S. Government and Agency Securities $768 $797 $707
Dividends on FHLB Stock 86 79 70
---- ---- ----
$854 $876 $777
==== ==== ====
</TABLE>
NOTE 4 - MORTGAGE-BACKED SECURITIES
The balances in mortgage-backed securities as of September 30, 1997 and 1996
were comprised of:
<TABLE>
<CAPTION>
Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
(In Thousands)
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
======= ======= ======= =======
</TABLE>
F-12
<PAGE> 105
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:
<TABLE>
<CAPTION>
Amounts maturing in: Cost Market Value
------- ------------
(In Thousands)
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Mortgage Loans:
One-to-Four Family Residential $ 53,584 $ 52,691
Other 10,315 16,658
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
======== ========
</TABLE>
A summary of activity in the allowance for losses on loans for September 30,
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
The Savings Bank had no loans on non-accrual status as of September 30,
1997 and 1996.
F-13
<PAGE> 106
NOTE 6 - LOAN COMMITMENTS
As of September 30, 1997, the Savings Bank had fixed and adjustable rate
loan commitments as follows:
<TABLE>
<CAPTION>
Fixed Adjustable Total
------- ------- -------
<S> <C> <C> <C>
First Mortgage Loans (In Thousands)
on One-to-Four Family
Residential Property $ 399 $ 75 $ 474
======= ======= =======
Weighted Average Interest Rates 8.11% 5.5% 7.78%
======= ======= =======
</TABLE>
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest at September 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Loans $440 $478
Mortgage-Backed Securities 124 140
Investments and Other 147 200
---- ----
Totals $712 $818
==== ====
</TABLE>
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1997 and 1996 was comprised of:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
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
======= =======
</TABLE>
F-14
<PAGE> 107
NOTE 9 - DEPOSITS
A breakdown of deposits by interest rates and types as of September 30, 1997
and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Balances by Interest Rate Amount Percent Amount Percent
------------------------- ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C>
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%
======= ===== ======= =====
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1999 2000 2001 Total
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
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 2,891 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
======= ======= ======= ======= =======
</TABLE>
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.
Deposits in excess of $100,000 are not federally insured.
Savings deposit customers are primarily Northern Kentucky area
individuals and businesses.
F-15
<PAGE> 108
NOTE 9 - DEPOSITS (CONTINUED)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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. Eligibility
for this plan includes one year of service, age 21 and working 1,000 hours.
Due to the nature of this multi-employer plan, separate accumulated benefit
and net assets available for benefits is unavailable for the 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:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1997 1996 1995
---- ---- ----
401(k) Plan (In Thousands)
<S> <C> <C> <C>
Employee Contributions $82 $72 $67
Employer Contributions $30 $27 $27
Multi-Employer Defined
Benefit Retirement Plan $75 $89 $79
</TABLE>
F-16
<PAGE> 109
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 - NON-INTEREST EXPENSE - OTHER
Other non-interest expense includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax on Deposits and Other Taxes $99 $101 $101
Officers' and Directors' Expenses 54 48 50
Telephone 45 35 32
Professional Fees 35 31 28
Surety and Liability Insurance 33 38 39
Supervisory Exam Expense 34 34 36
Office Supplies 36 43 46
Other 103 82 86
--- ---- ----
Total $439 $412 $418
=== === ===
</TABLE>
F-17
<PAGE> 110
NOTE 14 - INCOME TAXES
Deferred income taxes arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. The principal source of temporary differences are
depreciation methods, allowance for losses on loans, 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:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In Thousands)
<S> <C> <C>
Deferred Tax Assets
Deferred Loan Fees $ 40 $ 80
Depreciation 4 5
Savings Association Insurance Fund
Assessment - 199
Allowance for Losses on loans 102 60
----- -----
Total Deferred Tax Asset 146 344
----- -----
Deferred Tax Liabilities
Book Value of Federal Home Loan
Bank Stock Over Tax Basis 213 184
Special Tax Bad Debt Deduction 94 94
Unrealized Loss on Available For
Sale Securities 1 -
----- -----
Total Deferred Tax Liabilities 308 278
----- -----
Net Deferred (Liability) Asset $(162) $ 66
===== =====
</TABLE>
No valuation allowance has been provided for deferred tax assets because
management expects to be able to benefit from these temporary deductible
differences.
A reconciliation of income tax expense at the statutory rate (34% for all
periods) to income tax expense at the Savings Bank's effective rate is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Computed Tax at the Expected
Statutory Rate $ 290 $ 200 $ 410
Nondeductible Expenses 2 1 1
Other Differences 8 (1) (22)
----- ----- -----
$ 300 $ 200 $ 389
===== ===== =====
Effective Rate 35% 34% 32%
===== ===== =====
</TABLE>
F-18
<PAGE> 111
NOTE 14 - INCOME TAXES (CONTINUED)
The components of income tax expense at September 30 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Current Tax Expense $ 72 $ 339 $ 323
Deferred Tax (Benefit) Expense 228 (139) 66
----- ----- -----
Income Tax Expense $ 300 $ 200 $ 389
===== ===== =====
</TABLE>
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 15 - 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:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Balance at September 30, 1996 $ 799
New Loans Made 363
Payment of Principal (253)
-----
Balance At September 30, 1997 $ 909
=====
</TABLE>
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 16 - 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-19
<PAGE> 112
NOTE 17 - 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:
<TABLE>
<CAPTION>
Effective
Interest Maximum
Amount Rate Terms/Duration
------ ---- --------------
(In millions, except percents)
<S> <C> <C> <C>
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
</TABLE>
NOTE 18 - RECONCILIATION OF NET INCOME AND RETAINED EARNINGS
A reconciliation of net income and retained earnings per these audited
financial statements with reports filed with the Office of Thrift
Supervision as of September 30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
F-20
<PAGE> 113
NOTE 19 - 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 if 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:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Capital under Generally Accepted
Accounting Principles $ 13,091 $ 13,091 $ 13,091
Capital Reconciling Items:
General Valuation Allowances - - 300
Unrealized Gain on Securities
Available for Sale, Net (1) (1) (1)
-------- -------- --------
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%
</TABLE>
F-21
<PAGE> 114
NOTE 19 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
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.
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the 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.
F-22
<PAGE> 115
NOTE 20 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
The estimated fair values of the Savings Bank's financial instruments
are as follows:
<TABLE>
<CAPTION>
September 30, 1997
------------------
Amount Value
------ -----
(In Thousands)
<S> <C> <C>
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
</TABLE>
The carrying amounts in the preceding table are included in the statement of
financial condition under the applicable captions.
NOTE 21 - DEPOSIT INSURANCE
Deposits of the 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 65.7(cent) 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-23
<PAGE> 116
NOTE 22 - CORPORATE REORGANIZATION
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-24
<PAGE> 117
================================================================================
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
RECENT DEVELOPMENTS.............................32
THE BUSINESS OF COLUMBIA FEDERAL................36
MANAGEMENT OF CFKY..............................56
MANAGEMENT OF COLUMBIA FEDERAL..................56
REGULATION......................................62
TAXATION........................................68
THE CONVERSION..................................71
RESTRICTIONS ON ACQUISITION OF COLUMBIA
FEDERAL AND CFKY AND RELATED ANTI-
TAKEOVER PROVISIONS.............................83
DESCRIPTION OF AUTHORIZED SHARES................87
REGISTRATION REQUIREMENTS.......................88
LEGAL MATTERS...................................88
EXPERTS.........................................89
ADDITIONAL INFORMATION..........................89
FINANCIAL STATEMENTS...........................F-1
================================================================================
Until the later of March 20, 1998 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)
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PROSPECTUS
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CHARLES WEBB & COMPANY, A
DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
February 11, 1998
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